Q2 2020 Castlight Health Inc Earnings Call

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Please be advised of today's conference is being recorded require any further assistance. Please press star zero.

Leading today's call or leave Merrill Chief Executive Officer, and will Andre Chief Financial Officer Me, even will offer their prepared remarks, and then they will take your questions.

The Castlight press release webcast link and other related materials are available on the Investor Relations section of Catholics website.

This call contains forward looking statements regarding trends strategies and anticipated performance.

Oh, the castlight business, including but not limited to guidance for full year 2020, new sales our ability to bring new innovation the opportunities an impact is posted on our own operation.

Our ability to sell.

And our operating results.

Opportunities and the impact of co bid on our customers businesses and their decisions to by certain benefits or institute workforce reductions retention of existing customers.

Gross margins and operating expense trends.

[noise] shoes feature crash position.

And the changes in the growth strategies on the company's performance. These statements are made of July 27th 2020 reflect management's views and expectations at this time and are subject to various risks uncertainties assumptions.

If any of these risks or uncertainties develop or any of the assumptions prove incorrect actual results could differ materially from those expressed or implied by our forward looking statements. The company disclaims any obligation to update or revise any forward looking statements.

This call contains financial guidance, but the company will not provide any further guidance or update on performance during the quarter unless a regulation FD compliant forum.

Please refer to todays press release and the risk factors included in the company's filing with the Securities and Exchange Commission for a discussion of important factors that may cause actual events or results to differ materially from those contained in Catholics forward looking statements.

Today's call and presentation also include certain non-GAAP metric such non-GAAP gross margin operating expenses operating income loss. The net income loss per share the Catholic believe aid in the understanding of Castlight financial results.

Disclosure regarding non-GAAP metric and reconciliation to comparable GAAP metrics on a historic basis can be found under the heading reconciliation of GAAP to non-GAAP financial measures.

The earning release that was filed before the call.

With that I'll turn the call over to be able to merit CEO of Castlight health needs.

Thank you all for joining US today. This year continues to challenge all of us with the ongoing spread of cobot 19, and the systemic social justice an equity issues that face our country. We're privileged to be at a company that has an opportunity to help support our customers and our communities. During this train time.

And are focused on ensuring that we stay heads down on execution and heads up on innovation at the landscape is changing quickly.

I'm pleased with our strong second quarter 2020 results and at the result of the predictability of our subscription based business model. We are on track to achieve our annual guidance for the full year, we have demonstrated operational discipline with a priority on financial sustainability, resulting in a non-GAAP operating profit and positive.

Cash flow ahead of plan.

We entered 2020 energized and ready to build upon the foundation, we have solidified during my first six months as CEO at the beginning of this year I outlined for strategic priorities, one signing a new health plan partner to continuing to revitalize our employer business three building on our early.

Success with our care guides pilot and for working to achieve financial sustainability I will review, where we stand in regards to those objective and then well we'll provide a deeper dive on our financials for the quarter.

Before we discuss our progress against our goals for the year I want to take a step back to share our reflections on the two major strategic decisions. We have made since last July 1st the criticality of serving the health plan market and second the opportunity to introduce high touch service, that's an extension of our existing platform.

Our confidence in our strategy has only increased over the course of this year as we see momentum building in our health plan sales efforts and continued market interest in high touch support we are confident and these strategic decisions and are proud of the team for the rapid execution last year in both expanding our anthem partnership and launching our care.

Solution.

Starting with the help Clinton market when I spoke with you in May I shared that we were seen positive pipeline generation and having strong conversations, but we're concerned about a slowdown in timing due to the immediate impact of cobot 19 today I'm pleased to share that we have made significant progress I'm very confident in our ability.

To achieve our goal of signing a new health plan customer this year.

We have several mid to late stage opportunities with expected decision points over the next six months and continue to see that our solutions are resonating we're competitive across a wide range of offerings from transparency to wellbeing, which has enabled multiple entry points and participation in more processes I look forward to updating you on our progress.

Soon.

Turning to the employer market last quarter I talked about our teams nimble and innovative approach to supporting our customers and their cobot 19 response.

Our focus on increasing access to testing support for vulnerable populations, an extension of our platform to enable turnkey integration with free digital solutions has deepened relationships with our customers and driven real measurable impact on our users.

It demonstrates castlights ability to innovate execute and drive business momentum even in the pace of a pandemic. In addition to supporting millions of users and finding kill the testing we continue to strengthen our relationships with new partners like Google and are now actively working with over a dozen state and County Health Department.

Our focus on customer pain points, let us to deploy working well our end to end solution to help employers manage safe work force re entry, which Leverages our test site finder.

The solution securely tracks the health of the total population with symptom and exposure assessment supports testing protocols enables worksite contacts tracing and can be customized to an employer specific policies and returned to work needs. It is designed to seamlessly evolve along with cobot 19 recovery.

The strategies with the ability to configure new protocols and leverage its best practices gleaned across Castlights large employer book of business. Today, we have signed three customers the first of which launched earlier this month.

Well working well has shown early traction cope it is still pressuring our ability to bring in new employer business. We continue to have active discussions with prospects, but our buyer in HR and benefit has shifted much of their focus to covert 19 specific response and the broader economic uncertainty for many companies.

Has caused nearly paper deals to be held up by procurement or finance.

Ultimately these factors have resulted in a long good sales cycles and have impacted our ability to sign new business during the past 90 days.

Turning to retention the results were roughly in line with our expectations given cobot 19 delayed new business sales. We saw sequential decline in air are at the end of the second quarter 239 million as we look at the second half of the year. There is risk in our renewals as we observe clients, making broader benefit Illinois.

The nation's within covert 19 constrained budgets, but I'm confident we're doing the right things to mitigate the impact of the economic downturn.

Well covered 19 has delayed returned to growth in the employer market. We have made significant progress with our care guides offering as a reminder, care guides extends the power of our platform to provide a personalized human experience to members who have complex needs are simply require more support and navigating barriers to.

Care. In addition to the 30 plus customers opting into free Cobot specific care guide support we now have three customers utilizing the full portfolio of our care guides offering we have seen strong engagement, particularly in regard to behavioral health and medication adherence support.

The high touch and high Tech capabilities of care guides provides additional support to those with chronic conditions behavioral health needs and those navigating new challenges presented by Cobot 19 at its core care guides provides additional support to vulnerable populations, who are even more vulnerable during the call that crisis.

For this reason, we believe the product is well positioned to support employers and their employees through the pandemic and into the new normal.

I will conclude my comments by sharing some perspective on our quarter's financial results, we reported a strong second quarter, specifically as it relates to our priority of establishing financial sustainability and delivering a non-GAAP profit and positive cash flow in the quarter. The proactive measures we instituted in Q2.

While difficult have proven to be effective and our commitment to operational discipline is bearing fruit.

The challenges in the macro environment I feel confident we have made the right strategic decisions and I'm excited about our clear progress in the health plan market along with our operating results I'm amazed at what our team has been able to accomplish in the face of a pandemic and I want to thank calculators for the energy and the excitement that they bring to solve in the massive problems we had drew.

I'll now turn the call over to well to review the financials well.

Thanks nave.

As we look back at the quarter, we're pleased with the progress in our health plan strategy the market momentum for care guides and the immediate impact of our fiscal discipline on our financial health.

I'll start today with a review of the financials annualized recurring revenue or air our totaled 139 million or the ended the quarter down approximately 3.2 million sequentially.

As we've mentioned retention was in line with our expectations for Q2 and the sequential decline was primarily driven by limited employer sales due to cover 90.

Particular potential customers that have delayed signing agreements in some cases.

In terms of retention, we're fighting to retain are renewing customers in Q3 units cobot is introduced risk and budgets are constrained.

I also want to highlight the early traction we've seen with are working well solution as we've mentioned.

This point, we've signed several customer contracts worth around $500000 on an annualized basis for working well and implemented one customer but these customer contracts are not included in our 630 or.

Revenue was 35.5 million in the second quarter, a decline of 1% year over year revenue in the corner benefited from membership levels that exceeded our conservative forecast around potential kobin related layoffs or user count decreases for our employer clients.

Subscription revenue accounted for 97% of total revenue as expected and professional services revenue of 1.2 million was in line with our expectations.

Turning to our non-GAAP financials in the second quarter gross margin of 68% was favorably impacted by the Q2 cost management actions that we discussed on our last call.

And Mike Koban related savings and compared to 63% a year ago.

Our subscription gross margin of 77% was in line with the expectations, we shared earlier in the year.

Non-GAAP operating expenses of 22.1 million, we're down about 14% compared to a year ago and declined as a percentage of revenue from 71% in Q2 thousand 19% to 62% this year.

The year over year improvement is primarily a result of our planned efficiencies for 2020 due to completed migrations and the additional cost management measures, we implemented during Q2 and discussed on last call.

Based on these factors second quarter non-GAAP operating income was 2.1 million compared to a loss of 2.9 million in Q2 between 19.

Notably this quarter represented the best non-GAAP operating margin and the company's history.

I'm pleased to share that our cash provided by operations was a positive 3.1 million in the second quarter or non operating cash used was 2.5 million, which principally reflected the final buildout of our Utah customer center of excellence.

On our last quarterly call, we shared our goal of approaching cash flow breakeven in the second half of the year.

As a result of our proactive cost structure actions as well as customer payment timing cobot related cash referral programs. We were pleased to achieve a cash flow positive quarter and continue to anticipate second half the year will approach cash flow breakeven, even as the customer payment timing and kobin related deferrals benefited Q2.

We ended the quarter with approximately $44 million in cash.

As a reminder, on our last call we updated our outlook to reflect the uncertainty of the duration and overall impact of covert 19 on our customers and the broader economy.

At this time or outlook for the year remains unchanged and for 2020, we continue to expect revenue in the range of 127 million 235 million.

Non-GAAP operating loss between 17 million and to 24 million.

And non-GAAP loss per share between 11 cents and 16 cents per share based on a 150 to 151 million shares.

We continue to expect cash used from operations to be in the range of 12 million 20 million to approach cash flow breakeven for the second half from 2020, and 2020 with around $40 million in cash and marketable securities.

As we've said we have strong conviction and the strategic decisions. The Castlight is taken in the past year and in our progress against those initiatives are ahead of pace progress in the health plan market and the interest level in our care God solution give me confidence in our strategic position.

Most importantly, I'm grateful that our solutions are important and helpful to our users and an all of our teams passion and drive to support our mission in the midst of a pandemic and real important conversations about equity in health and our country.

At this time, we'd be pleased to take questions.

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Try your question press, the pound or husky, they sound Bible, we compile the Q and a roster.

Your first question comes from just girl with William Blair and company. Your line is open.

Yeah, good afternoon, and thanks for taking the questions I'd like to ask about here, our performance and expectations for the employer business and so I'll lay it out and three parts that the first is whether the yearly paper deals are expected to sign in Q3, the second part as weather historical.

So seasonality for more decisions in the marketplace is expected to hold for the third quarter. This year and third assist us for Thomas specifically around Catholics pipeline for the employer business for the remainder of the year.

Sure Hey, Jeff Good to hear your voice and thank you for the very detailed set of questions. So I'll start actually by taking a step back and just talking about growth in air our which is really a function of three things. So certainly our employer business from a sales and retention perspective, as well as our health plan.

Gross and you know given the climate, we've been focused on controlling what's in our control, which you've seen evidence of that in our successful delivery of care guides and then the operational discipline. We've shown on the cost side outside of our four walls as you can hear [noise].

We feel very good about the progress we're making on the health plan side, whereas the employer business is definitely more impacted by coded which leads me to.

He or set of questions.

So I think you started by mentioning the slipped deals. So I'll begin there. So there's really two reasons that deals slip number one is the focus of HR and benefits teams being pulled into the cobot response, and then number two is you know really getting lot jammed at the procurement and contracting.

Phase and so you know while we do continue to see both of these creating headwinds.

Deals haven't gone away, we're certainly hopeful to see them close and are working hard to make that happen.

Your second question I think was around our people don't making decisions and a you know it's Q3 operating like a normal.

You know sales cycle and so you know what I would say as you know we've already talked about the headwinds I'm you know one of a key point to make here is that we can launch customers really anytime throughout the year, an increasingly employers are launching solutions off the one one cycle. We also are in a window, where we can absolutely still want.

For one one.

We're also able to rapidly turn on care guys. So you know I think it remains to be seen I think employers approaches are varied in terms of whether the sales cycle is simply been elongated or shifting into next year and so we'll certainly have more visibility in October but were very much in a window, where we are able to implement anything that's all.

Unimplemented quickly your final question I believe with on pipeline and so just to address that so you know a bright spot here certainly has bad that we continue to see new opportunities coming in at the top of the pipeline, we actually just as a data point.

More RF peas in July than we have the year before so that would certainly be an indicator that the sales cycle has shifted as opposed to shifted out of full year and many of these are for high Tech high touch solution, So navigation and aligns well with our set of capabilities. So that the pipeline is indeed actually.

Pretty healthy, but you know kind of part of the previous comments, obviously, we're waiting to see kind of how that how things actually move through the pipeline.

Understood and appreciate you guys trying to focus on on what's in your control and.

During the bus to respond to what's out of your control. So another question that to change gears, a little bit you know it very nice outperformance in the quarter, but does the guidance is reiterated so so curious what's driving the conservatism there and I guess, you're more even more specifically even at the the high end of the guidance range, there's a bit of a drop off and.

Slide for the second half of the your and revenue also so maybe you could help us, thereby but quantifying some of the retention risk that you mentioned.

Yeah, absolutely as a reminder, in May we did update our 2020 outlook for the year to reflect conservatism given the potential impact of cobot on our business, especially as relates to our large employer clients, where layoffs or furloughs, our real possibilities and ultimately our customer pain as our pain I'm looking forward we chosen.

Take a pragmatic approach and I want to reflect the continued uncertainty and the economic situation that our customers face and in the broader economy, especially as Kobin continues to impact the day to day of each of our lives and so as we look forward, we do see risk and uncertainty in that on the revenue side.

Specifically, the topline and the employment within our margin per customer base.

[laughter] to follow up there a little bit.

I think there are some comments around clients that are up for renewal and in the third quarter. So so maybe some more color around weather Coke is influencing both those decisions versus general customer satisfaction, and where you see the outlook and again any quantification of the risks to the revenue.

Projections for the back half of the or yeah, absolutely. All go quickly on the on the 2020 numbers then I'll, let me talk about renewals. So as we think about 2020 outlook or your revenue is fairly predictable we have long term customer contracts the risk to a you know to achieving the guidance and and to our topline for 2020 is.

Really related to customer layoffs furloughs with a worsening of the economic situation in the country.

The renewal we talked about renewal dynamic we talked about relates to customers that are.

In a renewal cycle and would impact 21, and 22, so maybe I'll, let me have talked about kind of the renewal conversation more broadly sure you know so as well mentioned, yes. There are you know renewals the majority of renewals to be clear in the second half of the year and Jeff to your direct question, we expect that co beds introduction of budgets.

Constraint is going to play a role in churn and overall, our our customer satisfaction our value across the book of the business is up. So you know we've talked in the past about what do you need to have to have a healthy book of business.

We actually feel very good about our execution across those as well as our execution in terms of the levers that we have to pull in the context of cobot, but you know kind of to your point I think we have to flag that Cove. It has introduced budgetary constraints as it has obviously for many solutions and that that is a risk factor.

Her for our second half renewals.

Understood. Thanks for the color I'll jump back into queue.

Huh.

Our next question comes from Charles Rain with Cowen Your line is open.

Oh, yes, thanks for taking my question [laughter], if I could ask on the all Melphalan side, maybe you talked about the.

Good confidence or comfort in that you will get.

Oh I often find a within the next six months can you talk about timing then as we think about well once the deal gets and how long implementation typically takes for a health plan customer.

Just trying to think about you know if you get something sign let's say you know in the next month is that something that can contribute to 21, if it's by the end of the year does that really push it up to.

22, just trying to go something timing on I'd imagine health plans are are fairly large implementation cycles here.

Maybe start there yeah, no. Thanks, Charles and all all great questions and they're all actually just provide a little bit of color in some sense around says questions. There number one you know it is it does feel good to be on a call talking about the positive traction with health plans. In addition to the strong financial quarter, and so talking a little bit about timing.

And kind of why the confidence so we have a very healthy pipeline. We now have several mid to late stage opportunities and to your specific question on many of those actually have early 2021 implementation timelines or mid 2021, I should say implementation timelines across that set of of those opportune.

Studies, so given that you know certainly I think that there's an opportunity to contribute to 21. The other thing I would just add by way of color is that a lot of these conversations are with larger plans, where the intent is to start with a portion of the population where there's a clear path to expansion both from a product and population.

Active but you know kind of two to your overarching question. We do you believe that we can get the it's an opportunity closed in the next six months and that would contribute in 21.

Okay. That's helpful. Then, we'll if I could ask questions about the cash flow.

It sounds like you're saying the second quarter benefit because there were some deferrals that.

That occurred in Q2 from customer starts up that actually benefited the quarter itself. If those didn't occur what what would have cash flow look like because it sounds like you're saying backup it's going to be more breakeven and is that should we be modeling more like a third quarter or use of cash and then you know positive getting or is it kind of work just kind of running breakeven in the back half.

For the year, yet they started and you're right. We're really pleased to see the quick impact of the of the cost management changes and cash flow positive quarter, but we did benefit from two items versus payment timing sort of customer payments. We expect in Q3 that came in Q2 and the second is some kobin related cost or for all.

Programs as we participated in some of the.

Options offered to us under the care as I can other measures. If you kind of take out those items, we would have been casual positive on the operating.

Cash flow side, but it would have been at a lower scale and so as you look at the second half of the year, we do expect to approach cash flow breakeven, but but clearly you know there's a timing benefit to Q2 that then turns around it and hurts Threeq and Fourq you.

Okay. So so so far for modeling purposes is I understand like other companies I've been talking about deferred taxes cash taxes in two cute because the chairs actors that that's kind of what you're talking about and does that get paid out in threeq you for you or is that spread out over both quarters. It varies across the different places, where we have a tax.

Tax burden tax liability in general we expect to see kind of those payouts in fourth quarter and then into 2021.

So so we'll see a kind of an impact actually over the next up four to six quarters from those deferrals.

Okay, and then lastly, all around the non operating.

Use of cash right in Capex, you talked about the finishing out Youre Oh center of excellence.

Should we should we be thinking about capex in the back up similar to the second quarter or or or does that drop off yet the second quarter was a heavy capex non operating cash quarter for us as we finished the you talked customer center of excellence is important strategic priority for the year and we are now done that facility is open and we have.

Folks actually in the office that are that are working.

We don't expect to see that degree of Capex and second half the year, there's going to be a small measure as we think about preparing our offices to reopen in items like that but but to see a substantial decrease in the non operating cash.

Okay, great. Thanks.

Our next question comes from Richard close with Canaccord Genuity. Your line is open.

Great. Thank you congratulations on the progress I'm, just a little piggy backing here off of Jeffs and Charles questions I'm I'm not they are in the implied revenue guidance I just want to be clear. It sounds like you guys are being conservative during this renewal process.

But there's nothing like you know a couple of years ago. When you had a walmart not renew and you actually had a quick step down in in a are all right. After the second quarter, there's nothing necessarily known at this point or you're just being conservative.

With the guidance.

Yeah, I know he retired and thanks for the question. So just kind of taking a step back in terms of just looking at the composition of our air our Ana and end up our revenues about 50% is coming from anthem I am so that provides us quite a bit of stability you know 75% of our I have archive.

As far as are also on the full platform. So kind of to your point you know as I said, we do want to be thoughtful about highlighting that we do think we have increased risk of churn during co bed. Just as you know obviously many companies do but to your point around kind of at the a wall.

Art that is not you know what we would be if there is not a customer like that that we are anticipating but you know certainly we think that during this time that you know we do have a lot of renewals and cobot is absolutely putting pressure on budget.

Yeah, I wasn't me it didn't necessarily Walmart from of size perspective, but I think they had when you announced the second quarter. I think there was a couple of years ago, you're already knew that they werent renewing so that was immediately take him out of they are there's nothing that I guess, what I'm asking there is nothing message.

Clearly known at this moment.

That you still have to go through there are renewal process and and see how that shakes out.

Richard that's exactly right so okay.

Our renewal book for this year was slightly smaller than 2019, but you know represents about a third of our of our air our we've seen we still have the majority of those renewals to do they typically happen in the summer and were somewhat delayed because of covered this year. So we're just representing the fact that we have renewals to execute on in 2020.

Not that Theres anything known at this point okay.

That's a good a good to hear there and then I guess following up on Charles' question on the hope plan side.

Thought it was interesting you said you get a several late stage discussions are opportunities and mentioned large plans. When you say large plans was curious if you could put any like maybe bookends on that is that national in scope is just.

Large states any thoughts there and and as you think about health plan customers and gaining.

New logos I guess on that side.

Is there anything to think about her for us to think about in terms of like what the size of those opportunities are I know, you're I'm, probably about a 50% of revenue like anthem anything like that but just any magnitude there.

Sure So I'll start and well can talk a little bit more specifically on sites, but what I would say is that you know the mid to late stage conversations do encompass as larger blades and national plans.

The intent however is to start with a portion of the population, which I know I mentioned earlier, but I think that all of these with start with the portion and certainly we believe that there are clear pathways to expansion.

So that's how I would think about it just from a size perspective, well do you want to add anything else that good and what we said Richard before and I think it's still true is that we'd expect health plans to be on the order of one of our very large employer customers from an error perspective up to something that is a portion of anthem, we don't expect to to sign of helping us any.

Thing on the order of anthem, we will grow to that but you'd be thinking about something in the you know several million dollars range on the small size.

Okay, Great and my final question. This is on care guides, obviously, that's relatively new and.

<unk>, obviously, making some progress there but is there anyway, we should think about like the size of those types of contract tracks is a different starts off small one that expands any.

They are a clarity there would be helpful for us.

Sure. Yeah now we are really feeling good about the decision to invest in high Tech high touch.

And you know to your point I think that certainly as we look at where a lot of the growth is coming from it isn't navigation and both of those including Hi Tech and high touch.

You know in terms of actual size and kind of how it fits at I mean, the customers that we've launched we mentioned that we have three lives. They were existing customers I think it actually showed the ease of the implementation and just how much. This is a natural extension of the platform.

And one of the Big advantage is that we have is that we're able to provide that's frankly at a lower price point because of the technology advantage I said, well do you want to talk little bit about the size or excuse me the economic yeah, absolutely. So the way to think about a care guides for US Richard is that it is a up seller and additional price on top of the core.

Technology platform, we think they go to gather high touch high Tech and that care guide candidly are made more efficient and more effective by being built on top the platform. So it's an upside that looks similar to the size of the of the original purchase a clearly driving.

And with additional value and with the real cost of delivering it. So that helps you think about size and Tomatoes point kind of the first set of customers have come from our existing book, where it's been a step up as opposed to a net new conversation, although the net new conversations we're having many of the deals in the pipeline do include both Catholic complete and Karen.

Yes.

Okay. Thank you.

Again, if you would like to ask a question. Please press star one on your telephone. Our next question comes from Gene Mannheimer Polio Securities. Your line is open.

Thanks, Good afternoon, congrats on the good quarter.

My My question was partially answered before with respect to the renewal risk and.

I'm just trying to get a handle on if you could quantify the level of renewals that is exposed in the back half I think.

I think you said the renewal book is a third of the or are you still have some more to do so is that to say that 10 or 15% of your are ours is at risk here, how should we think about that.

Yes gene absolutely the best way to think of it is that you know our client contracts are typically about three years and so on and every year. We had about a third of our direct employ are up for renewal and so so you can kind of back into what that looks like we've done certainly some renewals we talked in the last call about.

Signing a couple of very large customer to renewals, which is important and did close a couple of important renewals in Q2, but have I'd say slightly above 50% of the renewal book yet to do for 2020, and so do you think about kind of what that that risk looks like it's you know it's about half of a third of our.

Of our entering the year.

Got you Okay very helpful. Thanks will.

And I want to ask maybe the optimism that I'm hearing over signing another health plan before year end is is it feasible that you would sign more than one or am I ask for too much there. Thanks.

[laughter] I'd seen nice to hear your voice and then my focus is on meeting the goal that we articulated at the beginning at the year, which is signing our first health plan partner beyond the on them, but you know as I mentioned, we have a healthy pipeline and I certainly I look forward to building on that goal. So well look forward to updating you in October.

Already sounds good thank you.

There are no further questions at this time I'll now turn the call back over to Maple Merrell for closing remarks.

<unk>.

Thank you all for being here today, we're energized by the momentum were seen in the business, particularly in the health plan market and I look forward to updating you on our progress in October.

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

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