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Greetings. And welcome to the Ceridian Fourth Quarter and Full Year 2018 Earnings 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 evening. 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 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 fourth quarter and full year 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.
With that, I will turn the call over to David.
Thanks, Jeremy. Good evening, everyone, and thank you for joining our fourth quarter yearend earnings call. We are pleased with the results from the fourth quarter of 2018. During the fourth quarter, Dayforce revenue grew by 34% year-over-year and Cloud revenue grew by 28%. On a constant currency basis, Dayforce revenue grew 36% year-over-year and Cloud revenue grew 30%.
The fourth quarter was a record setting quarter, both in terms of Dayforce recurring revenue taken live and the number of customers added. We ended the year with 3,718 customers live on the Dayforce platform, a net increase of 253 customers from the third quarter of 2018 and an increase of 717 customers since December 31, 2017.
Q4 adjusted EBITDA increased 22% year-over-year. We achieved a 220 basis point improvement in our adjusted EBITDA margin to 21.7% of revenue. And income from continuing operations before income taxes was $12.7 million in the fourth quarter.
For the full year 2018, Dayforce revenue grew 38% and Cloud revenue grew 32%. And total revenue grew 11% year-over-year. Gross margin on Cloud recurring services increased from 63% to 68%, and gross margin on professional services and other improved from negative 88% to negative 41% year-over-year.
Total revenue increased by $76 million, and we converted over 30% of that revenue growth or $39 million into adjusted EBITDA, and adjusted EBITDA margin improved nearly 330 basis points to 21% for the full year 2018.
We continued our investment in product development during 2018. Our cash investment in product development, including research and development expense and capitalized software development, was $55 million, up 22% year-over-year to 7.4% of revenue.
In 2018, we launched compensation management, learning management and succession planning. We also announced near term Dayforce platform features, including advanced analytics, benefits decision support, engagement surveys, compensation data benchmarking and On-Demand Pay. We believe these product enhancements will broaden our HCM functionality and will enable us to sell additional functionality to new and existing customers.
In 2018, approximately 20% of our sale were add-on features to our existing customers. We expect the cadence of product announcements and launches in 2019 to be similar to that of 2018.
Globally, we also launched native U.K. payroll in 2018 and already have customers live in the U.K. In 2019, we are launching native Australian payroll and intend to expand our native payroll functionality into New Zealand and Ireland. In addition, we intend to expand the countries covered by Dayforce connected pay solution.
We also invested an additional $15 million in sales and marketing during 2018 compared to 2017. These investments contributed some strong sales throughout 2018, and in Q4, we saw strong demand from larger customers.
In our financial services vertical, we closed the financial service leader with more than 22,000 U.S. employees. In the retail and hospitality verticals, we closed a 20,000 employee retail, a restaurant chain with more than 8,000 employees and a hotel chain with more than 11,000 employees.
In the manufacturing vertical, we signed a major producer of electronic and fiber optic connectors and coax cable who has approximately 15,000 employees. And in the health care and human services segment, we signed a nursing and professional services health care company with approximately 9,000 professionals.
In summary, Q4 2018 was a record sales quarter and 2018 was a record sales year. We are very pleased with the performance of our sales team and the continued strong demand we are seeing in the marketplace.
I would now like to briefly highlight some recent industry recognitions. In 2018, we received a record number of awards for our products, services and employee engagement. I'm especially pleased with engagement awards, including Glassdoor Employees' Choice Awards for 2018 best places to work in both the U.S. and Canada, best places certification in both the U.S. and Canada and our presence on lists for best workplaces for inclusion, for millennials, for women and for technology. We believe that our great culture leads to great customer experiences. We are an example of how using Dayforce at Ceridian has created a culture of innovation and performance.
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 evening, everyone. I'm going to take a few minutes to talk about our fourth quarter 2018 financial results. Then, I'm going to provide some highlights on our full year 2018 financial results. And finally, I'll provide guidance for 2019.
Starting with our fourth quarter 2018 financial results. Dayforce revenue increased by $31.3 million or 34% to $122.6 million. Cloud revenue, which includes both Dayforce and Powerpay, increased by $32 million or 28% to $148.3 million. And total revenue, which includes revenue from both our Cloud and Bureau solutions, increased by $17.9 million or 10% to $200.3 million. On a constant currency basis, Dayforce revenue grew by 36%, cloud revenue grew by 30% and total revenue grew 11%.
Cloud revenue growth in the fourth quarter was driven by a 26% increase in Cloud recurring services revenue and a 34% increase in Cloud professional services and other revenue. Of the $32 million increase in total Cloud revenue, $5.1 million or 16% was attributable to Bureau customers migrating to Dayforce.
Excluding the impact of migrations to Dayforce, revenue from Bureau solutions declined by $9 million or 13.6%, which was in line with our expectations. Cloud revenue accounted for 74% of our total revenue in the fourth quarter of 2018 compared to 64% in the fourth quarter of 2017.
Q4 revenue from Powerpay, our cloud HR and payroll solution for the Canadian small business market, increased 3% to $25.7 million. On a constant currency basis, excluding the impact of the year-over-year decline in the Canadian dollar, Powerpay revenue increased by 7%.
The average float balance for our customer trust funds during the fourth quarter was approximately $3.08 billion compared to $2.99 billion in the fourth quarter last year. The average yield on our float balance was 2.26% during the fourth quarter of 2018, an increase of 62 basis points compared to the average yield in the fourth quarter of 2017.
As a result, income from invested customer trust funds was $17.4 million in the fourth quarter compared to $12.3 million in the fourth quarter last year. The balance sheet value of customer trust funds as of December 31, 2018, was $2.6 billion compared to $4.1 billion as of December 31, 2017.
The decline in the end-of-year balance sheet value of customer trust funds reflects the fact that the last business day of 2017 was a Friday, while the last business day of 2018 was a Monday, and Friday balances are higher than Monday balances.
We also continued to expand our gross margins and operating margins during the fourth quarter. While Cloud recurring services revenue grew $24.8 million or 26%, our cost of Cloud recurring services to support this growth increased by only $3.9 million or 11%, and our gross margin on Cloud recurring services increased from 64% in the fourth quarter last year to 68%, reflecting an increase in the proportion of Dayforce customers live for more than 2 years from 59% in the fourth quarter last year to 63% and also our ability to continue to realize economies of scale in customer support and hosting costs.
While professional services and other revenue grew $6.5 million or 29%, professional services and other costs increased by only $0.5 million or less than 2%. And our negative gross margin on professional services and other improved from negative 49% in the fourth quarter last year to negative 17%, reflecting an increase in profitable post go live professional services and productivity improvements in implementing new customers.
As we discussed on our second and third quarter earnings calls, we stepped up our investments in research and development and in sales and marketing in the second half last year, and our fourth quarter results reflect these initiatives.
Product development and management expenses increased by $3.9 million or 33% to $15.7 million. Sales and marketing expenses increased $4.6 million or 13% to $39.6 million, and sales and marketing expenses as a percent of revenue increased from 19.2% to 19.8%.
G&A expenses increased $3.8 million to $30.8 million primarily due to costs associated with the secondary offering in November, increased share-based compensation and increased costs associated with being a public company.
We realized an operating profit of $21.5 million in the fourth quarter compared to operating profit of $16.1 million in the fourth quarter last year, up 34% year-over-year.
And income from continuing operations before income taxes was $12.7 million, an improvement of $18.4 million compared to a loss of $5.7 million in the fourth quarter last year.
Adjusted EBITDA increased by $7.9 million or 22% to $43.5 million, and adjusted EBITDA margin improved by 220 basis points to 21.7%.
Turning now to our full year 2018 financial results. Dayforce revenue increased by $123.1 million or more than 38% to $443 million. Cloud revenue, which includes both Dayforce and Powerpay, increased by $130 million or 32% to $534.3 million. And total revenue, which includes revenue from both our Cloud and Bureau solutions, increased by $75.6 million or 11% to $746.4 million.
Foreign currency rates had an immaterial impact on our full year revenue growth as the Canadian dollar was relatively flat year-over-year on an annual basis.
During our last call, we provided guidance for full year 2018, and I'm pleased to report that our actual results for total revenue exceeded the high end of the range by $3.4 million. And primarily due to the revenue overachievement, our actual results for adjusted EBITDA exceeded the high end of the range by $4.1 million.
Cloud annualized recurring revenue, which includes the full year impact of customers who went live during 2018, was $506.2 million at the end of 2018, up $115.2 million or 29.5% from 2017.
Annual Cloud revenue retention was 96.3% compared to 97.0% in 2017 and 95.7% in 2016. And Bureau revenue retention was 86.9% compared to 89.7% in 2017 and 87.4% in 2016.
We continued to expand margins during 2018. Our gross margin on Cloud recurring services increased from 63% in 2017 to 68%. And our gross margin on professional services and other improved from negative 88% in 2017 to negative 41% in 2018.
Adjusted EBITDA increased by $39.3 million or 33% to $157.1 million, and adjusted EBITDA margin expanded nearly 350 basis points to 21.0% in 2018.
Moving to the balance sheet. As of December 31, 2018, we had cash and cash equivalents of $217.8 million, an increase of $123.6 million compared to December 31, 2017. And our total debt was $670.3 million as of December 31, 2018, a reduction of $449.5 million compared to December 31, 2017.
The $123.6 million increase in cash and to $449.5 million reduction in debt were primarily attributable to proceeds from our successful IPO and refinancing of our term debt.
Negative free cash flow in the first half of the year of $52.9 million, which was primarily attributable to IPO-related items and higher first half interest expense, was partially offset by positive free cash flow of $9.4 million in the third quarter and positive free cash flow of $14 million in the fourth quarter.
Our capital expenditures in 2018 were $43.4 million compared to $50.6 million in 2017. Included in the $43.4 million in capital expenditures were $32.2 million for software and technology and $11.2 million for property and equipment.
Turning now to our outlook for the first quarter and full year 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. As we've noted on previous calls, the adoption of ASC 606 has 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 will be amortized over a 5 year period. To facilitate comparisons with prior years, we provided pro forma results for each quarter in 2017 and 2018 as if the new standard had been in effect.
Second, our guidance reflects the Canadian dollar to U.S. dollar exchange rate of $1.30. Third, our guidance also assumes no changes in the U.S. Fed funds rate or the Bank of Canada rates during 2019, so any Fed funds or Bank of Canada increases during the year will be upside to our guidance.
For reference, based on current investment practices, an increase in market investment rates of 100 basis points would increase float revenue by approximately $17 million over the 12 months following a rate increase.
Now with respect to guidance for the full year fiscal 2019, we expect Cloud revenue to be in the range of $655 million to $660 million, total revenue to be in the range of $810 million to $815 million and adjusted EBITDA to be in the range of $182 million to $187 million.
For those of you modeling EPS, we're looking at net interest expense of approximately $40 million for the year or approximately $10 million per quarter, income tax expense of approximately $30 million for the year and diluted weighted average shares outstanding of approximately $148 million for the year.
For the first 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 $203 million to $205 million and adjusted EBITDA to be in the range of $46 million to $48 million. Q1 2019 adjusted EBITDA margin is expected to be between 22.7% and 23.4% of revenue compared to 24.6% in Q1 of 2018 as restated under ASC 606.
On a full year basis, we expect to continue to expand our adjusted EBITDA margin by 80 to 130 basis points. However, our current guidance for Q1 adjusted EBITDA margin is slightly lower compared to the first quarter last year before our IPO, which did not reflect certain public company expenses and investments in R&D and sales and marketing.
At this time, I'm going to ask the operator to open up the lines for questions. Thank you.
[Operator Instructions] Your first line -- your first question comes from the line of Mark Murphy from JPMorgan. Your line is open.
Thank you very much and congrats on a nice finish to the year. So David, I believe you mentioned Q4 booking strength with larger - the larger customer segment. I'm curious to what extent do you attribute that to growing interest in continuous payroll versus any other factors that might have been driving it. And are most of those new logos heavy on the hourly employees?
So thanks, Martin. Nice speaking with you. The first point I would make is that our messaging around the continuous calculation, which, leads to better compliance calculations, as well as more efficient payroll benefits and other HCM processes efficiencies resonate even better with the larger account than it does with the mid market account because in that particular size of company, anytime you have an exception, they are thousands of the same exception.
In terms of the wins that I spoke about in the press release, we did a financial services organization with more than 20,000 employees. That, I believe, has a very high mix of salaried employees, so that is not a focus on hourly. We also announced a large health care organization.
Again, there's a nice mix over there between salaried. They do have some hourly. And then I did speak about the multiple wins that we had in retail and hospitality, a 20,000-plus retailer. By the way, that retailer will probably have 3,000, 4,000 salaried employees.
We spoke about a fast food chain, and we also spoke about a large hotel chain. And obviously, there will be a higher mix of hourly with that. And we also spoke about a large manufacturer, which obviously would be an hourly. But in summary, you've got quite a nice mix between some customers -- some large customers with salary and some customers who have a blend.
Okay. Just as a quick follow-up, do you plan to make more incremental investments this year on the talent management side? Or do you think it's more critical to focus on that core payroll engine and launching data payroll in additional countries in terms of just where you see better strategic value, better ability to monetize?
So Mark, if you look at the product announcements that we've made in the latter half of 2018, you'll see there's actually quite a good blend between the focus on additional talent functionalities. So for example, if I go into 2019, we'll be launching engagement surveys, which is obviously talent.
Even when we look at some of the compliance modules like benefits, we're now talking about benefit decision support. When we -- at the end of last year, we released succession planning, which is also on the talent side. So our belief, really, is that by focusing on the user experience as opposed to the module, you typically end up with quite a differentiated product.
And obviously, we're leveraging that continuous calculation, which, quite honestly, applies even between the talent modules like compensation and payroll and applies very well when you look at recruiting, bringing in some of the compliance pieces into there as well, which we believe gives us a nice advantage.
Thank you very much.
[Operator Instructions] Your next question comes from the line of Alex Zukin from Piper Jaffray. Your line is open,
Hey, guys. Thanks for taking my question. One maybe for David and then a quick follow-up for Arthur. So David, now that Leagh has been in the seat for about six months, how should we think about her biggest priorities for '19? And can you give us an update around maybe what kind of success you're seeing in attracting enterprise, incremental enterprise sales talent, how that org is ramping? And where do you expect it to be a year from now?
Great. So Leagh has been with us for about 5 months now, and we're delighted with the impact that she's had on the organization just in the latter half of the year. As I pointed out, Q4 was a record sales quarter for us, and we saw substantial wins in what we would term strategic market.
Also, inside Leagh's domain are the professional services and other, as well as all of the other aspects of go to market. A lot of the priorities that Leagh and her group have been focusing on are, if you like, leveling up our go-to-market strategies, particularly in the upper end of the market by taking much more of a verticalized approach to the industries that we've seen a lot of success in.
Perfect. And then maybe just a quick follow-up for Arthur. Looking at the Cloud ARR number. I think you grew 30% year-over-year in 2018, a slight deceleration from 35% the year before. I know you're not explicitly guiding to ARR.
But how should we think about the sustainability of this growth cadence into next year, particularly given the leveling up of the sales organization? And are there any other elements like FX or things that we should think about when we look at that for next year?
Well, I would guide you to look at the absolute dollar increases. The absolute dollar increase in 2017 was $101 million. The absolute dollar increase in 2018 was $115 million. I think you can kind of trend it that way. In a number of areas now we've been growing so fast.
The denominator has gotten so big. It's hard to move the needle. But if you look at the actual dollar increases, not only are we continuing to increase but the increases are getting larger.
Perfect. Thank you, guys.
Your next question comes from the line of Michael Turrin from Deutsche Bank. Your line is open.
Good afternoon, thanks. Dayforce Live customers saw a big increase. I'm just wondering, is there anything onetime or unique there? And are you geared now to handle a bigger throughput of customers as might be needed?
So Mike, let me take that. There are a few things I would like to kind of emphasize over here. The first is that we saw tremendous efficiencies in our implementation teams last year. In fact, the headcount that we had in implementation, I believe, was down year-over-year, even though we saw a tremendous increase in the number of accounts that we took live.
In comparison in Q4 '17, we took live 146 customers. Q4 of '18, that increased to 253 customers that were taken live. The other area that I'll probably point you to is that we've seen an increase in the average revenue per client between 2017 and 2018. In 2017, the average revenue was 107,000 per customer, and that increased to 119,000 per customer in 2018.
And if we actually look at it from an incremental revenue add per client, you will see that the number in 2017 was about 153,000 per customer, and that increased in 2018 to 172,000 per customer. So the incremental revenue added per new client went up by about 13% between those 2 years.
And so we're very pleased with the increase that we're seeing in the ability to onboard and activate the customers as well as the increased revenue that we're actually getting per client. What drove that? Is that an anomaly? No, we don't believe that is an anomaly. We had guided and we had spoken about that we had expected Q4 to be a record quarter for us in terms of activations.
I'd also like to actually add one other to each - one other. We are, this year in 2019, increasing the number of professional services resources. But unlike in 2018 where we actually decreased the headcount and the expenses, we do expect our headcount to go up slightly in professional services and other in 2019 to handle the activation and professional services demand requirement.
Thanks, David. That's great color there. One quick follow-on, I'm sure we're all wondering. Does the recent go private acquisition of one of your direct competitors in any way change the way you're thinking about your 2019 plans and priorities? Thanks.
The short answer is no. We don't believe it'll have a short-term impact into the marketplace.
Okay. Thanks, guys.
Your next question comes from the line of Raimo Lenschow from Barclays. Your line is open.
Thanks for taking my question. Congrats from me as well. David, can you talk - you gave the customer examples you talked about. The size of the customers seems to get bigger. Can you talk a little bit about that, your thinking about like your evolution in terms of kind of which customers you are dealing with? And is that kind of - is it you that's getting pulled up? Or is that kind of part of a plan? Can you talk through that, please? Thank you.
Sure, Raimo. So the increase in revenue per client is largely driven by increased module density and services. As we look towards 2019, we believe it'll also be driven by increased size as we move much more into the strategic market. Moving to the strategic market is twofold.
First, we have been opportunistic where we have been brought into the larger accounts based on the success, if you like, of the continuous calculation messaging in a single database.
The second part, with Leagh joining the organization, we're taking a much more disciplined approach in how we target strategic accounts in terms of taking more of a value added sales approach to specific verticals where we can tailor the message and the benefits of the technology.
Okay, perfect. Thank you. Good luck.
Your next question comes from the line of Mark Marcon from R.W. Baird. Your line is open.
Good afternoon, David and Arthur and let me add my congratulations. Wondering if you can talk a little bit about who you were winning some of these larger clients from. Are you seeing a change with regards to the RFP pipeline in terms of who the incumbents are? The features, obviously, the continuous calc and the module robustness, is impressive.
But just wondering what are some of the key drivers, both in terms of what causes you to get invited in, who you're seeing and what's -- and the key driver for winning.
Thanks, Mark. Nice to be speaking to you as well. The first point I'll make is that we've seen an increase in our Net Promoter Scores year-over-year. And that increase has been most pronounced in the strategic accounts sector, which means that our referenceability and customer satisfaction in the large market has obviously influenced where we are brought into deals.
The second piece is, we have been investing in partnerships in developing relationships with advisory firms and SI firms. Just as an FYI, we had our partnership conference scheduled for early April this year, and we expect to see quite good attendance over there. Those partnerships have led to obviously higher pipeline and then obviously, influencing the actual deals as well.
And can you talk about who you're going up against and if there's any big change?
The competitive nature hasn't changed at all. We obviously do replacements of some of the other payroll companies. We also see replacements of the ERPs. It hasn't -- we also still see quite a bit of replacement of really old legacy technologies. So we haven't seen any market changes in that regard.
Great. Thank you.
Your next question comes from the line of Brad Zelnick from Credit Suisse. Your line is open.
Numbers [ph] in the first half and throughout the remainder of the year?
I'm sorry, Brad. I didn't catch most of the question. Could you repeat it?
I'm sorry. Can you hear me now?
Yes, we can. Thank you.
Excellent, yes. So especially coming off of a record number of wins in Q4, based on the current pipeline that you have, how should we think about the cadence of go lives into the first half and throughout the year in 2019?
Brad, I don't think we give guidance into the actual count. There is quite a lot of fluctuation between quarters in terms of the number of accounts we take live. We are scheduled to go live but based obviously on when the client is actually signed but also based on the availability of the customer team. We do not have a backlog in terms of implementation, which means we can typically kick off the projects as quickly as the customers are able to.
But as I said, Q4 was a record sales quarter, and I spoke previously in prior earning calls that we have seen very strong demand throughout the entire of 2018. And our goal would be to obviously take those accounts live in 2019.
That's helpful. And just a quick follow-up. Your Cloud retention rates are best in class. But if we look at year-on-year, there's a slight downtick. Can you maybe speak to what explains for that and specifically, what Dayforce retention was?
Sure. So by looking at reduction in a longer term basis, 2018 was actually in line with 2016. It's exactly -- in fact, slightly higher than the midpoint of the range that we gave.
We gave guidance to 95% to 97%, which I think is actually a very good number for our industry. I can't speak to the exact specific as to why 2017 was so high. What I would point out though as well is that our net retention rate is above 100%.
Excellent. Thank you so much.
Your next question comes from the line of Justin Furby from William Blair. Your line is open.
Hey, guys. Fabulous quarter. David, to start, can you give a sense for the growth trajectory? How are you thinking about growth in '19 between the Powerpay business and Dayforce embedded in your guidance? And then just what you think in terms of the Bureau contribution in 2019 as a percentage of your growth? And I've got a quick follow-up for Arthur.
Sure. So in terms of the balance, obviously, the majority of the Cloud growth is coming from Dayforce. If I look historically in terms of the differences, if I look at Q4, on a GAAP basis, Dayforce revenue grew by 34.3%.
On a constant currency basis, Dayforce revenue grew by 35% in Q4 of '18. And if I look at it on a Powerpay basis, on a GAAP basis, the growth rate of Powerpay was 2.8% and the constant currency growth rate was 7.4%.
And as Dayforce is obviously the vast majority of the Cloud revenue, you would expect the majority of the growth of Cloud to come from the growth of Dayforce, and that would obviously continue into 2019.
Okay. And then the Bureau, David, in terms of the assumptions for '19 and what the percentage of mix coming from that is.
Sure. We expect, obviously, the mix of Bureau to continue to drop. And Arthur, have we given guidance to what we expect the decline in Bureau to be in 2019?
You can infer from -- we've given the total revenue in the Cloud guidance. But the Bureau retention was 86.9% in 2018 versus 89.7% in 2017, 87.4% in 2016. So we continue to be in the high 80s, and you can assume the same, excluding migrations to Dayforce.
Migrations to Dayforce accounted for approximately 18% of our increase in Cloud revenue in '18. You should expect something in the neighborhood of 13% to 17% going forward.
Okay. That's helpful. And then, Arthur, just to be clear on the ARR, just the way you define it, it wouldn't include most of your Q4 bookings, is that right? I think it's just a live customer sort of run rate of ARR.
And can you remind us, as you go through the year, what the seasonality of your new bookings looks like in terms of which quarters are the biggest? I think for Ulti, it was Q2 and Q4. What does it look like for you guys? Thanks,
It will be the same for us.
Okay, perfect. Thanks, guys. Nice quarter.
[Operator Instructions] Your next question comes from the line of Samad Samana from Jefferies. Your line is open.
Hi. Thanks for taking my question. David, when we were at INSIGHTS, I think one of the things that customers -- that they're pretty excited about was the On-Demand Pay solution that you're rolling out in early 2019. I was curious if you guys have determined a pricing model for that and how we should think about the potential monetization opportunity of that. And then I have a follow-up.
Sure. I appreciate the question. We haven't disclosed in the market the pricing, but we do have several customers that are now in early stages of implementation with On-Demand.
Great. And then have you disclosed what the pricing model is? Or maybe is it standard PEPM or is it based on wages? Maybe any color there would be helpful.
It would be sort of per employee per month pricing model, but we haven't disclosed the dollar amount in the market.
Great. That's helpful. And then in terms of a follow-up, I was wondering, if we look at the average number of employees live per live customer, that was -- they grew about the same or consistent year-over-year. I'm curious, you've highlighted a lot of really nice-sized deals.
Should we expect the average number of employees as you get these customers you've called out this year live to increase? Or how do you think about growth in units live next year versus total users as we're thinking about a model?
So if I look at it on the total users, we saw an increase of 600,000 users between 2018 and 2017, and we saw that obviously across an increase of 717 customers that were taken live in '18 as compared to 662 customers that were taken live in 2017, which was obviously an increase from 569, which were taken live in 2016.
So you've seen an upward trend per year in the number of accounts that we've been activating. We haven't obviously given guidance, as I mentioned earlier, into the number of customers we'd expect to go live to next year, but you can see what the historical trend has been.
Great. Thanks for taking my question.
Your next question comes from the line of Chris Merwin from Goldman Sachs. Your line is open.
Okay. Thanks for taking my questions. So just a follow-up on a comment, David, you made earlier about revenue per client. I think you called out module density as the main driver more so than the shift upmarket at least as it related to fiscal '18, but you continue to invest in R&D and roll out new products. Maybe can you just frame for us how we should be thinking about the opportunity for PEPM over the long term? And I've got a follow-up for Arthur.
Chris, thank you for that. So a bit more color. If I look at the number of employees per customer, it was largely constant between 2017 and 2018. You can do the math yourself, 3.1 million active users in 2018 over a base of 3,718 customers versus 2.5 million employees right at the end of '17 on a base of 3,001.
And so if you do the numbers, it averages out to obviously 833, slightly different, obviously, if you look at the median, which gives you actually a bit more accurate information.
The increase that we saw in revenue per client, and again, if you look at the increases, we want from $106.6 thousand per customer in 2017 to $119.2 thousand per customer in 2018, so a nice increase of about almost 12%. So the increase over there was driven by the add-on and the increased PEPM that we're getting from the new clients.
And you see that again. If you look at the incremental revenue per new Dayforce customer, which was $152,000 in 2017, that grew by about 13% to $172,000 in 2018. We've always spoken about the platform opportunity in the marketplace, which effectively is we get the customer for payroll benefits and time, OHR [ph]. We work on making sure that they're very happy. And then we go back to them and we sell them the additional features as we release them.
The cadence of building our products has been 2 to 3 new features per year, and as I said, we expect that cadence to continue into the future. And as such, I would expect the incremental revenue per client to go up regardless of our move upmarket.
The second point is with Leagh joining the organization and a more focused go-to-market plan for the strategic accounts, strategic for us -- by the way, we've now defined it, as above 6,000 employees, and that involves having a more of a vertical realization [ph] go-to-market strategy that extends all the way from sales to implementation to customer support. We would expect to see more success in that particular segment of the market, and so the average number of employees should go up.
Thank you for that. And then just for Arthur, looks like professional services gross margins under 606 were negative 14% in '18. And under 605, I think you called out negative 41%.
So just as we think through the 606 transition, anything you can share the trajectory of professional services gross margins getting to breakeven, especially as we see the mix shift change over of professional services related to customers that you already have live? Thanks.
Sure. So for the full year 2017, we see the professional services margin would have gone from negative 87.8% to negative 32% under 606. For full year 2018, professional services margin would have increased from a negative 40.8% to a negative 14.3%, would have improved.
And in Q4 last year, we were at negative 17% before 606. After 606, we're at -- we're, I believe, in the tens, 10.6%. So I think that we're in the -- we're probably in the minus 10% to breakeven range going forward.
Okay, perfect. Thank you.
Your next question comes from the line of Nandan Amladi from Guggenheim Partners. Your line is open.
Thank you. Thanks for taking my question. So in the selling cycle, David, I know your customers tend to be little bit larger, 800-plus average. Are you seeing any changes in their behavior in the sense of decision-making process, the number of steps you have to go through, any of that really as it relates to sort of the macro environment?
As you've seen with us and others, obviously, Q4 is a very healthy buying quarter. So I haven't seen any changes in the macro environment. And if I look at the pipeline into 2019, I don't see any either.
Okay, thank you.
Your next question comes from the line of Walter Pritchard from Citi. Your line is open.
Hi, thanks. Two questions. One for David, one for Arthur. David, on the U.K. market rollout, is - any update there in terms of timing, contribution to your thinking about for 2019? And then I had a follow-up.
So we issued a press release a couple of days ago announcing a few go lives that we've had in the U.K. on our native payroll product. So we are now beginning to see customers get activated on that major U.K. product. We will be having another summit in the U.K., I believe, within the May time frame.
And so we obviously are seeing pipeline development and market demand. So we're quite happy at the moment. We've also begun ramping up the sales organization in the U.K. As it pertains to 2019, the impact would obviously be towards the end of the year and obviously into 2020.
Great. And then, Arthur, as it relates to the professional services allocation as we look at 2019, should we expect it to roughly look like it did in 2018 after the 606 accounting takes hold?
Yes. I think, again, I think Q4 is a fair indicator. Yes.
Okay. Great. And then actually, last one just on investments. It looks like you did ramp up your investments as it related to Q4. And I'm wondering if you think about your - especially on the sale side, the kind of efficiency you're getting and so forth, how should we think about that through the course of 2019?
So if we look at the actual numbers, you'll see that the sales and marketing expense in Q4 of '18 was $35.8 million as compared to $31.8 million in Q4 of '17. So we increased the actual spend there quite a bit. The reason for that is obviously increased commissions, which drove a lot of it as well we have our customer conference, which falls into October, so it's booked in Q4.
Going forward, we'll continue to invest in sales and marketing, but the changes aren't going to be a big step. So continue to be very focused investments that have high returns.
Okay, great. Thank you very much.
I now turn the call back over to David Ossip for closing remarks.
Just thank you, everyone, for joining the call today, and I look forward to our future conversations.
That concludes today's conference call. You may now disconnect.