Q1 2020 Benefitfocus Inc Earnings Call
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Greetings and welcome to the Benefitfocus first quarter 20, <unk> earnings Conference call.
At this time, all participants are to listen only mode.
Question and answer session will follow the formal presentation.
If anyone should require upward or assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Patti Leahy, Vice President Investor Relations and innovation. Thank you you may begin. Thank you operator, good afternoon, and welcome to benefit focusing first quarter 2020 earnings call.
Joining me today or re August President and Chief Executive Officer, and Steve <unk>, Chief Financial Officer.
Rain, Steve will offer some prepared remark and then we'll open up the call for couponing.
Before we begin let me remind you that today's discussion will include forward looking statements such as our second quarter and full year 2020 garden and other prediction expectation and information that might be considered forward looking under federal Securities law, including statements about our positioning for the future.
These statements reflect our views as of today, only and should not be considered as representing our views as of any subsequent date.
These statements are subject to volatility and uncertainty in the global economy and financial markets in light of the evolving cobot 19 pandemic.
Variety of risks and uncertainties, including are continuing losses and need to achieve GAAP profitability.
Fluctuation of our financial results, the imager and volatile market for our products and services recruitment and retention of key personnel risks associated with acquisition, they need to innovate and provide useful products and services.
Our ability to compete effectively cyber security risks and the changing regulatory environment that could cause actual results could differ materially from expectations.
For further discussion of the material risks and other important factors that could affect our actual results. Please refer to our annual report on form 10-K, and our other SEC filings.
During the course of todays call. We will also refer to certain non-GAAP financial measure you can find important disclosures about those measures in our earnings press release.
I'll turn the call over to Ray.
Thank you Patty and good afternoon, everyone.
Sure. We hope everyone on the call is safe and sound our Hearts go out to those impacted by the pandemic and our gratitude extends to those working to help bring this crisis under control.
I'd also like to thank benefitfocus team for their ongoing commitment.
Our associates have responded extremely well to these new challenges they remain fully engaged and committed to strengthening our platform and serving our customers I would also like to welcome Patty as our new we appointed VP of IR.
Thanks, Mike Baur Who's moving on from the company. After five years of dedicated service, we wish him all the best.
I'll start todays call was three key takeaways first we believe benefit focus is strategically well positioned.
Our ability to offer the right benefits to consumers, where they need them the most because at the heart or or enduring value proposition.
Virus has challenged our health care infrastructure, having proper coverage has never been more important.
Second we have accelerated our innovation to deliver on the pressing needs of our customers. The world is rapidly changing as a consumer take some more prominent role as the purchase of their benefits, we've opened new channels to enable them to engage with benefits in the more efficient and automated way.
Health plans also need to adapt to this shift by offering more robust individual quoting enrollment and payment capabilities, which are end to end solution enables.
And third we acted quickly to reduce costs and accelerate our focus on automation a move that will ensure not only we can whether the crisis, but emerge more profitably and efficient than ever before.
Our mission is to improve lives with benefits and then has never been more relevant.
Value, we delivered to our consumer employer and health plan customers continues to grow.
Robust benefits remain a vital part of how they can help protect and support the well being of their employees and members our ability to help them maximize and automate their investment against the backdrop of increasing unemployment and rising healthcare costs is key.
[noise] individual health care's growing to serve an audience that as multiplied overnight by the end of April 20% of Americans are reported to be unemployed and a significant number of them have elected to retire early.
We believe that benefits should transcend the employer employee relationship.
They should follow the consumer for life. Therefore, we've accelerated our innovation to realize our philosophy of benefits for life.
And meet the evolving needs of our customers.
First we introduced our Kobin 19 resource center to provide our customers the tools and insights to guide them through the pandemic.
We then launched our for you initiative, which includes a colleague for life portal and a community resource center to provide HR leaders the insights necessary to address operational challenges and deliver support for affected employees.
A key feature of this offering helps employer stay connected with separated employees from offboarding to potentially rehiring.
Most employers like ourselves hope to bring back separated staff into the workforce as operating conditions improve.
Our solution automates, the offboarding experiencing kinetics affected individuals to affordable health plan alternatives and voluntary benefit products.
It enables HR admins to customize and outreach program with timely and critical resources, while connecting separated employees with employment assistance.
And finally, it allows employers to quickly reactivate staff when business circumstances improve and easily change eligibility status of employees through various stages of employment from full time to part time differ low and back again.
The increasing need for individual benefits solutions for the consumer has been fueled by rising unemployment accelerated retirements and growing 10 99 workers to accommodate this growing population. We have introduced our first direct to consumer offering benefit place dotcom with.
Preconfigured communications and no additional administrative effort required HR leaders can tailor a set of products from our extensive catalog for separated employees. This includes health plan options such as a CA health exchange plans short or long term medical coverage.
Tele health and a discounted prescription drug program.
Discounted grocery delivery service life insurance auto and home policies and student loan refinancing.
This dilution is currently available for and the employer and is also available for any independent gig or freelance workers, who needs to access affordable and relevant benefit options.
In addition, this week, we are announcing a new initiative for U.S.C., which provides unemployed workers in the state of South Carolina with additional benefit options. During this economic crisis for U.S.C. enables workers, who have applied for unemployment benefits through the department of and.
Women and workforce to access other affordable benefit options via benefit place dotcom.
We intend to quickly make this solution available to other state governments seeking additional benefit options for unemployed workers.
Our direct to consumer strategy will allow us to scale and address a larger number of lives. In addition to the more than 25 million people. We serve today the employers and health plans, we believe having more consumers on our platform, which enhances aggregate value and we are.
Confidence that the economics will accelerate overtime and create value for benefitfocus shareholders.
In addition to these areas of innovation, our product offering is uniquely positioned to help our customers address the growing burden of rising healthcare costs.
Our health insight solution helps optimize health plan costs and utilization provide predictive planned modeling and industry benchmarking provides population health management and offers integrated claims data.
This offering is tailored for every key member of our ecosystem and when combined with the power of our AI platform benefits age is a key differentiator of our platform.
In mid March we held our annual conference one place using a fully digital experience. We compressed three days of learning sessions into about six hours of digital content and we more than doubled our expected attendance.
And can in connection with our one place conference, we launched our new corporate identity and introduced a simplified go to market solution benefit place benefit place is a new name of our comprehensive enrollment and voluntary benefits offering and replaces our point.
Solution approach.
Turning to the expense management actions, we've taken in response to the pandemic.
Current macroeconomic pressure and historic projections unemployment.
Let us to revise our revenue forecast for the year.
In response to our revised expectations, we took swift and proactive steps to improve our profitability and Cashel estimates were doing so through aggressive expense reductions and with automation that drives operational efficiency as well as gross margin expansion.
In short, we positioned ourselves to emerge from the pandemic more profitable and more efficient than before.
We're also running the normal activities as a business.
Let me now turn to these items for the quarter.
Early in Q1, our health plan team close to seven figure transaction.
Which we disclosed in our prior earnings call.
We've now closed three major health plans since integrating that Connecture acquisition last year.
We continue to have favorable traction in our pipeline as health plans view, our end to end solution as a strategic asset.
An asset that helps them grow their revenue while also controlling costs.
We expect to continue gaining share and acquiring new clients in that in this year.
Our employer team has also closed several transactions from a variety of industries, including multiple hook hospital systems and the specialty chemical employer.
In Q1, we also grew our relationship with a gig economy employer shift, which contributed to net benefit eligible lives increasing to 17.5 million at the end of the quarter.
Importantly, one of the key attributes of our SaaS platform is the ability to virtually implement customers.
The vast majority of customers remain on their implementation schedules, including our three large health plan transactions slated to go live later this year.
We have a well diversified customer base across business verticals, our sales team and growing broker channel have done an effective job continuing to build pipeline and in this environment in both employer and health plan markets.
While we are seeing some slowing of the pace at which deals are moving through the pipeline, we're still seeing deals progressed and close.
Looking forward, we remain focused on increasing the value of our platform and improving our profitability.
We have the resources market leadership and technical advantage to exit the co bid 19 storm stronger and better positioned and we're confident that we're taking the right steps to drive near and long term shareholder value creation, Steve will now cover the details of our quarterly results and outlook I'm pleased to have.
The depth of his financial leadership, especially during these challenging times Steve.
Thank you Ray let me begin by giving an update on our full year guidance and sharing with you a summary of the process. We followed to develop a plan that incorporates the anticipated impact of the pandemic.
And then I'll discuss our first quarter results in Q2 guidance.
At a high level, we believe benefit focus is fortunate to have a durable business model and a strong cash balance during these challenging times.
The majority of our revenues recurring and generated from a diversified install base with no meaningful concentration in any industry vertical.
For reference retail and entertainment in travel, which in the current environment are two of our higher risk verticals represent approximately 7% of our subscription and platform revenue.
In addition, most of our employer and health plan contracts have minimums.
As the country began to shut down to stop the spreading of the virus, we launched a bottoms up evaluation of the potential impact of it on our business.
To that end, we sensitized the following areas.
Sales cycles.
Close rates implementation timelines.
Take rates on certain voluntary benefit offerings and most importantly, the impact of unemployment on subscription and platform revenue.
The result of this process is that 2020 revenue will likely be in the range of 250 to 270 million has compared to our prior revenue outlook of 310 to 320 million.
The majority of the difference comes from the impact of lower than expected new sales on professional services and platform revenue.
And the impact of higher than expected unemployment.
On platform revenue.
We anticipate a lagging and somewhat lesser impact on our 2020 subscription revenue.
Due to a delay in when unemployed workers actually leave the platform and the contractual minimums.
Additionally, we anticipate Mercer revenue, which is now estimated at about $8 million for the year to perform consistent with our brought our revenue base.
To offset the lower revenue estimates and enhance the financial sustainability of the company. We took a number of actions on the cost side of the business, including a reduction in the size of our workforce by more than 17% across the company.
Pausing the hiring of news associates spit spending all non essential costs.
And reducing executive pay including both our CEO and our executive chairman voluntarily cutting their paid to zero until the environment improves.
In addition, we began to renegotiate some of our professional services and platform contracts to generate higher returns and higher margins.
We expect it that some of the less profitable work will stop and other work will be reduced their pot, thereby impacting topline, but also expanding margins.
The cumulative result of these actions is expected to save the company $50 million to $60 million. This year compared to our original plan was still enabling continued key R&D investments to drive innovation and increase automation.
We expect to take a cash restructuring charge of approximately 5 million in Q2 relating to that these activities.
As a result in 2020, we expect non-GAAP and GAAP software and professional services gross margins to expand over prior year levels as we progress through the year.
Adjusted EBITDA to be between 25, and 35 million, which means that the midpoint of guidance adjusted EBITDA margins will be approximately 12% of revenue and up 500 basis points from 2019.
And we expect to consume between 10 and $20 million of free cash flow.
Because we are expecting unemployment to meaningfully impact our customers. We believe net benefit eligible lives will be down year over year.
That said, we are working to retain as many of those lives as possible through the new innovative customer offerings Ray discussed.
Now, let's turn to our first quarter results.
The total revenue for the quarter was 66.2 million a decrease of 3% compared to the first quarter of 2019.
Subscription revenue decreased 4% compared to the same period last year, primarily due to the impact of Mercer, which came in as expected in Q1.
Excluding the impacts of Mercer Q1 subscription revenue increased 5% compared to Q1 2019.
This increase was driven principally by the contribution and synergies of the connection of the Connecture acquisition.
Platform revenue, which represents revenue from voluntary benefits grew 17% year over year.
This growth reflects more lives engaged with our platform.
Offset in part by the timing of revenue share bonuses.
And a decrease in the rates received on certain benefits products in our catalog.
The decrease in rate is the result of a contractual renegotiation where prices were reduced and certain low margin support services. We're also eliminated.
We expect the lower prices on this contract and higher unemployment levels to negatively affect the growth rate of this portion of our business in the near term.
Total revenue for Q1 was below our original guidance range, principally because of lower than expected professional services revenue.
As deals came in lower than expected.
Slipped out on the quarter or we'll put on hold because of the pandemic.
On a GAAP basis gross profit was 32.2 million representing a margin of 49%.
On a non-GAAP basis gross profit was 33.2 million representing margin of 50%.
The year over year declining gross margin as a percent of right revenue reflects the combination of a reduction in high margin Mercer revenue and increased investment in staffing.
Which our recent cost management actions have addressed.
Q1, adjusted EBITDA was 4.1 million.
This exceeded our guidance and compares Favourably to 3.6 million in Q1 2019.
Our adjusted EBITDA was positively impacted by shifting our annual conference the digital.
Lower sales costs due to lower than expected sales and professional services.
And tighter expense management in the quarter.
Operating loss was 5.7 million and net loss per share was 34 cents. This compares favourably to the operating loss of 9.1 million and net loss per share of 44 cents in Q1 2019.
Now, let's move to the balance sheet and cash flow.
We have a strong cash balance of approximately 115 million.
This reflects our activity in the first quarter, including the drawdown of $10 million from our revolving line of credit and the repurchase of approximately 1 million shares of our common stock at a cost of 9.4 million.
We drew on the revolver in the first quarter to increase the strength of our cash balance during this unusual time of economic uncertainty.
We have remaining capacity to draw down an additional 40 million from our revolver.
We consumed $11 million of free cash flow in the quarter, which was inline with our expectations.
Free cash flow is a non-GAAP measure that we defined as cash provided are used in operations plus property and equipment.
Looking ahead to Q2 guidance, we are targeting Q2, 2020 total revenue of 55 million to 58 million and adjusted EBITDA between 2 million and 4 million.
We expect non-GAAP net loss of 9 million.
To 7 million, which represents a non-GAAP net loss per share of 28 cents to 22 cents based on 32.1 million basic and diluted weighted average common shares outstanding.
The outlook for Q2 reflects continued impacts.
Of lower than expected new sales on professional services and platform revenue.
The decline in Mercer revenue and expect it impacts of unemployment at our subscription and platform revenue.
We're also expecting non-GAAP gross margins to expand over Q1 2020 levels.
In closing, we have a strong cash position significantly lower run rate costs and a realistic estimate of revenue for the full year given the current environment.
We are more confident than ever in our position and relevance in the marketplace and expect that we will exit this crisis stronger and then we weren't going into it.
With that I'll open up for questions operator.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you like to ask a question you May press star one on your telephone keypad a confirmation Tom will indicate your line is in the question Q.
You May press Star too if you would like to remove your question from the Q.
Or participants you can speak or equipment, and maybe necessary to pick up your handset before pressing the star Trek.
Our first question comes on the line of Brian Peterson with Raymond James. Please proceed with your question.
Yes. Thanks, This is Alex sklar on for Brian.
First question for Ray or Steve a lot of color on the expense management measures both today and in the release last week, but I wanted to dig into into some of the investments you're still making in the business, particularly like the launch of the direct to consumer product and how we should think about the growth opportunity for benefit focus when we do return to normalcy.
Yes, Thanks, Alex.
As we think about power.
Investors and we think about what they are focused on obviously, we're focused on both short term return and also creating long term value for for all of our shareholders.
As we thought about this opportunity and as Weve analyzed the pandemic situation that we're in we're really focused on how do we address the uncertainties that are happening in the market today and as you said we've talked.
Considerably about the expense actions and and steps were taken but at the same time, we see a tremendous opportunity where we can really elevate our role as a trusted connector between consumers and the benefits that they buy and as we went through our planning on our modeling one of the things we did even when we looked at cost state.
Got it was how can we make our company stronger than we were.
After the crisis than any of them before the crisis. So as we went through our expense reductions in our restructuring what are the things we thought about was.
How do we put the customers at the center of everything we do how do we create an environment, which makes it makes our environment more automated with less friction for everybody on our platform and also how do we make sure that we're we're finding that by reducing some of our investments in sales and marketing to get those more in line with industry norms.
So we really can accelerate our progress and so as we come out of this situation that as the company will be stronger. So what we've done is actually created an environment, where our gross margin is better than before the before the crisis. Our EBITDA is this higher as a percentage of sales and we're using.
Less cash to do so all those things are enabling us to invest in what we see is the opportunity and the opportunity for US is really center centered around our mission and our mission is more need and now than ever our mission is to improve lysa benefits and when you think about improving lives with benefits, it's really how do we.
We are unable to consumer to take care of themselves and their family in every step of their journey.
Up until now the primary way where people came onto our platform was either through an employer or a health plan. What's happening now there are over 30 million Americans, who are unemployed today every one of those Americans who are unemployed comes from an employer in the comes from an employer on ours for somebody else is platform Weve.
We focus and we built an offering which we call colleagues for life, which allows us to enable and help employers.
For people off of our platform in an efficient and effective way and with the hope of every employer hopes, including us that we bring those employees back on the platform going forward into the future.
Other thing that has happened to 30 million Americans is while they are in any status whether its employed are unemployed they have to purchase and by benefits for themselves and take care of there.
Family, So what we've done as we accelerated our investment at an accelerated bringing to market our benefit placed dot com solution, which is our consumer portal, which allows consumers to to purchase benefits the unemployed still need to buy medical insurance into somebody to buy life insurance, assuming to take care of their family and.
We see benefit place dot com.
As as where that will happen so to sum it up we really see coveted as an accelerator that really puts the consumer in the spotlight as it relates to the purchasing it benefits prior to this benefits were purchased through an employer now we're seeing an increasing activity where the consumers going to buy.
Hi benefits on our platform for the last 18 months, we've been talking about the Consumerization of benefits now, we're seeing that accelerate due to what's happening with co bed and are met our mission of improving unless it benefits has never been more relevant and it presents a lot of long term opportunity for benefit focused.
Got it right. Thanks helpful color, there and one other for you right. We're right in the middle of your bookings typical booking season, and so outside of the unemployment impact. The lives can you just give some color on on gross booking trends in March and April and if it did bring it all by channel between the brokers and carriers in your direct.
Salesforce thanks, Yeah.
As we go to market, we really go to market and serving the consumers serving the employers and providing solutions for them and working with the health plans and using the brokers and our channel to leverage to leverage those activities.
The consumer market, we talked about where we have our new benefit place dotcom offering in which we provide benefits directly to consumers.
The strong this opportunity for US right now is in our health plan.
Offering health plans are very much needed in today's environment Bye bye everybody. There they are funding and paying for a lot of the activity that we're seeing around covance and we're seeing extremely strong demand for our offerings and.
Health plans as I've said in the prepared remarks, we signed another customer this quarter. This makes three in the last two quarters, which is.
The most accompanies ever booked in that period of time, and it's really a result, though the combined.
Solution, we have by combining the assets of.
Connecture and Benefitfocus sourcing and really strong demand there and we expect that to continue with a robust pipeline and the employer segment were seeing the.
As we've talked about earlier, we're seeing.
Really.
The employers focused on.
Exporting their employees, which we've created a solution for the HR teams are really focused on.
Taking care of what everybody's focused on.
You know their employees make sure that employees or health are healthy so that was reflected in our revised guidance. So all in all seeing strong activity and health plans seeing a lot of nascent startup activity and consumer and.
Impacts that Covance really are hitting us within in the employer segment.
Alright, great. Thank you.
Our next question comes from the line of Jamie Stockton with Wells Fargo. Please proceed with your question.
Hi, Thanks.
So I guess maybe first.
I appreciate that.
Just for Q2 I.
I guess I would love it.
If you could get a little more granular on what you expect from our pro service standpoint, just because it sounds like that's where theres going to be the big step down.
And then maybe.
You know how durable you think that stepped down will be on a going forward basis.
Hi, Jamie this is Steve.
The main drivers.
Impacting Q2 are Mercer declines continued Mercer declines and then the expectation of a kick up in unemployment.
And.
And unemployment as I said hits, most immediately with with the voluntary benefits.
And then on a lag basis with subscription subject to those minimums.
The Pos.
You are right that.
We do expect softness in the year in PS and that's largely.
From revised estimates of new business.
And.
And also I said that we're tightening up our efforts around.
We're being a little.
Or scrutinizing the level of effort, making sure we're getting compensated for the level of effort. There. So you might see some decline in what I call like empty calorie revenue.
But but im not going to do too much more as it relates to to Q2, one that there's.
There's still a fair amount of.
Business to be had and I gave you as much color as I have right now and I'm looking forward to give me another update and in a quarter.
Okay.
I guess, maybe the other two things I wanted to touch on the comment about lives this year being down I mean, obviously on the unemployment rate has exploded here. You know is there is there a magnitude of decline that you guys would be willing to say that you're you're baking into your.
Modeling right now.
Oh no. This is Steve again.
Well I think a bigger drivers of that decline are going to be unemployment in the modeling I would say that was one of the bigger assumptions made it. So if you look at the guide in the range in the guide one of the major differences between the high and low as level of import unemployment and.
And that is what will drive the majority of that that comment.
We are we are seeing.
Well, we are expecting some offset to that certainly as time passes from the activities that.
Ray mentioned in the innovations that we have that are going to the consumer.
But but it's too early for me to to kind of pin a number on it.
Okay, and then maybe maybe just lastly that the gross margin comments.
I know you said that it would be up sequentially.
From Q1, and Q2, and it's kind of like.
You know you are implying it's going in and per throughout the year should we expect the gross margin to be higher for the full year this year than 2019.
Ah, Yes, Jamie I I don't think it'll be linear, but I think we will exit higher.
And you're right I guided Q2 to be above the 50 points in in Q1.
And and then I expect us to get traction as we proceed through the year and as that automation has a has the ability to take hold.
And then I think Q4, we'll see an exit rate that is better than last year.
Okay. Thank you.
[noise] or no.
He leaves you operator.
Can you hear me.
Got it now again.
Okay, I'm, sorry about that I was on mute didnt realize it.
Ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone keypad.
There are no further questions in the queue.
I will hand, it back to re August for closing remarks, great. Thank you operator, and thank all of you for joining US here today as a company we remain focused on protecting the safety and well being of our employees while at the same time seamlessly serving our customers we're balancing actions across the company to preserve operating capital.
While continuing to innovate as a market leading benefits platform for consumers employers and health plans, we are confident and focus on coming out of the stronger than ever before we look forward to updating you on our progress next quarter have a good night.
Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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