Q2 2021 Progyny Inc Earnings Call

August 5, 2021

[music].

Good afternoon, ladies and gentlemen, and welcome to the project, Inc. Second quarter 2021 earnings call on.

At this time all participants are on a listen only mode and the floor will be opened for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host James Hart, Sir the floor is yours.

Thank you Catherine and good afternoon, everyone and welcome to our second quarter Conference call with me today are David Schlanger, CEO of progeny, Peter <unk>, President and COO, and Mark Livingston, and CFO and we'll begin with some prepared remarks before we open the call for your questions.

Before we begin I'd like to remind you that today's call contains forward looking statements, including but not limited to statements about our financial outlook for both the third quarter and full year of 2021, and the impact of COVID-19, including variance on our business clients member activity and industry operations, our ability to acquire new clients and retain existing clients our market.

<unk> size and expectation of long term growth, our corporate governance plans business performance industry outlook financial outlook strategy future investment plans and objectives and other non historical statements. As further described in our press release that was issued this afternoon. These forward looking statements are subject to certain risks uncertainties and assumptions, including those related to <unk>.

Raj and his growth market opportunities and general economic and business conditions. We have based these forward looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business financial condition and results of operations. Although we believe these expectations are reasonable we undertake no obligation to.

Revise any statements to reflect changes that occur. After this call descriptions of these and other risks that could cause actual results to differ materially from these forward looking statements are discussed in our periodic and current reports filed with the SEC, including in the section entitled Risk factors and our most recent 10-Q.

During the call. We will also refer to non-GAAP financial measures such as adjusted EBITDA and adjusted EBITDA margin reconciliations with the most comparable GAAP measures are also available and the press release, which is available at investors day project and Dot Com I would now like to turn the call over to David. Thank you Jamie and thank you everyone for joining US today, we're pleased to report that we had.

Solid second quarter, reflecting not only our continued strong revenue growth and margin expansion, but more importantly, our further success in scaling the business growing our presence and the fertility industry and building long term value on our business. We believe 2021 will be another year, where we not only achieved exceptional client retention, but also deep and many of those.

Relationships through Upsells and expansions and in fact, a large number of our existing customers have already committed to service expansions for 2022, and while client retention is critically important to the growth of our business, so too with sales activity and our selling season is off to the strongest start we've ever seen at this point and the year as it relates to both new sales.

And up sell commitments. Additionally, we have built a strong pipeline of active opportunities and we are continuing to pursue over the remainder of this year selling season.

And we believe this positive momentum across many facets of our business demonstrates how progeny remains and its strongest ever competitive position that our market opportunity remains very robust and that all of the macro factors that have been contributing to our growth remains fully intact.

And then you've likely seen from our press release, we have slightly revised our outlook for the second half of the year to reflect a lower level and expected utilization for Q3 that began somewhat suddenly at the end of June with a drop in the pace of new appointment scheduling for July and August as compared to what we would normally have expected to see and <unk>.

I want to be clear that we don't believe that this is indicative of any macro change in behavior, and fact 90 plus percent of our members have been going through treatment as we would normally expect for a small percentage of members the uncertain and changing external environment appears to have caused a slight pause and their pursuit of treatment, it's difficult to gauge where.

This is associated with the summer vacation season, after 16 months and the pandemic or the impact of the Delta variant or both Fortunately, we're already starting to see indications and the most recent week that the pacing of appointment scheduling is returning to more typical levels and while we believe this is an anomaly that will be short term in nature.

We expect it to have a modest impact to near term results and we've adjusted our guidance Accordingly.

And while Mark will take you through the results in more detail here are a few of the highlights from our second quarter revenue and the quarter nearly doubled over the revenue and the quarter nearly doubled over the second quarter of last year to $128.7 million adjusted EBITDA of $18.5 million and the quarter reflected and nearly fivefold.

Increase and the second quarter, a year ago, and our margins continued to expand at a healthy rate art cycles more than doubled from the year ago period to a record 70.340 average members for the quarter grew more than 30% from the year ago period to $2.8 million showing the resilience of both our business and our clients during the worst of the <unk>.

Pandemic.

Another highlight during the second quarter was the CDC and the society for assisted reproductive technology, releasing their latest fertility data, which affirmed 2 things first our outcomes continued to significantly outperform the national averages as they have done each year over the past 5 years and second our outcomes have.

To improve each year, while the national averages have stayed largely the same over those 5 years from the.

A lack of improvement and the National average is really underscores not only how differentiated the projecting approach to managing fertility is as compared to the rest of the industry, but also how difficult. It is for a competitor to replicate our approach otherwise, we would see their improvements reflected and better outcomes and.

Unlike progeny, both the traditional carriers and the new entrants and our space are struggling to demonstrate their value as they are unable to either impact or measure the outcomes for their members due to their benefit design member support and network models. We are exceptionally proud that <unk> is the only company with a 5 year history and achieving proven.

And at outcomes over thousands of patients that far exceed the nascent national averages with over 60000 completed art cycles since the launch of our benefit in 2016, and we believe the outcomes are the best measure of the value of our fertility solution.

From the employer's perspective, better outcomes result in better financial value happier employees and higher retention to illustrate this project. These live birth rate is now 25% better than the national average, reflecting our success not only getting people pregnant more quickly, but also on a healthier way that results in significant.

Fewer miscarriages.

Consequently, the typical project and client will have to fund significantly fewer rounds of treatment across their member population than they would under a competitive solution when.

And when you add and the value of the medical cost avoidance from fewer multiple births. The project benefit provides meaningful financial savings both in terms of medical and pharmacy cost as well as include improved employee productivity and we do so while also creating an experience where each member feels educated supported and cared for throughout their journey.

The combination of our superior outcomes and the exceptional experience. We deliver has also allowed us to consistently achieve and industry, leading NPS score from our members, which now stands at its highest level ever.

This high level of member satisfaction as well as our leading clinical outcomes provide the foundation upon which we have continued to build the company's scale and industry presence to talk about the progress we made and the second quarter from a sales and client perspective, I'll now turn the call over to Pete.

Thanks, David Good afternoon, everyone.

Each selling season, we focused on 3 areas first expanding our market share through the acquisition of new clients second retaining the clients. We already have with an emphasis on whatever clients are coming up for renewal that year and third expanding our relationships with our existing clients through up sales and walk you through what we've seen and each of these areas over the past quarter.

Starting with new client acquisition as a reminder, we began the year hearing that consultants and benefit buyers were looking for 2021 to be a more normal year for them and 2020 was in terms of their ability to evaluate new benefits and make changes to their health plans.

And while that early sentiment was encouraging ultimately the best barometer and measure the progress of the season and sales commitments and on that measure we've seen that demand. Among prospective accounts has returned to pre COVID-19 levels. The second and third quarter are the heart of any selling season for us with significant and activity as our sales team actively manages the opportunities that are in different stages and the.

Pipeline and typically this involves helping potential clients understand and detail how the project and the benefit works and how our superior outcomes translate into not only significant financial savings from the company, but also higher workforce productivity and employee satisfaction.

As a result, we've historically seen and the majority of client decisions are made at the tail end of the summer early fall and while a certain number of commitments have always come in during the second quarter. The commitments. We have received to date or the most we've ever received as at this point and the season and well beyond what we expected to see at this point and the year and it's.

Is impossible to know whether some of this is because of certain embedded and managers simply choose them to commit to us earlier than they normally would particularly since many of those early commitments have come from the not now accounts that had deferred a decision from the prior season and they were well primed to make a decision and somewhat earlier. This season. Nevertheless, we believe the record level of commitment.

And we've received a day is a strong indication that prospector and a much better position to make decisions. This year as compared to 2020 and that the demand from utility and family building benefits continues to growth.

And every sales season, our goal is to grow the absolute number of new clients and covered lives from what we achieved and the prior season, given how COVID-19 affected companies decision, making last year, we're looking to 2019 as the baseline from which want to meet our growth goals. This year.

And with the early results we have achieved thus far we believe that we're on track and returned to historic trajectory of sequential growth and new clients and new covered lives that we had been on prior to Covid.

Turning now to renewal activity and addition to the excellent start we've had to our selling season on.

Client retention continues to be exceptional.

In fact, a number of clients, whose agreements were up for renewal this year, including some of our largest and longest tenured accounts agreed to contract renewals during the quarter..1 of our guiding principles is that we have to earn on renewals every day and this influences every interaction that we have with clients and members. We recognize the signing of new client can often be based on the promise of what.

You say you can do but the renewal is going to be based on the reality of what you've been able to achieve for them.

We believe the high retention rate, we have historically achieved and there were no activity we've seen amongst our largest clients continues to affirm that we're helping our clients achieve their goals specifically, we are lowering their cost and an area of critical importance to their targeted workforce, while also providing a superior experience and better results the employees seeking care.

Sure.

In addition to the renewal activity and other important indication and the value we provide to our clients can be measured through their appetite to expand their product and relationship either by enhancing their coverage with additional smart cycles, but adding additional services such as projecting rx or by including employee populations that may not have had access to projecting and the path and.

As 1 final data point and the momentum we're seeing and the market. We're pleased to report that we've seen healthy upsell demand and have already achieved our sales target for up sales. This year, although there are still upsell opportunities and our pipeline for 2022, the majority of upsell commitments to generally occur early and our sales here the new sales activity.

Turning now to utilization, although we can't control utilization, we're able to look at each client and consider a number of factors to model a range of expected utilization that and the aggregate is proven to be highly accurate over a prolonged period of time.

And while utilization and the second quarter.

Was within the range of what we expected as the third quarter began we saw a sudden change and member behavior that resulted in lower scheduled volumes for initial consoles and treatment cycles.

We've spoken to some of the our largest network partners, who confirm that Theyre also seeing softer volumes with their non project patients as well.

While we can't know for sure and what drove this change given that we're not able to speak to people who don't pursue treatment. We believe it's not a coincidence that this change of behavior began around the end of June which is when many states across the country reopened and relax restrictions put in place because of Covid with so many people across the country, having been unable or uncomfortable traveling and visiting their fab.

He has over the past 15 months, we believe that there was a pent up demand among a portion of our members to resume these activities such that this became an immediate priority and the short term and consequently chosen to defer their pursuit and treatment.

And there may also be some impact due to the delta variant surged and some areas of the country.

However, as David discussed, we don't see this as being a new macro trend because we're already seeing indications that the pacing of appointment volumes is returning to normal and while this recent activity may have a short term impact to our results. We view this largely as an anomaly that should correct itself and relatively short order.

Let me now turn the call over to Mark to talk about the results for this quarter Mark. Thank you Pete and good afternoon, everyone I'll start by walking you through the second quarter results and then provide our expectations for the third quarter and the full year.

Revenue grew 99% over the second quarter last year to $128.7 million our growth was primarily due to higher number of clients and covered lives as compared to a year ago, though as previously reported revenue and the prior year period was negatively impacted by the lower utilization that resulted from the short term closure and fertility <unk>.

At the onset of the pandemic.

Looking at the components of the topline both medical and pharmacy revenue doubled over the second quarter last year with medical revenue growing to $92.3 million and pharmacy, increasing to $36.4 million.

We had 182 clients as of June 30, representing an average of $2.8 million covered lives during the quarter. This compared to 134 clients and an average of $2.1 million covered lives and the second quarter last year, reflecting growth of approximately 31% and lives over the past year.

Turning now to our utilization metrics. There were 7340 art cycles performed during the second quarter. This was more than double the number of cycles from the second quarter last year and reflects our highest ever quarterly total.

The female utilization rate this quarter, which as a reminder is a component of utilization that corresponds most closely to our financial results was 4.7% this compared to 3.2% and a year ago, though the utilization rate at that time was negatively impacted by the temporary disruption and fertility care related to the.

Nick.

Although utilization rates will vary from quarter to quarter due to a number of factors our second quarter utilization was equal to with what we saw in the first quarter of this year.

Turning now to our margins and operating expenses. In addition to the factors I'll highlight in a moment I'll remind you that our margins and operating expenses as a percentage of revenue and the second quarter of 2020 were negatively impacted by our decision to keep all of the project workforce intact, even with the pause and treatments at that time due to.

The onset of the pandemic.

Gross profit more than doubled from the second quarter last year to $29.6 million, reflecting a 23% gross margin and an increase of 450 basis points from the year ago period.

This increase is due to the favorable impact of the previously disclosed new terms with our pharmacy program partners. The ongoing regular contract renewals with our providers and the efficiencies that we continue to realize across our care management service teams.

Yes, as compared to a year ago, primarily reflects the margin improvements I've just described as well as the tax benefit of approximately 7 per share, which includes the favorable impact of deductions associated with equity compensation activity.

Turning now to our cash flow and balance sheet operating cash during the quarter used during the quarter was 7 and $5 million. This compares to cash provided a 2.2 and the million dollars million dollars and a year ago period the.

The year over year difference is primarily attributable to the short term use of working capital. We described to you last quarter, and which relates to a change and the timing of payments, we receive under the new pharmacy partner arrangements the payments owed to us Ah reflected in the balance sheet as accounts receivable and are also the primary contributor to the increase and.

R as.

As compared to the first quarter.

We continue to expect that are operating cash flow will normalize by the third quarter.

As of June 30th we had total working capital of nearly $140 million, reflecting $94 million in cash cash equivalents and marketable marketable securities and no debt.

Secondly, as it relates to our selling season at this point and the season. We are ahead of where we thought we would be for sales commitments from launch dates in 2022, which includes a strong conversion rate of the not now deferred accounts from previous seasons, where all time also having good upsell success within the existing base and a continued high level of renewal active.

<unk>, including from our largest clients. In addition, we have a strong pipeline of active opportunities that we continue to pursue.

With the sales commitments, we have received to date from new client launches and upsell starting in January 2020.

2022, as well as our expectations of what we believe we should be able to close from the active sales pipeline over the remainder of the season using historic close rates as we look into 2022, we are comfortable that we can continue to achieve a comparable rate of revenue growth as to what we expect to achieve and 2021 with that.

We'd like to open the call up for your questions. Operator can you. Please provide the instructions.

Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star 1 on your phone now we ask that you and your question you. Please pickup your handset if a fan speaker phone to provide upfront and sound quality. Please.

Please hold them on the line for questions.

Your first question is coming from and Samuel with Jpmorgan.

Your line is live.

Guys. Thanks, so much for taking the question.

Hoping maybe you could provide a little bit more color on utilization.

And is it you said it rebound as it kind of back to where it was pre June drop.

And and is your thought that maybe some of those if those are new appointments were deferred while people go on vacation do you think that those are able to recover on the back half of the year. Thanks.

Yes.

So it's rebounding its not rebounded yet so just to give you some clarity.

As we were entering the quarter exiting.

Q2.

And we were basically on pace to what we would've expected and then we dropped.

Scheduling pacing dropped significantly relative to what we would expected.

And that's been recovering its not recovered yet and because we do believe it is related to the activity that we talked about in terms of pent up demand for people to just basically get out of the house get on vacation and get to see their family et cetera, and because it's already rebounding, including the early scheduling thats happening for for September.

We do believe it's going to rebound we're not sure if it's going to fully rebound, which is why our guidance doesn't reflect while we adjusted the overall guidance and for the year down to $5.30, but we do believe it's going to rebound somewhat.

That's that's really helpful. And then maybe just a question around the selling season and your conversations.

Are you finding that you're speaking to more clients that don't have fertility benefits or maybe starting to look to add more fertility benefits or is it is it still a similar mix as you've seen and in prior years and your your conversations are taking away from those with existing benefits.

We've historically about 2 thirds of our new new clients and had some level of benefit in the past, although as we've spoken about in the past any debt that the level of benefit varies pretty dramatically so and about a third of had really no coverage at all those trends are largely intact. This year also where.

Theres a large a large group of accounts that we're bringing on and that had coverage before but it's certainly not insignificant minority that have had no coverage before so that continues.

Takeaways from the carriers are really important source of business, but companies that have not provided coverage before continue to be a strong source of business also and thats consistent with many of the industry trends. We've all been seeing that the percentage of employers that are offer and coverage continues to grow every year and the.

The other thing and that's also happening which has happened and the path is when existing companies that have fertility benefit today take on the project benefit usually they're expanding what they're offering to their employees versus what they've been doing under a dollar Max plan and Thats also been.

Consistent.

Current sales activity and those companies that are purchasing that do have the benefit that's happening this year as well.

Great very helpful. Thank you.

Your next question is coming from Michael Cherny.

Your line is live.

Good afternoon, thanks for taking the question.

Diving, a little bit on the revenue side and I know, there's probably some.

Randomness to this but it looked like revenue per art cycle.

So pretty meaningfully.

And I'm doing my math correctly up 1 and change percent last quarter down 8 and <unk> down, 7% skew up $1, 6 and <unk> last year and.

Great thing any rhyme or reason to that is any of that tie into the dynamics you saw around utilization and maybe how utilization was used in terms of how broad or how deep each of the art cycles that was recorded was.

Yes, there is it is always mix, primarily and and the mix.

The medical revenue and total is and only from the art cycles as a simple example, and so to the extent that you have a different level of mix.

Mix in dollars.

And they will show up and utilization for those starting on treatment and gaining initial council that's going to drive it.

A different level of revenue part cycle versus periods, where you don't so if you look at.

If you look at the change year over year for example, and revenue for our cycle you see a drop this year and Q2 versus last year that drop is and any fundamental change in pricing or anything like that is really just a function of the fact that a year ago. If you remember during COVID-19 there were a lot more folks just doing initial comps.

And Q2 and not going on to treatment as a mix and so the overall medical revenue divided by art cycles looked higher versus this year you are back to more normal activity in terms of mix, so and that does fluctuate each quarter.

Q1 is generally every year, even normal years, the highest percentage of initial consults, which again what sort of drive that number appears to be higher and then it's going to drop sequentially.

Got it.

Just another question you had a pretty nice.

Sense on where you see utilization of activity versus Normalised levels would fall based on the low and and high end of the ranch.

Yep Yep. So so I'll do Q3, and then 4 year Q3 at the at the low and high of the range hazardous at either down 5% of what we expected or set a different way 95 per cent of what we're expecting is happening and at the <unk>.

<unk>, 11.5% put that in perspective, we're currently at roughly 10% down.

<unk>, but had been improving we were down further as we had talked about and our comments earlier and in the month and and it's turning around and so the expectation is that we believe because of the reason that we said and it's gonna keep turn it around but nonetheless, those are assumptions for the full year, where where on the high down roughly 2%.

And on the low roughly 5 and 5% for.

For the full year in terms of our revised guidance again.

No exactly what's going to happen and whether or not and all that could come back, but that's our view right now based on where we're at in terms of scheduled the appointment for Q3.

Perfect. Thanks.

Your next question is coming from Stephanie Davis with STP Merit.

And your line and 5.

Hold on thank you for taking my question.

I stepped on Earth.

I was hoping you guys give us some color on it and it sounds easy on me.

Frame it and the context prior year's salary Ethan.

Traditional and you've only tie kind of stick with $20 million step up from 14 to 1 to you but gave it and this is 2022 lamp and client cohort.

Should we think of that as far too low as we get into the out years.

The easiest way probably to think about well are we talking about 2022 are we talking about we're not talking about were not getting any commentary for years beyond and that's what we talking about out years, we did make a comment relative to our expectations for 2022 growth versus.

Full year guide and 2021 growth as compared to 2020.

And based on our view right now in terms of early commitments that we've already gone and new sales activity as well as the upscale activity that I talked about and that's been favorable our view is that 2022 to see comparable revenue growth off of 2021 full year guidance.

As 2021 full year guidance implies growth off of 2020 actuals.

And when I think about that kind of similar growth is that assuming that utilization is flat or is there any assumption that you're.

<unk> hotmail com or disruption become a baby boom and you get 1 line on lies environment.

Which is why we're able to comfortable making the comments that we are around potential 2022 growth.

That's helpful. Thank you guys.

Your next question is coming from Ralph Giacobbe with Citibank.

Your line is live.

Great. Thanks, I guess first 1 just anything you can tell from a geographic perspective on markets and in more or less impacted from the lower schedule on.

Yes.

Specific market data is actually confusing so so in markets for example that are having.

They are getting hit harder by the Delta variant right. There is some of those markets, although smaller from a book of business, but nonetheless, they are actually up a little bit right.

However, other markets that are also getting hit are down and they're the ones that are sort of dragging down. The overall results. There are some of our bigger markets.

So.

And as we look at market by market.

The country, including our largest markets, it's not consistent and.

And.

And Thats, what sort of makes the whole thing difficult, but the 1 thing that is consistent and that generally across the book of business scheduled and pacing is down and.

And as a result, because the drop sort of occurred pretty much across the board across markets and compete.

<unk> to be what we believe which is just sort of short term activity related to literally people getting out of the house and deferring for a short period of time any treatment decisions are going to make and thats whats impacting our visibility into what we're seeing currently and unfortunately, as we've talked about and the path that visibility and <unk>.

Hello, and yet because people again, only generally schedule out about a month or so out right and.

So that's the activity that we're looking at and the turn of that actually first the planning and sort of not worsening of that activity and then.

The.

Positive activity in terms of schedule and pacing that we're seeing now and the most recent week or so and so that's what's giving us opt.

Optimism that it's a very short term anomaly for the reasons that we said both the fact that it dropped dramatically and we generally don't see that.

As well as the fact that it seems to be already recovering.

Combined with our conversations with our largest clinics in terms of what they're seeing and their book of business and so it's sort of a collective view that gives us. The view that says we think it's an anomaly and just to remind you.

Our.

And so and our expectations as I commented on the private question for the.

For the quarter at the midpoint for Q3 is 8% down and.

And if the improvement continues hopefully.

Will be either at or above the high and but but who knows right now it's too short term in terms of the improvement and when it started versus the the date of this call.

Okay, Alright, fair enough and 1 more if I could I could squeeze and and I just Wanna.

I think the math and straightforward, but just figured out and ask the 20th 2 revenue growth in line with 2021, I think that's about a 50% increase and at the mid point just wanted to confirm that we're looking at the right numbers and the mid point off of the current guide would suggest about 780 million of revenue for next year.

And yeah, you're right that it's off the midpoint around 50% and comparable would be around that that's right.

Okay, alright, great. Thanks very much.

Thank you. This concludes the Q&A portion of today's call I would now like to try and we're back to James Heart for closing remarks.

Thank you Catherine and thank you everyone for joining us today.

Free to reach out for any follow ups, otherwise, we look forward to speaking with you next quarter.

Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.

[noise].

[music].

Good afternoon, ladies and gentlemen, and welcome to the progeny, Inc. Second quarter 2021 and earnings call.

At this time all participants are on a listen only mode and the floor will be opened for your questions and comments. Following the presentation. It is now my pleasure to turn the floor over to your host James Hart.

<unk> the floor is yours.

Thank you Catherine and good afternoon, everyone and welcome to our second quarter Conference call with me today are David Schlanger, CEO of progeny, Peter <unk>, President and COO, and Mark Livingston, and CFO and will begin with some prepared remarks before we open the call for your questions before we begin I'd like to remind you that today's call contains forward looking statements, including but not limited.

2 statements about our financial outlook for both the third quarter and full year of 2021, and the impact of COVID-19, including variance on our business clients member activity and industry operations, our ability to acquire new clients and retain existing clients our market opportunity size and expectation of long term growth our corporate governance plans.

Business performance industry outlook financial outlook strategy future investment plans and objectives and other non historical statements. As further described in our press release that was issued this afternoon. These forward looking statements are subject to certain risks uncertainties and assumptions, including those related to project as growth market opportunities and general economic and business conditions.

We are based on forward looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business financial condition and results of operations. Although we believe these expectations are reasonable and we undertake no obligation to revise any statements to reflect changes that occur. After this call descriptions of these and.

Other risks that could cause actual results to differ materially from these forward looking statements are discussed in our periodic and current reports filed with the SEC, including in the section entitled Risk factors and our most recent 10-Q.

During the call. We will also refer to non-GAAP financial measures such as adjusted EBITDA and adjusted EBITDA margin reconciliations with the most comparable GAAP measures are also available and the press release, which is available at investors day project <unk> Dot Com I would now like to turn the call over to David. Thank you Jamie and thank you everyone for joining US today, we're pleased to report that we had.

Our solid second quarter, reflecting not only our continued strong revenue growth and margin expansion, but more importantly, our further success in scaling the business growing our presence and the fertility industry and building long term value on our business. We believe 2021 will be another year, where we not only achieved exceptional client retention, but also deepened many of them.

Is it relationships through Upsells and expansions and in fact, a large number of our existing customers have already committed to service expansions for 2022 and.

And while client retention is critically important to the growth of our business so to sales activity and our selling season is off to the strongest start we've ever seen at this point and the year as it relates to both new sales and upsell commitments. Additionally, we have built a strong pipeline of active opportunities and we are continuing to pursue over the remainder of this year selling season.

And.

We believe this positive momentum across many facets of our business demonstrates that <unk> remains in its strongest ever competitive position that our market opportunity remains very robust and that all of the macro factors that have been contributing to our growth remain fully intact.

You have likely seen from our press release, we have slightly revised our outlook for the second half of the year to reflect a lower level and expected utilization for Q3 that began somewhat suddenly at the end of June with a drop in the pace of new appointment scheduling for July and August as compared to what we would normally have expected to see.

Whether this is associated with the summer vacation season, after 16 months and the pandemic or the impact of the Delta variant or bus. Fortunately, we're already starting to see indications and the most recent week that the pacing of appointment scheduling is returning to more typical levels and while we believe this is an anomaly that will be short term in nature.

We expect it to have a modest impact and near term results and we've adjusted our guidance Accordingly.

While Mark will take you through the results in more detail here are a few of the highlights from our second quarter revenue and the quarter nearly doubled over the revenue and the quarter nearly doubled over the second quarter of last year to $128.7 million adjusted EBITDA of $18.5 million and the quarter reflected and nearly fivefold.

Increase and the second quarter, a year ago, and our margins continue to expand at a healthy rate art cycles more than doubled from the year ago period to a record 70.340.

Average members for the quarter grew more than 30% from the year ago period to $2.8 million showing the resilience of both our business and our clients during the worst of the pandemic.

Continued to improve each year, while the national average is have stayed largely the same over those 5 years.

But the lack of improvement and the National average is really underscores not only how differentiated the projecting approach to managing fertility is as compared to the rest of the industry, but also how difficult. It is for our competitors to replicate our approach otherwise we would see their improvements reflected and better outcomes. Unlike progeny, both the traditional carriers and the.

New entrants and our space are struggling to demonstrate their value as they are unable to either impact or measure the outcomes for their members due to their benefit design member support and network models. We are exceptionally proud of the project and is the only company with a 5 year history of achieving proven documented outcomes over thousands of patients that.

Far exceed the nascent national averages with over 60000 completed art cycles since the launch of our benefit in 2016, and we believe the outcomes are the best measure of the value of our fertility solution from.

And from the employer's perspective, better outcomes result in better financial value happier employees and higher retention to illustrate this project. These live birth rate is now 25% better than the national average, reflecting our success not only getting people pregnant more quickly, but also on a healthier way that results in significantly.

Fewer miscarriages.

Consequently, the typical project and client and we'll have to fund significantly fewer rounds of treatment across their member population than they would under a competitive solution.

When you add and the value on the medical cost avoidance from fewer multiple births. The project benefit provides ample financial savings both in terms of medical and pharmacy cost as well as include improved employee productivity and we do so while also creating an experience where each member feels educated supported and care for throughout their journey.

This high level of member satisfaction as well as our leading clinical outcomes provide the foundation upon which we have continued to build the company's scale and industry presence to talk about the progress we've made and the second quarter from a sales and client perspective, I'll now turn the call over to Pete.

Thanks, David Good afternoon, everyone.

Starting with new client acquisition as a reminder, we began the year hearing that consultants and benefits of buyers and we're looking for 2021 to be a more normal year for them. In 2020 was in terms of their ability to evaluate new benefits and make changes to their health plans.

And third quarter are the heart of any selling season for us with significant and activity as our sales team actively manages the opportunities that are in different stages and the pipeline. Typically this involves helping potential clients understand and detail how the project and the benefit works and how our superior outcomes translate into not only significant financial savings from.

The company, but also higher workforce productivity and employee satisfaction.

As a result, we've historically seen and the majority of client decisions are made at the tail end of the summer early fall and while a certain number of commitments have always come in during the second quarter. The commitments. We have received to date or the most we've ever received and at this point and the season and well beyond what we expected to see at this point and the year.

And it's impossible to know whether some of this is because of certain embedded and managers simply choose them to commit to us earlier than they normally would particularly since many of those early commitments have come from the non now accounts that had deferred a decision from the prior season and they were well primed to make a decision somewhat earlier. This season. Nevertheless, we believe the record level of.

The commitments that we've received to date is a strong indication of prospects and a much better position to make decisions this year as compared to 2020 and at the <unk>.

And from utility and family building benefits continues to growth.

And every sales season, and our goal is to grow the absolute number of new clients and covered lives from what we achieved and the prior season, given how COVID-19 affected companies decision, making last year, we're looking to 2019 as the baseline from which want to meet our growth goals this year and.

And with the early results we've achieved thus far we believe that we're on track and returned to historic trajectory of sequential growth and new clients and new covered lives that we had been on prior to Covid.

Turning now to renewal activity and addition to the excellent start we've had to our selling season.

Our client retention continues to be exceptional.

And in fact, a number of clients, whose agreements were up for renewal this year, including some of our largest and longest tenured accounts agreed to contract renewals during the quarter..1 of our guiding principles is that we have to earn on renewals every day and this influences every interaction that we have with clients and members. We recognize the signing of new client can often be based on the promise of <unk>.

What you say you can do but the renewal is going to be based on the reality of what you've been able to achieve for them.

We believe the high retention rate, we have historically achieved and there were no activity we've seen amongst our largest clients continues to affirm that we're helping our clients achieve their goals specifically, we're lowering their cost and an area of critical importance to their targeted workforce, while also providing a superior experience and better results the employees seeking.

Care.

In addition to the renewal activity and another important indication and the value we provide to our clients can be measured through their appetite to expand their product and relationship either by enhancing their coverage with additional smart cycles, but adding additional services such as projecting rx or by including employee populations that may not have had access to projecting and the path.

And there's 1 final data point and the momentum we're seeing and the market. We're pleased to report that we have seen healthy upsell demand and have already achieved our sales target for up sales. This year, although there is still upsell opportunities and our pipeline for 2022, the majority of upsell commitments to generally occur early in the sales here are the.

And new sales activity.

Turning now to utilization, although we can't control utilization, we're able to look at each client and consider a number of factors tomatoe a range of expected utilization that and the aggregate is proven to be highly accurate over a prolonged period of time.

While utilization and the second quarter with debt.

And was within the range of what we expected as the third quarter began we saw a sudden change and member behavior that resulted in lower scheduled volume for initial counsels and treatment cycles.

We've spoken to some of our largest network partners, who confirm that Theyre also seeing softer volumes with their non project and patients as well.

While we can't know for sure and what drove this change given that we're not able to speak to people who don't pursue treatment. We believe it's not a coincidence that this change in behavior began around the end of June which is when many states across the country reopened and relax restrictions put in place because of Covid with so many people across the country, having been unable or uncomfortable traveling and visiting their fab.

And lease over the past 16 months, we believe that there was a pent up demand among a portion of our members to resume these activities such that this became an immediate priority and the short term and consequently chosen to defer their pursuit and treatment.

May also be some impact due to the delta variant and surge and some areas of the country.

However, as David discussed, we don't see this as being a new macro trends because we're already seeing indications that the pacing of appointment volumes returning to normal and while there is.

Recent activity May have a short term impact to our results. We view this largely as an anomaly that should correct itself and relatively short order.

Let me now turn the call over to Mark to talk about the results for this quarter Mark.

Thank you Pete and good afternoon, everyone.

And by walking you through the second quarter results and then provide our expectations for the third quarter and the full year.

At the onset of the pandemic.

And the female utilization rate this quarter, which as a reminder is a component of utilization that corresponds most closely to our financial results with 4.7% this compared to 3.2% a year ago, though the utilization rate at that time was negatively impacted by the temporary disruption and fertility care related to the pandemic.

<unk>.

Although utilization rates will vary from quarter to quarter due to a number of factors our second quarter utilization was equal to with what we saw in the first quarter of this year.

Turning now to our margins and operating expenses. In addition to the factors I'll highlight in a moment I'll remind you that our margins and operating expenses as a percentage of revenue and the second quarter of 2020 were negatively impacted by our decision to keep all of the project any workforce intact, even with the pause and treatments at that time due to.

And the onset of the pandemic.

Gross profit more than doubled from the second quarter last year to $29.6 million, reflecting a 23% gross margin and an increase of 450 basis points from the year ago period.

Sales and marketing expense was 3.1% of revenue and the second quarter, reflecting a 250 basis point improvement from the year ago period.

And the leverage we are achieving and sales and marketing reflects not only our improving scale, but also the benefits of our high client retention rate given that our acquisition costs are largely borne and the first year or so after a new client launches with progeny.

G&A costs were 10, 8% of revenue this quarter as compared to 14, 6% and the year ago period, as we continue to realize efficiencies across our administrative functions as we grow the business.

With the across the board improvements and our cost structure adjusted EBITDA increased nearly fivefold during the second quarter from $3.8 million a year ago to $18.5 million this quarter.

Our adjusted EBITDA margin of 14, 4% reflected a modest increase from the first quarter of this year and and 850 basis point improvement from the year ago period.

Adjusted EBITDA margin on incremental revenue and the quarter was 22, 9%. We continue to believe that margin on incremental revenue is useful as a forward indicator for where the business is capable of moving and it highlights our expanding rate of margin capture on new revenue.

Net income was $18.7 million and the second quarter and <unk> 19 per share this compared to a net loss of $1.1 million or <unk> <unk> per share and the year ago period.

The higher income and EPS as compared to a year ago, primarily reflects the margin improvements I've just described as well as a tax benefit of approximately 7 per share which includes the favorable impact of deductions associated with equity compensation activity.

Turning now to our cash flow and balance sheet operating cash during the quarter used during the quarter was $7.5 million. This compares to cash provided of $2, 2 and the $1 million and the year ago period.

The year over year difference is primarily attributable to the short term use of working capital. We described to you last quarter, and which relates to a change and the timing of payments, we received under the new pharmacy partner arrangements and the payments owed to us are reflected in the balance sheet as accounts receivable and are also the primary contributor to the increase and.

As compared to the first quarter.

We continue to expect that our operating cash flows will normalize by the third quarter.

As of June 30, we had total working capital of nearly $140 million, reflecting $94 million and cash cash equivalents in marketable and marketable securities and no debt.

Now turning to our expectations for the third quarter and the full year 2021 to reflect a slight reduction and utilization that we've seen as of the start of the quarter. We are projecting third quarter revenue of between $121 million to $130 million representing growth of between 22% and 31%.

The prior year period.

For adjusted EBITDA, we expect between 14 million to $16.5 million along with net income between $3.1 million to $6.7 million or between <unk> and <unk> <unk> earnings per share on the base of basis of approximately 101 million fully diluted shares.

For the full year, we now expect revenue of $510 million to $530 million.

Reflecting growth of between 48% and 54% over the prior year period on this basis. We now expect adjusted EBITDA of between $67.5 million to $72.5 million and net income of between $43.2 million to $50.4 million or between <unk> 43, and <unk> 50.

Earnings per share based on approximately 101 billion fully diluted shares.

As a reminder, our net income ranges for both the quarter and the year do not reflect estimates for discrete income tax items, including the income tax impact related to equity compensation activity.

At the midpoint of this guidance, we expect to see continued expansion of our margins in 2021 with adjusted EBITDA margin on incremental revenue of 21, 5% let.

And let me now turn the call back over to David for some closing remarks, thanks Mark.

Conclude we are pleased with both our results this quarter as well as the progress that we've made and the execution of our strategic initiatives, particularly as it relates to our selling season at this point and the season. We are ahead of where we thought we would be for sales commitments from launch dates in 2022, which includes a strong conversion rate of the not now deferred accounts from <unk>.

Previous seasons, we are also having good upsell success within the existing base and a continued high level of renewal activity, including from our largest clients. In addition, we have a strong pipeline of active opportunities that we continue to pursue.

With the sales commitments, we have received to date from new client launches and upsell starting January 2020.

2022, as well as our expectations and what we believe we should be able to close from the active sales pipeline over the remainder of the season using historic close rates as we look into 2022, we are comfortable that we can continue to achieve a comparable rate of revenue growth as to what we expect to achieve and 2021 with that.

We'd like to open the call up for your questions. Operator can you. Please provide the instructions.

Certainly from ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star 1 on your phone now we ask that and your question and please pickup your handset amplify on speaker phone to provide outflow and sound quality. Please hold them on monthly for questions.

Your first question is coming from and Samuel with Jpmorgan.

Your line is live.

Guys. Thanks, so much for taking the question.

And I was hoping maybe you could provide a little bit more color on utilization.

Is it you said it rebound as it kind of back to where it was pre June drop.

And is your thought that maybe some of those if those are new appointments were deferred while people go on vacation do you think that those are able to recover on the back half of the year.

Yes.

So it is rebounding its not rebounded yet so just to give you some clarity.

As we were entering the quarter or exiting.

Q2.

And we were basically on pace to what we would've expected and then we dropped.

Scheduling pacing dropped significantly relative to what we would expected.

And that's been recovering and has not recovered yet and because we do believe it is related to the activity that we talked about in terms of pent up demand for people to just basically get out of the house get on vacation and get to see their family et cetera, and because it's already rebounding, including the early scheduling thats happening for for September.

We do believe it's going to rebound we're not sure if it's going to fully rebound, which is why our guidance doesn't reflect while we adjusted the overall guidance and for the year down and $5.30, but we do believe it's going to rebound somewhat.

That's really helpful. And then maybe just a question around the selling season in your conversations are you finding that you're speaking to more clients that don't have fertility benefits from maybe starting to look to add more fertility benefits or is it is it still a similar mix as you've seen and in prior years and your conversations are taking.

And from those existing benefits.

We've historically about 2 thirds of our new new clients have had some level of benefit in the past, although as we've spoken about in the past any debt that the level of benefit varies pretty dramatically so and about a third of had really no coverage at all those trends are largely intact. This year also where.

Theres a large a large group of accounts that we're bringing on and had coverage before but certainly not insignificant minority that have had no coverage before so that continues.

Takeaways from the carriers are really important source of business, but companies that have now provided coverage before continue to be a strong source of business also and thats consistent with many of the industry trends. We've all been seeing that the percentage of employers that are offering coverage continues to grow every year and the other thing and that's also happening which has happened and the path is when existing.

And <unk> companies that have fertility benefit today take on the projected benefit usually they're expanding what they're offering to their employees versus what they've been doing under a dollar Max plan and Thats also been.

Consistent.

Current sales activity and those companies that are purchasing that do have the benefit that's happening this year as well.

Great very helpful. Thank you.

Your next question is coming from Michael Cherny.

Your line is live.

Good afternoon, thanks for taking the question.

Diving, a little bit on the revenue side and I know, there's probably some.

Randomness to this but it looked like revenue per art cycle.

Fell pretty meaningfully and.

And I'm doing my math correctly up 1 and change percent last quarter down $8, <unk> down, 7% skew up $1, 6 and <unk> last year and.

Yes, there is it is always mix, primarily and and the mix.

The medical revenue in total is and only from the art cycles as a simple example, and so to the extent that you have a different level of mix in dollars and.

And they will show up and utilization for those starting on treatment and chemo and initial council that's going to drive.

A different level of revenue for our cycle versus periods, where you don't and so if you look at.

If you look at the change year over year for example, and revenue part cycle you see a drop this year and Q2 versus last year that drop is and any fundamental change in pricing or anything like that is really just a function of the fact that a year ago. If you remember during COVID-19 there were a lot more folks just doing initial commvault.

And Q2 and not going on to treatment as a mix and so the overall medical revenue divided by our cycles looked higher versus this year you are back to more normal activity in terms of mix, so and that does fluctuate each quarter.

Q1 is generally every year, even normal years, the highest percentage of initial consults, which again would sort of drive that number appearing to be higher and then it's going to drop sequentially.

Got it.

Another question you had a pretty nice.

Sequential improvement in new members and the quarter, despite not adding.

My checkmate and customers and obviously thats still there.

Same store growth from your existing customers. Obviously, you have a number of customers that are still very much heavily and hiring sprees. As you think ahead to those growth rates for next year.

Are you expecting a normalized level more or less same store member growth versus what you had previously.

From everything that we're seeing we do expect normal level. So.

Last year I think we grew on the base over the year around 200000 lives off of the beginning of the year of around $2.1 million lives and round numbers right. So so something in that range plus or -1 percentage point is a normal activity in terms of growth.

And and we will see that what happened is unfortunately, the reporting that we get from clients isn't always perfect each quarter and we do our best to sort of make sure we get the most perfect reporting but the reality is that there is sometimes a lag in reporting so there is sometimes within a quarter versus the prior quarter a bit of a catch up and sort of true it up numbers with our clients.

The sequential growth isn't perfect.

Over just the quarter, but over the year I think is much more indicative of what's happening.

Got it and if I could just squeeze 1 more and when you think about the new revenue guidance range for this year and completely understand the variability that COVID-19 either for a number of reasons likely to be causing can you just give us a sense on where you see utilization and activity versus normalized levels would fall based on the low end and high and others.

Yep Yep, so so I'll do Q3, and then full year.

Q3 at a at the low and high and the range has and is that either.

Either down 5% of what we expected or said differently and 95% and what we're expecting is happening.

And at the low 11, 5% to put that in perspective, we're currently at roughly 10% down but had been improving we were down further as we had talked about on our comments earlier and in the month and is turning around and so the expectation is that we believe.

And we said, it's done and keep turning around but nonetheless, those are our assumptions for the full year, where we're.

On the high down roughly 2% and.

And on the LOE roughly 5.5% for.

And for the full year in terms of our revised guidance again.

No exactly what's going to happen and whether or not all of it could come back, but that's our view right now based on where we're at in terms of schedule the appointment for Q3.

Perfect. Thanks.

Your next question is coming from Stephanie Davis with STB Larry.

Your line is live.

Hey, guys. Thank you for taking my question.

Hi, Steph.

I was hoping you guys give us some color on the debt free.

Net and the context of prior years selling season.

Traditionally you've always had kind of a typical $20 million step up from 14 to 1 to you, but give it and this is 2020.2 ramp and client cohort.

Should we think of that as far too low as we get into the out years.

The easiest way probably to think about well what are we talking about 2022, and we're talking about we're not talking about we're not giving any commentary for years beyond that and we can talk about out years, we did make a comment relative to our expectations for 2022 growth versus <unk>.

Full year guidance 2021 growth as compared to 2020.

And based on our view right now in terms of early commitments and we've already gone and new sales activity as well as the upsell activity that I talked about that's been favorable.

Is that 2022.

To see comparable revenue growth off of 2021 and full year guidance.

As 2021 full year guidance implies growth off of 2020 actuals.

Yeah.

And when I think about that kind of similar growth is that assuming that utilization is flat or is there any assumption that you are.

Our high growth online disruption and become a baby as well.

And the line normalized environment.

It assumes normal utilization assumptions not hot.

Hot-draw summer utilization and Samsung.

Call it.

And you're just seeing as you are aware.

It assumes normal levels doesn't assume any catch up and and any other sort of pent up demand or anything.

And so.

And it assumes and so what it does if you remember the way we do it and it takes into account client by client industry by industry, our expectations for those clients. Obviously those that are booked so far and those that are and again, the upsell activity and client by client that activity rolled that out in terms of expectations from those clients.

And those industries and yield utilization result, and all of that is sort of factored in to the comment that we're making around expectations as we sit here right now for 2022 revenue flow.

And last 1 on just to think about the out year. If we didn't have all of the utilization disruption and the year, how should we think about the revenue range or India and missed opportunity that could be kind of back and a bolus.

Well the thing that we think about which is positive around sort of this activity put aside for a second.

As you know a little bit about BNET and utilization.

Activity.

Is the return to normal level of sales activity, both on the upsell side as well as on the new sales acquisition for new clients and.

I think that's sort of the most favorable trend that were seeing and.

And continue to see and and continue to be excited about in terms of remaining pipeline as we continue to.

Get through this sales here, but the early activity and early commitments certainly is positive relative to where we're at.

Which is why we're able to comfortable making the comment that we are around potential 2022 growth.

That's helpful. Thank you guys.

Your next question is coming from Ralph Giacobbe with Citibank.

Your line is live.

Great. Thanks I.

And I guess first 1 just anything you can tell from a geographic perspective on markets and in more or less impacted from the lower schedule.

Yes.

Specific market data is actually confusing so so in markets for example that are having.

They are getting hit harder by the Delta variant right. There is some of those markets, although smaller for our book of business, but nonetheless, they are actually up a little bit right.

Other markets that are also getting hit are down and they're the ones that are sort of dragging down. The overall result, there as some of our bigger markets. So as we look at market by market throughout the country.

<unk>, our largest markets its not consistent and.

And that's what sort of makes the whole thing difficult, but the 1 thing that is consistent and that generally across the book of business schedule and pacing is down and.

And as a result, because the drop sort of occurred pretty much across the board across markets and continue.

And you need to be what we believe which is just sort of short term activity related to literally people getting out of the house and deferring for a short period of time any treatment decisions and theyre going to make and Thats whats impacting our visibility into what we're seeing and currently and unfortunately, as we've talked about and the path that visibility and <unk>.

Limited, we have decent visibility pretty good visibility into our current month and a lot less visibility until next month, but it's generally about a 4 week or so visibility. So as a result, we can only look at what we see and and patterns and what we see and we look at it and then make our best educated guess.

Okay, Alright fair enough and then I guess historically, how often do you see abrupt changes in scheduling and this really sort of a 1 off time, obviously outside of the Covid period and.

And if I heard you right.

It sounded like it started and ended June or early July and and so it's been over a month now and it still hasn't recovered and if you could what's the magnitude of the change I guess I'm just struggling with just trying to size or think about how much lower scheduling is yes.

Yes, I think the I think the.

Let me answer the first question first it started literally so this is new in terms of this level of drop this quickly across the book of business.

And.

Like you said aside from put aside COVID-19.

And it happened literally the last week of June and into the first week of July and leveled off for like 3 weeks and is now improving.

So the level of it is is.

Roughly we're down now roughly 10% from what we would've expected, but it's gotten better and so the recent activities you might imagine because of just math and the recent activity has been real strong in terms of starting to recover but hasnt recovered fully yet because people again, only generally schedule out about a month or so out.

And so that's the activity that we're looking at and the turn of debt I take first the planning and sort of not worsening of that activity and then the.

On the.

Positive activity in terms of schedule and pacing that we're seeing now on the most recent week or so and so that's what's giving us optimism that it's a very short term anomaly for the reasons that we said both the fact that it dropped dramatically and we generally don't see that.

As well as the fact that it seems to be already recovering.

Combined with our conversations with our largest clinics in terms of what theyre seeing and their book of business and so it's sort of a collective view that gives us. The view that says we think it's an anomaly and and just to remind you our hour.

And so and our expectations as I had commented on the prior question for the.

And.

For the quarter at the midpoint for Q3, and 8% down and.

And if the improvement continues hopefully.

We will be either at or above the high end, but but who knows right now it's too short term in terms of the improvement and when it started versus the data on this call.

Okay, Alright, fair enough and 1 more if I could I could squeeze and and I just want to.

I think the math is straightforward, but just figured out and ask the 'twenty 2 revenue growth in line with 2021.

That's about a 50% increase at the midpoint just wanted to sort of confirm that we're looking at the right numbers and the midpoint off of the current guide would suggest about $780 million of revenue for next year.

Yes.

Right that it's off the midpoint around 50% and comparable would be around that that's right. Okay.

Okay, alright, great. Thanks very much.

Thank you. This concludes the Q&A portion of today's call I would now like to turn on the floor back to James Hart for closing remarks.

Thank you Catherine and thank you everyone for joining us today, obviously feel free to reach out for any follow ups otherwise we look forward to speaking with you next quarter.

And.

Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time on a wonderful day. Thank you for your participation.

Q2 2021 Progyny Inc Earnings Call

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