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Greetings and welcome to the Ceridian Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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 begin.
Thank you and good morning. On the call today we have Ceridian CEO, David Ossip, and CFO, Arthur Gitajn. Before we begin, allow me to provide a disclaimer regarding forward-looking statements.
This call, including the Q&A portion, may include forward-looking statements about our current and future outlook, guidance, plans, expectations and intentions, results, levels of activities, performance, goals or achievements or any other future events or developments. These statements are based on management’s reasonable assumptions and beliefs in light of information currently available to us. Listeners are cautioned not to place undue reliance on such statements. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those set forth in such statements. We refer you to our previous filings for information regarding significant risks, assumptions underlying forward-looking statements and certain risks and 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 maybe required by law.
Third quarter earnings release, the related financial statements and the MD&A will be available on the SEC’s EDGAR database in the U.S. and the SEDAR database in Canada as well as on the Ceridian Investor Relations website at investors.ceridian.com. As a reminder, all figures discussed on this conference call are in U.S. dollars unless otherwise noted.
And with that, I will turn the call over to David.
Good morning, everyone and thank you for joining our third quarter earnings call. The third quarter of 2018 was another strong quarter for the company as we continued to execute on our strategic initiatives. Market demand for Dayforce remains strong. Dayforce revenue grew 36% year-over-year and cloud revenue grew by 29%. On a constant currency basis, Dayforce revenue grew 37% year-over-year and cloud revenue grew 31%. We had 3,465 customers live on the Dayforce platform at the end of the third quarter, an increase of 157 customers from the second quarter of 2018 and increase of 610 customers from the same period last year. We also recorded net income this quarter of $4.4 million compared to last year’s net loss of $20.1 million. Adjusted EBITDA increased 28% year-over-year and we achieved a 290 basis point improvement in our adjusted EBITDA margin to 20.3%. We are raising the range of our full year 2018 revenue and adjusted EBITDA guidance to reflect our strong Q3 results. Arthur will go into more detail, but I want to walk through the progression of our Q3 results and our Q4 guidance.
We exceeded the high-end range of our third quarter guidance on adjusted EBITDA by about $4.5 million. A portion of this beat is attributed to the revenue over-performance, which exceeded the high-end range of our third quarter guidance by about $2.5 million. The remaining $2 million adjusted Q3 EBITDA over-performance is due to lower expenses that are primarily timing of spending between Q3 and Q4. In addition, we have approved an additional $2 million of expenses to support the growth of the business that includes sales bonuses and commissions to close out our strong year, implementation expenses tied to the activation in Q4 of what we anticipate to be the largest go live quarter ever in terms of recurring revenue taken live, and an additional Orlando HCM Summit that will be held in December to help drive Q4 and Q1 sales and continued hiring in the sales organization to drive growth in future years. But to reiterate, even with this additional $2 million of expenses and with some movement of the expenses between Q3 and Q4, we are raising both our full year adjusted EBITDA and revenue guidance.
I would like to now discuss our continued product innovation and market momentum. In October, we held our annual customer conference, INSIGHTS. The conference was successful. We had about 3,000 attendees and more than 50 customers presented their Ceridian success stories. At INSIGHTS, we discussed new and near-term Dayforce platform features, including succession planning, advanced analytics, benefit decision support, engagement surveys, compensation data benchmarking, and on-demand pay. These available and soon-to-be available modules, allows us to increase our target recurring revenue pricing. One innovation we are particularly excited about is on-demand pay that will allow employees to use our mobile applications to access their earned wages before the end of the pay period. We believe that this will make work life better for the millions of people that use Dayforce and that Ceridian will be the first to bring to market an on-demand payment position based on the continuous calculation of payroll.
In terms of our global footprint, at INSIGHTS, we also announced that in addition to Australia, we intend to expand our global payroll solution to Ireland and New Zealand. The additions of Ireland and New Zealand as the next locations to rollout our major payroll functionality will help round out the UK and Ireland and ANZ regions. We plan to have Australian native payroll ready for the start of the 2019 Australian payroll year. And as you know, we already have live customers using our native UK payroll. We expect to continue to expand on native payroll functionality while also expanding countries covered by our connected pay solution.
I would also like to note some of the additional recognitions we received this quarter. I am delighted that we continued to be recognized for having a great culture. In fact, we are an example of how using Dayforce has allowed us to create a culture of innovation and how that has led to organizational performance. To this end, I am very proud that in the quarter, Ceridian was recognized as the great workplace by Great Place to Work for the fourth consecutive year and Ceridian was also recognized as a 2018 award winner of the Working Mothers’ 100 Best Companies. I would also like to congratulate Lisa Sterling, our Chief People and Culture Officer, who was named a Working Mother of the Year by Working Mother Media. Our success at Ceridian is a direct reflection of the passion and dedication of our people who represent the core of our innovation and cultural excellence. We also received several awards that reflect our continued excellence in product development and services.
For the sixth straight year, Dayforce was named a leader in Nucleus Research’s HCM Technology Value Matrix. The report highlights Ceridian’s latest functionality, including the launch of Dayforce payroll in the UK, the rollout of enhanced predictive analytics and the releases of new Dayforce talent modules, including compensation management and learning management. We were also recognized by Constellation Research, a Silicon Valley technology and research advisory firm, as the leading solution for workforce management and payroll. And Dayforce Talent Management modules recently won a Gold Stevie award at the third annual Stevie Awards for Great Employers.
On the services side, Dayforce received an HCM Customer Experience gold medal by Software Reviews, a world class customer review platform. And at the recent Technology Service Industry Association Star Awards, our robotic process automation implementation tool, Dayforce Activate won the award for innovation in enabling customer outcomes professional services. Regarding all these awards, we are very proud to be recognized as an engaged innovation and customer-focused organization and for delivering products and services that help transform culture and make work life better for us and our customers.
In summary, we are pleased with our performance in the third quarter and we are excited by the opportunity that lies ahead. I want to close with two final items. First, I want to reiterate our long-term goal, which we have spoken about on previous calls. We aspire to be a $1 billion cloud revenue company and with that goal we expect recurring gross margins of the business to be 75% or greater, professional service and other gross margins to be breakeven and adjusted EBITDA margins to be 30% or greater. Second, I want to thank all our employees for their outstanding efforts and I especially want to thank our customers for their continued partnership.
I will now turn it over to Arthur to discuss our financial results and guidance with you in greater detail.
Thank you, David and good morning everyone. As David mentioned, we are very pleased with our performance in the third quarter ended September 30, 2018. Dayforce revenue increased by $29.4 million or 36% to $111.7 million, cloud revenue, which includes both Dayforce and Powerpay, increased by $30 million or 29% to $133 million and total revenue, which includes revenue from both our Cloud and Bureau solutions increased by $16.1 million or 10% to $179.6 million. On a constant currency basis, Dayforce revenue grew by 37%, cloud revenue grew by 31%, and total revenue grew 11%.
During our last call, we provided guidance for the third quarter and I am pleased to report that our actual results for cloud revenue exceeded the high-end of the range by $2 million, our actual results for total revenue exceeded the high-end of the range by $2.6 million and our actual results for adjusted EBITDA exceeded the high-end of the range by $4.4 million. Cloud revenue growth in the third quarter was driven by a 29.5% increase in cloud recurring services revenue and a 27.5% increase in cloud professional services and other revenue. Of the $30 million increase in cloud revenue, $5.6 million or 19% was attributable to Bureau customers migrating to Dayforce.
Excluding the impact of migrations to Dayforce, revenue from Bureau solutions declined by $8.3 million or $13.7%, which was in line with our expectations. Cloud revenue accounted for 74% of our total revenue in the third quarter this year compared to 63% in the third quarter last year. Sequentially, Q2 2018 to Q3 2018 cloud recurring services revenue was up by $5.5 million. Q3 revenue from Powerpay, our cloud HR and payroll solution for the Canadian small business market increased 3% to $21.3 million. On a constant currency basis, excluding the impact of the year-over-year decline in the Canadian dollar, Powerpay revenue increased by 8%.
The average float balance for our customer trust funds during the third quarter was approximately $2.97 billion compared to $2.94 billion in the third quarter last year. The average yield on our float balance was 2.11% during the third quarter, an increase of 55 basis points compared to the average yield in the third quarter last year. As a result, income from invested customer trust funds was $15.8 million in the third quarter compared to $11.6 million in the third quarter last year. We also continued to expand our gross margins and operating margins during the third quarter. While cloud recurring services revenue grew $25.3 million or 29.5%, our cost of cloud recurring services to support this growth increased by only $4 million or 13%, and our gross margin on cloud recurring services increased from 63% in the third quarter last year to 68%, reflecting an increase in the proportion of Dayforce customers live for more than 2 years from 57% in the third quarter last year to 62% and our ability to realize economies of scale in customer support and hosting costs.
While professional services and other revenue grew $4.5 million or 25%, professional services and other costs were reduced by $2.3 million or 7% 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 quarter, our negative margin on professional services and other revenue improved from negative 94% in the third quarter last year to negative 45%, reflecting an increase in profitable post go-live professional services and productivity improvements in implementing new customers.
Product development and management expenses increased by $3.5 million or 32% to $14.5 million, primarily due to increased research and development costs. Overall, we generated a $16.1 million increase in total revenue with a $2.4 million increase in total cost of revenues and gross profit increased by $13.7 million or 22% to $75 million. Selling, general and administrative expense increased $7 million to $59.4 million, included in SG&A is $29.7 million of sales and marketing costs, representing 16.5% of revenue, and up $2.7 million or 10% compared to the third quarter last year.
We realized an operating profit of $15.3 million in the third quarter, compared to operating profit of $5.1 million in the third quarter last year, up 200% year-over-year. As David discussed, net income attributable to Ceridian increased by $24.5 million to a net income of $4.4 million compared to a net loss of $20.1 million in the third quarter last year. Adjusted EBITDA increased by 28% to $36.4 million from $28.4 million last year. Interest expense was reduced by $13.1 million due to the redemption of the senior notes during the second quarter of 2018 and income tax expense was reduced by $1.8 million.
Moving to the balance sheet, as of September 30, 2018, we had cash and cash equivalents of $188 million, an increase of $93.8 million, compared to December 31, 2017, and our total debt was $671.8 million, a reduction of $448 million, compared to December 31, 2017. The $93.8 million increase in cash and the $448 million reduction in debt are primarily attributable to the IPO and refinancing of our term debt. Our capital expenditures through the first nine months of 2018 were $28.7 million, compared to $32.1 million through the first nine months last year. Included in $28.7 million in capital expenditures were $21.9 million for software and technology and $6.8 million for property and equipment.
Turning now to our outlook for the full-year of fiscal 2018, our performance through the first nine months of the year provides us with the confidence to raise our full-year fiscal 2018 outlook as follows: cloud revenue is now expected to be in the range of $532 million to $534 million; total revenue is now expected to be in the range of $741 million to $743 million; and as David discussed given our overperformance in the third quarter, adjusted EBITDA is now expected to be in the range of $150 million to $153 million. I would also note that our guidance for the remainder of the year assumes no significant changes in foreign exchange rates.
At this time, I'm going to ask the operator to open up the lines for any questions you may have. Thank you.
[Operator Instructions] Our first question comes from the line of Alex Zukin from Piper Jaffray. Your line is open.
Hi guys. Thanks for taking my question and congrats on a good quarter. Could you maybe talk about what are your biggest priorities kind of with the new head of sales and how maybe you or she is thinking about incremental hiring and potential impact on OpEx for maybe the out-year?
Hey, Alex, thanks for joining us this morning and thanks for the complements. In terms of Leagh as you know Leagh joined us from SAP where most recently she was global CEO of Strategic Accounts. When we look at the future growth of the business we will continue doing very well in disrupting HCM market in the current segments that we have been very successful. With Leagh as well, we will have more of a focus now on repeat term strategic accounts which are account that are towards the largest side and that requires a slightly different approach to market in terms of how we market, how we approach the customers, how we cultivate the actual account. Along with that, we will accelerate hiring in that particular segment in terms of sales and marketing support. In addition, we are also focused on growing business on a global basis and so you will see additional headcount in both the UK and in Australia as we look to expand. In terms of how we will increase the headcount it will be gradual increases of headcount, we don’t provide our sales headcount numbers to the marketplace. I don’t expect that you will see any dramatic changes in the sales and marketing expenses.
Got it. Thanks. And just my one follow-up, as you continue to continue see more traction in the marketplace, any changes that you are observing the competitive environment particularly maybe any commentary on win rates as you introduce some of this new functionality around continuous pay and on-demand pay?
So the on-demand pay will be released in early 2019. In terms win rates and in terms of the competitive environment it remains largely unchanged.
Great. Thank you, guys.
Our next question comes from the line of Mark Murphy with JPMorgan. Your line is open.
Yes. Thank you. I will add my congrats to David. You had several intriguing product announcements at the recent INSIGHTS conference, I am just wondering where do you see the strongest response and the largest revenue opportunity and specifically based on the initial responses do you see a stronger opportunity to go out and monetize for on-demand pay?
First, Mark, thanks for saying that. At INSIGHTS, we announced quite a few new products available already is succession management, that follows learning management and compensation management which were also added in effectively 2018. The adding of additional modules allows us to effectively increase our target PEPM, per employee per month pricing and it also provides us with an opportunity to go back to the accounts that are already live and provide add-on sales. In terms of the on-demand pricing, we haven’t released pricing to the market yet. But yes I do believe that it will give us an opportunity to increase revenue from existing and from future accounts and as well it should increase our competitiveness in the marketplace as we are the first to offer on-demand pay calculated on the continuous calculation of payroll. In another words we know precisely what people have earned and we allow them now to access those wages.
Great. And as a follow-up, Arthur I believe you said that 62% of Dayforce customers are now live for more than 2 years and we have noticed that that did improve year-over-year, I am wondering what role is your Activate products playing in that improvement and if you have any early thoughts on where you see that 62% level of getting to at this time next year?
Yes. We haven’t projected it out. Certainly, the productivity improvements in implementation including Activate and also the experience of our consulting organization helps us increase the efficiency reports we are bringing to customers live and again it’s evidenced by the reduction in the negative margin on professional services and other.
Yes. Hi Mark if I could just add to that with Activate we are now using the product in all segments of the market. If you recall we introduced the product originally for the small and medium sized segments. The product has now been expanded to handle the larger accounts as well. And another benefit of Activate beyond the reduced cycle times and the reduction in effort is that we get consistent configuration of customers and that makes it easier for us to support the accounts and it has been very helpful in driving an increase in the improvement in the gross margin of recurring.
Okay very good. Thank you so much.
Our next question comes from the line of Brad Zelnick with Credit Suisse. Your line is open.
Fantastic. Thanks and I echo my congrats on a great quarter. My question David, can you give us a sense of the average pricing for the average mid-market customer versus the maximum PEPM on Dayforce or said differently, what’s the current adoption rate and at what pace do you see it growing relative to the pace of innovation you are targeting?
I would say, Brad, it’s really consistent I would say with prior quarters that in any quarter approximately 20% of the ACV or sales tends to be add-on sales to customers that are already live. And in terms of the target effect on pricing or the realized pricing that we are seeing I would say the 1,000 employee firm level, it appears to be around $20 to $25.
Thanks. And just for Arthur, post go-live professional services it’s nice to see the margin progression there, is there any reason we wouldn’t see continued similar improvement moving forward?
Actually, next year which as we adopt ASC 606, under ASC 606 our margin on professional services would be I think minus 14%, so we would be very close to breakeven already.
Awesome. Thanks guys.
Hey, Brad. Just on that again I remember that the gross margin on professional services and other consists really of three line items. You have the services related activation of the accounts, which currently sits I believe at around 52% of that line item, you have professional services to customers that are already live and that currently is now 29%. And then you have effectively a clock, which are the time and attendance rates that we sell which is currently about 18. What’s driving the improvement in professional services and other gross margin is the shift in mix. Last year in Q3 the professional services which is again the services to customer already live was 19%, this year it is now 29%. And as that percentage continues to grow, the overall margin of professional services and other gross margin will continue to improve.
Thanks for the granular color, I really appreciate it.
[Operator Instructions] Our next question comes from the line of Raimo Lenschow with Barclays. Your line is open.
Thanks for taking my question and congrats from me as well. David, can you talk a little bit about what you see on Bureau like – obviously like you kind of managed the numbers down here, is there, first of all, like the decline increased a little bit, but then I also wanted to think more longer term as Dayforce gets more powerful, is there I am thinking at some point to kind of accelerate in migration even further? And then I had a follow-up for Arthur.
Raimo thanks for that. Again, the business today is – the majority of the business today is the cloud revenue. As of Q3 of 2018 74% of our revenue is now cloud. In terms of migrations from the Bureau it is with inside the range that we gave that we spoke about at the end of last year, which is at 15% to 20%. I think we came in I believe at 18.7% in this particular quarter.
Correct.
In terms of accelerating migrations, we are more focused on acquiring new customers as we always have. As you know always around 75% of our Dayforce accounts have been net new accounts or add-on sales to existing Dayforce accounts. The Bureau will continue to decline as we mentioned until it reaches about $100 million or so, and at that point, we expect that the decline will basically flatten out because inside that line item we have the standalone tax business and a few other businesses.
Raimo, I would also add that even though we saw a little bit of an uptick in Q3 over the first nine months when you exclude the impact of migrations, Bureau revenue declined 11%, and then for comparison, the decline last year excluding migrations was about 10%, the decline the year before excluding migrations was about 11%. So again, I think we’re in line.
Okay, perfect. Makes sense. And then Arthur on the cost side like, can you just talk me through a little bit in terms of the – how much was expected on the Q3 bigger, it’s like for example like conference kind of you knew and how much was kind of unexpected in terms of cost moving from Q3, Q2, Q4?
A lot of the timing has to do with headcount. When you hire headcount at the end of a quarter, you get a much bigger full quarter impact in Q4.
Yes. So that was kind of pretty much it like the – like – it’s like the conference et cetera you knew, so it's really more headcount and then business performance?
Raimo, just the conference actually was in Q4, it was in October.
Oh, yes, yes. I know that’s what I meant like, but you knew it like it’s a little bit what I meant. Okay, alright.
True, but I believe the timing of payments and et cetera also kind of fluctuates towards the end of the quarter as well. But again, as I mentioned about $2 million off the beat of the Q3 EBITDA over-performance was due to the movement of expenses between Q3 and Q4. But even with that movement and with the additional approved $2 million of expenses, we did increase our EBITDA guidance for the year.
Yes. Perfect, yes. No, well done. Thank you.
Our next question comes from the line of Mark Marcon with Baird. Your line is open.
Right, good morning, and let me add my congratulations. I was wondering, with regards to the new clients that have come on board, what are you seeing in terms of differences in terms of the number of new modules that they are taking on, how would you characterize the broadening of the suite over the last quarter and year, two years, et cetera?
Hi, Mark, thanks again. As I mentioned, about 20% of each quarter sales are add-on sales to the existing base, as well we are – we generally do see an uptick and realized PEPM that we are able to get from the actual marketplace. We launched the modules, which were compensation management and learning management towards the, I’d say, the middle of the year. So, we haven't yet had enough data to kind of reflect back as to what the new realized price is for the market, but I would expect it to go up year-over-year and into the future as well.
Great. And then between INSIGHTS and some of the market specific client events that you’ve been hosting, you’ve been getting a lot of interest. I’m wondering, if you can talk a little bit about how the sales pipeline looks right now, I know what you mentioned with regards to the implementations, but in terms of new sales, RFPs, how that stands relative to a year ago and how that seems to be tracking?
So, Mark as I mentioned in my opening remarks, we still see a very strong demand for Dayforce product in the marketplace, and as well some of the additional $2 million of expenses that we preapproved for Q4 has to do with the sales bonuses and commissions, which are obviously tied to sales.
Great. And then in terms of – Arthur, in terms of the cloud revenue guidance, what are you expecting in terms of or what are you baking in, in terms of exchange rate or sort of in another way what’s the expectation on a constant currency basis in terms of the growth rate on the cloud side?
So we are assuming a further erosion, further weakening right now in the Canadian dollar and so you would have a little bit of a headwind in Q4 as a result of the year-over-year exchange what we are assuming is that we would maintain where we are today in terms of exchange rates.
Great. Thank you.
Our next question comes from the line of Justin Furby with William Blair & Co. Your line is open.
Thanks guys. Maybe just quickly house keeping item first, Arthur I think during your comments prepared remarks you said cloud recurring are 25.9 in Q3, I just want to be clear the growth was I think was 29.5 and maybe I have misheard, but just wanted to make sure that’s right?
I believe it’s 29.5 on cloud recurring and 27.5 on professional service and another.
Great. And then the last few quarters on that line item on cloud recurring growth you are seeing a little bit of deceleration, it seems like your guidance and I know you would explicitly guide between services and recurring, but I feel like you are kind of guiding for sort of high-20s implied cloud recurring growth which seems sort of stable quarter-on-quarter, is that the right read. And then maybe just for David or Arthur just in terms of the medium-term and longer term cloud recurring growth, can you give us the sense for what you think is sustainable level is? Thanks.
Well, again, I would just point out that cloud revenue actually increased sequentially from $127.8 million in Q2 to $143 million on a – and on a constant currency basis cloud revenue grew 31.3%. Over time as your basic revenue gets larger even we think increasing dollar value the math will affect your percentage, which becomes so commonplace we take it for granted even with the effects of the weakening Canadian dollar. We have set new records for Dayforce and cloud revenue each and every quarter for the last seven quarters and we will by all – by our expectations we are going to set new records again in Q4.
Right. I guess, Arthur, what I explicitly think was if you look at the last three quarters, your quarter [ph] trade has been high-30s and mid-30s, 30% this quarter and I feel like you are guiding to a similar level in Q4, is that fair or no?
I think that’s fair.
Okay, fair enough. Thank you very much guys.
[Operator Instructions] Our next question comes from the line of Michael Turrin with Deutsche Bank. Your line is open.
Hi guys. Thanks for taking my questions. You have been adding sort of consistently around 150 Dayforce go-live customers per quarter, I think I heard you reference that you are expecting Q4 to be a record number there, so does that mean is the right way to think about that that means we could see back to that 200 plus number that we saw in Q2 of last year and if so are there any comments you can make around the average size or segmentation of that customer base?
Okay. So if I look at the actual add-ons based on live Dayforce customers is effectively seems to harbor between a range of about 150 to about 200 customers on a quarter-by-quarter basis, so if I look at Q3 we added a 157 Q2 was 154, Q1 was 153, Q4 was 146 and so on. The amount of revenue that we activate is driven by the number of customers but there is also the average size of customer. And we have seen the average size of customer go up year-over-year. In terms of Q4 as I have mentioned we – part of the $2 million of additional expenses is tied to implementation expenses related to the activation or the take in live of the record number of customers in Q4, so we would expect obviously to see positive numbers coming out of that group.
The average trailing 12 months revenue per Dayforce customer in Q3 was $118,000 which is an increase of about $15,000 or 15% compared to $103,000 for the trailing 12 months in Q3 2017 as David said. That’s a combination of both increased size of customer and increased product density.
Well, thanks. That’s helpful. And then looking at the full year guidance, you are raising cloud revenue guidance by more than the Q3 would be which seems imply some good confidence in the momentum you are seeing, but the EBITDA number for Q4 that’s implied might be a touch lighter than some of us were expecting. So I am just wondering if you can just hit on the trade-offs or how you balance those two and what you are thinking about as you are heading into the exit of the year this year?
Yes. Again, let me try to be clear. So within Q3 we beat the high end of our EBITDA adjusted guidance by about $4.5 million. Two – about $2 million of that will be towards a timing difference. So you can effectively take down the Q4 number we have gave out previously by that $2 million. And then in addition we have pre-approved expenses of an additional $2 million related to sales, bonuses, commissions, implementation expenses related to the activation of accounts in Q4. We have added an additional summit that will be held in December in Orlando and we are also continuing to hire in the sales function. So if you take the $2 million of time and if you take the $2 million of additional pre-approved expense that amounts $4 million and that’s basically what we have taken out of the Q4 number. But even with that we have increased our adjusted EBITDA guidance for the year.
Understood. Thanks guys.
Our next question comes from the line of Samad Samana with Jefferies. Your line is open.
Hi, good morning. Thanks for taking my question. First, Arthur just maybe a housekeeping question, the 30% adjusted EBITDA margin at $1 billion of revenue, is that factoring in the changeover to ASC 606 or is that under 605 framework? And then I have a follow-up?
It’s not bringing the ASC 606. And again as we implement ASC 606 in the first quarter next year, we will be restating all of the comparable prime period numbers to give you apples-and-apples comparisons.
Great. That’s helpful. And then maybe David as we think about the rollout of UK payroll and customers being live on that now and the announcement of Australia and New Zealand and Ireland, can you help us maybe think about the revenue opportunity and how the company is thinking about the expanded revenue opportunity selling native payroll into those markets and maybe just the ramp time for that? Thanks.
Sure. So in terms of growth, obviously the short-term growth comes from continued to disrupt our existing markets in the way that we have been doing over the last number of years. In terms of I would say late ‘19 or early ‘20 growth, that’s going to be driven I would suspect from the movement into strategic accounts. And on the global side that is more longer term growth as the lead time if you like is slightly longer and so you will start to see that in late 2020 and late 2021.
Great. Thanks again.
Our next question comes from the line of Richard Davis with Canaccord. Your line is open.
Hey, thanks. So as it’s interesting, last week I had breakfast with a CEO of a company that they would call themselves kind of LinkedIn for everyone else which means kind of ecosystem of people that work in the gig economy, so when I look at your products, I mean I know Powerpay is more Canadian, is there – how do you guys participate in that kind of more fluid segment of the employment market, so it’s obviously hourly workers, but if you work in a restaurant you switched jobs from place to place, so you have worked at UPS and stuff like that, how are you participating in that space and how should we think about that?
Hey Richard, the on-demand pay functionality that we announced at INSIGHTS allows us to provide a unique service to the gig economy, where effectively people can clock-in, clock-out with their mobile devices and as their shifts get approved, we can calculate the net earnings, notable deductions, etcetera and we can facilitate payment immediately to a digital wallet for them. So that’s the first beat from our product side. And we believe we are quite unique in that regard that we have this continues calculation anytime you clock-in, clock-out, modify any part of the HR record, we recalculate the net earnings and that’s unique to us. The second area that we see the raise of the gig economy is that we see more demand from staffing companies particularly in the human services businesses, so you typically see nurse companies where they provide other on-demand nurse staff or they might provide short-term nurse staff say for a week or up to say a few months. And we obviously participate in that as well.
One just quick strategic question and I don’t know if there is really any answer I missed, but look artificial intelligence is the hot topic these days, is there anyway because when you apply AI to people, are there ways that you can provide kind of guide rails or guardrails to it kind of ensure that AI is not replicating existing bias and then also kind of accountability I just feel like that’s going to be a hot topic as we kind of push this stuff into the space?
So Richard, that’s a good question. I think people have to move away from the word AI, because it’s not the technology is not there at the moment. In terms of predictive technologies the tech that is exist today is really around machine learning and possibly some deep learning. Most of the advances had been in image recognition so you will see areas like voice recognition and such gaining a lot of traction, a lot of improvement year-over-year. Within Dayforce, we have a Dayforce assist, which we now have customers using which is our voice tech which allows employees to basically say hey Google or hey Cortana hey Siri or hey Alexa, ask Dayforce when I am next scheduled too. I have no idea I will turn that off. Sorry about that. So we have got the Dayforce voice tech quite nicely. We also used ML quite a bit predictive models if you like to determine what people might be at risk of leaving an organization. We don’t go into the area of trying to make decisions about people using ML tech because we don’t see any empirical evidence by any of the techs out there that justifies that. And we obviously do a lot of research and a lot of lab types of programs around that sort of tech. We also use predictive text quite a bit in the support functions, so we continually mind the usage data of our clients data or how people using the application and we are able to use that to predict when we should call a customer to resolve a support item before it becomes a support issue and that’s being quite well received by our customers and we have seen increases in NPS scores and such from that. And the other area that we use kind of which are the areas we use a lot of predictive text one has to do with the deployment of labor where we are able to look at across data predict out when people are required and then use various types of algorithms to help managers position labor that’s really aligned to the objectives and the strategies of the company. We do the same thing in compensation management where we are able to look at data for a team, understand if there is any type of gender or diversity bias or such inside a particular group. Look at now market compensation data by locality, again to determine if there are some adjustments and then we are able to give the managers a starting worksheet that helps move people salary ranges in terms of merits and bonus to align with the strategic objectives again of the actual – the actual company. So for us kind of the use of predictive tech is very well embedded inside the product it has been from the very outset of Dayforce. We continued to look at the advances in kind of ML and deep learning and other types of predictive text. But we are quite pragmatic about using the technology in a way that there is strong evidence.
Got it, that’s super helpful. Thank you.
Our next question comes from the line of Walter Pritchard with Citibank. Your line is open.
Hi, thanks. Two questions I guess for Arthur on the pricing could you talk about type of impact there and how we should think about it in segments and so forth. And then on the expense side the accelerated pace of spending in Q4 around the summits – and summit and so forth, how should we expect that that type of us spend to unfold as we move into ‘19. Thanks.
So Walter, let me just take it. So in terms of the summits, you will see a similar type of cadence to what we have done in the latter half of this year. So just to put in perspective, we had a summit in New York I believe in June, we then had an event in Chicago, we had another summit in London, we then followed that with INSIGHTS, which is our customer conference in October and we are going to have another summit now in December in Orlando. So, the cadence seems to be about one about every, I suppose 2 months or so that we seem to have a summit. And I think that’s probably the pace that you will see in terms of summits, so you could kind of model out what we spent I suppose in the second half of this year and it will be something similar like that going forward. In terms of PEPM pricing as I mentioned before and we expect that the realized PEPM to go up over time, but we haven’t really provided new guidance not before that.
Maybe help us just understand order of magnitude to some of the value on some of these features that you are rolling out, how that might relate to some of the value you have been able to capture on prior features?
It’s similar to the prior features depending on the module that we already announced. It could be anything from a dollar to a few dollars per employee per month.
Great. Thanks, David.
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.