Ceridian HCM Holding Inc

NYSE:DAY

Earnings Call Transcript 2018-Q2

[Operator]

Greetings, and welcome to the Ceridian Second Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jeremy Johnson, Vice President of Finance and Investor Relations at Ceridian. Sir, please go ahead.

[Jeremy Johnson, executive]

Thank you, and good morning. 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 of the call, may include forward-looking statements about current and future 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 may be required by law.

The second 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 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.

[David Ossip, executive]

Thanks, Jeremy. Good morning, everyone, and thank you for joining our second quarter earnings call.

I'm pleased to report that Ceridian had another strong quarter. We achieved Cloud revenue growth of 36% and adjusted EBITDA growth of 49%, which drove a 440 basis point improvement in our adjusted EBITDA margin. Revenue from Dayforce, our flagship Cloud HCM platform, grew over 40% during the quarter, reflecting continued strong market demand. We had 3,308 customers live on the Dayforce platform at the end of the second quarter, an increase of 154 customers from the first quarter of 2018 and an increase of 618 customers from the same date last year.

As I mentioned last quarter, as part of our planning process for 2019, we have been evaluating the acceleration of investments in several growth initiatives in the second half of 2018. These initiatives include investments in people, product and sales. With respect to investments in people, I'm thrilled to announce the appointment of Leagh Turner as President and Erik Zimmer as Chief Strategy Officer. In addition, we have decided to separate the roles of President and Chief Operating Officer, with Paul Elliott serving as COO until May 2019.

Leagh has over 20 years of experience in the software industry and has served in many senior leadership roles within SAP over the last decade, most recently as Global Chief Operating Officer of SAP Strategic Customer Program, and prior to that, was SAP's COO of EMEA and Canada. Leagh brings a breadth of experience and expertise that will help us continue to drive growth and expand globally.

Erik joins us from T.H. Lee. I've had the pleasure of working with Erik over the past 7 years in his role as a Managing Director of T.H. Lee's operating group. Erik was very involved in the design and development of our Dayforce Activate technology, which has significantly reduced implementation hours and cycle times for our customers. We are very excited to welcome both Leagh and Erik to the Ceridian team.

In addition, we have added Steve Weintraub as VP of Professional Services, reporting to Head of Services, Adrian Grbavac. Prior to Ceridian, Steve was President, North America at NGA Human Resources. Steve's focus is to optimize the professional services organization as we expand delivery of profitable post go-live professional services to our customers and improve overall professional services gross margin.

With respect to product initiatives, after completing native payroll in the U.K., with our first customers going live this past quarter, we are accelerating the build-out of native payroll functionality in Australia and expect completion early next year. We are in the process of building on-demand pay capabilities for Dayforce and other initiatives around emerging gig economy, which we'll highlight in October at our annual customer conference, INSIGHTS. And we are accelerating the development of additional talent modules, including succession planning, which will also be demonstrated at INSIGHTS.

With respect to sales and marketing, we are adding additional headcount across sales, marketing and business development organization, and we have increased the number of HCM summits that we'll host this year, including Chicago, which will be held next week; London in September; and Hawaii in late August.

Our HCM summits are 1-, 2-day conferences designed to connect our existing customers with leaders and decision-makers at prospective companies to discuss why they selected Ceridian and what their experience has been working with us. An example of a recent win from an HCM summit is a 5,000-employee mortgage finance company based out of Chicago that selected us shortly after attending the HCM summit in Denver.

During the second quarter, we also hosted a HCM summit in New York, which was extremely well-attended, so much so that we had to change venues to accommodate all of the attendees. We are excited by the positive traction that Dayforce has achieved in the marketplace, and we believe our customer engagement events are critical to sustain our positive sales momentum.

I'm also proud of the continued recognition that Ceridian received for our culture and products in the past quarter. First, after an extensive third-party evaluation, we were EDGE-certified for gender balance, equal pay for equivalent work, effectiveness of policies and practices and inclusiveness of culture. In addition, Ceridian was recently recognized by independent analysts as the Best Workplace for Women by Great Place to Work. And on our products, Dayforce continues to be recognized as a leading HCM solution, most recently highlighted by winning gold for Most Innovative Company of the Year as part of Network Products Guide's Annual IT World Awards. In summary, we are pleased with our performance in the second quarter, and we are extremely excited about the tremendous opportunity that lies ahead. Thank you again for your time and continued support.

I'll now turn it over to Arthur.

[Arthur Gitajn, executive]

Thank you, David, and good morning, everyone. This is our first quarterly financial report reflecting our performance as a public company since our IPO at the end of April. And I want to take a few minutes to highlight some of the IPO-related items in our Q2 2018 Form 10-Q, which was filed this morning and is available on the U.S. SEC EDGAR website.

First, Note 1 to the financial statements, beginning on Page 9, provides the detailed accounting for the IPO and the use of IPO proceeds. The primary use of IPO proceeds was to redeem $475 million of senior notes, which saves the company more than $50 million a year in interest expense going forward. And after associated fees and expenses, we ended up with an additional $68.6 million in cash on the balance sheet as well. Second, as discussed in Note 8, beginning on Page 19, at the same time, when we refinanced our remaining debt, and we now have a new $680 million term loan and a $300 million revolving credit facility.

In addition, as discussed in Note 3 to the financial statements, beginning on Page 13 of the 10-Q, contemporaneous with the IPO, we distributed our controlling financial interests in Lifeworks to our pre-IPO stockholders. As a result, Lifeworks has been reclassified and presented as discontinued operations, and our financial statements now present only one reportable segment, our Human Capital Management, or HCM, business. For your reference, we provided quarterly financial, quarterly income statements excluding Lifeworks for the first quarter this year and for each of the 4 quarters in 2017 as a schedule in our press release.

And finally, in the interest of providing more disclosure on the impact of share-based compensation and other adjustments, we provided new tables in our Management Discussion & Analysis on Pages 36 and 37, detailing share-based comp expense and other adjustments by expense line and reconciling our reported results to our adjusted results for the second quarter and year-to-date in 2018 and for the comparable periods last year.

As David mentioned, we are very pleased with our performance in the second quarter ended June 30, 2018. Dayforce revenue increased by $31 million or 41% to $106.3 million. Cloud revenue, which includes both Dayforce and Powerpay, increased by $33.5 million or 36% to $127.8 million. And total revenue, which includes revenue from both our Cloud and Bureau solutions, increased by $21.8 million or 14% to $179.3 million.

During our last call, we provided guidance for the second quarter, and I'm pleased to report that our actual results for Cloud revenue exceeded the high end of the range by $2.8 million. Our actual results for total revenue exceeded the high end of the range by $4.3 million, and our actual results for adjusted EBITDA exceeded the high end of the range by $4.6 million.

Cloud revenue growth in the second quarter was driven by a 35% increase in Cloud recurring services revenue and a 40% increase in Cloud professional services and other revenue. Of the $33.5 million increase in Cloud revenue, $6.1 million or 18% was attributable to Bureau customers migrating to Dayforce. Excluding the impact of migrations to Dayforce, revenue from Bureau solutions declined by $5.6 million or 8.9%, which was in line with our expectations.

Cloud revenue accounted for 71% of our total revenue in the second quarter this year compared to 60% in the second quarter last year. Breaking down our Cloud revenue by solution, during the second quarter, Dayforce revenue increased 41% to $106.3 million, and Powerpay revenue increased 13% to $21.5 million. Excluding the impact of foreign currency fluctuations, Dayforce revenue increased approximately 40%, Powerpay revenue increased by 8% and Cloud revenue increased by 33%.

The average float balance for our customer trust funds during the second quarter was approximately $3.35 billion compared to $3.23 billion in the second quarter last year. And the average yield was 1.94% during the second quarter, an increase of 55 basis points compared to the average yield in the second quarter last year. As a result, income from invested customer trust funds was $16.2 million in the second quarter compared to $11.2 million in the second quarter last year.

While Cloud recurring services revenue grew 35%, our cost of Cloud recurring services to support this growth increased by $3.9 million or 13%. And our gross margin on Cloud recurring services increased from 62% in the second quarter last year to 68% as we continue to scale the business.

While professional services and other revenue grew 36%, cost of professional services and other revenue was reduced by $0.7 million or 2%, 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 104% in the second quarter last year to negative 47%, reflecting an increase in profitable post go-live professional services and productivity improvements in implementing new customers.

Product development and management expenses increased by $5.1 million or 51% to $15.1 million, primarily due to increased research and development costs, and capitalized software development costs were relatively flat year-over-year. Overall, we generated a $21.8 million increase in total revenue, with a $6.7 million increase in total cost of revenues. And gross profit increased by $15.1 million or 26% to $72.8 million.

Selling, general and administrative expense increased $29.3 million to $84.1 million. Of the $29.3 million increase in selling, general and administrative expenses, $23.2 million was attributable to onetime expenses related to the IPO and debt refinancing. Excluding IPO-related expenses, selling, general and administrative expenses increased by $6.1 million, primarily due to increased sales commission expense, employee benefit-related costs and incremental costs associated with being a public company.

We incurred an operating loss of $11.3 million in the second quarter compared to operating profit of $0.9 million in the second quarter last year. Excluding the impact of $25.3 million in IPO and debt refinancing expenses, we would have realized an operating profit of $14 million in the second quarter compared to an operating profit of $0.9 million in the second quarter last year.

Adjusted EBITDA increased to $33.6 million from $22.6 million last year. Interest expense increased by $21.4 million, reflecting $25.7 million in interest expense related to the redemption of the senior notes and refinancing of our term loan debt.

Income tax expense was reduced by $0.8 million. And net loss attributable to Ceridian increased by $42.6 million to a net loss of $65.5 million compared to a net loss of $22.9 million in the second quarter last year. Excluding the impact of $51 million in IPO and debt refinancing expenses and assuming no change in tax expense, net loss would have been $14.5 million compared to a net loss of $22.9 million in the second quarter last year.

As discussed in our Form 10-Q filing, beginning in the first quarter of 2019, we plan to adopt the new revenue recognition standard ASC 606. To facilitate comparisons with companies that may have already adopted, we have estimated the impact of new standard -- that the new standard will have on our financial results and have disclosed these in our Form 10-Q. We expect that adoption of the new standard will result in changes to the classification and timing of our revenue recognition.

Specifically, we expect an increase in revenue classified as professional services and other revenue and a reduction in revenue classified as recurring services revenue under the new standard as compared to current U.S. GAAP. Further, we expect that the new standard will result in changes to the timing of our revenue recognition compared to current U.S. GAAP. We also expect changes to the timing of certain incremental selling, general and administrative expenses, as the new standard will require capitalizing and amortizing certain selling expenses, such as commissions and bonuses paid to the sales force. These sales expenses will be amortized over the customer's period of benefit.

Under the new standard, in Q2 2018, professional services and other revenue would have increased by $5.7 million, recurring services revenue would have been reduced by $5.3 million, so total revenue would have increased by $0.4 million. In addition, sales expenses would have been reduced by $2.8 million, resulting in an increase in operating profit of $3.2 million. The margin on professional services and other would have improved from negative 47% to negative 18%, and the gross margin on Cloud recurring services would have been reduced from 68% to 66%.

Moving to the balance sheet. As of June 30, 2018, we had cash and cash equivalents of $171.8 million, an increase of $77.6 million compared to December 31, 2017. And our total debt was $671.5 million as of June 30, 2018, a reduction of $448.3 million compared to the balance of December 31, 2017. The $77.6 million increase in cash and the $448.3 million reduction in debt are primarily attributable to the IPO and refinancing of our term debt.

Our capital expenditures through the first 6 months of 2018 were $18.8 million compared to $19.2 million through the first 6 months last year. Included in the $18.8 million in capital expenditures were $13.9 million for software and technology and $4.9 million for property and equipment.

Turning now to our outlook for the third quarter. We expect Cloud revenue in the range of $129 million to $131 million, total revenue to be in the range of $175 million to $177 million and adjusted EBITDA in the range of $30 million to $32 million. Our outlook for the third quarter also includes the following assumptions: Interest expense of approximately $10 million and approximately 138 million weighted average shares outstanding.

Turning now to our outlook for the full year fiscal 2018. Our performance through the first half 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 $526 million to $530 million. Total revenue is expected to be in the range of $735 million to $740 million. And as David discussed, given our over-performance in the second quarter, we believe that we can accelerate some of our investments and growth initiatives and still meet our profitability targets, and we are reaffirming our outlook for adjusted EBITDA to be in the range of $148 million to $152 million.

Our outlook for the full year fiscal 2018 also includes the following assumptions: Interest expense of approximately $86 million and approximately 114 million weighted average shares outstanding.

I would also note that our guidance for both Q3 and the full 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 that you may have. Thank you.

[Operator]

[Operator Instructions] Our first question comes from the line of Jesse Hulsing with Goldman Sachs.

[Jesse Hulsing, analyst]

David, the U.K. launch at the end of July, how did the launch go versus your expectations? And I guess, how do you think about that geography starting to contribute to revenue over the next couple of years?

[David Ossip, executive]

Jesse, nice to speak with you. The launch was fantastic. We're delighted with the initial go-live of the first few customers. In fact, I will be in the U.K. in early September for one of the customer's go-live celebrations. So it appears that they are very happy as well. As I mentioned, we have accelerated some of our HCM summits. We're having one in the U.K. right after Labor Day. And I also mentioned that we've started to increase across sales and marketing, specifically business development executives. These are the people who do the outbound calling to identify opportunities, and we're actively ramping up that team currently in the U.K. And alongside that, we're hiring sellers in the U.K. In terms of how it'll impact revenue, in 2018 and early 2019, it will be minimal. As you can imagine, we have to go through the sales cycle, do the implementations and then activate the accounts. So I would expect to see some impact towards the latter half of next year and into 2020.

[Jesse Hulsing, analyst]

Great. And Arthur, Cloud recurring revenue was down a little bit quarter-over-quarter. Can you walk through what drove that?

[Arthur Gitajn, executive]

Yes, so first of all, Cloud recurring revenue increased year-over-year by $27.2 million or about 35%. As you noted, it was relatively flat sequentially quarter-to-quarter. It was relatively flat last year as well, and it's because there's some seasonality in our revenue. Q1 and Q4 are typically our strongest quarters, as Q1 benefits primarily from tax filing revenue earned in association with W-2 tax forms in the U.S. and also T4 tax forms in Canada. I would point out that Q2 Cloud revenue exceeded the high end of our guidance range by $2.8 million. Professional services and other revenue was $22.1 million, an increase of about 40%. Even if you attribute all of that over-performance to PS and other and subtract the $2.8 million from the $22 million, then our PS and other growth rate would have been roughly half, but we still would have hit the high end of our guidance range. So you can infer that Cloud recurring revenue was in line with our expectations. I would also point out that what we're seeing in this quarter's results and the overall trend that we expect to see reflected in the full year numbers, is that as the customer base matures, and you can see this on Page 31 of the 10-Q, the proportion of our customer base that's been live for more than 2 years has gone from 50% in Q2 2 years ago to 57% in Q2 last year to 61% in the second quarter this year. As the customer base matures, we have the opportunity to go back into our customer base and sell post go-live professional services and additional functionality. And the post go-live services are more profitable than the initial implementation services, and that's contributed to improvement in our margins on PS and other, which have improved from negative 104% to negative 47%. And the incremental hosting and customer support costs when customers buy additional modules is much less, and that contributes to the improvement in gross margin on Cloud recurring services, which increased from 61.5% to 67.7%. And you can also see this reflected in revenue per customer. The average revenue per customer added in Q2 was more than $50,000 compared to the average revenue per customer for all Dayforce customers, which was about $32,000. We believe Dayforce revenue per customer will continue to increase, not only as we continue to attract larger customers, but also as we sell additional functionality into our customer base.

[Operator]

Our next question comes from the line of Mark Murphy with JPMorgan.

[Mark Murphy, analyst]

Yes, I was curious if you can ballpark the number of new Dayforce customers that were booked during the quarter and how that volume compares to Q2 of last year? I'm also just wondering how that number would compare to the number of Dayforce customers who went live, which I believe was 154, in Q2.

[David Ossip, executive]

Mark, thanks for the question. We don't report out the number of accounts that we sold in a given quarter. We'll take it under consideration for future quarters. What I can say is we do see a very robust market.

[Mark Murphy, analyst]

Okay, great. And as a follow-up, David, how aggressive are your global payroll aspirations? For instance, what cadence do you think you can expect to roll out native payroll in new countries? And how many countries do you plan to offer in the very long run?

[David Ossip, executive]

So Mark, we've announced that we're accelerating Australia, which will be ready in early 2019. There are adjunct markets to both the U.K., such as Ireland and New Zealand, in Australia, which obviously would make a lot of sense. We also have quite an elaborate global strategy that we're now beginning to operationalize. And as we get further along, we'll begin to share a bit more information.

[Mark Murphy, analyst]

Okay. One last question, David. If you look at the Dayforce wins during Q2, is there any way you can approximate what mix of the customers selected Dayforce over the competition primarily because of the continuous payroll calculation engine versus any other attributes, for instance, the -- just the overarching architecture with the single application, single database, et cetera?

[David Ossip, executive]

Mark, we've spoken about this beforehand, we are differentiated in that we are a single application, meaning one database, one user experience and one rule engine, and that allows us to do the continuous calculation, which, as you probably have researched, does differentiate us from the other players inside the market. Generally, it is one of the top reasons that clients select us. That 5,000-employee mortgage company that I spoke about out of Chicago, that would have been their reason for selecting us. And I would imagine that it probably holds true for the other customer wins we had in the quarter.

[Operator]

Our next question comes from the line of Alex Zukin with Piper Jaffray.

[Aleksandr Zukin, analyst]

So I guess, maybe the first one for David. As you think about the increase in the incremental investments that you're making on sales and marketing, can you maybe talk about what you're seeing from either a new ARR bookings perspective in the first half that's giving you the confidence to make these investments and maybe how that compares to first half of last year?

[David Ossip, executive]

Sure. Nice to speak with you, Alex. As I mentioned, we're seeing a robust market. And in prior conversations, I have spoken about that we would not hire ahead of market demand. So the fact that you can see us investing in sales and marketing probably is indicative that we do see a very strong market and strong demand for our types of services.

[Aleksandr Zukin, analyst]

That's helpful. And then maybe one for Arthur. Can you talk about Powerpay? Sequentially, both this year and last year, it can be down on a sequential basis. So I'm just curious, what drives that usually? And how should we think about any seasonality in the back half of the year on either Dayforce or Powerpay?

[Arthur Gitajn, executive]

The big impact on Powerpay is foreign exchange. The stronger Canadian dollar positively impacted the Powerpay growth rate. Since Powerpay is exclusively a Canadian product and the Canadian dollar strengthened by 4% from CAD 1.34 to USD 1 in Q2 last year to about CAD 1.29 in Q2 this year, Powerpay revenue grew 8.1% on a constant-currency basis compared to 13.2% on a GAAP basis.

[Aleksandr Zukin, analyst]

Perfect. And if I could just sneak one more in on Dayforce. Can you comment on the quantity and kind of volume and success of converting Bureau customers to Dayforce during the quarter? How did that trend relative to last year? And maybe what do you expect that to look like during the remainder of the year?

[Arthur Gitajn, executive]

Again, we saw a contribution -- the migration of Bureau customers to Dayforce was approximately 18% in -- contributed approximately 18% of the increase in Cloud revenue. We've been guiding to about 15% to 20%, and historically, we've seen about 25%. Important to note that even as the impact of migrations declines, we continue to see solid Cloud revenue growth and Dayforce growth, which even on a constant-currency basis, Dayforce grew 40%.

[Operator]

Our next question comes from the line of Karl Keirstead with Deutsche Bank.

[Karl Keirstead, analyst]

Just a follow-up on the decision to increase the investment in the second half. Perhaps for David or Arthur, whoever wants to take it, I'm just curious whether you view this as a relatively sort of onetime step-up? Or would you expect the level of investment spending in sales capacity build-out to perhaps continue into 2019, such that we should temper our expectations around the growth in adjusted EBITDA margins?

[David Ossip, executive]

So nice question. As Arthur had mentioned, we have increased our revenue guidance, but we've held steady with our EBITDA guidance for the remainder of the year. The fact that we came in above the EBITDA guidance in Q2 can be used to kind of infer what the investment would be in terms of growth initiatives for the remainder of the year. Going into next year, I imagine that we will continue to invest in the growth of the business.

[Karl Keirstead, analyst]

Okay. And then maybe a follow-up for me. You've given, obviously, the Dayforce customer count and the sequential growth. I'm just wondering whether there were any notable mix shifts in terms of enterprise, mid-market, smaller customers, David, worth flagging for us.

[David Ossip, executive]

I would say it's rather constant with prior quarters. We are seeing success across all of the different segments.

[Operator]

Our next question comes from the line of Siti Panigrahi with Wells Fargo.

[Sitikantha Panigrahi, analyst]

I just want to dig a little bit more on that investment on sales and marketing. Would you be able to share your maybe areas of investment, whether it's more on the Dayforce side or Powerpay or the international market? And like how -- what's your aspiration in terms of quota-carrying sales rep increase for there versus what you plan to achieve?

[David Ossip, executive]

Sure. The investments that we're making are predominantly on the Dayforce side, just given that the majority of our Cloud revenue is Dayforce. However, we are making investments on the Powerpay side. The Powerpay investments are largely around developing more broker relationships, more marketing to get more inbound leads and as well as to increase the headcount slightly in the outbound sellers. Remember that a Powerpay seller is quite different than a Dayforce seller in that those -- these are mostly telesale types of agreements. In terms of the investments that we're making in Dayforce, there are a number. The first piece is we've increased the number of HCM summits that we're doing this year, and I would expect that number to continue growing as we go into next year. These are the 1.5-day events that we typically have, where we bring in prospective customers to a particular location and we have existing customers speak about why they selected us and what their experience has been working with Ceridian, what the implementation was like and what the benefits they've received from the system. And we've been quite successful. The Chicago mortgage company that I spoke about was the output of the Denver summit that we had earlier inside the year. We also are making investments in BDEs. These are the outbound callers who call into organizations to identify active opportunities for HR, payroll, time and attendance, all various HCM types of modules. We are increasing the number of quota-carrying reps, although we did not disclose to the market the number of reps that we have. And as well, we are investing in sales and market -- sorry, we are investing in marketing and alliance programs to obviously also increase the pipeline.

[Sitikantha Panigrahi, analyst]

And just a follow-up to Powerpay. How big is that opportunity? And what's your penetration at this point? I guess that's only focused on Canada. And also, are you planning to ever bring Powerpay or even Dayforce to U.S. at least to target 500 and below market?

[David Ossip, executive]

So I didn't hear the first part of your question, but in regards to the second part of your question, the Dayforce technology does scale both up and down market. In fact, in Canada, we do see some small market wins with customers below 500. We are looking at new implementation tooling and methodologies that could make the Dayforce implementations very attractive for the smaller market in the U.S. as well. However, we haven't made any decisions on that at this point in time. Could you repeat the first part of your question?

[Sitikantha Panigrahi, analyst]

Yes, I was asking how big is the opportunity still remain in Canada. And what's your penetration at this point for Powerpay?

[David Ossip, executive]

We -- our biggest competitor for Powerpay is really boxed software, so there's still a tremendous amount of opportunity for Powerpay in Canada. I had talked about this a little bit earlier in the year. In the last number of years, we effectively have taken our -- what at the time was a limited marketing and sales expense and targeted at Dayforce, as we were building up the business. Now that we have a slightly different balance sheet, we are looking at opportunities to accelerate sales for Powerpay in Canada.

[Operator]

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

[Mark Marcon, analyst]

I was wondering if you could talk a little bit about the incremental clients that you ended up bringing on to Dayforce. Clearly, they are larger in size in terms of the revenue spend. And I'm wondering if you could dimensionalize that, either in terms of size of clients or number of modules that are brought on. And also, what were you seeing in terms of the competitor takeaways? And staying on Dayforce, obviously, Q2 is not a big turnover period, but just any sort of commentary with regards to client retention?

[David Ossip, executive]

Sure, Mark. A lot of questions inside there. We haven't really broken out the segment of the customers that we've onboarded within the last quarter. I would expect that they are somewhat consistent to what we've seen previously. In terms of success rates, I mentioned before we're having success across segments. Our competitiveness of the product that's differentiated by the continuous calc and the single app is still resonating very well inside the market, and that has allowed us to have many competitive wins. The account in Chicago that I spoke about was a very, very competitive sales process, where we did replace one of our primary competitors.

[Arthur Gitajn, executive]

Mark, with respect to retention rates, we're only providing those annually, and our Cloud retention rate last year was 97%. We went into the year planning between 95% and 97%, and at this point, we don't see anything that would cause us to rethink those numbers.

[Mark Marcon, analyst]

Great. And then I was wondering if you could just -- there was an earlier question just about the step-up with regards to the investments for this year and implications as it relates to EBITDA margin expansion for next year, and I wasn't entirely clear in terms of the answer. And I was just wondering, should we continue to expect the margin expansion pace beyond this year that was previously outlined?

[Arthur Gitajn, executive]

We're still in the very early stages of planning for next year and beyond. As David's talked about, there is a time lag between investment and when you realize it in revenue, and we want to balance that. But we -- we want to balance the investment and -- but we also see very positive trends in terms of margin expansion. Again, the sale of additional functionality to our existing base and incremental additional modules and the maturity of the customer base, so it's going to be a combination of sort of those 2 factors. But more to come, quarterly, as we continue to develop our plans for next year and beyond, we'll share more in subsequent quarters.

[Operator]

Our next question comes from the line of Walter Pritchard with Citi.

[Walter Pritchard, analyst]

Wondering, I guess, for David, on the Dayforce live customer count, that's been decelerating a bit here. I'm wondering, as we look towards the end of the year, given the investments you're making in sales and marketing, should we expect that, that go-live customer count accelerates off of the Q2 levels that we saw in terms of growth year-over-year?

[David Ossip, executive]

So a couple of things over there. We have been going upmarket. So if you go year-over-year comparisons and such, there is a slight difference that there are larger accounts going live as opposed to lots of smaller accounts going live. Q4 in terms of go live is obviously our biggest, and I would expect to see a healthy number of customers going live in Q4.

[Walter Pritchard, analyst]

Got it. And then just maybe for Arthur. On the pro serv side, in terms of just -- it seems like we've got a bit of systematic upside to that business over the last couple of quarters. How much of that is the post-implementation services versus any leading indicator of implementation-type activity that's going on that may result in go-lives here in the next few quarters?

[Arthur Gitajn, executive]

It's primarily the -- a larger proportion of the post go-live professional services. That's what's primarily driving the increase in the overall margin.

[David Ossip, executive]

So if you actually look at the numbers, we -- the post live service revenue as a percentage of total professional services and other revenue increased from 22% to 29% Q2 to Q2, and that's obviously driving the increase in the margin of that particular group.

[Walter Pritchard, analyst]

Great. And then just lastly, on the additional investments, they've been talked about quite a bit here, but just help us understand domestic versus international split of that incremental investment, if you could.

[David Ossip, executive]

The majority of it is still in North America. However, we are beginning now to ramp up BDE, sales and marketing in both the U.K. and in Australia.

[Operator]

Our next question comes from the line of John DiFucci with Jefferies.

[John DiFucci, analyst]

I have a question for David and a follow-up for Arthur. David, regarding the executive team changes, you said that Paul is going to serve as COO until May of 2019 and -- while Leagh Turner is going to take over as President. I guess, just to be clear, is Paul going to remain with the company after May of 2019? And then also, the new CSO role for Erik Zimmer, just curious as to what areas of the company's strategy he's going to be first focused on?

[David Ossip, executive]

Great. So those are a few great questions. So the first thing is I'm delighted both that Leagh and Erik are joining the company. We've obviously taken advantage of the IPO to, what I would say, level up the organization. Leagh joins us from SAP, where she most recently was COO of Global Strategic Accounts. And prior to that, she served as COO of EMEA as well as Canada for SAP. She was acting President of Canada for a while. Leagh is exceptionally strong on the growth side. So in terms of sales, marketing, alliances and strategies around that, she has significant experiences in both running large successful sales organizations as well as a lot of experience on the global side. Erik joins us from Thomas Lee. I've worked with Erik now for at least 7 years. Erik was an MD in their operational group, and he and I worked very closely together on the Activate technology that was very successful in terms of reducing cycle times and effort hours for implementation. Erik's responsibilities will be to focus on, if you like, strategic areas of growth for the business. So looking for ways to accelerate the Powerpay business, looking at ways that we can make the global organizations more comprehensive and more robust, with higher levels of services for the organization, looking at various types of biz dev and corp dev activities as well as helping generally across the organization, similar to what he was doing from T.H. Lee in terms of operational excellence. In terms of Paul, Paul has been a fantastic person to work with over the last number of years. Paul will be transitioning into a consulting role post May of 2019, so it's a very gradual transfer. And he will be active in that type of role for around another year. The details of all of the executive changes are on the 8-K that we filed last night.

[John DiFucci, analyst]

Great. And Arthur, just a clarification to, I think the question has been asked a few times, just about the sequential decline in Cloud recurring revenue. But I'm pretty sure that's primarily due to the seasonal onetime revenue you get in the first quarter for Powerpay, which Powerpay almost -- I guess, last year, it actually grew, but the recurring part of Powerpay usually declines in the second quarter almost every year, and I think that has the biggest effect here. Isn't that correct? You still have a lot of things there, but I think that's the main thing.

[Arthur Gitajn, executive]

That is the main thing. There's a little bit of additional Dayforce revenue as well, but you're right.

[Operator]

[Operator Instructions] Our next question comes from the line of Justin Furby with William Blair.

[Justin Furby, analyst]

David, just to start, can you give a sense for what PEPM looks like today for new deals on the Dayforce side and maybe how that compares a year ago? And if you sold everything to a customer before discounting, what does that opportunity look like?

[David Ossip, executive]

So I can answer in broad terms, because we haven't disclosed what the average PEPM is or what the target PEPM is. Obviously, the number is going up as we increase the number of modules that are available to the clients. We also typically sell the full suite when we are in the mid-market, which for us is between around 700 employees and a few thousand employees. And as we're getting more and more success in that particular range, obviously, the average PEPM is going up in that series. In terms of product investments, I mentioned that we are accelerating some of the R&D side. At INSIGHTS this year, which is in October, which is our client conference, we'll be showing success -- or sorry, succession management as well as on-demand pay, both of which will add to the platform.

[Justin Furby, analyst]

Okay, got it. And then just a pretty hypothetical question, but if you think about your growth investments on the sales side, if there's 100 deals in play in any given quarter, which, hopefully, the number's a lot higher, but on the payroll side, in the Dayforce market, like how many of those do you think Dayforce is being considered in? What percentage of those opportunities in the mid-market, enterprise, are you being considered in? And where do you think that could go over time?

[David Ossip, executive]

I don't have an answer for that. I do believe there are deals that we do not see. And obviously, increasing sales and marketing expenses across the board will allow us to play at more -- to have more at-bats. As we know that our win rates are quite healthy, we're quite confident that by making those investments, we should see growth.

[Justin Furby, analyst]

Okay, got it. And then just, Arthur, a housekeeping item. The $5 million or so under 606 that would get reclassified from recurring into services, can you give us a sense of what that revenue consists of or what sort of revenue that is?

[Arthur Gitajn, executive]

Well, basically, what we're doing under 606 is you take the fee for the entire arrangement and then you allocate it as between the elements. And the elements here are primarily the PEPM recurring revenue and the professional services and other. Professional services -- so on PEPM, we're deemed to have stand-alone sales price of whatever we sell it; on the services, not. And so really, it's the -- you're allocating from PEPM -- from the recurring revenue to services, based on estimated stand-alone sales price.

[Operator]

Mr. Ossip, there are no further questions at this time. I'll turn the floor back to you for any final comments.

[David Ossip, executive]

Well, thank you very much. In closing, we are pleased with our strong performance in the second quarter and our continued positive momentum into the third quarter, which has allowed us to increase our revenue outlook for the year and to accelerate investments in growth initiatives. We remain dedicated to building and to delivering innovative technology that helps make work life better for our customers and their employees.

I would like to thank everyone again for your interest in Ceridian and joining us for the call today. Thank you.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.