Q4 2020 Benefitfocus Inc Earnings Call
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Greetings and welcome to the benefit focus as Q4 2020 earnings conference call. At this time all participants are in a listen only mode. Later, we will conduct a question answer session.
Do you require operator assistance during the conference. Please press Star zero on your telephone keypad. He's note. This conference is being recorded I would now like to turn the conference over to your host Patti Leahy Vice President of Investor Relations. Thank you you may begin.
Thank you operator, good afternoon, and welcome to the benefit focus as fourth quarter 2020 earnings call joined.
Joining me today are Steve Swan, President and Chief Executive Officer, and El Pen on Wagner Chief Financial Officer.
Steve and Al Panna will offer some prepared remarks, and then we will open up the call for questions.
Before we begin let me remind you that today's discussion will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from these statements, including impacts of COVID-19 Alliance on key personnel and development on our market and business.
For more information please refer to the risk factors discussed in our most recent form 10-Q filed with the SEC.
Additional information will also be provided in our upcoming form 10-K filing for the year ended December 31 2020.
During the course of today's call. We will also refer to certain non-GAAP earnings on that hurt you can find important disclosures about those measures in today's earnings press release.
With that I'll now turn the call over to Steve.
Thank you Patti and welcome everyone.
I'm pleased to be with you. This afternoon following a fantastic one place user conference last week.
Where we brought together over 1000 members of our ecosystem.
One place truly is one of our industry's hallmark events, where we host an incredible audience of customers prospects and business partners and thought leaders from our industry.
A big thank you to the benefit focus team and everyone involved in delivering such an impactful event.
Before I get into the priorities of the company and the progress. We've made let me step back briefly and remind you why our customers need us.
Benefit focus makes enrolment and benefits easy.
We served two big markets health plan and employer.
Her employer, we make the administration of benefits easier for HR departments, and we provide data and insights to help them take actions to reduce health care costs.
For health plans, we provide core enrollment data and billing services to make their back office more efficient.
Our flagship product provides coding to enable a more unified end to end offering which positions the health plans offering and a more relevant way to the broker community.
We believe our products are necessary for employers and health plans, because they enable employees and members to enroll in and access their benefits.
Now, let's get into the progress we've made since I became CEO and let's talk about a handful of key priorities that we are executing on to drive shareholder value.
They are one engage our associates to increase productivity.
To improve customer service and increased customer engagement to drive higher satisfaction three.
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Adjusted our cost structure to generate sustainable profitable growth.
Before Seth.
Set the strategic direction of the company to return to growth.
And finally, strengthen our board governance and sustainability practices.
Our success measures focused on improving employee engagement, our corporate culture customer satisfaction subscription revenue EBITDA free cash flow and of course share price performance.
Let's go into these priorities that we have to unlock value.
First engaging our associates to increase productivity is a very big lever.
It can have fast and lasting impact.
I've engaged in an active listening tour since assuming my role as CEO and have spoken with over 500 associates and hosted monthly all hands with the entire company.
I've heard loud and clear our associates weren't more focus and simplified processes to better serve our customers.
I take this feedback to heart and I'm committed to improving the end to end customer journey.
I am seeing signs that the culture of the company is improving.
Associate engagement is up associate productivity is up.
Star ratings are also up.
In addition, I'm working to continue to strengthen our leadership team to areas of immediate focus are to recruit a CMO and head of customer success.
Turning to improving customer service and increasing customer engagement to drive higher customer satisfaction I've talked with over 200 of our customers and as a result, we've expanded customer quarterly business reviews and are focused on operational excellence for our customers.
The biggest part of operational excellence is to deliver a successful open enrollment, which we did.
As a result, our customer sat score from enrolled employees exceeded 90% and our N. P. S for employer customers was up meaningfully.
I'm incredibly proud of our team and the progress we've made to date.
Our next priority to unlock shareholder value is adjusting our cost structure and generating profitable growth.
I'm pleased to share that we reported 44 million of adjusted EBITDA in 2020, which is more than two times. The prior year a strong proof point that we are beginning to see operating leverage in the business.
Once we did the heavy lifting to adjust our cost structure I turn my focus to setting the strategic direction of the company.
The strategic growth priorities I shared with you last quarter haven't changed.
Invest in the core enrollment business <unk>.
Extend in the fast moving adjacencies connected to employee engagement and deliver more impactful insights to participants of the ecosystem by leveraging our data assets.
Enrollment engagement and data.
Enrollment is foundational to our business.
It's a critical application for our customers. This year, we're increasing our platform's capabilities to deliver better customer experiences.
For example, we're simplifying employer administrative services to relieve customer pain points.
We're streamlining the on boarding and annual open enrollment experience for employees.
And we're expanding our quote to pay health plan solution into larger groups.
I am pleased with our focus here and expect this to help attract new customers and prepare us for an even better O E in 2021.
Increasing employee engagement with their benefits is another important growth priority.
Employers are asking for help making benefits for their work force easier to understand navigate and engage with.
Benefit focus is well positioned to do this with over two decades of industry experience, we have the technology the data and the benefits knowledge to help our customers. We plan to use these assets to strategically extend our expertise beyond enrollment to include health navigation.
Health navigation is designed to help employees make more informed decisions when using their benefits, which should naturally increase satisfaction and reduce costs for both employees and employers.
We believe integrating this offering into the enrollment workflow and supplementing it with our data will lead to higher levels of engagement.
We're working to bring a new product to market later this year to address this priority and drive growth in 2022.
Our final growth strategy.
Is to use our world class data to create insights and efficiencies for our clients.
We're leveraging our industry, leading data assets to innovate and add products to complement our core offerings, both through partnerships and internal development.
The combination of our scale and data allows us to offer products and services that are highly targeted highly personalized and highly impactful for employers employees health plans and brokers.
As an example.
We're exploring a new partnership offering that leverages, our existing data to identify pharmaceutical spend inefficiencies and use advanced automation to achieve significant savings for both employers and employees.
We have an excellent opportunity to leverage existing data assets to help our employer customers reduce reduce health care costs day.
Keeping our relationship with them and increased error overtime.
Okay.
Based on our review of our claims data, we estimate an initial incremental a or our opportunity with existing customers.
To be approximately $10 million to $15 million.
The final piece I'll share today aimed at unlocking shareholder value is our priority to strengthen our board governance and sustainability practices.
We recognize the importance of ESG to our stakeholders and published our first sustainability report.
This can be found on our website and highlights the strength of our data privacy cyber security and human capital policies and practices.
From a governance perspective, the board is focused on ensuring that it continues to operate independently and diligently on behalf of all shareholders.
As we have previously disclosed the board is in the process of recruiting another independent director, who we expect will bring fresh perspectives and relevant expertise to our board.
We also recently announced that Doug dinner line will become our new independent chairman as of the upcoming annual meeting.
This week with the goal of further increasing board independents.
Gordon Mason Hall in one of our founders agreed to forgo Maisons previously announced board advisor role, an observer rights, which were otherwise slated to commence at the annual meeting.
Mason plans to continue as a major shareholder of the company and is fully supportive of our board.
The fresh and growing leadership team and the company's clear focus on driving shareholder value through focused profitable growth and excellent execution on customer commitments.
We believe these are all solid steps in the right direction, we will continue to listen and identify ways to advance our ESG efforts and disclosures.
Looking forward.
I see COVID-19 headwinds dissipating.
I see Mercer headwinds diminishing.
And I see the successful execution of the initiatives that I've outlined increasing bookings improving customer retention and continuing to drive operating leverage in the business.
I believe executing on our plan will achieve revenue growth rates of approximately 8% to 10% by 2023 and approximately 30 to 35 points against the rule of 40.
We plan to add to our rate of growth through tuck in acquisitions.
I believe in our plan and our ability to deliver it I'm confident that we have the right strategy the right assets and we are building the right leadership team to create substantial shareholder value.
With that I'll turn it over to a panel for a deeper dive into the numbers and our outlook.
Thank you Steve I'll start with the Q4 financial highlights and then cover our 2021 guidance.
And last I'll share with you on.
Mid term financial targets.
Let me start with from contacts for financials.
Pandemic hit last March we quickly adjusted our cost structure, and we've made excellent progress to improve our liquidity margin and profitability.
We continue to feel some pressure from the pandemic on the top line. This is reflected in our 2020. One outlook. However, we are pleased with the environment appears to be improving our employer customers as evidenced by some key wins in the fourth quarter.
These wins include another new state health plan in the Western United States.
Win at a large national retailer.
A win with a technology leader in our partnership with our therapy.
On a large customer renewal with a fortune 200 company.
Turning to our results for the fourth quarter.
Total revenue for the quarter at $76 2 million was above the midpoint of our guidance range and down 13% compared to fourth quarter of 2019.
This is driven by lower subscription and professional services revenue.
Prescription revenue was down 9% year over year, primarily due to the anticipated continued runoff of our legacy agreement with Mercer.
Professional services revenue was down 26% year over year to $13 9 million, primarily due to reduced levels of new business. As a result of it depends on that and a shift away from unprofitable professional services contracts.
Q4 platform revenue declined 8% year over year to $17 4 million.
Our platform revenue.
From a life and ancillary products in Q4 increased 28% year over year.
This was offset by declines in specialty and broker commissions due to lower levels of new business.
As a reminder, the timing of platform revenue recognition depends on the type of product purchased.
From revenue from on a product purchase is recognized evenly over the year following open enrollment.
Whereas specialty on commissions are recognized all at one period of purchases made.
On a GAAP basis gross profit was 41 3 million.
Presenting gross margins of 54%.
On a non-GAAP basis gross profit was $43 2 million, representing a gross margin of 57%, which is up from 53% last year.
This improvement in non-GAAP gross margin reflects the cost management actions taken in acute care to streamline expenses investing automation on them.
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On a GAAP basis software gross margins were 67% down from 68% in Q4 of last year on.
Non-GAAP software gross margins for the fourth quarter were approximately 69%, which is about 60 basis points less than last year.
This decline is the result of decreased high margin Mercer revenue.
We expect software gross margin will improve in 2020, one as we realize the benefits.
Operational excellence initiatives underway.
Professional services GAAP gross margins were negative 5% compared to negative 13% in Q4 of the prior year.
On a non-GAAP basis professional services gross margins were roughly breakeven for the quarter better than Q4 of last year, which was negative 11%.
As a reminder, we expect the professional services gross margins to be down sequentially in Q4.
On the seasonal increase from contract call center staffing associated with every week.
We are pleased with the advancements we've made on this area and the expected improvements as we continue to increase utilization and expand our automation efforts.
Q4, adjusted EBITDA was $20 2 million exceeding the high end of our guidance and up approximately 62% compared with Q4 of 2019 EBITDA of $12 5 million.
Q4, adjusted EBITDA margin was 27% up 200 basis points year over year.
Our adjusted EBITDA, when compared to our guidance was positively impacted by higher than expected revenue as well as improved operating expenses.
This improvement reflects the operational improvements, we have made and illustrates the operating leverage within our business.
GAAP net income was $3 1 million and GAAP net income per share with force that this compares favorably to the GAAP net loss of $3 8 million and GAAP net loss per share of 12%.
2019.
Non-GAAP net income was $8 7 million on non-GAAP net income per share was <unk> 18 cents.
This compares favorably to non-GAAP net income of $1 9 million on non-GAAP net income per share of six seven in Q4 of 2019.
Now, let's move to the balance sheet and cash flow.
We ended the quarter with approximately $186 million in cash and marketable securities. In addition, we have on 50 million line of credit available to us.
Moving on to free cash flow, we generated $13 4 million of free cash flow in Q4 compared to two and a half million Inc. Q4 2019.
We generated full year free cash flow from approximately $20 million compared to consuming 32 million in 2019.
Free cash flow is a non-GAAP measure that we define as cash provided or used in operations.
Purchases of property and equipment and it excludes restructuring costs.
Moving on to net benefit eligible lives our total and those in Q4 were $18 3 million up 6% year over year and up 1%.
From Q3.
The year over year improvement is primarily due to higher consumer lives on the platform from our shipped relationship.
As a reminder, while these lives have high potential every time. They currently are at low value from a financial perspective, because their platform on the life.
And voluntary benefit and not recurring subscription on.
Given our strategic focus on air are from the employer and health plan market and reduced focus on direct consumer.
We are terminating our unprofitable relationship with chip, which comprised the majority of the consumer lives on our platform.
I expect this will result in a decline in Enbrel beginning next quarter.
We are continuing to evolve our lives metrics and plan to share more on this as we progress through the year.
Before I move onto our guidance I'll offer some context on the future if market benefits that we.
We believe our associates to work, where they can be most productive and engaged whether that's on an office or a hybrid of that.
Based on our experience our teams have been able to productively work from home and we expect this to continue on a long term under a hybrid approach.
We're actively assessing options to reduce our physical footprint and sublet or exit certain locations, which could result in future impairment under GAAP.
Shifting to our outlook for 2021.
Our revenue outlook for 2021 escaped by handful of key factors.
The first factor is the impact of our lower Q2, 2020 bookings due to the pandemic, which then had a ripple effect on our 2021 revenue outlook book.
Bookings in an otherwise normal selling season would have been realized as revenue beginning in the third and fourth quarters. When new groups. Typically go lives. This is not the case in 2020.
The second factor is our expectation for health plan customers potentially renewing at lower revenue levels.
Health plans serves small and mid size businesses and these businesses have been negatively impacted by unemployment trends.
Our existing contract minimums, largely protected revenue in 2020 against this decline.
Our expectations for 2020, one account for the potential of that health plans for new at reduced Enbrel and revenue levels in 2021.
When small and mid size businesses recover we expect these really low rates to return to historical levels in future periods.
To a lesser extent our outlook also reflects the non renewal of lower margin non core legacy can extra business as we focus our efforts on the parts of our business that are foundational and scalable.
The third factor is our expectation for platform revenue to perform similar to 2020, including growth from new business, which is partially offset by reduced commission.
During this year's total premiums from voluntary benefits increased nearly 20% to 1 billion, whereas participation was flat.
The last factor shaping our outlook for 2021 is improving spending trends in our employer market.
Customers and potential customers are coming to the table ready to make investments as we saw on Q4.
This comes after a period of delayed customer decision, making due to the pandemic.
Assuming the pressures from depends on that continue to work, we expect to realize a more customary level of employer demand in 2021, allowing the company to return to growth in mid 'twenty 'twenty two.
In 2021, we will continue to be focused on profitability margin expansion and investing to restore organic growth in 2022.
The path to revenue growth is linked to improved customer retention and new bookings our expectation is our shareholders should be able to see proof points of this strategy by the end of 2021.
For the full year of 2021, we expect total revenue between 254 and $260 million.
To help you with your modeling we expect the first half of 2021 to reflect low.
Low watermark for revenue.
And then expect in the second half to see the normal seasonality of implementation and go live.
We expect adjusted EBITDA of between 44, and $50 million, representing 18% EBITDA margin at the midpoint of revenue and adjusted EBITDA.
And we expect free cash flow between 20 and $26 million.
For Q1, 2020, one we expect total revenue of $59 million to $61 million with the largest year over year decline being in professional services consistent with our shift away from lower margin services.
We expect adjusted EBITDA between nine and $11 million and we expect non-GAAP net loss between $5 1 million and $3 1 million, which represents non-GAAP net loss per share of between 16 cents from Tencent based on $32 3 million basic shares outstanding.
Shifting gears to our midterm targets.
As mentioned earlier, we expect to return to revenue growth by mid 2022.
As we look at our targets over the next three years by 2023, we expect revenue growth of approximately 8% to 10% adjusted EBITDA margin, reaching approximately 22% to 25%.
And cumulative free cash flow over the three year period through 2023 of $80 million to $100 million with the biggest driver being EBITDA.
This will result in a total of 30 to 35 point again.
Our rule of 40 target.
All of these factors assume a return to pre pandemic business condition.
We are also actively seeking strategic acquisitions to help accelerate our growth.
Which would be incremental to these targets.
In closing we are pleased that we have established a more profitable foundation for the business in the midst of navigating the challenges of the pandemic.
I'm optimistic that the business environment for our products on our services is beginning to improve.
And I'm excited about the opportunity to execute on our strategic growth priorities and create a more sustainably profitable business, while unlocking substantial shareholder value.
Thank you I'll now turn it over to the operator for questions.
At this time, we will be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad low comp.
Permission total indicate your line is on the question queue. You May Press Star two Pulitzer move your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please as we poll for questions.
Our first question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.
Oh, hi, good evening, everyone. Thanks for thanks for taking the question. So just to kind of start off on other were watching a lot of content there, but just if we think about some of the things that are maybe non core lower margin that you'll maybe extra day is there any way to kind of size the revenue or the lives and part of that just so we can kind of maybe look at our models and say hey, this isn't as COO.
Or going forward. So how do we think about what is or how do we evaluate day that base going forward.
Yeah, Brian This is Steve Hum.
We are not in a spot to provide more guidance than we just gave we are going to one week. We come back to you with Q1, we're going to introduce some more measures about lives in and maybe at that time, we'll be able to give you. Some tighter estimates on lives through that.
Disclosure, that's intended to match closer to subscription revenue.
Yeah, Okay Oh.
Oh, sorry go ahead al.
Oh, sorry go ahead.
Well get more and we did give a lot of content there and that's the one area that we did highlight was just the consumer to direct them.
And then they're shipped lives that I mentioned, where we're terminating the contract. It's a it's a nonprofit or a contract for US right now not a core area of focus what I'd say from a modeling perspective and from a revenue is it is not a meaningful contributor to revenue today.
You'll see those lives coming off youre not going to see you know sort of the commensurate revenue indicator.
Understood understood.
I thought I heard that you know some confidence in the employer market potentially coming back in 2021, and obviously that maybe helps with the growth in 2022 could you maybe give a little color behind what's giving you guys. Some optimism about the selling season in 2021.
Yeah, Brian.
Couple of things, we're seeing customer activity up we're seeing rfps up we're seeing customers coming to the table wanting to improve their systems around benefits and so that's what's giving us some confidence. We're also seeing the close rate of the pipe improve.
So that's that's driving our confidence and then as you think about growth drivers in 2022 in addition to that.
Those Z engagement product and the pharma product. We also believe we'll will continue will contribute to growth in 2022.
Good to hear thank you.
Okay. Thank you.
Our next question comes from the line of Chris Merwin with Goldman Sachs. Please share with your question.
Okay. Thanks, very much for taking my question.
Wanted to ask a bit about the platform revenue growth in Q4 can you talk a bit about what what impacted that.
You also talked about certain number of lives on and off the platform.
Just wanted to think about the impact in Q4, and then how we should think about the direction of lives growth as we as we move into 2021. Thank you.
Yeah, Hey, Christmas about Pan out. So lives are the biggest driver from a voluntary benefit perspective, and as I noted on our in my comments the timing of that revenue has two elements to it one relates to the current years.
<unk> in OE and the purchasing that takes place in the second one has to do with you know this.
Areas on which we are are those transactions on which we are a broker of record and have some commissions and so.
Well, what I would say is that we're expecting is part of our 2021 outlook that you see.
Defence performance on the platform revenue as what we saw in 2020 and so we do expect from this years away and the growth in premiums that we saw that there would be growth. However, as we continue to.
Shift away from actively speaking to the broker of record them as part of our broker strategy and the relationships that we have with the broker community that will be an offset to that growth.
Okay understood. Thank you and then just another question on on sales cycles that efficiency is a focus and you can do that by managing head count, but also to the extent the sales cycles come in.
You know that that can be better put us well on shore. So just curious anything you can say about you know as demand comes back what youre seeing happen with those sales cycles.
Yeah.
Yeah, one more time.
What was it about how sales cycles have been trending in terms of the way Yeah, Oh, yeah. Thank you yeah.
Yeah. They hit lows in Q2 of last year and had been building ever since and Q4 was was by far the most activity we've seen since since the pandemic.
And and we're seeing you know all kinds of green shoes like the the marketing.
The digital marketing that we're using is showing higher returns as I said our customers are are engaging with those prospects are engaging with us and so our general feel on that employer market as it is stronger and it's getting stronger.
Great. Thank you.
Our next question comes from the line of Matt Coss with J P. Morgan. Please go with your question.
Hi, good afternoon. Thank you for taking my questions.
So you noted that employer customer demand improved and that health care plans, because they're exposed to.
To the S&P market have been more challenging.
Have health care plans.
Is the demand there bottomed or do you see sort of in flight at the end of the tunnel.
Kind of where are you with health care plans in terms of when you maybe get to a recovery.
And then you know as you do recover and work towards growth.
You're beginning next year, where do you see sales and marketing spending going on.
As it's gotten pretty low as a percentage of revenue.
Okay.
Yeah.
Health the health plans, we saw dip in Q4.
And and and as Al Panna mentioned, we're modeling declines as renewals come during 2021 importantly, the way we our contracts work is they have floors and not ceilings and so.
As those as those businesses restore to the market and and get on our platform the contract would automatically pickup the bump but in into 2020. One we are we are forecasting declines and in in the quarter Q4 of <unk>.
2020, we saw a decline.
We're hopeful that as we look into 2022 that stabilizes and improves but but through 2021, we've got it going down.
As it relates to sales and marketing we have made a pretty meaningful changes in the efficiency of that business certainly from a <unk>.
2019 to 2020 and again in 2000 22021, and so we.
We are going to invest more in marketing.
In 'twenty, one than we did in 'twenty, but that that line item as a percentage of revenue, we think will will tighten a little bit.
Okay. Thank you.
And once again as a reminder, if you would like to ask a question. Please press star one on your telephone keypad. Once again, if you would like to ask a question. Please press star one on your telephone keypad. Our next question comes from the line of Sean Wieland with Piper Sandler. Please go with your question.
Hi, it's Jeff Katherine on for Shawn Thanks for taking my question.
I think we're just interested to know if you could talk that through kind of the course of a customer's contract over that lifetime, what happens to price things to just outside of platform revenue do you have opportunities or levers to drive price.
And if so what are they do they require any kind of incremental R&D investment to be able to realize.
Yeah, maybe I'll start and I'll kind of jump in pricing has been flattish.
In both markets and.
And where you see improvement is from bundling or up sells and.
And.
And that's why you're seeing us talk about new product offerings that we can sell into our base like the pharma offering I mentioned as well as the health advocacy product that that where.
We're looking to take the market.
But overall pricing is flattish the contracts specifically are very sometimes they have.
Some marginal CPI increases sometimes they don't their fixed fee.
And they're normally multi year, and then they renew and sometimes they renew multi year and sometimes they renew annually.
L P on anything yet.
Is that helpful.
Yeah. It is and then just as a follow up could you remind us what what the impact on Mercer was and then 2020 and then just what the go forward impact is anticipated to be.
Yeah, we had previously.
<unk> that we were looking for Mercer to be around $8 million in revenue in 2020, and it performed pretty close to what we had anticipated and so there were no big surprises there and then as it relates to 2021, we are not.
Anticipating any any sort of meaningful.
<unk> had wins coming from Mercer, we think I feel like those are behind us and so we're not specifically guiding but what I would say is we're not anticipating growth in that business and we've modeled in normal churn assumptions that would take place and you know sort of the debt. The Mercer base business that would then carryover to us as those groups come off the platform.
Thank you.
There seems to be no further questions left at this time I would like to turn the call back over to management for any closing remarks.
Thank you everybody for joining us.
I Hope you got from today's call that we have a plan we're executing on that plan, we're driving profitability and we have a plan for growth.
And I look forward to sharing our progress.
As we go through the year I.
Thank you very much.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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