Q3 2021 Castlight Health Inc Earnings Call
Today's conference call will begin momentarily. Please continue to standby. Thank you for your patience.
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Good afternoon, and welcome to cast White Health's third quarter 2021 conference call.
Time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.
Good question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to.
I'll hand, the conference over to Sofia Golden. Please go ahead.
Leading today's call are nave or Meera, Chief Executive officer, and well Bonder on Chief Financial Officer, Nathan well after our prepared remarks, and then they will take question. They kind of like press release webcast link and other related materials are available on the Investor Relations section of Catholics website.
This call contains forward looking statements regarding trends strategies and anticipated performance of the Catholic business. These statements are made as of November 2nd 2021 reflect management's views and expectations at this time and are subject to various risks uncertainties and assumptions.
Please refer to today's press release and the risk factors included in the company's filings with the Securities and Exchange Commission for a discussion of important factors that may cause actual events or results to differ materially from those contained in Catholic its forward looking statements.
Kathleen disclaims any obligation to update or revise any forward looking statements, except as required by law.
Today's call and presentation also include certain non-GAAP financial metrics. These non-GAAP financial measures should be considered in addition to not as substitute for or in isolation from measures prepared in accordance with GAAP.
Disclosures regarding non-GAAP metrics and reconciliation to comparable GAAP metrics on a historical basis can be found under the heading reconciliation of GAAP and non-GAAP financial measures of the earnings release that was filed with the SEC before the call and in this quarter's presentation slides available on the Investor Relations section of Catholic website.
With that I'll turn the call over to the nasal Meera CEO of Kathleen House maps.
Thank you all for joining us to review our third quarter 2021 results today I'll start by sharing an update on the continued progress in our business, including our meaningful traction and direct to employer sales and strong pipeline of health plan opportunities and then provide further perspective on the longer term growth initiatives.
I discussed in August.
Part with a brief review of the key metrics, we delivered another quarterly increase in annualized recurring revenue or are our two $132 million up 2 million sequentially from Q2. The increase was driven primarily by our strong execution on direct to employer sales netted against the <unk>.
We forecast and realized in the quarter direct to employer quarterly bookings were the highest in over three years I'll speak more about our sales pipeline and forward view for employers and health plans in a moment.
Our total revenue for the third quarter of $34 8 million was at the top end of our guidance range and was ahead of our expectations. Our non-GAAP gross margin was again, 69% and calculate achieved a sixth straight quarter of non-GAAP profitability and positive cash flow and in the quarter was $66 million in cash.
Cash and no outstanding debt.
I will begin with employer sales as I mentioned in my opening comments. Our Q3 bookings were the highest we have achieved since Q4 of 2017 the bookings spilled on the active pipeline generation in RFP season, I mentioned in our Q2 earnings call as well as improved sales execution. We are very pleased to welcome our new.
New customers, such as Elbit systems of North America, and Baptist Health, among others to the Cat fight family.
Nearly three quarters of our Q3 bookings were from new customers, including multiple competitive navigation Rfps. There are combination of high Tech and high touch we're a critical factor in winning the business importantly, approximately two thirds of our new customers added our care guides offering validating our.
The decision to add expert human support and solidifying our navigation market possession.
We also saw benefits from prior relationships such as a large university that was forced to terminate its contract last year due to COVID-19 cost reductions, even while seeing meaningful value with tough fight who re signed in the quarter and also will now expand from care guidance to Catholic complete as of January one 2022.
Similarly, one of our new wins, followed the acquisition of an existing wellbeing customer the acquiring organization and its brokers learned about test flight through the acquisition process and ultimately decided to expand the relationship to include Catholic complete as well as care guides across the whole organization.
We believe that Catfights market, leading technology in combination of high Tech and high touch solutions are squarely meeting the needs of the navigation market.
We are also one of the few if not the only providers of comprehensive transparency and coverage solutions. This is becoming a priority not only for our health plans, but also large self insured employers with our compliance focus and our government contracts and the strength of our experienced and transparency drove one of our most.
Meaningful customer wins in the quarter, we have a robust employer pipeline entering the last months of the year and we look forward to updating you on our progress.
From a customer retention perspective, I shared last quarter that we were on track to deliver a meaningful improvement in retention compared to last year I shared that churn was weighted to the second half of the year given the majority of renewals occurring in that time period as expected we did experience a reduction from a small number of.
Clients that we had identified as being at risk of attrition, while churn ticked up sequentially. As we forecasted we are pleased that churn was less than half the level that we experienced in Q3 of 2020, the attrition in the quarter was more than offset by our new bookings and we are pleased that our team is executing against meaningfully.
Our churn in 2021 versus prior years.
Turning to our health plan business I am pleased to share that our health plan pipeline has increased since we last spoke we experienced no losses during the quarter and all the pipeline opportunities I mentioned in August remain active although certain decisions that we'd hoped would occur in the late Q3 timeframe have pushed to the fourth quarter right now we have.
A half dozen meaningful health plan opportunities in mid stage or late stage and we remain optimistic in our position across the full set the opportunities encompassed full digital navigation navigation plus care guides as well as transparency only well, we will continue to refine and improve how we forecast.
Timing of our large health plan prospect decision, making we are excited to have such a robust health sales pipeline for this quarter and looking into 2020 to the traction we are seeing in the market as evidenced that help fund the U S are critical trusted partners and delivering value to their customers.
I'll conclude my remarks today with additional commentary on the longer term growth strategy I discussed on our last call as I mentioned last quarter, we believe our data and technology capabilities to support the demand for health care data infrastructure that provides information on the consumer's health and enables steerage to higher quality lower cost.
Providers, both bricks and mortar and virtual as we laid out two years ago, we have seen demand for this capability from new buyer categories like telehealth providers offering virtual primary care advanced primary care providers retail pharmacies and more.
We are pleased to be engaged in a rigorous evaluation process from one of the leaders in those categories to bolster their offering and we have several additional conversations underway, while I want to be clear that any contribution to 2022 revenue will be nominal from these relationships. We believe there is meaningful Tam and Robin.
Potential as we expand our intelligence as a service capabilities. Finally, we believe our discussions to date demonstrate the power of scale and uniqueness of our core data and technology as well as experience driving health care outcomes to close I'm happy to report our meaningful progress in 2021 and I am excited for.
The fourth quarter of the year, our team is executing on our core goal of delivering aircrafts, we see our next generation navigation solution resonating in the marketplace and we continue to demonstrate operating discipline as we grow the business. We are in a large and growing market and the momentum across the business, it's real and exciting I want.
To thank the entire Catholic team for their excellent work not only this quarter, but across all of 2021, it's gratifying to see your work producing outcomes for our customers users and shareholders with that I will now turn the call over to well for a review of third quarter financials, and our outlook for the remainder of the year well.
Thanks, Steve.
I'll start by reviewing our third quarter results and then I'll discuss our outlook for the fourth quarter and the full year.
Beginning with annualized recurring revenue or <unk> or <unk> of $130 2 million increased sequentially for the third quarter in a row. The increase was driven by the employer market, including meaningful new client additions as well as upsells to current clients.
As we have mentioned previously our 2021 renewals were weighted towards the second half of the year and as <unk> shared we had strong renewal activity in the quarter the largest customer that terminated with an air of more than $2 million was signed in December 2019, but never launched because of COVID-19 impact on their implementation.
This is the only customer whose implementation was delayed or impacted by COVID-19.
Total revenue in the third quarter of $34 8 million decreased 2% sequentially and decreased 1% compared to a year ago and was at the upper end of our previously shared outlook for the quarter.
Subscription revenue of $31 6 million represented 91% of our total revenue and professional services revenue accounted for the remainder of.
Our professional services revenue again, principally reflected our Boston Children's Hospital CDC vaccines Dot Gov support.
And the expected sequential decline was in line with the expectations, we laid out earlier in the year and our work to support BCH and the CDC.
Turning to non-GAAP measures gross margins of 69% were essentially flat sequentially and compared to a year ago.
Subscription gross margins were over 77% for the sixth straight quarter.
We remain pleased with our industry, leading attractive gross margin profile, which helps demonstrate the scale of our technology and competitive advantage that our R&D investments have generated.
Non-GAAP operating expense as a percentage of total revenue of 62% was down 1% sequentially and up 4% year over year as we continued to see increased business as expenses from the Covid impact to 2020 baseline.
Our non-GAAP operating income of $2 5 million delivered our sixth consecutive positive quarter of non-GAAP profit similar.
Similarly, we reported positive cash flow from operations of $5 8 million and our cash balance was $65 8 million at the end of the quarter in.
In the quarter, we made the final payments on our term loan and the company now has no outstanding debt as of 930.
After several years of an intentional focus on operating with fiscal discipline, we feel well positioned to invest in the areas of our business that are driving growth as we plan for 2022.
Turning now to our outlook, we are updating the 2021 full year outlook. We originally provided in our Q1 call and now expect revenue of $135 million to $140 million.
Our non-GAAP operating loss of $4 million to an operating income of $1 million.
Non-GAAP loss per share of <unk> <unk> per share to an income of one cent per share now based on approximately 160 million shares outstanding.
Gross margins in the mid to high sixties compared to our previous expectation of mid sixties cash.
Cash flow from operations between 10, and $15 million of cash generated compared to our previous expectation of between 2% and $7 million of cash generated from operations.
And our cash balance at year end of around $60 million compared to our previous expectation of at least $50 million.
For the fourth quarter, we expect revenue in the range of 33 million to $35 million.
As you can hear in today's call. We are pleased at how well calculate solutions are resonating with large employers health plans and potential future customers of our data and technology, our strength and transparency means we are one of the only firms that can support employers and compliance with coming regulation are.
The launch of <unk> care guides positions us to meet the customer demand for navigation and we are now focused on finishing strong in 2021, the one launch period and planning for 'twenty two.
As always I'd like to thank the casualty team and specifically Sofia Golden who read today's safe Harbor and was the winner of the making things happen Culture Award in Q3 as a key member of the team delivering our vaccine navigation solutions.
With that we'd be pleased to take questions operator.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Your first question will come from the line of Richard close from Canaccord. Please proceed with your question.
Great. Thanks, maybe been well first congratulations on the success and building momentum.
Well I was wondering if you could just go over on the guidance.
When you look year to date, you've generated about I guess it was $5 6 million in non-GAAP operating income through September.
But you've kept the guidance the annual guide of 4 million lost a positive one so that implies a pretty big range for the fourth quarter can.
Can you just talk a little bit about that.
Absolutely Richard and thanks for the question so you're right to mention that we've done a really nice job on delivering operating profit non-GAAP operating profit for the first three quarters of the year as we look at the fourth quarter. There's a couple of dynamics in play. The first is that we do see expenses tick up in advance of the one one.
<unk> launched season, that's especially true when we have meaningful new business activity and obviously you heard me talk about that on the employer side. We're also launching Blue Cross Blue Shield of Alabama in this quarter for one one and then we're hiring in advance of some investments in the growth areas for 2022, and so there is an investment.
Set planned for the fourth quarter, along with that that essentially seasonal expense load between both of those pieces. We chose to maintain that operating income guidance at the range of kind of a loss of Florida income of one.
Okay.
It's helpful. Thanks.
Maybe I'm a health plans you know I think it was my understanding that late stage means.
That can't flight's been selected but Ah contract hasn't necessarily been finalized.
Correct me, if I'm wrong, there, but.
How are you thinking about the.
These deals that are in the pipeline is there anything specific that maybe hanging.
Hanging them up in terms of crossing the finish line or.
Yeah no. Thanks for the question Richard and you are remembering correctly in terms of how we characterize the pipeline and so you know what I'd say is that we were really excited to see the pipeline grow and continue to expand and certainly we had hoped that some of those decisions or excuse me with.
Those opportunities would actually close in Q3, we do expect both decisions and contracting in Q4.
So frankly focused on improving our forecasting ability, but on the whole I think the key takeaway should be that we feel really good about the health plan pipeline and our position in the market and are excited to pursue the opportunities that I mentioned in the prepared remarks.
Okay, I guess, just a follow up on that so let's say you bring you know one or two or whatever the number is across the finish line just remind us like you know in terms of what the timeline would be for you get selected you win the business side and the contract.
And then maybe when it goes in the E. R. R. And then begins to convert to revenue sure.
Sure absolutely I can just comment first and well can add anything I've missed but I think an important point with health plans is that we have seen implementations can happen very quickly as you saw with Cigna and that was a four month implementation and then you can also with other health plans expect a 12 month implementation often coinciding.
With a one one or seven one launch well do you want to speak to the recognition of revenue.
Absolutely Richard So to <unk> point, if you think about essentially when we are awarded the business. We enter a contracting phase that typically is anywhere from six to 12 weeks as we work through the contracts at the point the contract is signed we would.
Essentially put the guaranteed subscription revenue into <unk>. So we would disclose that as part of for example, our 12 31 <unk>. If we sign a health plan. This quarter and then the revenue contribution would come when that customer launches.
Call it half dozen or so opportunities may have mentioned.
Small number would launch in the middle part of 2022, most of them would be oriented towards the fourth quarter of 2022 from a revenue contribution perspective, but you would know the error or in advance.
Okay.
Great I'll jump back in the queue give some others a chance.
Once again as a reminder to ask a question that is star. One. Your next question will come from the line of Charles <unk> from Cowen. Please proceed with your question.
Yeah. Thanks for taking the question.
A question on the gardens here I appreciate the comments about the the costs here.
Expected in the fourth quarter, I think last quarter, though you guys talked about unexpected step up in sales and marketing.
Salespeople can start to assume travel.
Obviously, we didn't really see that here in the quarter.
Is that something we should expect a bigger step up in the fourth quarter of when Youre looking at.
EBIT assumptions for the full year or particularly the fourth quarter, it's really more.
An impact maybe the gross margins.
No. It's a good question Charles and I have to say this is a place where COVID-19 duped me, we expected to be doing more travel in the third quarter and more kind of field sales and marketing expense than we did.
Partly I think because of the Delta variant in the fourth quarter, we do expect to see that tick up we've been at in person conferences. This month or I should say in October last month already part of the fourth quarter and so do you expect to see SG&A tick up in the fourth quarter, even though to your point the gross margin specifically.
Cost of <unk> the cost of delivering the implementations line is where we would also see kind of a step up quarter over quarter.
Okay. That's helpful.
And then.
Maybe you've obviously a lot of success here.
Year to date.
It's nice to hear about the inquiries in the pipeline with health plans.
You know, maybe what has changed or maybe not changed perhaps but what is what do you think has been the key here.
To this kind of acceleration in interest from health plans.
Is it that the market has changed dramatically, given perhaps COVID-19 or or.
Or is it that the they view cast light as a more robust offering now with the addition of care guides, maybe maybe some thoughts there.
Sure.
Thanks, Charles I appreciate the question.
Speaking, specifically about health plans.
You know, we really set this as a focus area, starting and really when I stepped into the CEO role in late 2019. So I think part of what you're seeing is actually just the result of spending.
Spending the 18 plus months.
Actually.
You know going out meeting health plans and really working that pipeline I think that the product market fit has been strong really from the start but.
But I think we were now starting to really see that come through in the opportunity set.
So you know part of that I think is just time and then the second piece that I think is benefiting us is that very often you know what health plans are looking for is to support their customers and the increase in customer interest and navigation solutions has shown up as health plans wanting to provide those solutions.
To their customers. So that's been the kind of second tailwind, which is manifesting itself in a large robust health plan pipeline.
Okay. That's helpful. And then maybe following back up to Richard's question it.
At this point do you still feel confident in closing something by the end of second another health plan here, but in the year yearend or is this something that you think at this point, probably more likely maybe it slips into early next year.
Well you know what we do expect is that decisions will occur in Q4, and certainly we are hard at work in cases, where decisions have been made so on the whole you know what I feel good about the pipeline and our position and so certainly are hoping to have.
Positive news to report the next time, we talk.
Okay, that's great and maybe just one more follow up will on when we think about the fourth quarter in terms of the EBIT guidance implied for the fourth quarter here.
Would you see more of that is coming.
In.
Sort of a.
The decrease in gross margin sequentially or an uptick in sales and marketing.
Because I'm, assuming maybe R&D and G&A are relatively flat.
Yeah, Charles I think the way to think of it as we do have a step up in the cost of delivering the essentially the product in the fourth quarter implementation cycle, and then what we call our pyro or a rollover cycle. When our teams are essentially reconfiguring and resetting up customers for the following year. So you.
We'll see a step down in that gross profit or gross margin quarter over quarter that will drive.
Most of the most of the the kind of the Delta between Q3 and Q4.
And then like I said as well you are going to see a step up actually in each of the opex lines sales and marketing R&D and G&A.
In sales and marketing and R&D, it's partly as we are investing ahead of the opportunities may have talked about from a growth perspective health plan into that data and technology opportunity.
Great appreciate it thanks guys.
We do have a follow up question in queue from the line of Richard close from Canaccord. Please proceed.
Yeah. Thanks, I appreciate the comments on the churn and.
Compared to last year and whatnot. The progress that's been made there can you just provide us an update in terms of where you are on the renewals for this year I know it was a second half weighted but did most of that occur in the third quarter or how much is remaining in the <unk>.
Sure no. Thanks, Richard and I will just start out by saying that I'm really proud of the fact that churn in 2021 will be meaningfully better than what we saw in both 2020 in 2019, so as you're pointing out we shared last quarter that we do have renewals slated towards the second half of the year.
And so at this point, we have about a handful plus to execute in Q4.
We have line of sight to the majority of those renewals and we do expect to the majority of them to be customers in 2022.
That said of course, we do expect some degradation and we are forecasting churn, but on the whole we feel like we've really turned the corner in terms of the health of our book of business, which is just a credit to the entire organization.
Okay.
And then with respect to the current selling season was most of that.
Most of <unk>.
Stuff for January 1st starts.
You've had already book or is there an opportunity.
The selling season, continuing here in the fourth quarter, where it could be a contributor to 2022.
Yeah. Thanks Richard.
To spend a moment unemployed or sales.
As we shared back in Q2, the team did a great job building pipeline in the first half of the year. They were able to do that because of the strong product market fit.
Hi Tech high touch navigation and then this past quarter. What you saw was the sales team doing a great job executing against that pipeline, which is a credit both to the sales team and the strong leadership in that organization.
To your point about the cycle of one one so certainly Q3 was a big quarter for us from an employer sales perspective, but we do have a healthy pipeline entering Q4.
Typically do see a set of employers.
It was certainly launch off one one so we are we will continue to be focused on those opportunities over the next two months.
Okay and.
My final question is on transparency you guys called this out a couple of times you mentioned government regulations.
I think one of the health plan is a transparency opportunity can you just go over.
You know obviously this is cort.
It's like the Genesis of the company.
Can you just go over the dynamics of the current environment as it relates to transparency.
Well as you mentioned Richard you know the company has been a pioneer in the health care transparency space and you know we've been actively track tracking both hospital and health plan related transparency regulations.
Very well aligned with the transparency rural and well positioned to support.
With our existing customers and future customers as they are focused on compliance with what is a very complex set of rules.
Terms of what we're learning kind of as time goes by which you probably heard in my remarks, we had initially seen the interest and focus on compliance coming from health plans, it's been a big opportunity for us to have those conversations and expand those conversations but more recently over the last quarter we.
Did see more interest from employers, particularly those who have.
Large meaningful government contracts.
Also see it from employers who are slice. So have multiple carriers are looking to ensure that theyre compliant across a multitude of plans, but Richard I mean, the the kind of high level here is that people are taking these regulations seriously and.
We believe that calculate is certainly one of the only solutions, that's really able to ensure compliance with those regulations.
Okay. Thank you.
Sure.
Your next question comes from the line of Andrew Weinberger, who is a private investor. Please proceed with your question.
Yeah, Hi, just to follow up on the last question with regard to transparency.
When you look at.
Sort of your Rfps, which started as transparency what percentage of those have sort of grown from transparency only to maybe cash quite complete or you've been sort of an addition of care guidance on top of that I guess, what I'm trying to understand.
As transparency transparency regulations become more in focus.
Much more RFP activity.
Do you expect cash quite to be invited too.
Are you sort of stuck just selling transparency or is there an opportunity once you're in front of customers to sort of showcase.
All of the solutions that castaway tests.
Absolutely I'll take that one as you think about the transparency and coverage kind of regulations. They lead to very specific conversations at the beginning as an example, one of the customers that the new customers. We added in Q3 was a customer that issued an RFP actually at the very.
End of Q2, and we signed and contracted them in a period of.
Really a matter of weeks about eight weeks because they were specifically focused on transparency and coverage in that conversation, though we expanded.
The dialogue from pure compliance to the value that a comprehensive navigation solution delivers.
Both in terms of health care, and then broadly and benefits that was one of our Differentiators. In addition to being able to deliver transparency and that comprehensive way may have mentioned.
And it was a really clear proof point of essentially the question you're asking.
Kind of the broader RFP question, though the majority of the RFP activity. We are receiving is still for our full digital navigation solution or navigation plus care guidance really around two thirds of our RFP activity is that and you saw that actually in the in the business. We closed about two thirds of the net.
New logos, we signed had care guides attached to them and we're really navigation customers.
Thanks for the question.
Again that is star one for any questions.
At this time there are no further questions in queue.
Thank you for joining us today, we look forward to speaking with many of you at the 30th annual Credit Suisse Healthcare Conference next week.
Okay.
This concludes the Catholic health third quarter 2021 conference call. Thank you for participating you may now disconnect.
Mhm.
Thank you.
Okay.
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