Q3 2021 Progyny Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the third quarter 2021 earnings call.
At this time all participants are in 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 third quarter Conference call with me today are David Schlanger, CEO of property President and CFO.
CFO, we will begin with some prepared remarks before we open the call for your questions.
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 fourth quarter and full year 2021, including our expected utilization rates and mix the impact of COVID-19, including on our business client member activity and industry operations are.
To acquire new clients and retain existing clients, our clients work and the timing of leadership and board changes or market opportunity size in expectation of long term growth, our corporate governance class business performance industry 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 properties growth market opportunities and general economic and business conditions were debating.
And that's 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 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 SEC, including in the section entitled Risk factors in 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 comparable GAAP measures are available in the press release, which is available at investors <unk> Dot Com I would now like to turn the call over to Dave.
Jamie and thank you everyone for joining US today, we're pleased to report a solid third quarter with strong 24% revenue growth and 220 basis point gross margin expansion. These results reflect a continued improvement in utilization from the low low point, we saw during the early part of the quarter that has continued into Q4.
Sure.
Pete will provide additional color on utilization shortly.
In a few minutes Mark will walk to walk you through the quarterly results in more detail, but I want to take a moment to talk about a few of the highlights as you all know by this point of the year, we've largely completed our annual sales and client renewal season, and I'm happy to report that will be entering 2022 positioned for another year of strong growth for the fifth year in a.
ROE we've achieved close to a 100% client retention rate. We also had strong upsell success within our existing customer base, where a third of our clients increase their benefit in some form or another for next year from a new sales perspective, and Pete will provide more detail. Shortly 2021 has been the most successful selling season in our history.
Producing a record number of new clients and members such that we expect to enter 2022 with 265 clients under contract representing an estimated 4 million covered lives, which is nearly a 50% increase in members from the beginning of 2021.
We believe this strong momentum in building our client base demonstrates that our market opportunities continue to be significant that we are in our strongest ever competitive position and that project has become the provider of choice and industry, leading fertility and family building solution for the largest and most successful companies in the world.
Beyond the pure numbers of accounts that we've won and retained over the years. We believe the caliber of our clients also attests to our ongoing ability to earn the trust of the most discerning and prominent companies companies, who are increasingly turning to <unk> to manage an area of their employee benefit plans that uniquely addresses their commitment to diversity equity and inclusion.
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While we've been successful at adding leading brands as clients. We remain at a very early stage of penetrating our market opportunities, particularly among the largest companies in the U S. Before I turn the call over to Pete to press release, we issued today also announced some transitions in our leadership team and progeny wanted to provide you with my perspective on what these changes.
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Summarize what was announced as of January one I will become the executive chairman of progeny, Dr. Beth Seidenberg, our present board chair will transition to the role of lead independent director Pete will move into the role of CEO and joined the board and Michael Sturmer, who has been our chief growth and strategy officer and was four.
Emily SVP of health of Health services at <unk> as well as Cigna, Chief operating officer for the New York, New Jersey Health plan will become <unk> President responsible for all sales marketing client services strategy and new product development let.
Let me first say congratulations to Pete and Michael on their well deserved new positions I believe these changes represent a very natural progression in roles and responsibilities for Pete Michael and me and it also reflects many of the ways that we've already begun to collaborate and work together as the leaders are projecting.
For anyone on the call who wasn't previously aware Pete and I have worked to get worked together closely for 25 years and across multiple companies. When we joined project five years ago. The company had just a handful of clients and was in the earliest stages of defining its solution beyond defining that solution and developing its positioning and value proposition there was a clear.
An urgent need to develop a culture progeny and to create the processes disciplined and infrastructure that would turn what was an interesting idea both are viable scalable business as well as a thriving enterprise with employees committed to our vision mission and values, but even in those very early days, we saw the incredible opportunity in front of us to do.
Sure up the traditional approach to managing their fertility benefit.
We could see how we will be able to provide employers with a more efficient use of their health care dollars and a high cost episodic disease category, where outcomes very significantly and where patients needed more support in order to successfully navigate what is often a complex and difficult journey.
Two are consistently superior clinical outcomes and world class service and support over the past five years, we have built a business that is producing significant and recurring value for all three central constituents in the healthcare ecosystem. The employer sponsored health plans the patients undergoing the treatments and the providers who want to help people build their family.
Because of how unusual and competitively differentiated our health care business that delivers measurable and sustainable value to all of those audiences is the initial five clients and 110000 covered lives that we had when Pete and I joined progeny will have increased by more than 50 times in 35 times, respectively as we.
To begin 2022.
I, obviously couldnt be prouder of what we've accomplished over these past five years given the many thousands of members who have achieved their family building journey because of our help.
And transitioning to executive chairman with <unk>, taking over responsibility for the day to day management of the business I can dedicate my focus to those areas, where I can make the greatest impact to project is ongoing growth and expansion by continuing to be a sound beyond continuing to be a sounding board for and partner to Pete My efforts will be directed on overall corporate.
<unk> and corporate development, including new markets products and businesses as we seek to extend project he's position as the brand of choice in fertility and family building benefits. This change will also give me the opportunity to spend more time with my family and I have previously been able to do in addition to having the flexibility to pursue certain other personal interests.
I also believe this is an opportune time to implement this transition given that we are now concluding the most successful selling season in our history and Pete Michael and I have the necessary time to ensure there will be a seamless continuity in the day to day management of the business.
I look forward to continuing to work closely with Pete Michael and the rest of the project team as we chart chart. The course for a continued strong growth and I couldnt be more excited for what's to come now let me turn the call over to Pete to discuss the success of the recent selling season in more detail. Thanks, David.
Let me begin by saying that I'm enormously grateful for the close collaborative partnership that David and I have as we transition into new roles. In 2022, I know that will continue to work together in much the same way that we have throughout the past five years of rapid growth at progeny.
Also want to congratulate Michael on his expanded role Mike logistical had our sales team through its most successful selling season in <unk> history.
While micro substantial experience in leading operations sales and strategy functions throughout his career I believe he is ideally suited to take on this larger role as properties President.
I still believe that we are in the very earliest stages of addressing our significant market opportunities and I look forward to working with both David and Michael as we capitalize on those opportunities to continue to grow the business given that our ability to win new clients and retain our existing clients are the single largest contributor to our future growth I'll begin today with a REIT.
Half of our most selling our most recent selling season, which is now largely complete.
When the year began we told you about the earlier than normal commitments that we were seeing particularly from those not now accounts that we had been unable to make change to their benefits a year ago due to their need to focus on mitigating the effects of the pandemic to their workforce. While these early commitments provided us with a healthy start to the year. We obviously wanted to sustain that early momentum throughout the year.
Remainder of the season, we were pleased to report that we succeeded having received commitments for more than 85, new clients in total who represent an estimated $1 2 million new covered lives.
This represents the most new business that we've won in any single seventies.
Put this in context and this sales year, we added more clients and nearly as many covered lives as what we had in aggregate. When we went public just two years ago.
Our newest clients continue to represent a broad cross section of over 20 different industries, including financial services consumer packaged goods energy professional services healthcare media food and beverage hospitality and manufacturing.
This further enhances the strength and diversity that already exist within our client base.
The average size of new clients last year was a bit smaller than our historical average the average for this year's cohort is 14000 covered lives, which is consistent with our results from the 2019 selling season.
And while the average this year is 14000, we continued to see a broad range in size spanning from companies with 1000 covered lives up to those with more than 100000.
We believe this further emphasizes the universal need for fertility as a benefit for any type of employer, regardless of either industry that they are in for the size of their operations.
Newest clients. This year also continued to select robust coverage levels for their employees.
Majority of selected either two or three smart cycles, which is consistent with our historical averages and while there were a number of similarities between this season than prior ones. There were some favorable differences as well.
We drove to the strongest adoption rate for <unk> Rx with 92% of our newest clients, taking the pharmacy benefit.
Second we can sell and expansion, making <unk> available to more lives at the client such as those populations, who werent previously covered by the benefit or to any employees that may have been acquired through M&A by these clients.
Third declines can add additional smart cycles and this year, we saw a small but growing number of clients moved to an unlimited smart cycle benefit.
We saw strong results across all three pathways. This year, which we believe speaks to the strength of the offering as well as the satisfaction of our clients.
Before I turn the call over to Mark I want to discuss our utilization this quarter.
As discussed in our previous call back in August as the third quarter began we observed a small decline in appointment volumes as compared to what we normally would have expected, which we attributed to a small percentage of members whose activity was inconsistent with historical patterns.
As of the time the August call, we had already begun to see an improvement in utilization of this low point and were pleased to see that the improvement utilization continued over the course of the quarter. Although at a rate that was somewhat slower than what was needed to reach the higher end of our topline guidance range.
Although the paas activity of our members has proven to be a reliable ratable indicator of what we should expect in the present the utilization that we actually see each quarter ultimately reflects patients making decisions based on factors that are unique to them at that point in time.
Over the past 18 months those decisions have been made against the backdrop of an ongoing global pandemic. Despite what has been a small impact to our utilization expectations. Overall, we're pleased that our services continues to prove its resiliency and at those impacts have been small relative to what others have been experienced in healthcare from a utilization perspective.
Yes.
As we begin the fourth quarter utilization has continued to improve versus our exit rate in Q3, giving us further confidence that the phenomenon observed this past summer was temporary.
With that let me now turn the call over to Mark to discuss the quarter in more detail.
Thank you Pete and good afternoon, everyone I'll begin with our results for the third quarter, and then provide our expectations for the remainder of the year.
For the reasons, we discussed on last quarter's call. This reflects a slight decrease from the record number of art cycles that were performed in the second quarter, though as Pete mentioned, a few moments ago. We continued to see appointment volumes improve over the course of the quarter.
Female utilization this quarter, which as a reminder is the component of utilization at corresponds most closely to our financial results with four 6% as compared to four 4% a year ago.
While the utilization rate is comparable with what we achieved in the second quarter. It is important to note that treatment mix is always a contributing factor to revenue utilization associated with consultations and diagnostic testing and procedures contribute a lower revenue value as compared with more advanced procedures, such as fertility preservation and IVF.
Our utilization in the third quarter included a lower than usual proportion of fertility preservation and IVF treatments, reflecting the small subset of members who didn't pursue those treatments during the third quarter.
Turning now to our margins and operating expenses gross profit increased 37% from the third quarter last year to $28 5 million, reflecting a 23, 3% gross margin or an increase of 220 basis points from the year ago period.
The increase is primarily due to the favorable impact of the efficiencies that we continue to realize across our care management service teams as well as the impact of the regular contract renewals with our providers and the pharmacy program partner agreements that were executed earlier this year.
I'll remind you that our third quarter margins are typically higher than what we see in the fourth quarter.
Because towards the end of the year, we're onboarding the new head count that we need in order to successfully manage the significant step up in our member base as our newest clients go live with their programs on January one.
<unk> was $24 2 million. This compares to cash provided of $15 3 million in the year ago period.
As expected our cash flow this quarter reflects a normalization in working capital, which stemmed from the change in the timing of payments we received under the pharmacy partner arrangements. We signed earlier this year cash flow also reflects ordinary timing items in both periods.
As of September 30, we had total working capital of approximately $150 million, reflecting a $114 million in cash cash equivalents and marketable securities and we had no debt.
Turning now to our expectations for the fourth quarter and full year 2020.
Pete described although utilization has continued to improve since its earlier lows the rate of improvement has been slightly less than what was implied in the top end of our original guidance range.
We are projecting fourth quarter revenue of between $133 9 million to $140 9 million representing growth of between 34% and 41% over the prior year period.
This reflects the continued improvement in utilization that we are seeing now on a sequential basis. This guidance represents between 10% to 15% growth versus Q3.
For adjusted EBITDA in the fourth quarter, we expect between $16 8 million to $18 3 million along with net income of between 800000 to $3 4 million or between <unk> and <unk> <unk> earnings per share on the basis of approximately 102 million fully diluted shares.
And for the full year, we now expect revenue of 507 million to $514 million, reflecting growth of between 47% and 49% over the prior year period.
On that basis, we now expect adjusted EBITDA of between $69 million to $70 5 million and net income of between 51 5 million to $54 1 million or between 51 and 54 earnings per share based on approximately 101 million fully diluted shares.
We were always stage of penetrating a core market.
Once our newest clients go alive, we will still have just a low digit percentage of the 8000 employers and our target market.
We're also continuing to explore the possibility of broiling our portfolio of services are adding new markets, where we believe it makes sense for us to expand.
We expect a significant majority of the new clients will go live with their benefits on January 102022, and for the remainder to launch during the second quarter of 2022 at that point, we expect to have 265 clients, representing an estimated 4 million covered lives.
Typically the utilization that we see in the initial period following a new clients launch provides us with insight as to what what that clients utilization could work like for the full year.
As a result, we expect to be in a position to provide you with the revenue range for 2022 as well as profitability guidance. When we report our year end results with the visibility we have into 22 22 around new sales client retention and Upsells, we remain comfortable that revenue will grow by approximately 50% in 2022.
With that we would like to open up the call for your questions operator.
Ladies and gentlemen, the floor is now open for questions.
Do you have any questions or comments please.
Dar one on your phone now we ask that while posing your question. Please pick up your handset endlessly on speakerphone to provide options sound quality.
Please hold a moment ointment for questions.
Your first question is coming from and Samuel with J P. Morgan.
Yes, hi, guys.
Thank you for using my handy.
I was wondering if maybe you could you give us a little bit of color on within the 50% revenue guidance for next year, what kind of utilization are you embedding within that and could you achieve that even if you don't see any sequential improvement versus where you are now in utilization.
Relative to current utilization levels, it's assuming.
That continues.
Other than that.
We estimate what we expect based on our new client ads.
My math, but what a lot of trouble, putting your EBITDA guidance for net income guidance, there's something funky going on in between those lines that we should be considering and does it have any impact on cash flow.
Mark will take a look at that and get back to you if there's something there Mike.
<unk> utilized more as a proportion of total medical services, it's consistent I think with our belief of what was going on early in the summer relative to just the utilization drop off that was temporary from what we expected which is.
People just made decision to pause pursuing treatment and as they are starting to pursue treatment again as you might imagine they're going to start with initial Commvault first and then go on to treatment. So that's sort of the.
The high level explanation as to how the utilization is returning.
Yeah.
Got it.
Thats good for me thanks.
Your next question is coming from Stephanie Davis with Seb Leerink.
Your line is now live.
Thank you for taking my question guys and congratulations to the whole team for the transition.
Pete now that you've been announced as the incoming CEO for about 30 minutes I was hoping you could keep it that way.
Additional goals for the new seat, maybe your top three priorities as the.
This field of some tech kind of rapidly expands.
I think we alluded to some of them at a high level.
They are a combination of expanding our addressable markets in certain ways.
Both with product and with markets themselves.
They're also looking at.
It's grown each year for us.
And our expectation is that you know there's no reason why that shouldn't continue.
Awesome. Thank you so much and congrats again.
Thank you so much.
Your next question is coming from Ralph G Kobe with city.
Your line is life.
Great. Thanks, good afternoon.
I guess the last quarter, Utah, you also talked about 50% revenue growth for twenty-two at the time of mid point of guidance. It was about $780 million is the 50% still holding for 22 off the lower revenue base. So what around six 765 or is it still.
Applied to the prior baseline.
Yeah, I think the 50% as we talked about it last quarter was an approximate it's still an approximate for the reasons that I said.
<unk> when we see the actual utilization from new clients, we're really not in a position to give any more precision.
The Delta whether you do it off of the midpoint.
At Q3 or the current guidance is really not that significant relative to the overall growth and if I were in a position or we were in a position as a company to provide more specific guidance now we would we're just not and so really that's why we continue to say approximately 50% I think that's more instructive versus trying to be more precise at this point.
Okay fair enough.
And then I just wanted to reconcile us on the commentary because you talked about close to 100% retention.
But just been looking at the numbers you are adding 85 clients. In 2022. You also said you are going to have 265 clients by two Q22. So the math there would just imply that eight or so are rolling off is that is that the right math, we should be doing or are you. The expect midyear AD. So it's it's not as it's not.
I think you might have missed one of the comments a few small clients.
As in past years, where we sold them during the year have already gone lives and so part of the 85 overall are a handful of small clients that have already gone live in our in our our numbers as of September 30th.
Your next question is coming from Ireland, Iris long with Barnburner.
Your line is live.
Hi, Thanks for taking my question first I wanted to go back to Pete's comments I think you mentioned that utilization was lower for IVF and fertility preservation in Q3 can you talk about that dynamic a little bit are you seeing or do you expect the same trend to continue in <unk>.
Q4, and then maybe next year.
Yes.
What I mentioned was the proportion of full IVF cycles versus overall.
Medical treatments was little lower than normal that is already based on what we're seeing in October you know scheduled for October November is already returning back to normal levels.
And it's really the proportion that we saw that was lower over the summer is consistent with what we believe was going on in overall, which is just a slight pause in pursuing treatment due to the fact that the pandemic is is what.
It's been around for back.
They were across 20 industries.
Many or most of which are industries that we already had clients and there was no disproportionate size in any industry from our account perspective, there were across the board.
And very positive as we continue to penetrate these industries it becomes a network effect, where more and more other companies in those industries, who want to remain competitive and attract and retain employees in the future become easier and easier to sell it.
Got it thanks.
This concludes the Q&A portion for todays call I'd now like to turn the floor back to James for closing remarks.
Thank you. Thank you very much.
And for joining us today, just to follow up on a question my journey.
There is a table at the back of the press release, because the reconciliation to the guidance Micah and getting a cable so that addresses. This question. So if there are any other questions. Please never hesitate to reach out to me.
Otherwise, we look forward to speaking to you and visitors enjoy the rest of the year.
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.
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