Q1 2021 Benefitfocus Inc Earnings Call
Greetings and welcome to the benefit focus first quarter 2021 earnings call. At this time all participants are in a listen only mode. The brief question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder of this conference is being recorded.
It is now my pleasure to introduce your host Patti Leahy. Thank you Patty you may begin.
Thank you operator, good afternoon, and welcome to the benefit focuses first quarter 2021 earnings call.
Joining me today are Steve Swat, President and Chief Executive Officer, and El Pen of Wagner Chief Financial Officer.
So even though panna will offer some prepared remarks, and then we'll open up the call for questions.
Before we begin let me remind you that today's discussion will include forward looking statements of risks and uncertainties that could cause actual results to differ materially from those statements, including impacts of COVID-19 reliance on key personnel and development of our market and business.
For more information please refer to the risk factors discussed on our most recent form 10-K filed with the SEC.
During today's call. We will also refer to certain non-GAAP financial measures 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 Patty.
I'm looking forward the sharing the great start we had to the year, but before we do that I'd like to begin with the leadership announcement, we released this morning.
On behalf of the entire board I could not be more excited the share of that Matt <unk> will be joining benefit focus as the company's president and Chief Executive Officer effective next week.
Let me share of why the board and I believe Matt is the right person to lead the company going forward and why we believe now is the right time to make this change.
Matt brings over two decades of deep industry experience centered on driving growth and value creation in the Ben Admin health insurance and health care technology industries.
He also has well established executive relationships across our industry with employers health plans consultants and brokers.
Most importantly, he shares my conviction and the conviction of our board that theres tremendous opportunity to unlock and create value of benefit focus.
Matt comes to us from ADP, where he most recently led strategic planning.
Development and the venture portfolio.
Prior to ADP, Matt was head of global strategy at a on where he largely focused on its health care businesses.
One of his largest contributions there was growing its benefits administration business through the launch of and health care exchanges.
Which remain amongst the largest and most successful in the country.
Before that Matt was part of the turnaround of Hewitt Associates, where he helped recenter the business around benefits administration and adjacent capabilities.
He was also part of the core team that led the merger between <unk> and E on.
The common thread woven throughout matts experience is customer centricity and has the ability to identify strategies partnerships and adjacencies to drive innovation and fuel revenue growth.
Now, let's shift the why do we believe it's the right time to make this change.
As I've previously shared with you our key area of focus for me has been to attract more top talent to this company.
We came across Matt as part of our broader search to continue to strengthen the leadership team.
We knew he was capable of filling of variety of roles and after getting to know him. It became clear of that he was ideally suited to lead the company in its next phase of growth.
A few years ago I stepped off the board to serve as CFO and now CEO and we've made real progress.
It's a good time for me the return to the board and hand the range. The math since we are executing well on our plans to return the company to growth.
So that and I'm pleased to report.
That we've reestablished our SaaS enrollment business as the most important priority.
We've re engaged our associates and Reoriented the company to put the customer at the center of everything we do.
Our focus on operational excellence is improving customer service and guiding our near term product roadmap.
We have moved the company from consuming cash to generating cash.
And we've attracted some very strong talent to drive necessary changes in the business.
We continue to prioritize building the absolute best team in the industry and Matt will accelerate this.
Last quarter I told you we believe successful execution around our core initiatives could increase bookings improved customer attention and continue to drive operating leverage in the business.
We made good progress in each of these areas during the quarter specifically.
We exceeded the high end of Q1 guidance for all metrics.
Well with S. H P and employer channel had a strong quarter.
Q1 revenue retention improved year over year.
And we improved EBITDA margins and grew free cash flow.
Additionally, we are pacing well against our subscription booking targets.
And we remain focused on driving to the rule of 40.
With this foundation in place the board and I believe this is the right time and Matt is the right person to help take this company to the next level.
In speaking with Matt I know he's eager to get started and importantly, he shares my belief that our top priority is to grow our SaaS enrollment platform and of serve our customers with excellence.
He also share with my belief that when we take good care of our customers other avenues for growth will open up.
This is where we believe match deep industry expertise and his track record for growing through Adjacencies and creating valuable partnerships will be so valuable the benefit focus going forward.
I will remain on the board for the remainder of my term and I will stay on as an advisor to map to ensure a smooth transition.
I'd also like to acknowledge other actions this quarter to continue diversifying our board and strengthening its independence with the addition of Korea the rushing former C. H arrow for Coca Cola and Equifax.
Well the only working with her for a few months, it's clear to me that her experience and skills bring tremendous value to our board and our company.
Finally, before handing off to our panel I want to thank the team at benefit focus.
Our associates have demonstrated incredible resilience and dedication while also raising the bar to better serve our customers.
Most importantly, they've supported one another and grown stronger as the team through what has no doubt, but on one of the most challenging times in recent memory.
I appreciate each and every one of them and no we would not be where we are today without them.
With that I'll turn it over to our panel to discuss our Q1 results in more detail I'll panna.
Thanks, Steve I'm pleased to share the results of our quarter and give an update on the progress, we're making executing against our strategy.
First we continue to see the employer market gaining traction as evidenced by a few notable wins, including a global software company and national convenience store retailer both leaders in their space.
Also as Steve commented our S. E. P channel had another strong quarter and I'm encouraged by some key competitive wins for which our quality of service where the deciding factors.
As we focus our employer solutions more up market in the quarter, we saw a R. R of our new wins increased 60% on average per customer compared to Q1 of last year.
Second we are seeing indications that our focus on customer service and customer engagement is improving our performance.
For example, our Q1 software revenue retention was above 95% up meaningfully from above 90% in Q1 of <unk>.
Last year.
We also experienced a significant reduction in performance credits.
Which are typically seasonally high in Q1, following OE, reflecting our improving service levels.
And third in terms of operational excellence, we're making progress automating data and improving the end to end customer experience.
We have mobilized a dedicated team to improve our automation and data quality with the goal of extending our lead in the industry for day to transfer.
We are streamlining data exchange strengthening our core data the validation framework.
Testing and platform enhancements, such as real time data processing through API.
Operational excellence will be an ongoing area of focus as we target increasing customer NPS and expanding our operating leverage.
Now turning to Q1 results in more detail.
Total revenue of $65 1 million was above the high end of our guidance driven primarily by two factors.
First an acceleration of the timing of platform revenue from second half interest.
Q1 <unk>.
Second subscription revenue performed better than expected due to lower sort of credit as a result of improved customer service.
Q1 revenue was down 2% compared to last year, driven primarily by lower professional services revenue year over year subscription revenue was down 1% primarily due to the anticipated continued run off of our legacy agreement with Mercer.
Professional services revenue performed as expected and was down 17% year over year, primarily due to lower levels of customer class from health plan customers.
The one platform revenue increased 29% year over year to $7 8 million well above our expectation primarily driven by transaction activity taking place in Q1 that was expected to occur in the second half of the year.
On a GAAP basis gross profit was $36 5 million, representing a gross margin of 56% on.
On a non-GAAP basis gross profit was $37 1 million, representing a gross margin of 57%, which is up from last year's 50% gross margin.
The improvement in non-GAAP gross margin reflects management actions taken in Q2 of last year to streamline our expenses.
On a GAAP basis software gross margins were 67% up from 64% in Q1 of last year.
Our non-GAAP profit gross margin for approximately 68%, which is more than 300 basis points greater than last year.
This increase is the result of higher than expected platform revenue the benefits of cost management actions taken in Q2 of last year and the operational excellence initiatives underway.
Professional services GAAP gross margin for 6% versus negative 5% in Q1 of the prior year on.
On the non-GAAP basis P. S. Gross margins were 9% better than Q1 of last year, which was negative 3%.
This reflects an increase in utilization heightened focused on profitable professional services and our continued focus on automation.
GAAP net loss of $2 1 million and GAAP net loss per share was 11 cents.
This compares favorably to the GAAP net loss of $11 1 million and GAAP net loss per share of 34 cents in Q1 of last year.
Non-GAAP net income was 2 million and non-GAAP net income per share was one cent.
This compares favorably to non-GAAP net loss of $6 7 million and non-GAAP net loss per share of <unk> 21 cents in Q1 of 2020.
Q1, adjusted EBITDA was $14 8 million exceeding the high end of our guidance.
And up 260% versus prior year.
Our Q1, adjusted EBITDA margin was 23% compared to 6% last year.
Our adjusted EBITDA, when compared to our guidance was positively impacted by.
Our revenue outperformance.
Now, let's move to the balance sheet and cash flow.
We ended the quarter with approximately $189 million in cash and marketable securities. In addition, we have our full 50 million line of credit available to us.
As we think about uses of cash we are prioritizing investments in partnerships and tuck in acquisitions to accelerate our growth strategy.
Moving on to free cash flow, we generated $8 3 million of free cash flow in Q1 compared to negative $11 million in Q1 2020.
Free cash flow is a non-GAAP measure that we define of cash provided or used in operations.
Less purchases of property and equipment and excluding restructuring costs.
Moving on to net benefit eligible lives.
Total end of those were $18 3 million in Q1 of 5% Europe over a year and roughly flat versus the prior quarter.
Once a week growth and low value consumer line were offset by declines in health plan line.
As we mentioned last quarter, because consumer lives are lower value from a financial perspective, and our strategic focus is on air are from our core platform offering the employer and health plan.
In Q2, we terminated our unprofitable relationship with ship.
Which comprised the majority of consumer lives on the platform.
This will result in a reduction of $1 9 million and enveloped in Q2.
And as a reminder of if we do not expect any meaningful impact to revenue as a result of these line coming off of our platform.
Touching briefly on real estate in the future of work it benefits okay.
We are managing to our real estate footprint of Sim fewer of our associates, who work from the office on a full time basis.
As previously noted we have been assessing options to reduce our physical footprint and sublet or exit certain location.
Since we last reported to you we have stopped a lot of portion of our headquarters office space, which is expected to result in an impairment under GAAP in the range of three to 4 million in the second quarter.
As a reminder, impairments are excluded from our non-GAAP outlook.
Shifting to our Q2 outlook for Q2, we expect total revenue of 50 860 million with the largest year over year decline being in professional services.
We expect platform revenue to be lower as Q1 benefited from timing.
We expect adjusted EBITDA of between eight and $10 million and we expect non-GAAP net loss between $3 6 million and $1 6 million, which represents non-GAAP net loss per share of between <unk> 16 cents and 10 cents based on 33 million basic shares outstanding.
For the full year, we're maintaining our guidance as communicated last quarter. We expect total revenue between 254 and 260 million weeks.
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.
As a reminder, there of three key factors, which impact our outlook for the year first the expectations that employer of bookings returned to pre COVID-19 levels. During this critical Q2 selling season.
Based on what we're seeing so far this quarter are positive indicators that demand is returning.
We factored in the risks that certain health plan customers renew at lower levels in the second half of the year, primarily because of their exposure to the SMB market.
And laugh.
Impacting 2021 is the planned reduction of.
Five to 6 million of certain non core revenue this.
Included legacy on Prem and unprofitable professional services can extra revenue and the run off from Mercer.
To help with modeling as I mentioned last quarter, we continue to expect revenue to flatten out in the second half of the year as we begin to experience the seasonality of go lives.
This means we expect Q3 revenue and EBITDA to be relatively flat versus Q2 of this year that would be followed by our seasonal increase in Q4.
In closing we are pleased with the solid start the year and feel optimistic that our second quarter selling season is off to a good start.
The key driver for our return to growth next year.
On a personal note I am grateful to Steve for his leadership during a particularly challenging time for our company. We are in a stronger position. Thanks in large part the his steady hand on.
I'm excited about the experience and leadership, Matt brings to the team and the.
Look forward to working with him to build on the foundation and create substantial value for our customers associates partners and shareholders.
With that Steve and I are happy to take your questions operator.
Thank you well now be conducting a question and answer session. If you would like to ask the question. Please press star one on your telephone keypad. The confirmation tone will indicate that your line is on the question queue. You May Press Star two if you would like to remove your question from the queue.
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One moment, please while we poll for questions.
Thank you. Our first question comes from Sean Weiland with Piper Jaffray. Please proceed with your question.
Hi, Thanks, It's Piper Sandler now, but all good congrats on the on all of the developments here today. My first question is on the new leadership, realizing Matt isn't here yet to speak for himself, but really what are the what are the changes that you're trying to signal in terms of strategy of priorities with with.
The appointment of Matt specifically.
Specifically, you mentioned re prioritizing the SaaS enrollment platform, maybe you can expand on that a little bit.
Yeah. Thanks, Thanks, Shawn nice to hear you.
I think you got it I wanted to start out by Matt and I have spent a fair amount of time together and on top of mind for Matt as he sees of a ton of opportunity at benefit focus and in the board and I think his experience and his skills and his industry knowledge industry.
Our contacts are just excellent an excellent fit to drive this company forward and take it to the next level with respect to specifics around strategy.
Guy Hasnt started I'm, certainly not going to speak for them, but we spent a lot of time together in what's clear to me.
Is his view is that the company should continue its primary focus around its core of SaaS business this quarter.
<unk> business and so much like the focus that I've had over the last.
A year or so he is going to continue that and that that is a natural start for him and then second to that again with equal conviction is his perspective that we have to deliver on our commitments to customers I've been calling on operational excellence and so I think you'll see him continue in that.
Zain as well and then from that he and I also share of the view that when you have the growing healthy customer base, you can bring to that base.
Additional adjacencies.
To help accelerate the growth and so.
I think we got to give them a couple of days to get in and get his feet on the ground. He is very knowledgeable of our company is very knowledgeable of space I don't think it's going to take them long and.
And I think youre going to see them hold tight to the core and then build around it with the Adjacencies.
Alright that sounds good. Thank you and then a question on the service revenues you called out of some things going on among health plans.
And on that a little bit and why are they under pressure and when does that pressure because the east.
Yeah, I'll start and then maybe on Panna you jump in.
You might you might recall, Shawn that our contracts with health plans have minimums in them.
Yeah.
I'm, sorry, I think the I think Sean just to clarify the question was your question around the professional services, because we had some bottom line.
On the professional services declined as a result of the health plans is that just to clarify your question.
It was but you know always interested in the where Steve has taken this to all of them.
Shawn I'll do both in sales.
On the on the.
Subscription revenue, which I'll kind of appropriately points out our our contracts have minimums in them in and as al Pan of pointed out we're seeing the lives in that SMB part of the business decline and we're expecting and we have planned for a reduction in that.
Subscription revenue in the back half of the year. That's that's one thing that we called out in the second thing that we called out is that there have been just fewer change order requests, which come in which result in lower professional services revenue.
Those are the two points on alpine I don't know if you've got anything else Dan.
I think that type of thing okay.
Okay. Thanks, so much I appreciate it.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate that your line is on the question queue.
Our next question comes from Matt <unk> with J P. Morgan. Please proceed with your question.
Hi, Good afternoon. Thank you for taking my questions just a question on <unk>.
Why did some of that the transactional activity that was expected to occur in the second half.
Come into Q1, I guess, if you expect it to occur in the second half that's a pretty big of pull forward. So any more color on that would be helpful.
Yeah, Matt This is out of town I. Thanks for the question. We as you know open enrollment in Q4 is the big volume driver for us on the transaction revenue of the platform revenue and we estimate items such as performance bonuses and some true ups on enrollment.
In the past historically it was seen as true up those bonuses come in the second half of the year and this year you know for reasons that are sort of outside of our control and driven more by our partners. We saw some of those come in earlier in the year and so that's really what was driving the pull forward there.
Okay, so sort of had to do with things not totally under your control of it sounds like okay.
And then I guess when we look at the outperformance this quarter and is that and then theres no sort of update to the full year of revenue guidance and so.
Are you expecting incrementally more challenging parts of the business.
Yeah.
In the second half the new where you can say a quarter ago. When you guys did.
Yeah, you know other mi the the benefit that we see in Q1 from that platform timing really the the remainder of our expectations for the full year perspective or are holding and so what I would say is that you know where were seeing them similar to what we guided to last quarter kind of a.
Q2, Q3, low point in the year of return in seasonal revenue in Q4, and and the the assumptions that we had you know that were driven growth around employer in finishing out this selling season that that's critical for us in Q2 as well as some of the what Steve commented on just a few minutes ago some of the.
Risks that we modeled into our plan for the second half on health plan. Those are all still holding for us and say well, we're maintaining our guide for the full year at this point.
Okay. Thank you very much.
Oh. The reminder, if you would like to ask a question. Please press star one on your telephone keypad. The confirmation tone will the King your line is on the question queue.
There are no further questions at this time I would like to turn the call back over to Stephen Smith for any closing comments.
Thank you all for joining US Tonight, it's been an honor to lead this company and I'm excited to turn the range over now to Matt, we're executing well against our plan and bringing in great talent into the organization.
The better today than I have at any point of my tenure here and I'm optimistic that the company is heading in the right direction. Thank you so much.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation of a wonderful evening.
Yeah.