Q2 2021 Castlight Health Inc Earnings Call
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With the S E C before the call.
With that I'll turn the call over to Mike O'meara.
Oh of Gaslight health needs.
Thank you all for joining us to any of our second quarter 2021 results today I'll start by sharing an update on the continued progress in our business, including our view of this year of direct to employer and health plan selling season will then comment on some exciting updates to the Callaway team and finally.
I'll share some perspective on our longer term growth initiatives.
I'll start with the brief highlight of some key numbers, we saw a slight uptick sequentially in annualized recurring revenue or <unk>, which continued to move in the right direction for the second quarter in of route and was $128.2 million Q2 was another very high customer retention quarter with strong sales activity setting us up well for.
Q3, our total revenue for the second quarter of $35.6 million landed at the top end of our guidance range and our non-GAAP gross margin was 69% and cast that achieved a fifth straight quarter of non-GAAP profitability and positive cash flow.
Turning to the progress on our business I'll begin with direct to employer. This was an incredibly active pipeline generation in RFP season, which benefited from our new care guides offering in total our RFP volume is up from the pre COVID-19 levels of 2019 meaningfully higher than 2020, and we entered Q3 with our largest late stage.
<unk> and for years, and we see multiple pathways to achieving our targets for the year by way of example, we were pleased to sign a Catholic complete deal worth approximately $1 million of <unk> in the first 2 weeks of Q3. Further in addition to our pipeline activity, we announced the new channel partnership with business all of our.
We are a preferred navigation vendor and were selected by a brokerage house in a competitive process to support of portion of their business as the navigation vendor.
On the health plan side, our initiatives progressed as planned in the first half of the year. We have developed a strong pipeline with the mix of expansion opportunities and potential new clients as of today, we have 1 late stage opportunity and several promising mid stage opportunities are BCBS, Alabama implementation of the ditch.
Little navigation and care guides the offerings are progressing on schedule and we are working closely with Blue Cross Blue shield of Alabama to meet market demand and to enable their team's effort.
And those of the employer and health plan market, we continue to see potential tailwind from transparency and coverage regulations as a best in class carry items on health care navigation vendor importantly, we are starting these conversations with transparency, but they are quickly evolving into broader opportunity.
From a retention standpoint, we continued to demonstrate meaningful progress Q2 represents 1 of our best quarters in the past 5 years in terms of churn I am confident we are on track to show a meaningful improvement in retention compared to last year, even though we do still have important second half for newell to complete as evidence of our continued.
Improvement in the health of our book of business, our customer NPS in Q2, both of <unk> 46 from negative territory when I stepped into the CEO role 2 years ago I am very proud of this progress, which I know has taken tremendous work from the entire organization.
Importantly, supporting our progress with clients. We were pleased with the results of a third party actuarial study released in May by Santa Barbara Actuaries are highly respected firm led by Ian Duncan, but as the trusted and heavily utilized by the large self insured employer market. The results demonstrated of 9.1% year over year.
<unk> and medical trend among those who use cash site compared to our matched control group and validate the clear rois on utilizing test flights navigation technology.
Study found of lower medical spend across members at every clinical risk level, including those with and without a chronic condition. This reinforces a key value proposition, we bring to market as the only navigation vendor able to demonstrate impact across the broad portion of our client's population, we have an exciting announcement from a team perspective.
In the quarter, we brought on our India based development team at the Ftes.
Talented and experienced team many with 10 years of 4 plus years had previously been working with US as part of the third party since 2014 and has been responsible for meaningful innovation in our platform. During the transition we were able to retain 100 out of 100 for members of our team, which is the reflection of engineering and.
Product leadership, our operational muscle and the people in finance function and calculate the strong R&D culture importantly, bringing our India R&D operations and the Capsulate directly will allow us the scale and grow our team in India.
Taking a step back from the quarter I want to close by speaking to the next evolution of our growth strategy when I stepped into the role of CEO 2 years ago calculate was viewed as a purely digital navigation company and honestly often known only for its role in creating the category of transparency on my first earnings call in July.
The 2019 I spoke about the immediate strategic shifts needed, namely expanding the go to market through health plans and the addition of high touch navigation following that call. We stood at the health plan sales team and announced our care guidance offering.
On July 2019, though I also shared and I quote that the shift of value based care. The introduction of alternative delivery models and payer provider consolidation has created demand for health care data infrastructure that provides the information on the consumer's health and enable spirit to higher quality lower cost providers.
This is the core of what we do or architecture of the services oriented. So we can expose the technology services that support our current offerings empower user experiences and new buyer categories, such as retail pharmacies labs telehealth providers and more.
Given our progress against the key growth levers, we can now begin utilizing our data and technology capabilities to support the demand for health care data infrastructure that provides the information on the consumer's health and enables steerage to higher quality lower cost providers as we laid out 2 years ago, we have seen interest.
Mid of capability for new buyer categories like telehealth providers offering virtual primary care on site in your site clinics retail pharmacies and more.
While all of this commercial development is still early stage, we believe it will meaningfully expand our market opportunity and enable long term growth. We will keep you updated on our progress.
To conclude I am pleased with the progress we've made in the first half of 2021, we continue to deliver against our financial goals and we're poised to Reaccelerate our growth in the second half of the year as always I want to think of the team for their commitment to our mission as we serve our customers with the focus that comes from the privilege of purpose I'll now.
I'll turn the call for well for a review of the second quarter financial results and our outlook for the remainder of the year well.
Thanks for me.
I will start by reviewing our second quarter results and then we'll discuss our outlook for the third quarter and full year.
Beginning with the annualized recurring revenue or <unk> or <unk> of $128.2 million increased slightly sequentially.
While we signed some new business for the second quarter, our pipeline in the back half weighted this year for both of the employer and health plan markets as we had mentioned.
We are confident that our team will be able to implement the new business signed in the third quarter and be ready to launch on January 1.
Total revenue in the second quarter of $35.6 million increased 2% sequentially and was essentially flat compared to a year ago subscription revenue of $31.1 million, representing 87% of our total revenue and professional services revenue accounted for the remainder of our PFS revenue reflects continued <unk>.
Attribute <unk> from the Boston Children's Hospital of CDC vaccine find your work.
Total gross margins of 68, 7% increase of 190 basis points sequentially, and 40 basis points compared to a year ago. The increase was driven by top line contribution from the vaccine for under work and continued operational efficiencies subscription gross margins remain over 77% for the fifth straight quarter.
Operating.
The expense as a percentage of total revenue of 63, 5% was relatively flat year over year as we hit the anniversary of our cost management measures implemented last year and we started to see the return of some expense associated with COVID-19 savings.
As we mentioned in the quarter, we established in the Indian entity and hired approximately 100 individuals of Ftes, who previously worked with calculate it of third party as part of our development teams given.
Given this our total head count increased to approximately 550 from approximately 450 of the prior quarter.
Don't expect the material change in our 2021 expense for this transition but are very excited about welcoming these talented individuals fully into the Catholic family and look forward to continuing R&D scale through our hydro about location.
Non-GAAP operating income of $1.9 million as our fifth consecutive positive quarter of non-GAAP profit.
Similarly, we reported positive cash flow from operations of $4.6 million and drove our cash balance to $60.7 million at the end of the quarter.
Turning now to our 2021 outlook.
We are reiterating the 2021 outlook provided in Q1, including full year revenue of $135 million to $140 million.
Non-GAAP operating loss of $4 million to the income of $1 million.
Non-GAAP loss per share of <unk> <unk> per share to the income of <unk> 10 per share based on approximately 160 to 161 million shares outstanding.
Gross margin in the mid sixties.
Cash flow from operation between $2 million and $7 million.
And cash balance at year end to be more than $50 million.
For the third quarter 2021, we expect the revenue in the range of 33% to $35 million.
In conclusion, we are pleased with another quarter of strong financial results and are excited for the strength of our pipeline entering Q3, we look forward to sharing our progress through this quarter as we look ahead towards 2022.
With that we'd be pleased to take questions. Thank you.
At this time I would like to inform everyone in order to ask a question you May Press Star then the number 1 on your telephone keypad.
Again, Thats star 1 on your telephone keypad, we'll pause for just a moment the compile the Q&A roster.
Your first question comes from the line of Charles <unk>.
From Cowen Your line is open.
Yeah, Thanks for taking the questions.
You know maybe maybe start maybe just a couple of ones you talked about sort of the pipeline for additional health plan clients and you kind of.
It off a couple of near term operating near or medium term opportunities.
Are these all.
Blue Cross Blue Shield.
Kind of plans or other non blue cross plans in the mix.
Yeah sure. Thanks, Hey, Charles Thanks for the question. So as I mentioned, we have a late stage opportunity on several mid stage just debt levels that late stage for us means that we have been selected and are in contracting.
Mid stage means that were out of finalist stage and would expect selection to happen.
This year presumably.
And in terms of the nature of those opportunities.
You're calling out.
Where we do believe we have a sweet spot with it which is some of the large regional blues that certainly those are included as well as other types of plants.
Okay. Thanks.
And on these mid stage opportunities, who are you typically competing against right now.
What does the competitive landscape look like when.
Yes, basically what type of companies are you competing against.
And these charges mid stage opportunities yeah, no. Thanks for the question.
In terms of what I guess I would say is that.
The challenge that we see and the.
Health plan market really from a velocity perspective is that there are not a ton of rfps in a given year. So very often a lot of our work is actually focused on opportunity creation and once there is an RFP, we certainly feel very good about our ability to win so the.
Kind of competitive question that you're asking I would say that the larger competitive dynamic is really a do do we build in house or do we partner.
<unk> at the plant level and then in terms of who we see actually competing.
Once there is an RFP is a range of cross players in the.
Of the wellbeing space of the navigation of space and then some of the traditional transparency vendors so it.
It varies a little bit in terms of how the actual RFP of threatened so it is a bit of a range of competitive set but I think the most important dynamic is really.
Of that first question around Bill first partner.
Okay. Thanks, and just for a follow up on that is does that mean that with the.
These rfps are are they are these health plans just looking for single solutions, just luck of other navigation or transparency or but how many of these are kind of more kind of comprehensive.
Rfps.
With like Catholic complete that would be GAAP now is 1 of the things that actually really exciting about the pipeline is that.
They are a navigation, both digital and high touch care guides.
So what we like about what we're seeing is that when we look at the capabilities that we do feel like we're uniquely well positioned to win those opportunities.
Okay. Thanks, and then just 1 last 1.
The in the guidance, the 33% of $35 million.
For the third quarter.
Can you give a sense of the what the split we should think about between subscription revenue.
Versus professional services.
It looks like we obviously outperformed the here on the second quarter.
It seems like it's probably more of alluded the Boston children's.
Just wanted to get a sense for that on third quarter. Thanks.
Absolutely Charles and thanks for joining us today. So you are right in the second quarter were glad to kind of be at the top of on the range outperform that upside was principally driven by Boston Children's hospital. The rest of that of deliverables in Q2 that had revenue associated with them as we launched the vaccines dot Gov site and <unk>.
<unk> on some of the kind of the key commitments of that relationship going forward in Q3, we expect the.
Boston Children's hospital, CVC revenue to step down.
We'll still be a meaningful driver.
Look something more like Q4, maybe a little bit more than Q4 from our Boston Children's hospital of contribution.
And you heard the $33 million to $35 million.
Q3 revenue guidance.
Okay, great. Thanks, a lot of I'll jump back on here.
Absolutely Thanks Charles.
Again for anyone else, who wants to ask question you May press star 1 on your telephone keypad.
Your next question comes from the line of Richard close from Canaccord Genuity Genuity.
Your line is open.
Okay.
Great. Thanks.
Get the ask a question this quarter I appreciate it thanks.
Yes.
I was wondering if you could just go into the <unk>.
Retention and Youre talking about churn being.
The lowest of spending quite some time can you just help us out with what's resonating with clients.
Is it just simply you have gone through.
Enough.
And.
So you are left with solid customers or just how you think about the where are you are with respect to the whole process since you've taken over.
Sure, Yeah, Hey, Richard Nice to hear you on thanks for the question of.
And Youre right that were certainly glad to see the low churn and <unk>.
Happy to have renewed some of our important customers over the first half of the year.
And we definitely think that there is a lot of things that are contributing to the feeling that we've turned the corner. So ive talked in the past about a healthy book of business.
On which by a lot of metrics that we would say that we of the healthiest book of business that we've had in years.
The first theres that element of just kind of operational excellence, which is something that.
We didn't have at all times and we really do feel like that's something that we've executed really well on the other really 3 legs of the store have been around are you delivering value, we talked a little bit about our third party validated study we're glad to have the study but it also just supports the results that we've been sharing with our customers. The second is.
No great relationships at every level of the organization and I think having the right people and giving them the right support.
It's a huge part of that and then finally really seen the world evolving in the same way such that the key to navigation Israeli ensuring that you're supporting the customer strategy and that Youre really of strategic partner, So I think that.
All of those factors are really supporting us in having healthy.
Healthy of the book of business, and therefore really allowing us to have.
<unk> turned the corner on churn.
Okay. That's helpful.
Can you just.
Refresh me you made some comments with respect to.
The renewals and whatnot. So how does the rest of the year and looked at again.
Have you gone through much of the renewal process or where our net.
I'll just I'll comment and then well you said you should add a little bit of detail for fab.
It's a great comment of.
Obviously, we've been happy to have low churn and bringing on some of our important customers.
I would also say that we still do have the majority of renewals in the second half and certainly we feel that given the health of book of business and given the smaller size that we're in a good position, but absolutely. We're focused on those renewals, which are happening in the second half well did you want to add detail for that.
No I think thats the right Richard we still have I would say the majority of the renewals for the year to be done but saw meaningful progress in Q2, including a 7 figure renewal of.
Large 6 figure renewal its really important client so our team did a nice job.
Great.
Good news there.
And then just on the employer side since Charles asked about the health plan.
Employer.
You seem pretty positive in your commentary.
Can you can you just update us on.
What is the market like in terms of appetite.
For these type of services has there been any meaningful change.
The change I guess as the year of progress just any update there.
Sure.
I'll start off and well certainly feel free to add.
Just for a market perspective, I think as we've talked about the navigation market is.
<unk> is growing and so I think just generally we're feeling the benefits of a market that is looking for navigation and I think increasingly looking for a mix of technology and services, which were well positioned to offer.
In terms of of just as we think about the employer business to provide maybe a little bit of commentary on our pipeline because I think it get some perspective on the conversations we're having.
Within our pipeline, we do have quite of bit of diversity. So there is some very large opportunities. Some smaller deals. The majority of what we see is complete and care guides. So the majority of the opportunities to include care guides.
And you have some of those opportunities and the.
The pipeline has actually come through transparency and coverage conversations so that's <unk>.
Ben another kind of contributing factor to the conversation.
So from a market perspective, we think we're in a growing market and uniquely positioned because of the high Tech high touch offering and I think that's reflected in what we see in the pipeline for the second half of the year.
Okay. That's helpful I'll jump back in the queue. Thanks.
<unk>.
Okay.
Your next question comes from the line of Charles range from Cowen Your line is open.
Yes. Thanks, I just wanted to follow up real quickly in terms of the second half for renewals.
What percent of of the.
<unk> is up for renewal.
It is left for.
For the renewed for the remainder of the year.
Yeah, Charles we had shared.
Entering the year that our renewable book for 2021 was about half of the renewal book for 2020, So we've got a little bit of a.
The favorable year.
And that about 70% of that was in the second half of the year. So that's kind of the.
I'd be thinking along.
Call. It 2 thirds of the renewals left to do we're pretty far along that path and have line of sight to certainly all of the large customers.
And renewal paper in front of all of them. So do feel good about where we are at this point in the year, but but have some meaningful renewals for the clear.
And then just on on those renewals of itself.
What percent of those are doing.
Any of those contain expansions to add share guys.
So like what kind of what percent of those renewals.
Are contemplating.
Expanded services. Thanks, Yes, absolutely I would give our customer success and sales team.
Lot of credit for introducing care guides to essentially every 1 of our customers over the last 6 to 9 months and where.
We're in conversations with the honestly.
About half of our customers about care guidance at varying stages.
A handful of the renewals on the second half of the year actively health care guidance contemplated as part of the renewal and expansion but.
But we do expect to see.
Several of care guidance up.
Upsells in the second half and more importantly expect to continue that cross sell tailwind into 2022 as well.
Great. So the on those renewals that have characterizing it that would.
That would lead to a <unk>.
Higher fourth where golden.
That's right so typically care guidance, when we're including it alongside Catholic complete.
The 30% to 40% uplift in the IRR when it happens at renewal there can be some netting out of.
The changes in the lives of the membership and then price negotiation, but yes. It would typically lead to an increase of expansion in IRR, which we then.
The benefit from in terms of that cross sell.
Okay, great. Thanks.
Okay.
Your next question comes from the line of Richard close.
Your line is open.
Thanks, I guess Charles from other tag team on today.
Okay.
What was the number.
On the uplift on IRR from Ed and care guidance did you say, 30% to 40%.
Yes, absolutely you guys are like synchronized swimmers of the Olympics.
True.
But that really raised or something but you are right. Its typically of 30% to 40% uplift in the contract value when we add care guides 2 of cash like complete customer relationship.
Okay. So let's say you have 1 of these renewals in the second half.
You're up so care guides, how do we think about that.
How quickly that can.
Be converted to revenue is that like.
January 1st.
Sort of lift off.
It's a good question on <unk> solution typically can be launched more quickly than the full of digital platform for our customer that's already live and so the kind of time needed is 6 to 8 weeks, but in terms of client strategy. They're typically at this point of the year going to be looking at 1.1 and so youre.
Correct that that and those conversations were most lately talking about 'twenty 2 revenue contribution.
Okay.
Helpful.
And then maybe back on the health plans.
The late stage I appreciate the the.
The.
Details what late stage is in terms of the selected.
How long do you think that takes to go from selected to the papers are signed.
And when would we think about like that of potentially.
And are beginning to contribute revenue.
Yes.
I'd say I'll speak broadly or generally about the health plan market. We've seen some of these move more quickly some of the move more slowly but once we are selected we then our into of contracting period on which is anywhere from kind of 6 weeks to 3 or 4 months, depending on the plan.
And then from that we are into an implementation period, which typically is on the order of about 12 months. If you think back to last year, we signed our relationship with Cigna.
August and launch them on 1.1 so that was the faster and risk.
We signed a relationship with Blue Cross Blue Shield of Alabama in December and we'll launch them in Q4, so a little bit closer to 12 months.
If we sign of plan. This year, we would typically be expecting that to be revenue contributing starting in the second half of 'twenty 2.
And full contribution in 'twenty 3.
That's very helpful.
Then can you just update us on the Sigma in terms of how that has gone and then maybe.
There.
Our dose view the.
<unk> on whether there's opportunities to expand and then maybe an update on the anthem on timeline finance them.
Sure I'm happy to start there so.
In the context of Cigna, So just to kind of refresh of where we began was transparency for their Taft Hartley clients with a 1.1 launch that we had on on time.
A really successful launch and are now in discussions with Cigna looking to expand the offering to additional groups.
So if you recall some of the details that wouldn't immediately contribute to revenue, but it's still I think a really positive signal about ex the expansion within the Taft Hartley business group.
And really the focus of the team is ensuring that we're engaging at the right levels throughout the segment organization.
The opportunities that we see around expansion is really both within Taft Hartley, but then of course product product expansion and then expansion and other SYGMA segment. So what I would say is that the launch was successful we have of happy clients and we are expanding to other Taft Hartley grips.
But of course in a broader expansion would really be looking at both the product as well as other segment expansion.
That's really where we are with cigna and as it relates to the anthem. We continue to have just honestly an incredibly positive relationship.
Really at every level of that organization.
And our conversations.
<unk> to be about really the evolution of the partnership.
We've had a number of conversations around other ways that we can partner and growth together and thats something that obviously I'm spending a lot of my time on so look for it to given an update on that at the at the right time.
Okay. That's helpful. And then just going back the signal in terms of expanding to additional groups.
<unk>.
Okay.
Is it because you signed a.
Contract for a set amount in terms of.
Why if you expanded within task there wouldn't be incremental revenue growth.
Yes, the thinking about the correctly the contracts for structure, we've aligned on with with health plans is for there to be kind of an initial tranche purchase.
So the of members of our group of members and so until all of those are used up there is no incremental revenue.
Okay.
We wouldn't be at that at that threshold as these new groups come on.
That makes sense thanks for.
Reminding me on.
Congratulations on the progress.
Thanks, Richard I appreciate the question.
Okay.
Again for anyone else, who wants to ask questions. You May press star 1 on your telephone keypad.
<unk>.
There are no questions at this time presenters. Please continue.
Great. Thank you all for joining us today, and we look forward to continuing the conversation have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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Good evening.
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