Q3 2019 Earnings Call

Good afternoon. My name is bring Andy Andy will be your conference operator today at this time I would like to welcome everyone to the Castlight health in Q3 2019 financial results Conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session.

If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

If you would like to withdraw your question press the pound key.

Thank you I would now like to turn the call over to Mr. Gary Fuges.

I've Investor Relations Sir Please go ahead.

Good afternoon, and welcome to the Catholic Health third quarter 2019 conference call, leading the call today or me bone marrow Chief Executive Officer ensure bond on main Genie, President and Chief Financial Officer also joining today's calls we'll bond around our new Chief Financial Officer effective November 15th maybe Travon will offer their prepared remarks, and then we'll take your questions press release web.

Cash and other related materials are available on our website.

This call contains forward looking statements regarding our trends strategies and the anticipated performance of our business, including but not limited to our guidance for the full year 2018, new sales retention of existing customers gross margin in operating expense trends future cash position the impact of medicine changes and changes in our growth strategy on the company's performance. These statements were made as of October 24.

In 2019 of reflect management's views and expectations at that time and are subject to various risks uncertainties and assumptions that this call's replayed. After October 24, 2019, the information in the call may no longer be current are accurate, we disclaim any obligation to update or revise any forward looking statements. We provide guidance in this call, but we will not provide any further guidance.

Sure updates on our performance during the quarter unless we do so in a public forum. Please refer to today's press release and the risk factors included in the company's filings with Securities and Exchange Commission for discussion of important factors that may cause actual events or results to differ materially from those contained in our forward looking statements. Finally today's presentation also includes certain non-GAAP metrics such as non-GAAP .

Gross margin operating expense operating loss and net loss per diluted share that we believe aiding the understanding of our financial results a reconciliation to comparable GAAP metrics on historical basis can be found in the appendix section of our earnings release filed before today's call with that I'll turn the call over to me of America CEO Catholic Me.

Thank you for joining us on today's call. We're pleased to update you on the positive steps we've taken towards stabilizing our current business and building a foundation for future growth over my first 90 days I outlined four priorities for the year solidify our relationship with anthem Jumpstart, our health plan growth strategy execute concrete initiatives.

To reinvigorate a healthy employer book of business and finally build out our executive leadership team I'm pleased to report significant progress against all four of these priorities I will begin with our new go forward anthem relationship today, we announced an expanded enterprise license agreement with anthem with two important pieces first.

The agreement for news and expands the contract for the highly successful engage health navigation solution that is delivered strong results, including a 55, plus N.P.S. and 24% increased in the closure of gaps in care second the agreement provides Anthony Nonexclusive enterprise license for components of our underlying.

Form technology, such as personalization and transparency.

This agreement provides business stability well also laying a foundation for growth with a total contract value of almost $170 million over the 30 month term disagreement provides increased revenue stability and visibility through mid 2022, we estimate the contract represents a 20% increase in anthem.

There are compared to its level at the end of Q3 as one single enterprise license will have a clear line of sight into a significant portion of our subscription revenue and should reduce our exposure to employer and member variability.

In addition to the stability and increased economics. The second piece of the agreement is important because it introduces a new framework for us to work together, where anthem can leverage our underlying technology capabilities across our digital solutions.

This model is also an important proof point that we believe will help support our go to market strategy with other health plans the ability to license and embed core components of our technology. In addition to the full navigation platform. We're honored to be a long time anthem partner and share our commitment to delivering the best customer experience possible to answer.

A members anthem is a referenceable partner in customer, which is critical as we seek to expand our health plan relationship.

Beyond anthem, our second priority, which jumpstarting, our health plan growth strategy.

Our diagnosis on the state of health plan initiatives, let us to concluded that we needed more talent with experience in selling and partnering with plan. My first step with to assemble a dedicated accountable team and begin building the organizational machinery to sell and deliver on our health plan business team activities included product and packaging.

Demo and marketing collateral and demand generation. In addition, I personally met with over a dozen health plan senior leaders since our last call and each of these conversations has increased my confidence that our value proposition resonates with plans, there's still a lot to learn and we understand the long planned sales cycle, but we're confident in the value.

We can bring to the member experience and cost of care through capabilities like personalization engagement and intelligent provider directory and transparency.

The third priority I highlighted with improving the health of our direct to employer book of business as we discussed on last quarter's call. We believe that healthy book of business requires deliver incredible value continuous innovation and deep partnership at every level of the organization. In addition, servicing our clients requires operational.

Excellence, we have made progress across all dimensions.

Value in innovation live hand in hand, and I'm delighted with this week's announcement of our new Castlight care guides unique high touch offering that combines the best of Castlights personalized health navigation technology with clinicians services powered by our data and technology infrastructure Castlight care guide amplifies the core strengths of our.

Platform to identify individuals who may have more complicated health needs or require personalized guidance to navigate basic barriers to care.

Customers have told us they want their users to get the right care with the right provider or partner at the right time and with Catholic care guys were enabling them to achieve this goal without having to choose between a digital or high touch interaction.

We've launched a charter customer program for Castlight care guides, including a fortune 500 manufacturing customer, which will help us develop the high touch Redknapp, we plan to make the solution broadly available in mid 2020.

The product will be a bias for our care guidance and complete customers.

Oh innovation is a critical ingredient to building partnerships in August we hosted our customer Advisory Board with 20 plus of our largest clients accounting for about one third of our direct to employer air or are we reviewed our 12 month roadmap priorities previewed Castlight care guides hosted a keynote on our machine learning work and ended.

With a co innovation session, we were energized by the feedback from customers and extended the momentum by launching for customer councils to participate in quarterly Roadmaps sessions with topics ranging from personalization to storage to analytics to wellbeing.

I mentioned that operational excellence is a foundational requirements, we have demonstrated our operational muscle in multiple ways over the last quarter in August we announced our new Salt Lake City Center customer center of excellence.

In the last 90 days, we executed a partnership with the state of Utah signed a lease began construction on our new facility and hired our first class of customer support guides. Many key calculators from our Charlotte location have committed to moving to Salt Lake City, and we are tracking to be fully transitioned by early Q1 without compromising service line.

Those are buyers are excited by this investment and recognize it as a critical asset for us and providing them a phenomenal customer experience.

In addition to our progress in Salt Lake City, we demonstrated operational excellence in migrating the remaining customers on the legacy wellbeing offering we've now completed over two dozen migrations today, including five large customers in early October and have only four customers left to migrate in December this if any massive cross functional effort.

On a testament to the discipline of the team. The completion of this task will allow us to shift resources from supporting a legacy offering to investing in innovation and growth.

Finally, I'd like to update you on our work to put in place and inspirational leadership team to execute against our priorities. We are committed to seeking exceptional leaders from outside of Castlight. While also expanding the scope of top performers inside the organization I'm excited to announce to external leadership additions and an internal promotion.

Hello, and pet Czubay has joined us as EVP and COO not Moran has joined us as SVP of corporate development and well Bonder on has been promoted to SVP and CFO .

How long, it's an experienced health care operations leader. She most recently served as chief of staff at New York Presbyterian Brooklyn Methodist Hospital, where she integrated the hospitals into a nationally recognized healthcare delivery system and managed a 300 person staff across 16 departments prior to that Palin spent 11 years.

Is that New York Presbyterian and a number of leadership roles managing a nine figure operating budget and leveraging technology to improve the patient experience Shelby instrumental in driving operational excellence across our entire business as well as bringing the provider perspective to the table.

Matt joined Castlight to support at some leading our new growth strategies, beginning with health plans. He has a great combination of digital health and deep Blues plan experience. So we understand how to drive value add digital solutions into the payer space. Most recently met with that rally health and he's held roles at Prime Therapeutics and healthcare serve.

Mrs Corporation, the second largest blue in the market.

In his role Matt will lead our strategic sales and partnership development initiatives pertaining to health plans and ecosystem relationships I'm thrilled to welcome both Helen and mapped to the team will Bonder aren't has been part of the Catholic family since 2013 with broad experience across finance and corporate planning strategy Health plan developed.

Matt product marketing and operations, most notably well has been a key contributor in our anthem relationship and was instrumental in Architecting, our new enterprise license, having worked closely with well over the years I know he understands the financial and operational intricacies of Castlight extremely well I'm confident he will be.

Phenomenal partner as we move the business forward.

It has been a non stop 90 days, while the new anthem agreement and our expanded relationship. It's the most visible proof point that we're making progress I'm equally excited about jumpstarting, our health plan growth strategy reinvigorating, our customer base with value focused innovation and perhaps most importantly, assembling the right team to lead Castlight.

And its next chapter as we approach the ended the year, we have three key priorities that set us up for 2020 leadership team new growth factors and a healthy employer business grounded in innovation. We are laser focused on the right commercial leadership across both sales and marketing to position us for a successful 2020 selling season.

Great companies are built by great people. So we will continue to prioritize talent and setting them up for success.

Finally, I want to thank the incredible Castlight team has shown up with energy and resilience in this time of change I'm grateful for the dedication and passion they bring to Castlight. Our team is talented tenacious and focused on our mission and they inspire me every day, we're driving real value and I am proud to be pioneering innovative approaches.

Healthcare's toughest challenges I will now turn the call over to ship on who will review our Q3 performance in 2019 outlook should Uh huh.

Thanks made good afternoon, everyone and let me also think all of you for joining us on today's call.

The Catholic team has had a very productive quarter and I look forward to reviewing our Q3 results and full year outlook. After that I'll introduce you to will who we taking over CFO responsibilities on November 15, then we'll take your questions.

We ended Q3 with $137.4 million, an annualized recurring revenue or a our our complete platform product grew to nearly 30% of air our with a diverse set of customers expanding to complete.

While Q3 sales were below our plan approximately half of our Q3 bookings came from existing customers, who upgraded to our full navigation products.

This is a proof point that large employer customer value our technology.

We again saw turned from customers who were not on our full help navigation offerings. This continues to emphasize the importance of co innovation and partnership on our direct to employer business and our ability to stabilize our book of business with our health navigation products going forward.

Our focus on high quality and durable revenue mix of particularly excited to announce our new enterprise license with anthem.

With this license noncancelable backlog at the end of Q3 would've been around $250 million versus $122 million, we will be reporting as of September thirtyth in the 10-Q.

With this enterprise license, we will now have over 45% of our air with anthem offering our highly scalable industrial Frank technology to its members.

It's important to note that the air are at the end of Q3 that I. Just shared does not include the impact and then you anthem licensing agreement, which was signed in October .

Incorporating but the benefit of the anthem contract as well as our expectations for seasonally light Q4 sales. We expect to end 2019 with approximately 140 $245 million in annual recurring revenue.

We could not be more pleased with the anthem enterprise license structure.

As it provides castlight with high quality revenue visibility improved economics, and a proof point for our growth strategy.

Third quarter revenue was $35.5 million inline with our expectations and year to date revenue tracking for full year guidance range.

Reported revenue is a function of completed implementation in Q3 is the seasonally light quarter for launches.

Subscription revenue was 98% of total revenue while services revenue was 2%.

In particular, we saw services revenue declined 83% year over year Q3's revenue reflects the growing mix shift of our revenue base with anthem as anthem customers do not have professional services revenue coupled with a reduction in some onetime service fees.

Given these dynamics, we expect professional services revenues to be in a similar range as it was in Q3 going forward.

Now, let's turn to third quarter non-GAAP financials, you three non-GAAP gross margin was 62%, which primarily reflects professional services costs associated with Q3 legacy while being customer migrations as well as investments, we're making to maintain support service levels as we move to our new customer center of excellence in Salt Lake City.

We expect to support investments to continue through Q1.

Overall subscription gross margin remained healthy at 78%.

In the near term as we make critical infrastructure investments in both our customer center of excellence as well as in our high touch Castlight care guys offerings, we expect to see subscription gross margins in the mid Seventys and total gross margin to running closer to current levels. In Q4 overall, we continue to main disciplined with our expenses across castlight, while setting the foundation to restore sustainable growth total non-GAAP .

Operating expenses were $27.4 million up about $600000 year over year.

Sales and marketing expense was elevated due to onetime expenses, but remained within that 20% to 24% of revenue target range of DNA reflects some increase spending as we prepare for four four be adoption at the end of this year overall, we continue to invest aggressively in R&D to drive innovation for future growth based on these factors third quarter non-GAAP operating loss was 5.4 million dollar.

Cash used in operations with approximately $7.4 million and we ended the quarter with $56 million in cash cash equivalents in marketable securities. We expect to end the year with more than $60 million in cash with that I'll now discuss our outlook. Our full year 2019 guidance is as follows we're reiterating our prior revenue guidance range of 140 245 million dollar.

Yeah.

non-GAAP operating loss will exceed $30 million, which is the high end of our previously shared $8 million to $13 million range. This is primarily due to investments, we're making around customer stability and operational excellence.

non-GAAP loss per share will exceed nine cents, which is the high end of our previously issued six to nine cents loss per share range based on a 145 to 146 million shares.

I'm incredibly proud of the progress we made this quarter across multiple fronts executing our anthem partnership standing up our health and go to market strategy and team delivering multiple sources of innovation in collaboration to our customers and growing and expanding our leadership team.

These early actions are not fully reflected in our financials and our full year 2018 guidance, but are setting the stage for both stability and growth in our future.

Finally, I'd like to take a moment to introduce you to will who will be taking over as CFO in mid November .

I will make retire and our financing strategy team six years ago and has been a versatile leader in high performing operator for Castlight since he joined us in 2013.

I believe will breadth of experience will make him an outstanding CFO , especially as we sell into new market to monetize our technology.

Im sure Youll hear from him during Q1 day and anticipate you'll have a chance to speak with him over this quarter.

Before we take your questions I want to take a moment to St. Castlight team for their focus on our top priorities and dedication to our mission. They are the key reason why we accomplished so much over the last 90 days and made will and I are all grateful to the working with them on each step of this journey to simplify healthcare operator, we'll now take your questions.

At this time, if he would like to ask a question. Please press Star then the number one on your telephone keypad again that is start than the number one we will Paul sorry, just a moment to compile the Q any roster.

Your first question comes from the line of Jeff Giro with William Blair.

Yes, good afternoon, and thanks for taking the questions.

Lots in the release, there I think I'll start with the care guidance. So.

You're announcing this project at a fairly early stage, which I think implies you want to signal to clients that this is a service that will be available from Castlight. Soon hoping you could summarize some of the client feedback you've received before after the announcement then and also.

Plus with the timeline or kind of bridging the gap between the charter program now and then general availability sometime in 2020 as you mentioned.

Sure absolutely Hi, Jeff. Thanks for the question. So first just to take a step back. So castlights mission is to help make healthcare as easy as humanly possible and get people to the right care at the right provider or program. So for US we very much view. This as the next natural step on our journey and given what we've built with our personalization engine and navigate.

Patient technology.

Theres, just a very clear opportunity for us to identify populations with more complex care needs and help them with our next best action.

So to your point on understanding the market, we saw a really big gap around bringing a tech first approach that Doesnt force a customer to choose between a digital or high touch model, which is one of the reasons that we're moving to fill that gap.

So in terms of just from a timeline perspective as you mentioned.

We've kicked off our charter customer group, which is actually a way that weve co innovated in the past that we're excited to bring that back to Castlight and we do have our first customer launching next month, which is the port Fortune 500 manufacturing company and really what we're looking to do with a charter customer group set in Q4 and through Q1 is.

Really evolved and expand the 2020 roadmap.

From a timeline perspective, we plan to enable our sales team at sales kickoff in January that's typically when we do all of our training and enablement.

With the product being GA in mid 2020, so we do expect to be actively in the market with this in the Q2 Q3 sales cycle.

Good to hear.

Follow up on the carry guys by asking about that the margin impact essentially can can you putting a little bit.

Further how castlight will use technology, either existing or in development to deliver the higher touch service with maybe greater efficiency. Then some similar services absolutely at scale Pataki, Jeff I think what's really exciting here is lets me with highlighting we're moving from technology and an incredible tech asset and data infrastructure.

Our asset into services versus the other way around and so we're being very thoughtful about the investment.

This is an investment not just in people, but actually in technology and manifesting that EPA into the tech and that are that our support that use in the near term as I as I said in my prepared remarks, we do expect subscription gross margins to decline a little bit into the mid seventys as we're making that investment, but then we do expect after that investment we're going.

At the margins begin to progress again because of the investment, we're making technology and the expectation that we're going to see frankly more efficiency with our tier one reps.

Even outside of the high Tech services, and then what we're going to be able to see with the clinical support I think one of things that is really exciting.

Frankly will move and I are out in the market with customers. All the time is that this is going to meet the market where they are we hear customers frequently say that there is a need for health navigation and they don't want to choose between services or technology, and we're really being able to deliver one package now at a frankly a very.

Cost effective price point and I think.

We're being really really smart in terms of how we're investing in that right now.

Great that helps as well.

That's a question on the anthem renewal and expansion as well almost.

Hoping for a little more color on what the changes might be in the economics to the renewed portion and then any framework you can provide on on the revenue model and potential scope on the expanded license agreement it sounds essentially like.

Term license agreement that will be recognized ratably, but was hoping for a little more color there.

Sure well before we speak to the economics I just want to start by sharing just how honored we are to be a long term anthem partner and we're thrilled to be expanding the relationship. So stepping into this role solidifying and strengthening our anthem partnership with my number one priority and after over five years of working so closely.

The anthem team, it's particularly gratifying to be able to share that.

So.

I think we could talk more about the actual structure, but I think your question was on the economics.

So Sean do you want to start off and then well maybe can talk through the mechanics sure yet so I think Jeff your rate I think what's really exciting here is we're seeing a move into an enterprise license agreement it dramatically simplifies and frankly, where we were before and we'll continue upon.

The mechanics of the deal.

To your point just in terms of the pure economics and what we're seeing here is anthem was about 40% of air are at the end of Q3, and we're seeing 20% growth from that and in terms of when this will go into effect it will be 112020.

You'll start to see that.

Continued then I think what were I think with very different here is is and I mentioned. This in my prepared remarks. This is now going to be noncancelable contact. So we're seeing the non cancel backlog double as a result, as I mentioned and then just finally as we think about what happens once the contract goes into effect.

You're right you basically start to see revenue over the falling 30 months given its one enterprise license agreement with anthem.

Maybe I'll just let will very quickly touch upon kind of the from to where we went and the underlying mechanics of the deal sure. Thanks, Jeffrey too good to talk so if you think about the previous relationship with anthem, yet multiple products and multiple contracts and you heard that into complexity, sometimes in our financials going forward as a single enterprise license one.

Receivables due to revenue base that encompasses all of the products, we've been offering historically, putting engage market of course as well as the new engage if you guys and we are excited to simplify the relationship but also to expanded going forward.

Just have great appreciate the comments and Jeff.

For everybody that's on the phone it it sounds like Edgar was down.

While we are trying to file. This so there will be an 8-K, given the materiality of disagreement that should be populated. After this call I think their system finishes on that right now.

Got it will keep an eye for then I'll jump back in the queue. Thanks again.

Yes.

Your next question comes from the line of Charles right with Cowen.

Yes, thanks for taking the question.

Maybe talking about the bookings record you said there are a little bit light here do you expect to but if I missed.

It sounds like Youre, saying youre expecting for Q sales to also be a little light as well apart from the anthem deal.

Can you go into sort of your expectations.

In the sales process for the fourth quarters.

Yeah, absolutely trials I will tick.

Talk to talk a little bit about what we're expecting Q4 I think it's also want to make sure that made can talk some of the early observations in terms of direct sales performance overall.

So in Q4, it's seasonally a very light sales quarter, we've got a handful of deals that have slipped from Q3 that we're tracking but we're not expecting much conversion.

At this point in time, and then I think the other dynamic here is this renewals are typically concentrated in Q4. So we've got about 30% of our renewal still up in the fourth quarter and so we're being thoughtful in terms of how we incorporate them into the air guidance that we shared today for year end and made would you like to maybe talk a little bit about direct sales in particular.

Sure.

Yes. So in my first 90 days I did a deeper review of our commercial strategy and based on that diagnosis I believe that despite having tenured and talented reps in the field that we do have lots of room for improvement. So we're laser focused on bringing in the right commercial leadership across both sales and marketing and we're moving with urgency.

To ensure that we're well positioned for the Q2 in Q3 2020 selling season.

Just to provide a little bit more color the opportunities that we're seeing around improved execution are really falling into two buckets number one is the go to market strategy and enablement and our gaps there around our around clear resonant messaging and actual tactical plays and then secondly deal execution, so better diagnosis of pipeline conversion.

Run rates by stage.

Specifically, we are focused on how we unstick some of our later stage deals, but those are some of our early observations from a direct sales point of view.

Great Thats helpful are going to one more follow up question on the but you're like Kyrgiakos presort customer care guides.

You talked about both Lynn investment here as you build it out.

So right to think that you're going to be staffing clinicians and is it right to think that just ramps up relative to the per margin profile.

Just to complete service business right, so that's sort of lower through operating margins.

On a steady state business.

Yeah. So you're right there is going to be some level of of clinical support here, we're not talking large numbers of people and actually the most significant investment right now is really in the technology and not to get to specific but we're literally exposing the underlying apiay into salesforce, which is what our support guides use and so thats.

Really when talking about in terms of investment of technology.

The expectation here is to drive efficiencies both in terms of frankly tier one tier to support the you'll see more efficiencies as we drive improvement there and then frankly, a much more efficient service model with the fit with the clinicians that you're asking about but in the near term you expect that you'll see some some dry.

Up in the subscription growth Mark it subscription margins, specifically as I said mid Seventys for Q4 2018.

You want to maybe talk about the use cases of like how clinician might use the technology sure absolutely so and I think it's actually worth noting that the use case actually spans both administrative so how do we help people removed basic barriers to care such as appointment scheduling to some more complex clinical use cases.

So very simple example would be right now in our data we identified polychronic patients and are able to see if they don't have a primary care physician. So we would be able to both do an outbound touch point to connect them with a provider who treats patients like them or if they came in for a question about their benefits or insurance card or HSH.

Actually proactively treat that use case, so it's really leveraging a lot of the work that we've done around personalization and understanding the conditions at the population to recommend next best action.

Thanks, that's helpful and just one.

Follow up question on the on the numbers here would be investor, you're saying sort of mid seventys.

Marginal subscription side would be kind investments you're making.

You know how should or do some of these sort of onetime investments that we should expect to kind of roll back off so that as we're thinking further our model lets say no should be on we should get some of those back and I guess that also translates into.

Operating income loss.

Should we think about your the pace of that or is this sort of the new baseline as we can begin to grow backhaul.

Yes, So let me talk about Q4, specifically and then does general trends, we'll obviously update 2020 guidance in February but in terms of the investment levels in technology and people.

The fact that will continue beyond Q1 May said, we're expecting a product to be generally available mid next year. So there will be that investment both in the tech buildout as well as people.

And I think we'll have more information around what kind of efficiency can we drive with support overall given we're.

Wanting the care guys, but also doing this move commensurate right now so what kind of efficiency are we expecting to see so there will be some level of duration I don't expect it to be.

Like.

Multiyear investment if you can imagine this is going to be.

Rosen.

Level of R&D build to get that up and launch and then there's some level of people that will support the bias, but we're being I think pretty thoughtful around what level of investment in terms of clinicians do we need.

But yes, I do think there's some level duration in terms the margin side of things in terms of Opex, which I think was the second piece of what you were saying on the sales and marketing side. There was some onetime expenses that.

Translated into the piano this quarter, so I do expect to see a little bit more efficiency in that line item in Q4 and beyond.

R&D I think we're operating closer to steady state right now.

Good day.

Long term target of 8% to 12% in particular, because we have four four being need to be.

Some client for year end I expect that we'll see some efficiencies as we look forward, but when you look into like the next quarter, we're going to get little bit efficiencies in opex, but not a huge amount just based off of where we are.

Great. Thanks look.

Your next question comes from the line as Brian Peterson with Raymond James.

Hi, This is Alex sklar on for Brian .

Just had a couple other follow up questions on the anthem deal first as there are there any additional investments needed on your part to enable that there are step up and then also or are there any variable revenue components that could provide upside to the to the TCV announce either in terms of.

Savings goals or something else along those lines then I've a follow up thank you.

Great I'll I'll dive into some of the components in terms of variable, but first I think it'd be great to have will hit on first question.

Yes, absolutely so as we think about relationship we've obviously been working with them for a long time and have worked together to build a products and have denied in market and sort of products and capacity enterprise license are all deployed today and we don't expect you to require additional building are really excited actually deploy them to additional folks.

And I don't expect increased investment or the interview product build out in terms of.

Kind of the upside when you have a chance to.

We had thought it would be filed at this time and apologies that Edgar apparently is down and we are filing the entire going up because the materiality of so you will see that agreement is structured with a set number of seats and so there is upside above that that number potentially if we don't.

Surely expect.

Them to hit that number in the near term yes.

Okay, Great and then one other one on the deal can you just talk about how the there are the revenue conversion post anthem I wish to then the numbers.

Yeah, absolutely. That's a great question. So air are ultimately is our best predictor for subscription revenue and that's why we gave guidance on it today expecting to end the year at $140 million to $145 million in air are effectively what drive conversion is implementation timelines Rev. Rec, and then turn headwinds.

Typically we see about 90% of our air our convert into subscription revenues. The following year and right now we're expecting a very similar trend for 2020 in that 90 is percentage range. Overall, we're super pleased with the progress that we've made to stabilize current revenues in.

The stability that the anthem contract provides us.

Okay, great. Thank you.

And if he would like to ask your question. Please press Star then the number one on your telephone keypad and your next question comes from the line of Jeff Giro with William Blair.

Yes couple of more from me thanks.

I guess the first as you mentioned the meaningful advances in Jumpstarting health plan growth initiatives and all the median thin and how year.

Feeling good about the progress there right.

Hoping you could frame that discussion a little bit in terms of the pipeline type.

In terms of relationships or dollar value of of pipeline kind of what was there before and what's been.

Added to it it now and and some type of outlook on on how that might convert to our AR.

Over the next 12 months or beyond.

Sure. So I'll start off and I know she wants to add a couple of comments around it around pipeline as well so.

Candidly, Jeff when we started off the first thing that we did what they diagnosis of the current state and what we did determine was that the pipeline really was effectively.

So we didnt have any qualified deals at any stage of maturity that we thought could move forward.

So a big first step with actually putting in place that organization that we talked about so having a dedicated teams pulling from both internal leaders as well as recruiting the external leaders.

And so.

As you mentioned I have been on the road with health plans and I think the excitement around the assets to just add a little detail. There have been primarily I would say in three areas. So transparency ton of interest around provider directory, certainly getting some tailwinds from some of the Washington conversations as you can imagine personalization.

Specifically pet care pathways gaps in care a lot of interest there as well and then finally integration so bringing together.

All of the clinical resources in external programs.

So the good news as we got a lot of interest.

The kind of challenging news is that these are long sales cycle. So we're thinking creatively about frankly, how that to move things more quickly through the pipeline. We do believe that the anthem agreement is going to be substantively important for us both as a referenceable customer, but also the fact that the model.

Is about exposing some of the external Apia eyes.

And I think one of the key insights and the time that we spent with plans is how important it is to meet them where they are on their technology journey.

Being able to be more plug and play.

So in terms of qualifying the pipeline Giovanni I know that you wanted to add a couple of comments.

Jeff I would say that this was were 90 days Inn is kind of the high level.

I would say that we have moved deals in through the through into a stage one phase, but we're definitely early on in qualifications.

And what as it's going to added.

When I think about like how that translates into the model what you're thinking about here is obviously, we now have a proof point, which is super exciting with the enterprise licenses of how we can work with other plants translating that to air as much more of like a 2020 exercise where that contribute to revenues in 2021 is how I would actually think about that.

Where we are at the state.

Got it that helps and one last one from me given the comments about the expansion of health plan relationships and also the new anthem model, maybe you could give us a little more commentary on how you're going to balance those efforts with reinvigorate that.

The direct to employer because it seems like the incentives have shifted into the anthem business and that's similar model is rolled into.

Future health plan relationships.

I know the director employer market is very wide, but wanted to hear your thoughts on how to balance those varying incentive.

Yes, well I'm happy to start and varnishes certainly at I mean, I think that the truth is the type of partnership that we have with anthem is about two things. It's about a great product meeting at rail market need and then trust and respect between leadership teams. So I understand your comment on incentives, but as we think about.

Building a long term business is very important to us to continue to meet the needs of anthem customers and membership.

And given the way that Weve architected the technology as we continue to innovate on the direct to employer side, we are able to roll that in two benefit engage customers as well. So I guess my first comment would be.

As a partner with anthem and as a valued member of their ecosystem.

We do have a strong commitment to our existing customers and membership.

And then the second piece is really just a product architecture commentary, which is.

Our innovation on our direct to employer side, we have the ability to turn that on or off into our health plan business as well.

Yeah, and I think that the thing that's really important is actually what made us emphasizing the way the technology built to single sets architecture.

It really is how do we innovate with with both anthem and employers and it's a win win and frankly right now with the way I think about it is we've created stability and growth with anthem relationship we put into place a bunch of initiatives for our direct to employer in business and obviously care guys being.

The most concrete new products that we're putting in place and then it's around diversifying further in terms of adding additional health plans are benefiting from that tech stack and so I think.

Honestly is a testament to the technology.

That we're able to be able to service both lines of business I think as well as you can.

Got it thanks again.

Sure.

Your next question comes from the line of Charles Rhyee with Cowen.

Yes, Hey, there's just a quick follow up question, what was the ending customer number but for the quarter, yes, we're expecting about to have around 250 customers at the end of year.

Still 40% Fortune 500.

As for the quarter end was about same.

Around the same it would say, there's a slightly higher as we're expecting to.

Have effective customer count.

Be lower at year end with the air our dynamics as talking about.

Okay, great. Thank you.

There are no further questions at this time I would now like to turn the call over to maybe o'meara for closing remarks.

Thank you all for joining us today the team is energized and focused on building on the progress we've made over the last 90 days, we look forward to speaking with you over the quarter and I hope to see what the health conference in Las Vegas next week have a good evening.

This concludes today's conference call you may now disconnect.

Yes.