Ceridian HCM Holding Inc

NYSE:DAY

Earnings Call Transcript 2019-Q4

[Operator]

Greetings, and welcome to the Ceridian Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions]

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.

[Jeremy Johnson, Vice President of Finance and Investor Relations]

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. Our current report on Form 8-K contains our fourth quarter and full year earnings release. The Form 8-K 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.

[David Ossip, Chairman and Chief Executive Officer]

Thanks, Jeremy. Good evening, everyone, and thank you for joining our earnings call. We are very pleased with the results from the fourth quarter of 2019. In the fourth quarter, we set new records for the value of new sales and for the value of customers taken live. Dayforce total revenue grew 35% to $159 million and was up 36% on a constant currency basis. And excluding float revenue, Dayforce total revenue grew even faster, up 38% on both a GAAP basis and on a constant currency basis. On the Dayforce recurring revenue side, we saw increases of 30% on both the GAAP basis and on a constant currency basis. And excluding float revenue, Dayforce recurring revenue increased by 32% on a GAAP basis and up 33% on a constant currency basis. We ended the quarter with 4,363 Dayforce customers live, and global active users were up 26% to 3.9 million. Not only do we have more Dayforce customers live, but we also saw a 12% increase in the average revenue per Dayforce customer to more than $131,000 per customer. This increase was driven by success in our enterprise, major markets and global segments and add-on sale to already live customers.

The average deal size of a new sale in 2019 grew by 24%, driven by enterprise, where the average deal size grew by 100%. And in global sales, primarily U.K. and Australia, we saw growth of more than 150% compared to 2018. In addition, approximately 23% of our sales during 2019 were sales of additional functionality to existing customers. Successful product launches include our benefit decision support module and learning management. Benefit decision support has been sold to over 180 customers, and Dayforce learning management has been sold to over 350 customers. From a profitability standpoint, we are very pleased that cloud recurring services gross margin expanded 280 basis points year-over-year to 68.8%; and professional services and other gross margin was positive, improving from a negative 10.6% in the fourth quarter of 2018 to a positive 5.9%. In the fourth quarter, adjusted EBITDA was $44.4 million, an increase of 6.2% compared to last year. Moving on to product development.

Our investment in product development during the fourth quarter, including research and development expense and capitalized software development, was $18.6 million or 8.4% of revenue, an increase of 33% compared to the fourth quarter of 2018. As previously discussed, we accelerated Dayforce growth investment throughout 2019, and we'll continue to do so in 2020. The areas of investments include Dayforce Wallet, which will begin initial customer implementation shortly, and we expect to have several hundred customers live by year-end. Another area of investment is the expanding breadth of the Dayforce offering, with new modules such as employee engagement and poll surveys, benefit intelligence and Dayforce hub. We already have several customers live with engagement surveys and expect strong traction across the client base. And the final area of investment is building additional major payroll engines for global markets. We currently have major payroll in six countries, including the U.S., Canada, U.K., Ireland, Australia and New Zealand. And we are now building native payroll for Germany, Mexico and Mauritius.

We expect to have native payroll for over 20 countries within a few years. In addition, we have a network of seven global payroll partners, who provide us with coverage in 157 countries. Moving on to sales and marketing. Sales and marketing expenses during the fourth quarter were $44.4 million or 20% of revenue, up by $8.6 million, an increase of 24%. This represents a continuation of our investments to grow and the commission from record sales in the fourth quarter. In the fourth quarter, we consistently broke sales record. In October, we signed the largest revenue deal in Dayforce history for approximately 63,000 U.S. and Canadian employees, other premier Tier one consulting company that is moving from a legacy on-premise solution to Dayforce. In December, we set another new record for the largest revenue deal in Dayforce history, when we won a popular quick service restaurant with over 2,400 locations and about 140,000 employees. The company was using legacy homegrown systems and wanted to enhance its flexibility, capabilities and efficiencies for core HR, time, payroll and talent with a single cloud platform for its entire HCM suite. Dayforce will bring the company's key HCM components into a single platform, while providing the flexibility to integrate with their other strategic systems.

Additionally, Dayforce will consolidate HR functionality for all its restaurant locations, allowing the company to increase efficiency and improve engagement throughout its workforce, while helping to maintain compliance and mitigate risk. In addition to these two record wins, we also had many other successes, such as two large amusement park operators, one in the U.S. with more than 50,000 seasonal employees and the other in the U.K. with more than 5,500 employees, a large manufacturer of integrated plastics with more than 7,000 employees, a healthcare management company with nearly 5,000 employees and a specialty food business with more than 5,000 employees. Before I turn the call over to Arthur, I want to discuss some personnel changes we are making as we continue to optimize our organizational structure to support the aggressive growth targets we have for our global organization. We promoted Chris Armstrong to lead our Global Customer Office, as Chief Customer Officer, reporting to our President and COO, Leagh Turner. In this capacity, Chris will take on additional responsibilities, including implementation, professional services, customer support, back-office operations and customer relationships.

I will now turn it over to Arthur to discuss our financial results and guidance with you in greater detail.

[Arthur Gitajn]

Thank you, David, and good evening, everyone. I'm going to take a few minutes to talk about our fourth quarter 2019 financial results then I'm going to provide some highlights on our full year 2019 financial results. And finally, I'll provide guidance for the first quarter of 2020 and the full year. Starting with our fourth quarter 2019 financial results. Revenue from our flagship cloud HCM platform Dayforce increased by $41.5 million or 35.4% to $158.7 million. On a constant currency basis, Dayforce revenue increased 35.7%. Revenue from Powerpay, our cloud HR and payroll solution for the Canadian small business market, declined by 0.8% to $25.5 million. On a constant currency basis, Powerpay revenue declined 1.5%. The year-over-year decline is primarily due to higher Powerpay revenue in the fourth quarter of 2018. As we spoke about last year, fourth quarter 2018 Powerpay revenue benefited from the fact that December 31, 2018 was a Monday and a number of customers processed their first 2019 payroll in 2018. Cloud revenue, which includes both Dayforce and Powerpay, increased by $41.3 million or 28.9% to $184.2 million. On a constant currency basis, cloud revenue also increased 28.9%. And total revenue, which includes revenue from both our cloud and Bureau solutions, increased by $27 million or 13.9% to $221.8 million, and on a constant currency basis, total revenue increased 18.8%. Our guidance for 2019 assumed a U.S. dollar to Canadian dollar exchange rate of $1.30.

The Canadian dollar weakened against the U.S. dollar during the fourth quarter, and the average exchange rate for the quarter was $1.32. Even with the weaker Canadian dollar, which had the effect of reducing cloud revenue by $1.1 million, cloud revenue exceeded the high end of our $180 million to $183 million guidance range by $1.3 million. And on a constant currency basis, cloud revenue exceeded the high end of our guidance range by $2.4 million. Total revenue exceeded the high end of our $216 million to $219 million guidance range by $3.2 million and by $4.4 million on a constant currency basis. An adjusted EBITDA of $44.4 million came in right in the middle of our $42 million to $47 million guidance range. Cloud revenue in the fourth quarter was driven by a 23.2% increase in cloud recurring services revenue and a 50.7% increase in cloud professional services and other revenue. Of the $41.3 million increase in total cloud revenue, $5.3 million or 13% was attributable to Bureau customers migrating to Dayforce. Excluding the impact of migrations to Dayforce, revenue from Bureau solutions declined by $9 million or 17.3%, which was in line with our expectations.

Cloud revenue accounted for 83% of our total revenue in the fourth quarter of 2019 compared to 73% in the fourth quarter of 2018. The average float balance for our customer trust funds during the fourth quarter was approximately $3.14 billion compared to $3.08 billion in the fourth quarter last year. The average yield on our float balance was 2.18% during the fourth quarter of 2019, a decline of eight basis points compared to the average yield in the fourth quarter of 2018. As a result, income from invested customer trust funds was $17.3 million in the fourth quarter of 2019 compared to $17.4 million in the fourth quarter of 2018. The balance sheet value of customer trust funds as of December 31, 2019, was $3.2 billion compared to $2.6 billion as of December 31, 2018. We continue to expand our gross margins during the fourth quarter. While Cloud recurring services revenue grew $26.2 million or 23.2%, our cost of Cloud recurring services to support this growth increased by only $5 million or 13%, and our gross margin on Cloud recurring services increased from 66% in the fourth quarter last year to 68.8%, reflecting an increase in the proportion of Dayforce customers live for more than two years from 63% in the fourth quarter last year to 69% and also our ability to continue to realize economies of scale in customer support and hosting costs.

Our gross margin on professional services and other revenue improved from negative 10.6% in the fourth quarter last year to a positive 5.9%, 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. Activations increased to $26.4 million or 59% of cloud professional services and other costs in the fourth quarter compared to $15.7 million or 53% of cloud professional services and other costs in the fourth quarter last year. And post go-live professional services costs increased to $10.5 million compared to $8.1 million in the fourth quarter last year. We continued to invest in research and development and in sales and marketing to support long-term growth in Dayforce. Product development and management expenses increased by $3.1 million or 19.7% to $18.8 million. In addition, capitalized software development costs increased by $3.2 million from $5.9 million in the fourth quarter last year to $9.1 million. Sales and marketing expenses increased $8.6 million or 24% to $44.4 million, and sales and marketing expenses as a percent of revenue increased from 18.4% to 20%. G&A expenses increased $3.8 million to $33.7 million, primarily attributable to increased share-based compensation of $3.3 million. Adjusted EBITDA increased by $2.6 million or 6.2% to $44.4 million.

And adjusted EBITDA margin percentage declined approximately 150 basis points from 21.5% to 20%, primarily due to the decline in float revenue growth and investments in sales and marketing. Turning now to our full year 2019 financial results. Revenue from our flagship cloud HCM platform Dayforce increased by $132.2 million or 30.2% to $569.7 million. On a constant currency basis, Dayforce revenue increased 30.9%. Revenue from Powerpay, our cloud HR and payroll solution for the Canadian small business market, declined by 1.1% to $90.3 million. On a constant currency basis, Powerpay revenue increased 1.1%. Cloud revenue, which includes both Dayforce and Powerpay, increased by $131.2 million or 24.8% to $660 million. And on a constant currency basis, cloud revenue increased 25.7%. And total revenue, which includes revenue from both our Cloud and Bureau solutions, increased by $83.4 million or 11.3% to $824.1 million. And on a constant currency basis, total revenue increased 12.1%. Cloud annualized recurring revenue, or ARR, which includes the full year impact of customers who went live during 2019, was $582 million at the end of 2019, up $105.8 million or 22.2% from annualized recurring revenue in 2018. Annual cloud revenue retention was 96.3% in 2019 compared to 96% in 2018. We continued to expand margins during 2019. Our gross margin on Cloud recurring services increased from 66.1% in 2018 to 69.6%, and our gross margin on professional services and other improved from negative 14.3% in 2018 to a negative 4% in 2019.

Adjusted EBITDA increased by $24 million or 15% to $184.6 million, and adjusted EBITDA margin expanded 70 basis points to 22.4% in 2019. Adjusted diluted net income per share of $0.46 for 2019 increased 76.9% year-over-year. Moving to the balance sheet. As of December 31, 2019, we had cash and cash equivalents of $281.3 million, an increase of $63.5 million compared to December 31, 2018. And our total debt was $677.1 million as of December 31, 2019, an increase of $6.8 million, primarily due to financing lease obligations of $12.4 million in 2019. Our net leverage ratio was 2.1x as of December 31, 2019 compared to 2.8x as of December 31, 2018. Our capital expenditures in 2019 were $55.2 million compared to $40.2 million in 2018. Included in the $55.2 million in capital expenditures were $16.3 million for property and equipment and $38.9 million for software and technology, of which $32.6 million was capitalized software development, an increase of $7.3 million compared to 2018. Turning now to our outlook for the first quarter and full year 2020, I want to highlight two assumptions underlying our guidance. First, our guidance assumes no changes in the U.S. federal funds rates or the Bank of Canada rates during 2020. So any Fed funds or Bank of Canada changes during the year will impact our guidance. For reference, based on current investment practices, a 100 basis point change in market investment rates would affect float revenue by approximately $18 million over the 12 months following the rate change.

Second, to simplify reporting as we expand globally, beginning with the first quarter of 2020, we're changing the way we report the impact of foreign exchange fluctuations on our revenue results. Instead of recalculating revenue on a constant currency basis using a fixed foreign exchange rate for all periods presented, which was USD 1 to CAD1.30 in 2019, we will calculate constant currency growth rates using the average exchange rates in effect during the applicable comparable prior period. Please note that this change does not impact disclosures for 2019, and 2019 disclosures on a constant currency basis reflect USD 1 to CAD1.30. As it relates to guidance, we'll be issuing guidance based on the average foreign exchange rates during the most recent fiscal quarter reported. In subsequent periods, we'll update our guidance based on the average foreign exchange rates during the most recent fiscal quarter reported and will disclose the impact of any change in guidance related to foreign exchange fluctuations. So our full year and first quarter 2020 guidance reflects foreign currency exchange rates in effect during the fourth quarter of 2019, which was USD 1 to CAD1.32. Now moving to the full year 2020 guidance. We expect Dayforce revenue of $708 million to $713 million, an increase of approximately 24% to 25% on both the GAAP basis and the constant currency basis. Excluding float revenue, Dayforce revenue is expected to grow approximately 27% to 28% on both the GAAP basis and the constant currency basis. We expect cloud revenue of $800 million to $805 million or an increase of approximately 21% to 22% on both the GAAP basis and the constant currency basis.

Excluding float revenue, cloud revenue is expected to grow approximately 24% on a GAAP basis and approximately 24% to 25% on a constant currency basis. We expect total revenue of $903 million to $908 million or an increase of approximately 10% on both the GAAP basis and the constant currency basis. Excluding float revenue, total revenue is expected to grow approximately 12% to 13% on both the GAAP basis and the constant currency basis. We expect total float revenue of $70 million in 2020, which would represent a decline of $10.2 million compared to 2019 float revenue. Of the total $70 million in 2020 float revenue, approximately $50 million will be reflected in Dayforce revenue and a total of $62 million will be reflected in cloud revenue. Reflecting investments to drive future growth, including the Dayforce Wallet, acceleration in the enterprise segment and expansion globally, adjusted EBITDA is expected to be $185 million to $190 million or an increase of 0% to 3%. Excluding float revenue, adjusted EBITDA is expected to grow approximately 10% to 15%. For those of you modeling earnings per share, we expect net interest expense of approximately $30 million for the year or approximately $7 million to $8 million per quarter. Total depreciation and amortization of approximately $50 million for the year; an effective tax rate of 40% to 45%, which reflects our U.S. statutory federal and state rate of approximately 27%, plus the estimated impact of the new base erosion anti-abuse tax and diluted weighted average shares outstanding of approximately $153 million for the full year and $150 million for the first quarter.

For the first quarter of 2020, we expect Dayforce revenue of $166 million to $168 million or an increase of approximately 25% to 27% on both a GAAP basis and a constant currency basis. Excluding float revenue, Dayforce revenue is expected to grow approximately 29% to 30% on both a GAAP basis and a constant currency basis. We expect cloud revenue of $188 million to $190 million or an increase of approximately 22% to 23% on both a GAAP basis and a constant currency basis. Excluding float revenue, cloud revenue is expected to grow approximately 25% to 26% on a GAAP basis and approximately 25% to 27% on a constant currency basis. We expect total revenue of $221 million to $223 million or an increase of approximately 8% to 9% on a GAAP basis and 9% to 10% on a constant currency basis. Excluding float revenue, total revenue is expected to grow approximately 11% to 13% on a GAAP basis and 12% to 13% on a constant currency basis. We expect Q1 total float revenue of $21 million, of which $15 million will be reflected in Dayforce revenue and $18 million will be reflected within cloud revenue. And we expect adjusted EBITDA of $47 million to $49 million, a decline of approximately 2% to 6%. Excluding float revenue, adjusted EBITDA is expected to grow between 2% and 10%.

At this time, I'm going to hand the call back to David for some concluding remarks.

[David Ossip, Chairman and Chief Executive Officer]

Thanks, Arthur. I would like to speak about a few things before we open it up to questions. As I mentioned earlier, we accelerated the investments throughout 2019 and we'll continue to do so in 2020. While we benefited from Fed rate increases in the first three quarters of 2019, we anticipate a 2020 float income headwind of approximately $10 million. To provide clarity around the performance of the business, we issued an 8-K in December 2019, showing our revenue results, excluding the impact of float. And as Arthur just covered, we are providing 2020 guidance with and without float income. Because of float revenue flows almost directly to the bottom line, our adjusted EBITDA guidance includes the impact of the float headwind as well. Excluding float, we expect to grow adjusted EBITDA by 10% to 15% year-over-year, which at the top end of guidance is an acceleration compared to 2019. On the Bureau side, we are moving to an aggressive end-of-life strategy, and this is reflected in our $103 million guidance.

Finally, we are continuing investments in product development, sales and services to support the massive amount of opportunity we see in our focused areas. Our growth strategy includes: first, winning more new customers in our existing markets; second, increasing our recurring revenue per client by adding functionality to the Dayforce platform; third, moving up market into more enterprise verticals, including retail, hospitality, manufacturing, healthcare, financial services, government and professional services; fourth, expanding globally by building major core HR, workforce management and payroll capability for more countries; and finally, extending into adjacent markets, such as The Dayforce Wallet. Consistent with our messaging since IPO, we are confident that we will exceed $1 billion of revenue in 2021 and in the longer term, exceed adjusted EBITDA margins of 30%.

With that, I will ask the operator to open up the line to questions. Thank you.

[Operator]

Thank you. [Operator Instructions] Your first question comes from the line of Nandan Amladi with Guggenheim Partners. Your line is open.

[Nandan Amladi, Guggenheim Partners]

Thanks for taking my question. So the guidance for the Bureau of $103 million implies a pretty sharp drop off. We saw that in the fourth quarter. David, you just mentioned that you're moving toward end-of-life. How many of those customers are you able to migrate successfully? Has the cadence of that changed at all as you've moved to this more aggressive end-of-life?

[David Ossip, Chairman and Chief Executive Officer]

Well, as you can see, if you look at the amount that we've migrated from the Bureau to the Cloud has been rather constant on a dollar basis over the last four quarters and you'll see that continue into 2020. All right. If we look at the -- the guidance we've given for Bureau about $102 million, $103 million, with the insight that, remember, half of that is a stand-alone cloud business, there's a small business payroll product, which is in there for between, say, $10 million and $20 million and then there are the remaining Bureau business, which accounts for the delta. So the reality is that there isn't that much left in the payroll Bureau business. And from a compliance perspective and from a maintenance perspective, it does make sense to have the aggressive end-of-life strategy.

[Nandan Amladi, Guggenheim Partners]

Okay. And then a follow-up on the international market, this is a different topic. How different is the selling motion in the international markets that you're entering, both in terms of the size of customer you're going after, the sales cycle and so on?

[David Ossip, Chairman and Chief Executive Officer]

So the average size of the global accounts is probably a little bit larger than on average than what we see in North America. If we look at the global business, we're obviously very happy. We've seen the growth of that business grow by 150% year-over-year. In terms of sales cycles, is quite consistent to what we see in North America.

[Operator]

Thank you. Your next question comes from the line of Samad Samana with Jefferies. Your line is open.

[Samad Samana, Jefferies]

Hi, good evening, and thanks for taking my questions. So David, one of the things that, I think, based on last quarter, I think we were expecting further acceleration in Dayforce recurring revenue ex float in the fourth quarter. So I'm just curious maybe what drove that slowdown? If there was any customer timing delays, kiosk revenue had quite a jump in the fourth quarter as well. And how do we reconcile maybe just the deceleration as investments are accelerating? And how does that impact 2020 Dayforce recurring export revenue growth? I know it's a long question, but we'd love some color on it, if possible.

[David Ossip, Chairman and Chief Executive Officer]

Sure. So let's just look at the overall Dayforce business. On an ex float business, Dayforce total revenue accelerated to 37.5%. In the quarter, obviously, up quite dramatically from the 23.2% the year before. If we look at the Dayforce recurring on the ex float basis, a year ago, we were 31.1% and in Q4 of '19, we came in at 32.4%. So an acceleration year-over-year. On a quarter-over-quarter basis, there are some gives and takes that get a little bit complicated from the 605 to 606 basis. Some of that you can see in, in fact, in effectively in the movement between the Dayforce professional services and as well between the Dayforce recurring. But overall, I would say we are very happy with the Dayforce recurring revenue and the Dayforce total revenue with or without float.

[Samad Samana, Jefferies]

Great. That's helpful. And then maybe just switching gears a little bit, mentioning -- expanding hundreds of customers on the on-demand pay side, it sounds like the company is quite excited about that. How should we think about that eventually impacting the revenue results? And what expectations have you already embedded into your guidance?

[David Ossip, Chairman and Chief Executive Officer]

Yes, sure. So as we've mentioned previously, in terms of 2020, it's largely an investment year when it comes to Dayforce Wallet. If I look at it year-over-year, the investments in the Dayforce Wallets are going to be up almost $9 million, and that's reflected in the EBITDA guidance that we've given. I would expect to see the benefit from that investment dollars really come into more of the 2021 time frame, more so than the 2020. In terms of progress on the Dayforce Wallet, as I've mentioned, we've started implementations for the first group that will be going live just after the end of Q1. The demand for the Dayforce Wallet is exceptionally high, and I would expect us to end the year with several hundred customers live on the Dayforce Wallet.

[Operator]

Your next question comes from the line of Daniel Jester with Citi. Your line is open.

[Daniel Jester, Citi]

Great. Thank you for taking my question. Maybe just a couple of quick ones for me. First, with regards to 2020 guidance, would you be able to share kind of what your expectations are for revenues from the Canadian government contract? And how we should be thinking about the cadence there, kind of any updates from the fall? And then secondly, could you -- speaking to Canada, it looks like the Powerpay, the quick math that I did, it looks like you don't have a lot of growth baked in for 2020 there. So I'm just wondering if you can kind of update us for how we should be thinking about that?

[David Ossip, Chairman and Chief Executive Officer]

Sure. On the Canadian government, it's still too early to tell. As a process perspective, the team is in Ottawa this week doing the final oral presentations, and we'd expect that the government will make a decision on the first half assignment shortly. That, I believe, will be followed by several other task requirements that the government will put out to bid to the three qualified vendors, which includes us. And in terms of Powerpay, remember that last year in Q4, we had about $1 million of processing revenue that usually would have fallen in Q1. So if we look at it from a year-over-year perspective, we had slight growth in the Powerpay business kind of consistent with what we saw in the other quarters in the actual year. In terms of next year, yes, it will be a low single-digit grower.

[Operator]

Thank you. Your next question comes from the line of Siti Panigrahi with Mizuho. Your line is open.

[Siti Panigrahi, Mizuho]

Thanks for taking my question. I just want to dig into more into the Enterprise segment. Could you share the performance this quarter? And as you think about 2020, definite leverage sell-side has gone up. So what's your expectation from that segment?

[David Ossip, Chairman and Chief Executive Officer]

So overall, you can see that the average size of the customer has increased quite significantly year-over-year. If I look at the enterprise segment, specifically, the average deal size went up by about 100% year-over-year. In the quarter, we had some significant wins that aren't reflected yet in the revenue numbers. We signed a Tier one consulting company with over 60,000 employees. We signed a well-known quick service restaurant with over 2,400 locations and about 140,000 employees. We signed a number of players in the amusement park industry.

One of them with about 50,000 employees in total. So we've obviously done tremendously well in terms of moving up into the market. When you look at the average deal size, you can see that has gone up. If I look at the average Dayforce revenue per customer, we're up 12% year-over-year. And if you look at the incremental revenue that's been added year-over-year, we're up -- last year in Q4, the average incremental revenue was $156,000 per client, and in this year, we've increased it to $209,000 per client. So going into next year, I would expect that trend to continue.

[Operator]

Your next question comes from the line of Mark Marcon with Baird. Your line is open.

[Mark Marcon, Baird]

Good afternoon, and thanks for taking my questions. You mentioned or reiterated the $1 billion revenue target for 2021. How should we think about the margin trajectory as we head there? Obviously, the priority is on growth and there's lots of different areas to invest. But when we're setting expectations, how should we think about that given all of the opportunities that you have?

[David Ossip, Chairman and Chief Executive Officer]

So as I mentioned earlier, Dayforce Wallet, which obviously will come into the growth revenue number in 2021. 2020 is largely the investment year. I mentioned that we are investing about an additional $9 million versus last year in the Dayforce Wallet without really seeing the benefits from the Dayforce Wallet in 2020. That begins to reverse in 2021. So you should see the EBITDA margins improving once again as we go into future years. We remain -- Mark, we remain quite consistent with the long-term guidance that we've given the market, as you pointed out, exceeding $1 billion of revenue in 2021. And as we mentioned throughout 2019, we would expect that the long-term EBITDA margins to exceed 30%, just a little bit lagged up with the $1 billion.

[Mark Marcon, Baird]

Great. And then with regards to the time line on the end-of-life strategy for Bureau, can you just give us a little bit more color there?

[David Ossip, Chairman and Chief Executive Officer]

Well, if you look at the numbers backwards, again, you take the $102 million, $103 million for the year, you subtract out, say, $50 million for tax, another about $15 million or so for the small business product, and given that we're migrating somewhere around -- what is it Jeremy, about $5 million?

[Jeremy Johnson, Vice President of Finance and Investor Relations]

A quarter.

[David Ossip, Chairman and Chief Executive Officer]

A quarter. At the end of the year, there's not that much bureau left in to end-of-life.

[Mark Marcon, Baird]

Got it. And then you mentioned a number of really impressive wins. Can you talk about who those wins came from? And is there any change in terms of the composition of who you're going up against as you look toward future opportunities?

[David Ossip, Chairman and Chief Executive Officer]

When we go into these larger deals, there is probably more of the legacy types of components that are used at those particular clients. So if I point to the consulting company, I believe that they were moving from a legacy payroll solution. The quick service restaurant, I believe they had tried to implement another cloud solution that wasn't successful and that we are replacing, in their case, Jeremy, do you know who it was?

[Jeremy Johnson, Vice President of Finance and Investor Relations]

I don't know. No, no.

[David Ossip, Chairman and Chief Executive Officer]

Yes. I think it's kind of a legacy solution that they had beforehand.

[Mark Marcon, Baird]

Right. Thanks for the color.

[Operator]

Your next question comes from the line of Drew Kootman with Cantor Fitzgerald. Your line is open.

[Drew Kootman, Cantor Fitzgerald]

Hey, thanks for taking my question.I was curious, just going back to the wallet. Longer term, if we look three, five years, how big you think it could be with the kind of penetration? Just anything around that?

[David Ossip, Chairman and Chief Executive Officer]

Well, if we look at it from the total potential, as you know, we move around $300 billion of payroll funds a year, about half of that, say, $150 billion is paid out in net earnings to the employees. As we've discussed previously, we expect to make about 0.8% on all spend on the wallet. So at 100% penetration, you're looking at potentially about $1.2 billion of really top line and bottom line. And obviously, it will take a lot of time to increase the penetration, and we won't reach 100%. But for every 10% penetration, we guess, its worth about $100 million of revenue. As we get more days are based on the usage of the wallet once people start using it, we'll start to disclose that.

[Drew Kootman, Cantor Fitzgerald]

Perfect. And then just looking at the professional services gross margin. I know that was positive and you guys talked about that. But I know you guys were looking for it to be flattish moving forward. But just curious what your thoughts are around that moving forward now?

[David Ossip, Chairman and Chief Executive Officer]

So on the professional services, obviously, you saw a tremendous jump in terms of professional services and other revenue. If we look at it year-over-year, Q4 of last year was $29.4 million. In Q4 of '19, it jumped to up by 51% to $44.4 million. That really is reflected in the amount of recurring revenue that we took live in Q4, which was a new record for us as well. In terms of the profitability on that group, again, also tremendous progress over there. We went from the professional services and other gross margin of being effectively negative 10.6% last year to negative -- sorry, to positive 5.9% this year. So really up really, really nicely. On a go-forward basis, in terms of 2020, I would expect it to be around breakeven.

[Operator]

Thank you. Your next question comes from the line of Scott Berg with Needham. Your line is open.

[Scott Berg, Needham]

Hi, everyone, Congrats on a strong sales quarter. David, I was just hoping that you could dig into your comments on the sales, the record value of new sales in the quarter a little bit. Was that driven by you selling to larger customers with more seats? Or do you think it's driven more by adoption of incremental modules now that you've released a lot -- several of them over the last two or three years?

[David Ossip, Chairman and Chief Executive Officer]

So it's a combination of both. If I look at the quick service restaurants, you already are looking at adoption of a lot of our features that we now have inside the platform. In the case of the consulting organization, it's largely a payroll deal that we sold over there. However, if you look at the number of employees, you can see that as the year progressed in 2019, we had bigger and bigger wins when it came to employee populations. Last year, for example, we would have said a 50,000 employee amusement park would have been a record number. But when I look at the quick service restaurant, you're almost 3x that in terms of the employee headcount. So the answer is it's both.

[Scott Berg, Needham]

Got it. Helpful. And then another several questions on wallets. But wanted to see if you can help us understand where the initial interest in the product is coming from. Do you have any commonalities across the customers that have shown an interest in it today, maybe your size or type of industry or something unique about those employees, anything there would all also be helpful?

[David Ossip, Chairman and Chief Executive Officer]

It's right across the gamut. We're seeing a relatively large organizations, the small organizations showing a lot of interest. And we're also seeing a uptick across the hourly salary, part-time market as well. I have spoken about this beforehand but in all the studies I've seen publicly in the studies that we've done internally shows that there is -- about 80% of all people really have struggled to bridge their finances, paycheck-to-paycheck and it doesn't really come from being a salaried individual hourly or part timer, it's generally a common pain point across all employees.

[Scott Berg, Needham]

Super helpful jump back in the queue.

[Operator]

Your next question comes from the line of Raimo Lenshow with Barclays. Your line is open.

[Raimo Lenshow, Barclays]

Thank you. A question on the -- you had a couple of very large wins in the international markets like the U.K., like The Big Coffee chain, etc. How are the implementations going there and the go-lives going there? And what does it mean for kind of the next customers? Because I'm sure a lot of people will look for what's going on there. And then the one question I got from a lot of people on the call was around, like, lower number of customer adds in Q4. In a way, can I see that -- can I say what you just answered that you have like big and bigger customers, basically also that there will be slower customer additions than in the past?

[David Ossip, Chairman and Chief Executive Officer]

Great. So in terms of cost to coffee, which obviously, we've discussed previously, the implementation is going very well. I would expect them to go live in the first half of this year. So just in a few months, they should be live. I think they're very happy with the progress of the implementation. In terms of the move up market, yes, if I look at the customer account, we added, Jeremy, 194 customers in Q4 of this year as compared to 253. However, if you look at the number of active users we have on the system now, we're up 800,000 users in 2019 versus the 600,000 employees that we took live in 2018. So we've increased the add on employees by 20 -- actually, it's more than that. It's 33% year-over-year on a smaller number of customers taken live, right, to 645 versus 717. And that's obviously reflected both in the incremental revenue per Dayforce customer, again, that is up 34% to $209,000. It's also reflected in the trailing 12 months Dayforce revenue per customer, which is up by 12% overall.

[Operator]

Your next question comes from the line of Mark Murphy with JP Morgan. Your line is open.

[Matt Coss, JP Morgan]

Hi, good afternoon. This is Matt Coss on behalf of Mark Murphy. As you build out native payroll for Germany and Mexico and Mauritius, do you expect this to require a similar length of time and dollar investment compared to prior native payroll build-outs? Or is there some savings or learnings that you can leverage as you build out for these countries?

[David Ossip, Chairman and Chief Executive Officer]

So that's actually a great question. So if I look at the -- our EBITDA guidance, for 2020, which, as I said, it's an investment year, there is an additional about $12 million of investment in global as compared to 2019. And that is really reflected not only in the incremental spend in R&D to build out those countries, but also in the sales and operation expenditures to establish in those two new countries plus Mauritius, plus as well continuing to grow and invest in the -- our four other countries outside of the U.S. and Canada that we're very active in.

[Matt Coss, JP Morgan]

Okay. That's helpful. And on the professional services side, again, kudos on the growth in the pro services gross margins. Is there sort of a ceiling that we can expect or a steady state for pro services gross margin going forward, roughly?

[David Ossip, Chairman and Chief Executive Officer]

I would model it on a breakeven basis going forward.

[Operator]

Thank you. Your next question comes from the line of Matt Pfau with William Blair. Your line is open.

[Matt Pfau, William Blair]

Hey guys, thanks for taking my question. Just wanted to ask on the Australia business and how the RITEQ acquisition is progressing? Is your thesis with that business playing out? And then what are your thoughts on continuing to use that acquisition strategy to gain a foothold in additional countries?

[David Ossip, Chairman and Chief Executive Officer]

We're pleased with the progress of the RITEQ acquisition. Remember, the RITEQ acquisition had a large component of acquiring very talented people who were expert on workforce management. And we required that expertise to really continue growing our Australia and New Zealand business, with the Dayforce footprint. In -- going forward, the typical global acquisition that we would look for typically would have a payroll component, not only a workforce management component. So it's somewhat different to the RITEQ acquisition.

[Matt Pfau, William Blair]

Right. So that's all I had guys. Thanks a lot.

[Operator]

Your next question comes from the line of Brad Zelnick with Credit Suisse. Your line is open.

[Brad Zelnick, Credit Suisse]

Awesome. Thank you so much for fitting me in and congrats on all the success. David, just on international. Kronos recently mentioned about 35% international growth. They seem to be the only other HCM pure-play competitor of size that's pursuing the international strategy. Can you help us understand how their footprint and offering may differ from yours in international? And why your acquisition-led strategy is differentiated and who you're displacing?

[David Ossip, Chairman and Chief Executive Officer]

Sure. Remember, Kronos, on a global basis really is workforce management. So time and attendance and scheduling. Of which, we've had as well for quite some time. We're active with Dayforce workforce management in dozens of countries globally. I do not believe that Kronos has any native payroll capabilities on a global basis, whereas we -- our Dayforce engine at the moment is active in six countries at the moment. And when we look at our partnership through the connected pay, we have seven global partners that gives us coverage in another 157 countries, which accounts for majority of the working population of the world. So I think we're quite differentiated.

In terms of an acquisition strategy, our acquisition strategy effectively would be to acquire companies that have a global presence but have legacy technology and over time, migrate their customers and their salespeople on to the native Dayforce system, which is that all single solution that cuts right across human capital management, including payroll on tax capabilities.

[Brad Zelnick, Credit Suisse]

Yes. In fact, we noticed how quickly you got RITEQ up and running. Are all 325 of their pre-existing customers now migrated over to the integrated new platform that you've localized?

[David Ossip, Chairman and Chief Executive Officer]

No, it will take some time to do that. And remember, with the RITEQ customers, their customers are workforce management only. So there's an upsell capability to move them onto the Dayforce platform. But we also are leveraging the RITEQ people, not only for implementation capacity in Australia and New Zealand, but also the R&D resources have been integrated into the Dayforce R&D team.

[Brad Zelnick, Credit Suisse]

And if I could just sneak in one quick follow-up here. If I look at the 2020 adjusted EBITDA guide, ex float revenue of 10% to 15%. It's a fairly wide range, ranging anywhere from again, ex float margin compression to margin expansion. And I appreciate the investment priorities and your comments that this is an investment year. But can you give us a sense of, again, considering the range what would be the greatest factors that would swing it one way versus the other? And perhaps a good time to just even remind us of the investment philosophy that you have and the time line that you consider when looking to see a payback?

[David Ossip, Chairman and Chief Executive Officer]

Sure. So in the EBITDA guidance, there's probably an additional $25 million that we're investing this year above what we regularly would invest in the business. And if I were to break it out, which I've done on the call today is almost about $9 million of additional expense in a Dayforce Wallet. If I look at the government vertical, there's a little bit over an additional $1 million of R&D effort and investment that we've put into that. On the global side, as I mentioned, it's above $12 million of additional spend, which is spread between operations, R&D, sales and marketing given that we have six active countries or four countries outside of U.S. and Canada.

We're building another three this year as well. And then there is another about $3 million outside that we're also investing in the enterprise side of the business, which is building out certain enterprise-specific features for the industries that we're currently playing, building out the sales and marketing team to go a bit wider and deeper in those particular verticals. The strategy for this year again, it's an investment year. We -- the intent is to hold EBITDA effectively flat outside of the headwinds that we have in float. We might see, as you mentioned, a slight increase in margins of about 10 to 15 basis points. And then as we go beyond 2021, we'll continue with our trajectory to above 30% long-term EBITDA margin.

[Brad Zelnick, Credit Suisse]

Thanks so much and appreciate you taking the questions.

[Operator]

Your next question comes from the line of Chris Merwin with Goldman Sachs. Your line is open.

[Chris Merwin, Goldman Sachs]

Thank you for squeezing me on here. So just a couple of questions. I guess, we come back to services for a bit. It was obviously, kind of the really healthy growth that you've seen there. I know you called out 606 as a driver. But as you bring on larger customers, is it fair to say they're paying significantly more for services? And as you continue to bring on those large customers in 2020, should we see pretty strong growth for that segment continuing in the year?

[David Ossip, Chairman and Chief Executive Officer]

So when we look at services, remember, inside, there are a number of lines. You have professional services, which is services to customers that are already live. You also have activations, which effectively are taking customers live. And then you have clocks, which is the clock hardware that we sell. If we look at the breakdown of Q4 of '19, you'll see that professional services went down in the quarter from 27% to 23%, and we had kind of an increase on activations from 53% to 59% with inside the quarter. And clocks was effectively the same. It went from 20% to 18%.

As we go forward, I would expect to continue to see growth on the professional services to customers that are already live continue as that's, obviously, more customers are live, more using the products. So there's an opportunity and the need to sell services to those customers. We'll continue to see increases in activations as we go forward. So from a dollar basis, you'll continue to see an increase in that. And from a clock basis, that really comes down to the mix of business, and I would expect it to continue a kind of around that 20% range in future Q4 of the year.

[Chris Merwin, Goldman Sachs]

Great. And then just one more on sales efficiency. As you continue to go after these large logos, are you seeing the same efficiency in that segment as you have with mid-market and as enterprise grows as a percentage of the mix, could that actually be a tailwind to sales efficiency in time?

[David Ossip, Chairman and Chief Executive Officer]

Well, on the sales efficiency, sales and marketing is about 20%. And in Q4, it's up about 160 basis points relative to Q4 of '18. That largely was because we had a record sales quarter, and it reflects the commissions that we paid out for those particular deals. I expect that we'll continue to be efficient on our sales and marketing going forward.

[Chris Merwin, Goldman Sachs]

Thank you.

[Operator]

Ladies and gentlemen, there are no further questions at this time, this concludes today's conference call, you may now disconnect, thank you.