Q2 2021 Benefitfocus Inc Earnings Call
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Thanks, operator, welcome to the benefit from.
Sure sure 2021earnings call.
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I would now like to turn the call over to Patrick I Hate Vice President Investor Relations. Please go ahead.
Thank you operator, good afternoon, and welcome to benefit focuses second quarter 2021earnings call.
Joining me today are Matt Levine, President and Chief Executive Officer, and El Paso, Wagner Chief Financial Officer.
Matt I don't think I 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 those statements, including integration and reliance on key personnel impacts of COVID-19, and the development of our market and business, including our growth strategy.
For more information please refer to risk factors discussed in 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 Matt.
Thank you Patty, it's a pleasure to be with you all today.
Benefit focus had another strong quarter and we're looking forward to sharing our results with you today.
Before we do I thought I'd start by highlighting why I'm excited about the opportunity to lead this company.
I'll also discuss some of the things I've learned since joining and more importantly, the actions, we're taking to enhance execution and return the company to growth.
In short you'll hear how we're ramping our focus on service Excellence I believe service excellence is the best path to create value, it's absolutely within our reach.
I strongly believe benefit focus is well positioned to build on its 21 year history and win in this industry.
I've watched and admired the company throughout my entire career.
Well I was at Hewitt I hope the business re center around benefits and grow into natural Adjacencies Les.
Later at a on my focus was launching new products and services such as health care exchanges.
This experience is a very useful proxy for it needs to be done at benefit focus we need to continue fortifying our core business, we need to enhance our customers' experience and we need to be thoughtful about growth areas.
I believe if we do these 3 things, we will unlock significant opportunity create value and return the company to growth.
During my first 90 days my top 3 priorities have been first to meet with customers and partners to understand how we can learn from them and better serve them.
Second conducting listening and learning sessions with associates to understand how we can build on our heritage and create an even better organization to work out.
And third to ensure we have the industry depth and experience to unlock this value.
I believe all of these elements are critical to drive our growth strategy focus and priorities.
Our customers have shared valuable insight with me they greatly value our commitment to them the value and respect our people the benefit focus team serves our customers' day to day and we strive to be the safest set of hands for their mission critical benefits compliance and administrative needs.
We've created a superior user experience and our customers tell us how highly they value that's for their employees.
We've made it easier than ever to help them enroll in and make decisions about their benefits, but we know we're not perfect and frankly, having been at this for a while I can tell you no..1 is in this industry.
Yeah, its our goal to lead the industry with service Excellence I believe service excellence will be the single biggest and most immediate lever that will drive growth for our company.
Service Excellence is important to all our ecosystem partners, including brokers and vendors selectors. It goes hand in hand, with gaining more reference about customers.
Service excellence increases customer retention.
It increases our NPS scores and it grows error. This will continue to be my greatest area of focus until we consistently lead the industry.
Given the importance of service excellence to our growth strategy I'm focused on attracting talent to benefit focus that has deep industry experience.
People, who can help the company reach its full potential.
Leaders, who will be a good fit with the incredible team we already have in place and I can tell you that while tech and service are key differentiators in the industry experience credibility and reputation are as well.
As you saw in today's press release, we announced 4 new members of the management team that I believe will be instrumental to our growth and execution.
Suzanne Leary will serve as our chief customer officer Sue comes to Us from Teladoc, where she was SVP of global operations previously she held senior level of customer enablement roles at best Doctors and Blue Cross Blue Shield of Massachusetts.
Sue is well connected into our key market segments health plans and employers and I expect it to hit the ground running.
Tim San joins us as VP customer operations from connect your care, where he was chief operating officer.
Before that he held senior level roles at Willis towers, Watson and Hewitt and later at a on Tim brings more than 25 years of experience in customer implementations open enrollment and benefits management.
He's been with us about a month and is already making a favorable impact on new client implementations and preparations for open enrollment.
Throughout their careers Sue and Tim have shared hundreds of employer customers as well as health plans their credentials are well known across the industry.
Craig Maloney is joining us as chief commercial officer. He comes to US from Maestro Health, where he was chief Executive Officer.
Before that Craig spent nearly 20 years in senior leadership roles with Hewitt N E on and universe workplace.
Craig has a wide network across health plans voluntary benefits providers employers and brokers. He has decades of experience and I would argue he knows the voluntary benefit space better than anyone in the industry.
We also hired our first chief strategy Officer, Tina Provence, all Tina has rich product and customer experience. She previously worked at fidelity.
And most recently at accolade, where she was senior vice president of transformation and change I have great confidence in Chinas ability to drive our health plan and employer product strategy.
I'm excited about the talent and experience. These individuals bring to our company each of them came from great jobs with great prospects.
But they chose to come to benefit focus because they saw an even better opportunity to create value.
Before we touch on our quarterly results I'd like to offer a few thoughts on our outlook in particular, the inflection point to return the business to growth. The single biggest priority for me and our company is to grow sustainably.
That's why the board hired me.
We've made great strides since emerging from the onset of Covid I feel good about our employer business. It started to turn the corner.
This business is trending favorable compared to last year, However pipeline and decision cycles exiting Q2 are not yet back to pre COVID-19 levels, and they're not where we need them to be.
Our health plan business continues to see lower levels of demand. This is primarily the result of a shift in near term I T priorities away from group enrollment.
Simply put health plans are prioritizing regulatory changes and addressing other market dynamics.
This is informing our outlook for 'twenty 'twenty, 2 along with the risk of lower levels of renewal, we've previously discussed and a more muted recovery of employer demand.
We continue to expect our revenue growth inflection point to occur in 2022, but most likely towards the latter part of next year, it's premature to determine if the company will return to growth for the full year. We plan to provide next year's guidance as we have historically during our fourth quarter earnings call.
Let me be clear about the specific actions, we're taking to address the near term organic growth challenges.
To start for health plans I've been in close contact with our key customers.
I'm confident that the vast majority of these relationships remain very stable and strategic.
We plan to activate lighthouse customers through reference of both solutions such as quote to pay.
We plan to further strengthen our health plan roadmap.
For employer I'm also intensely focused on advancing our broker strategy and partner relationships, which will help expose us to more opportunities.
And we're building on the momentum from last year's OE, placing even greater focus on service and implementations.
With these actions and our expectation that Covid subsides I believe we should see a nice tailwind next year that will allow us to convert more business the trajectory feels good.
In terms of our longer term outlook with our new leaders joining I'll be working with the team to execute our strategy and to set us up for sustainable growth.
Once I Formula lies a plan that we're a flex the input and commitment of my leadership team and input and oversight from the board I'll share our medium term targets for the company you.
You can expect us to focus on our product and service capabilities in our core market segments to grow across our base and expand our market reach.
In summary, I believe the first step to building a great company is to have a great team I would put our existing team combined with the leaders, we announced today up against anyone in the industry.
We are focused on delivering service excellence I expect our focus on service excellence will lead to higher levels of organic growth.
It starts with delivering a spectacular open enrollment this year, which sets the stage for up sell opportunities into voluntary benefits and future adjacencies such as engagement advocacy in health navigation.
We are putting the foundation in place to get this growth flywheel moving.
Our team's commitment to customers is impressive I'm proud of their accomplishments and believe our best days are ahead of us on a personal note I'm deeply grateful for how welcoming our associates have been to me in my early days, it's truly an honor to be part of the team.
Now, let me turn it over to our panel for a more detailed review of the quarter and outlook.
Thanks, Matt I'll start with an update on our commercial traction this past quarter.
Our employer business has made up a lot of ground since the onset of Covid.
It's a P channel had another strong quarter and has been a nice source of strength for us.
Key wins during Q2 from player direct sales team and cleared.
Large private University in Texas.
A large county in Texas.
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We also continue to expand our footprint with existing customers with a notable addition of service it with the state of Nevada deal. We initially closed in Q4 of last year, we continue to be pleased with our traction in the public sector.
Now turning to Q2 results in more detail.
Total revenue of $60.9 million was above the high end of our guidance driven primarily by better than expected subscription revenue.
Q2 revenue was down 2% compared to last year, driven primarily by lower professional services revenue.
Total software services revenue was $50.2 million up 1% compared to last year.
This includes subscription revenue of $44.3 million, which was up 1% year over year.
And platform revenue of $5.9 million, which was down 200000 year over year in line with our expectation.
We expect platform revenue growth later this year in line with our seasonal trends.
Software services revenue retention improved 300 basis points compared to Q2 of last year as.
As we look to the second half of the year because of the lower levels of health plan renewals. We've previously shared with you I expect the downward trend in subscription revenue as well as our software services revenue retention rate.
Professional services revenue performed as expected and was down 13% year over year.
Primarily due to lower levels of demand for custom requests from health plan customers.
On a GAAP basis Q2, gross profit was $32.9 million, representing a gross margin of 54 per cent.
On a non-GAAP basis gross profit was $33.8 million, representing a gross margin of 56%.
Which is up nearly 300 basis points over last year.
Improvement in non-GAAP gross margin reflects cost management actions taken in Q2 of last year to streamline our expenses.
On a GAAP basis software gross margins were 64% up from 62 per cent in Q2 of last year.
Our non-GAAP software gross margin or approximately 65%, which is more than 200 basis points higher than last year.
This increase is the result of the benefits of the cost management actions taken in Q2 of last year.
Professional services GAAP gross margin were 5%.
As compared to 7% in Q2 of last year on a non-GAAP basis P. S. Gross margins were 9% slightly below Q2 of last year, which was <unk> 10 per cent.
This reflects the recent increase in labor costs for our seasonal hiring as we ramp up for open enrollment.
We expect this trend will continue resulting in negative P. S margin in the second half of the year.
Q2, adjusted EBITDA was $9.6 million at the high end of our guidance and up from prior year of $9.3 million.
Our Q2, adjusted EBITDA margin was 16% compared to 15% last year.
GAAP net loss available to common shareholders was $16.6 million and GAAP net loss per common share was 50 cents compared to GAAP net loss available to common shareholders of $12.3 million and GAAP net loss per share of 38 cents in Q2 of <unk>.
Last year.
Non-GAAP net loss available to common shareholders was $5.9 million and non-GAAP net loss per common share was <unk> 18 cents. This compares favorably to non-GAAP net loss available to shareholders of $8.2 million and non-GAAP net loss per common share of 26% in Q2 of 'twenty 2.
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Non-GAAP net loss available to common shareholders in Q2, 2021 excluding restructuring cost was $3.2 million and non-GAAP net loss per common share excluding restructuring cost was 10 cents and exceeded our expectation.
Now, let's move to the balance sheet and free cash flow.
We ended the quarter with approximately $193 million in cash and marketable securities.
In addition, we have our full 50 million line of credit available to us.
As we think about they used to.
Of cash we are prioritizing accelerating our product roadmap.
Fortifying our customers experience.
And pursuing select tuck in acquisitions to accelerate our growth strategy.
Moving on to free cash flow, we generated $6.6 million of free cash flow in Q2 compared to $6.2 million.
In Q2 of last year.
Free cash flow is a non-GAAP measure that we define as cash provided or used in operation.
Less purchases of property and equipment and excluding cash paid for restructuring.
Turning to net benefit eligible lives.
Total npls were $16.3 million in Q2 in line with our expectation down 1.9 million sequentially from Q1 and down 7% year over year.
As we shared last quarter. The decline in lives is primarily attributed to the termination of the unprofitable relationship with ship.
Which also represented the majority of the gig consumer lives on the platform.
As a reminder, our strategic focus.
He's on a R. R from our core platform offering.
These gig lives were low value consumer lives and there was no meaningful impact to revenue as a result of the lives coming off our platform.
Shifting to our Q3 outlook.
For Q3, we expect total revenue of 58 to 60 million.
With expected year over year declines in subscription and professional services revenue.
Q3, adjusted EBITDA is expected to be between 5 and $7 million, which.
Which is lower than the expectations shared with you last quarter due to unanticipated legal and executive severance costs.
We expect non-GAAP net loss available to common shareholders between.
$10.5 million and $8 million, which represent non-GAAP net loss per share of between 31 cents and 24 cents based on $33.1 million basic shares outstanding.
For the full year, we are maintaining our guidance and expect total revenue between 254 and 260 million.
As a reminder, our revenue over performance in the first half of the year has largely been due to timing of platform revenue accelerating from the second half of the year.
We expect adjusted EBIT to add 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.
In closing I'm pleased we delivered against our financial commitments I'm excited about the leadership announcements, we made earlier today and the team that we're assembling to execute on our strategy to return the company to growth with that Matt and I are happy to take your questions operator over to you.
Yeah.
Thank you.
Good day and ended the question and answer session.
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Your first question comes from Jessica person, 1 type of sidewalk and shallow hole.
Hi, Thank you for taking the question and thank you for taking the question I think you guys referred to aforementioned health plan attrition can you just give us some color on that when did it start and I guess when are you lapping the headwind.
Yeah, Hey, Jessica this is al Panna.
So as far as the health plan lower levels of renewals that we reference there.
If you think about the timing of the cycle timing of when those renewals come up that's really a second half.
Where we see the revenues that are going to be impacted by those lower levels of renewals. This is free consistent with what we shared previously with you and what I'd say is you know that that the expected risk that we had previously discussed and what we're now seeing we've got better visibility.
And 2 is performing pretty much as we had expected.
Got it and I I guess, what what are customers, citing when they're declining to renew them and have you guys sort of figured out a way to mitigate them.
Mitigate those doctor in the low renewal rates as you head into what's it's definitely a selling season.
And correct me, if that's wrong selling season in the first half of next year.
Hey, Jessica it's Matt why don't I cannot for a couple of points of view on sort of what's going on in the market and hopefully address your question. So as I mentioned in my prepared remarks, I'm I'm I'm roughly day 90, and I've spent a good chunk of the first 90 days.
And the market specifically with.
<unk> customers as well as health plan customers.
The health plan customers that ive been visiting with has been you know.
Actually quite a bit of fun for me because I'm reconnecting with folks I used to work with largely when hours a day and so.
The reason I mentioned that is in these discussions I feel like I'm getting the straight scoop from you know from the market and their offering.
Since your reflections on what they're seeing in their priorities and I'd say a couple of observations overall number 1 we have you know we have extremely strong and strategic long term relationships with our with this book of business a majority of the customers we would label internally as green, they're in what they've been in multiyear contracts with us.
And they really value the people they work with on a day to day basis et cetera. When you talk to them, though you know the primary.
The current products that we offer them around group based enrollment and if you look at their priorities are and a lot of this is totally understandable given just we've all lived through over the past year, you know ranging from COVID-19 to an election to a Supreme Court.
Decision et cetera, their priorities have shifted a little bit not that grew based enrollment is an important it is but if you look at where they're spending money and where where they're prioritizing. It's on some of those issues. In addition to things like transparency, which is getting a lot of attention and retiree markets with products like Medicare advantage booming. So it's not.
We're not hearing feedback that.
Our customers arent happy with the products from their experience, it's really just they're focused on.
On the other on other priorities.
And I'd say that the thing that gives me the most optimism sort of addressing the other part of your question. These customers even the ones that had lower level of renewals are very eager to talk to us about our product roadmap and the things that we have to come. So I made a couple of comments on this in my prepared remarks.
But we recently launched a product that we call internally called quote to pay which is which has already referenced a bowl with.
1 customer in the market, we're getting terrific traction with both brokers and health plans with that product. It allows our you know our our health plan customers to bundle their medically their medical underwritten product with voluntary benefits and create a bundle where brokers can offer their customers the best realtime quote.
So theres nothing that Ive seen and again you know these are folks that I've been working with for the better half of 15 years I haven't I'm not hearing anything around dissatisfaction round surveys from a product or any of that it's really just re prioritization given the extraordinary last 18 months that we've had to get through.
Got it. Thank you congrats on the first 90 day.
Thanks, Thank you.
Thank you.
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Your next question is from.
<unk> from J P. Morgan. Please go ahead.
Hi, good afternoon, and thank you for taking my questions.
You talk about the trajectory of retention rate to be down for this year and you know just looking at 2020. It looks like it was above 90% 2019 is about 95 per cent, where where do you think that retention rate and compared to 2020 and is there.
Perhaps anything that can be done to to alter or improve that as the year goes on just any peripheral opportunities that may arise, we will not be picking up.
Yeah, Hey, Matt I'll, maybe start there and then you know for the second half of your question I'm sure that that will have some thoughts in terms of the the actions and opportunities we have to mitigate any of that that risk and so you know from a retention perspective, I'd say you know the primary driver from our from my remark.
Just in terms of giving the outlook of what we expect in the second half of this year, which is a downward trend in that retention rate is primarily driven by the health plan risks that we've called out for those renewals at lower level, Inc.
So we do see that that's going to trend downward I think it's going to get you know.
Closer to the in it just in the second half not necessarily them for that.
Full year, but on a second half basis I'm getting closer to the levels that we saw in 'twenty 'twenty them through the first half of this year, we havent closer to the levels of 2019 that you quoted and so you know our goal and our objective will be to get back to those levels.
And in terms of where we see those opportunities I think it's really centered around sort of excellence and the opportunity to continue to deliver really well from our customers that really does you know turn into improved.
Revenue retention and that's what I would say is our number 1 priority, but maybe Matt if you want to add anything there yeah, Hey, Matt the it's a great question and as I mentioned in my prepared remarks.
Being a my words, the same set of hands in the industry as the number 1 thing I'm focused on its why we brought on sue and Tim to backfill some roles.
And it's it's it's my focus every day right now and service excellence is on a couple of different dimensions, and we have a bunch of different metrics, but essentially.
At the point of view, so where participants are.
Employees are signing up for their benefits how has that experience handled are they landing in.
The rights plan choice for them and then when they have questions or are we being responsive to them equally for benefits managers.
Service is all about implementing what was sold to them doing it in a collaborative way and above all getting references in terms of metrics you know things like reference ability, we have specific NPS goals et cetera, I'm all for our service organization and right now more than anything and what will impact retention I would say in the meat.
Liam term I'm more than anything is over the next 6 months, having the best open enrollment season that we've ever had.
Getting the implementations, particularly competitive takeaway implementations at a very referenced the level and all of that and will give us a tailwind going into the selling season next year, where you know both references as well as influencers and the industries such as brokers vendors.
Vendor selectors et cetera are reinforcing the message around saves out of hands.
And service excellence, So you know that.
The best way to answer your question was very specific metrics operationally for it.
And we feel pretty good about the work that's been done on a day to day basis I can tell you I'm pretty excited about this open enrollment season and it feels like we're set up well for a for next year.
Thanks, Nat and they'll Pan out maybe just 1 more.
So if you look at spending in R&D you know it was down just very little sequentially and grew year over year on a pro forma basis.
His spending on R&D is that sort of stabilized at its current level and is this sort of indicative of unacceptable ration of.
Product development.
Yeah, Matt what I'd say is at least 4 or 2021, you know I think the current levels of standard what we're expecting for the remainder of the year and you did see a little bit of a ramp there and that was just because we you know has been leadership changes and priority changes we did see some additional incremental investments in but is it per se.
Did your revenue I would say you know kind of holding steady for the remainder of the year and then as Matt mentioned in his remarks.
We're spending time with the leadership team that we're forming here, we're going to spend a good amount of time on product roadmap and be able to give some additional color and guidance as we talk about 'twenty 2 when we've got that planned more formalized and and ready to share what our outlook looks like for next year.
Okay. Thank you both very much.
Okay.
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So a nice day.
This does conclude the Q&A session I would now like to turn the conference back over to a lot of them for any closing remarks.
Thanks, Rachel and thank you all for your time today and for your thoughtful questions.
Just in closing as I mentioned before I'm incredibly optimistic about the future of the company I am proud of the team I'm proud of the fact that we've been at this for 21 years with a terrific track record on delivering to our customers and really above all I believe that the addition of the leadership additions.
Additions that we announced today working with the team that we already have in place, which has been you know, which I find absolutely terrific I think we're going to make us a stronger company I think we're going to position ourselves and the.
The industry in terms of service excellence.
And I think we're going to return to the business to sustainable growth. This is all within our reach I've seen it before and I have total confidence that we're going to get there.
Above all really it's an honor to be part of the story and we look forward to keeping you updated on our progress so with that thanks again and have a good night.
Yeah.
Okay.
Thank you. This does conclude today's call. Thank you for participating you may now disconnect your line.
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