Q4 2021 Benefitfocus Inc Earnings Call
[music].
Greetings and welcome to the benefit focus Q4, 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.
I'll now turn the conference over to your host Doug Cocoa Ma'am you may begin.
Good.
Thank you operator, and good afternoon, and welcome to benefit focus as fourth quarter 2021 earnings call. Joining me today are Matt Levin, President and Chief Executive Officer, and Al Panna, Wagner, Chief Financial Officer, Matt and L. Panna will offer some prepared remarks then.
I'll open for questions before we begin let me remind you that today's discussion will include forward looking statements that involve risks and uncertainties market developments and opportunities and the impact of our growth strategy that could cause actual results to differ materially for more information please refer to risk.
As discussed in our most recently filed Form 10-K , we also refer to certain non-GAAP financial measures important disclosures about those measures can be found in today's earnings release.
Lastly, we will reference a presentation furnished an 8-K, which you can also find in our Investor Relations website at Investor <unk> benefit focus dot com with that I'll turn the call over to Matt.
Thank you, Doug and good afternoon, everyone.
Today, we will discuss our fourth quarter and fiscal year 2021 results.
As we close the year and look ahead I would also like to discuss the significant opportunity we have in front of us to create value for our shareholders.
I have never been more confident that benefit focus is well positioned for growth and to win in this industry.
Benefit focus has carved out a differentiated position in the benefits administration market.
I joined the team with the conviction that we can strengthen our offering and in turn put ourselves back on our long term growth trajectory.
Last year I spent a significant amount of time listening to our customers brokers and third party evaluated.
Based on the feedback from those discussions it became clear to me that we had some challenges, but also a lot of opportunity with.
We took that feedback seriously and we have been transparent in our commitment to make the changes necessary to rebuild our reputation as a safe set of hands for our customers.
As an organization, we have been unwavering in our focus and decisive in our actions to transform our business today.
Today I will discuss the progress made to date and explain how we are executing against our transformation strategy and what's still to come.
In a short period, we have delivered meaningfully against our commitments to improve our service levels began strengthening our go to market channel relationships and investing in our team with the addition of industry veterans.
We are looking forward to providing additional insight into our growth strategy accomplishments in our mid and long term financial targets at our Investor day on May 10th 2022.
If you turn to slide five I'd like to discuss three key takeaways from today.
First I can confidently say that we are on track to return benefit focus to long term sustainable growth.
We have a differentiated platform and an attractive industry with a total addressable market in the $30 billion range.
We believe that executing our strategy using our considerable domain expertise and leveraging our leading technology platform will drive sustainable <unk> growth and in turn deliver significant value to shareholders.
Second we are making great progress towards improving service excellence.
Most important initiative over the past eight months.
Our last open enrollment the best in our history is a testament to the transformational efforts underway, we achieved some of the best customer satisfaction scores ever as a company, which I will share with you in a moment.
And as a reflection of the hard work and commitment of our associates.
Third we are delivering on what we promised we call that our say do ratio, meaning when we say we're going to do something we deliver.
I'll now walk you through our three pillar strategy as well as the progress we are making against each.
Turning to slide seven.
The first pillar is to strengthen the core of our company aimed at serving our customers with excellence and strengthening our solutions platform.
We have been investing across benefit focus to improve our service levels and enhance our solutions platform.
We firmly believe that service excellence is key to creating value for our customers and shareholders, creating a flywheel effect.
By delivering excellent service, we earn higher NPS and customer satisfaction scores, which improves customer retention it increases customer references and translates into a growing air our base.
Service Excellence is also critical to our brokers and third party evaluate theirs, who generate referrals for our business.
Additionally, we improved implementations and testing processes to ensure a smooth customer experience, we've focused on readiness and data exchanges <unk>.
Improving our open enrollment on time starts to 99% for the employer business and we reached 100%, but the health plan business we.
We also reached 99% for on time data exchange a meaningful improvement from last year.
Finally, our customer satisfaction scores for open enrollment increased to 95% this year, which is our highest in recent years.
The feedback from our customers has been overwhelmingly positive.
The millennials reveal that end users have greater clarity around their benefits and increased conviction about their benefit selections. Additionally, they find the guide at enrollment experience helpful. The tools intuitive and most importantly, they have peace of mind for themselves and their families.
I'm also encouraged by the momentum we are gaining with brokers, we're seeing referrals from brokers at a meaningfully higher rate and we have seen in recent history.
We are also in the final stages of being added to the preferred vendor panels for a couple of the largest brokers in the U S. This highlights the progress we've made in improving our service levels.
Being part of these broker panels will give us the ability to partner with them to add value to their large customer bases.
The progress on this important milestone and reflects our ongoing efforts to strengthen our broker relationships and also provide a blueprint for future broker partnerships.
Seal of approval from brokers and third party evaluate or us as a strong validation of our efforts.
Positions us as an attractive partner and will help drive more business from current and new customers.
Regarding strengthening our solutions platform, we enhanced our administrative services suite with the acquisition of Tango health.
This enables us to further improve our service levels and administrative services for our customers through more advanced data technology and delivery processes.
We are bundling tangos suite of offerings with new customer contracts.
We'll cross sell it to our current base of customers importantly, this more robust and comprehensive solutions platform should enable us to improve attachment rates move up market and grow our revenues.
And to strengthen the core we have assembled the best team in the industry.
Last year, we brought in top industry leaders in sales product engineering marketing and customer delivery to ensure we have the domain expertise to drive our multi year strategy forward with energy and confidence.
I have said in the past I would put our team up against any in the industry.
Turning to slide eight.
Rolling with intense our second strategic pillar is designed to power our growth by bolstering existing capabilities and moving into attractive adjacencies as well as strengthening our value proposition to our current customers and end users our disciplined approach enables us to strategically deploy our capital.
Our focus on the right opportunities at the right time, so that we can expand our product offering increased our market share build scale and drive shareholder value.
The Tango Health acquisition is an example of our disciplined capital allocation process, while also enhancing our core capability and expanding our administrative service product offerings.
We are also leveraging the data on our platform to deliver superior Tech enabled services and insights.
Our data helps us better serve our customers during their enrollments and empowers them to better utilize their benefits with tailored plans.
<unk> and improved engagement and utilization of benefits.
These offerings also helped the broker community better support customers as they think about key areas such as planned design and ancillary services.
Recent data offering called Rx insights is gaining traction with early adopters, who have subscribed to this product since our launch last fall, we recognize the need for a product like this in the market and we accelerated our development cycle to bring this solution to customers in less than a year driving additional customer.
<unk> and growth opportunities in the process.
Lastly, we continue to focus on moving up market, we are working to fill gaps in our solutions offerings, but believe we are uniquely positioned given our domain expertise and foundation in technology.
To serve a larger customer base.
Turning to slide nine.
Our third pillar operating with efficiency speaks to our focus on creating long term shareholder value through profitable growth.
Benefit focus was founded as a technology company and our platform has allowed us to drive operational efficiencies and process automation that our customers. Appreciate in addition, our teams sensible rationalization decisions have enabled us to achieve a cost structure that is producing industry, leading margins while increasing our.
Our competitiveness.
We expect these focused efforts will help us expand margins over time as we continue to grow our revenue and scale the business.
And we will continue to reinvest efficiencies to support our growth strategy and improve our return.
I will let al kind of further explain how this strategic pillar has been an important driver of our results.
As we look to the months ahead and given the nature of the business cycles in our industry and our subscription recurring revenue model. The lion's share of our recent progress will be reflected in our 2023 financials, but I'm pleased to say that we expect to see a significant improvement in our underlying organic growth.
And I'm more excited than ever about the prospects of creating a sustainable high growth business model.
With more than 20 years of domain expertise, we have a solid base to build out our.
Our customers are facing increasingly complicated health care challenges.
And if it's management in particular is becoming more complicated more expensive and at the same time, a more integral part of the value proposition that companies provide to their employees.
The products and services that benefit focus delivers will increasingly give our customers a competitive edge in this rapidly evolving environment.
As we solidify the improvements I discussed and strengthen our customer relationships, we have the opportunity to win market share and expand into natural adjacencies simply put as we earn the right to serve we become an increasingly attractive partner for customers.
<unk> us to win business and take share in a large and growing market.
I'm confident we can grow in the mid single digits in the medium term if we continue to deliver on our strategy, we will be well positioned to meaningfully exceed this.
I'm encouraged by the progress we've made in the last eight months and confident we are on track to achieve our vision.
This team has been here before.
In this industry and we're excited for what the future holds.
Want to take a moment to recognize and thank our entire team, especially our associates, who have shown their dedication to and passion for serving our customers with excellence.
Now over to El pen it to walk through the financials. Thanks, Matt.
Start with an update on our commercial traction this past quarter before getting into the highlights of our Q4 financial results and then I'll cover our guidance for 2020 two.
We continue to be pleased with the S. A P channel, where we are seeing a trend of increasing air Ardiles sites. During the fourth quarter. We also saw good momentum in upselling to existing customers and closed several rx insights deals with both new and existing customers and our health plan team renewed.
Five health plans in the fourth quarter at or above existing E. R. R.
Turning to slide 11 to take a closer look at Q4 revenue.
Overall I'm pleased that we once again delivered results in line with or above guidance.
He did our revenue guidance for the quarter and full year. This marks the seventh consecutive quarter in which we have met or beat our revenue guidance.
Total revenue for the quarter was $75 1 million due to better than expected subscription and platform revenues there.
The approximate 1% decline in revenue year over year was driven primarily by.
Lower professional services and planned reductions in noncore revenue.
As a reminder, noncore revenue equally its legacy connects your on Prem and unprofitable professional services revenue and the run off of the Mercer relationship.
Total software services revenue was $63 8 million up 2% year over year.
Software services revenue retention improved by almost 300 basis points year over year.
And software revenue as a reminder includes subscription revenue of 44 million and platform revenue of $19 8 million.
Subscription revenue was down 2% better than expected due to lower customer credits and the inclusion of Tango house.
The year over year decline was due to two health plan renewal that were at lower levels as expected and the planned reduction of noncore revenue.
Platform revenue was up 14% year over year also performing better than expected due to higher volumes of premiums and specialty enrollment.
Q4 platform revenue reflects the seasonality of our voluntary benefits enrollment.
Professional services revenue performed as expected down 19% year over year, primarily due to the comparatively lower demand for customer requests from health plan customers.
Looking at our Q4 margin results on slide 12.
GAAP gross margins for 54% relatively flat year over year.
non-GAAP gross margins for 55% down approximately 150 basis points year over year, primarily driven by the decline in professional services gross margin, which reflects the recent increase in labor costs for seasonal open enrollment hiring.
Software services GAAP gross margins were 69% in the fourth quarter up approximately 2% year over year.
Software services non-GAAP gross margins were 70% approximately 100 basis points higher than last year, reflecting our ongoing focus on automation and process efficiencies.
Adjusted EBITDA was $18 million during the fourth quarter above the midpoint of our guidance.
Our adjusted EBITDA margin for the quarter was 24% a decline from 27% last year, reflecting the increase in seasonal contract labor costs I just mentioned.
During the past two years, we focused on improving operating margins to achieve greater scale in the business two or three primary areas.
First we automated and simplified manual delivery processes, which enabled us to streamline our organizational structure.
Second we increased our sales and marketing productivity and lastly, we exited certain noncore offerings that were not profitable.
As a result of this work we've seen margin improvements over the past two years.
Full year 2021 our adjusted EBITDA margins were 19% up over 200 basis points from prior year, our higher margins have helped us to improve cash generation, allowing us to invest in our team our platform and our growth strategy.
GAAP net income available to common stockholders was $1 2 million and GAAP net income per weighted average common share on a.
Basic and diluted basis with four cents.
Parents use GAAP net income available to common stockholders of $1 3 million with GAAP net income per weighted average common share unabated and diluted basis or four cents in Q4 of last year.
non-GAAP net income available to common stockholders was $8 3 million and non-GAAP net income per weighted average common share basic with 25 cents and 24 cents on a diluted basis, which exceeded the high end of our guidance due to a net income tax benefit triggered by the tank.
Oh acquisition.
non-GAAP net income available to common stockholders in Q4 of 2020 was $6 1 million and non-GAAP net income per weighted average common share basic with 19 sent an 18 cents on a diluted basis.
Moving onto our balance sheet and capital allocation on slide 13.
We ended the fourth quarter with approximately 68 million in cash and marketable securities a decline of approximately 26 million for the third quarter, reflecting the acquisition of Tango health.
During the quarter, we generated $2 1 million of free cash flow and for the full year, we generated approximately 24 million of free cash flow, a 20% increase year over year and above the midpoint of our guidance range as.
As we think about future uses of cash we will continue to prioritize fortifying our customer service experience accelerating our product roadmap and pursuing select tuck in acquisitions to accelerate our growth strategy.
As of December 31st 2021, our debt to EBITDA ratio was four two times all of a sudden it that our full 50 million line of credit remains available to us.
Shifting to slide 14 to discuss our outlook for 2022.
Our outlook for 2022 remains relatively unchanged, we have strong visibility into 2022 revenue trends with over 90% of our revenue booked in backlog based on our customer retention expectations as well as the strong open enrollment season. We just delivered we continue to expect our revenue growth inflection point too.
Her near the end of the year.
For the full year 2022 on a reported basis, we expect total revenue between 252 and 258 million.
We expect adjusted EBITDA between 44, and $50 million, representing a 19% adjusted EBITDA margin at the midpoint of our revenue and adjusted EBITDA ranges and we expect free cash flow between 18 and 24 million.
Help you with your modeling of 2022 revenue at the midpoint, we expect three points of decline in revenue from the two health plan renewals at lower levels. We've previously mentioned.
One point of decline from the continued run off of non core revenues.
And three points of growth from the revenue contribution of Tango health.
Additionally, we expect to begin to see the seasonality of go lives in the second half of beer.
For the first quarter of 2022 we expect revenue between 59, and 61 million again with the largest year over year decline in subscription revenue.
Adjusted EBITDA between seven and 9 million and non-GAAP net loss available to common stockholders between five and 3 million, which represents a non-GAAP net loss per share.
Between 15, and nine cents based on $33 5 million basic shares outstanding.
As a reminder, we had seasonally high platform revenue in first quarter of 2021.
We're expecting in 2022, a return to normal seasonality for platform revenue.
As we look ahead to 2023, we believe execution of our strategy will result in a growth rate in the low single digits.
Our 'twenty 'twenty three outlook is predicated on three factors.
One momentum in our employer market, having reestablished our industry credibility with our brokers and third party evaluated.
Two an increase in demand from health plan customers, which is consistent with the early indications we are seeing.
And three the strong open enrollment season, we just delivered leading to improved levels of software revenue retention.
We plan to provide additional details on our full mid and long term financial targets.
Key metrics during our Investor day in May.
Before turning it over to Q&A, Let me say, how pleased I am that our team delivered the strongest enrollment season in our company's history.
We've laid the foundation for sustainable growth and I'm excited about the opportunity we have to unlock substantial shareholder value.
With that Matt and I are happy to take your questions operator.
Thank you and at this time, we will be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
Formation tone will indicate your line is in the question queue.
You May press Star two if you would like.
To remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
And our first question comes from the line of Matthew Hewitt with Piper Sandler. Please proceed with your question.
Hey, Thank you for the questions and appreciate all the color today wanted to ask on Tango health I know in the past you've mentioned that taking you from having a C E capabilities to now being able to deliver the full credit answer wondering what opportunities specifically does this open up for you.
That the legacy offering ultimately could.
Yeah. Thanks for the question. So I mean, as we talked about in the prepared remarks were really excited about the acquisition I'm I'm really proud of the team and identifying it we've done a really nice job of integrating our associates in Austin and throughout the country.
And right now we're in the middle of a season and so far so good in terms of reporting.
Et cetera in terms of you know why we why we did the deal its on a couple of different dimensions first their ability to assimilate data and reporting and the accuracy of that we thought was really best in class and we're already seeing evidence of that you know based on SaaS scores and.
New customers being both within our our base and perspective customers being interested in it.
And it also enables us to go more up market. So as you have bigger populations and more complexity with those populations. They can just handle a larger and more complex cases.
As you probably know some of our historic.
Services in that area, we're using third party platforms and this is just something we wanted to own.
As part of our core bundle to serve our existing base and like I said.
New customers in and so far so good.
Got it that is super helpful and I'm curious within that business did the delay in Medicaid redetermination caused any headwinds for tango health and then as those Medicaid beneficiaries seemingly roll off and would now be seeking an AC a plan is that a potential tailwind going forward.
That is a great question and I will have to follow up with you I think the answer is no but.
Let us get back to you on that.
Got it appreciate it thank you.
And again as a reminder, if anyone has any questions you May press star one on your telephone keypad to join the queue.
Our next question comes from the line of Jimmy <unk> with J P. Morgan. Please proceed.
Yeah.
Oh, great Hey, thanks for taking our questions and congrats on the corner and also good to see the strong open enrollment season that seems like driving a good oh good acceleration on the platform side of the business, but I wanted to ask you on the recurring revenue side of the subscription.
Yeah, but help us understand what are you seeing in terms of demand from health plans and others are going into 2020 , two oh kind of.
You know what has been your conversations with.
Prospective customers.
Any color would be helpful.
Yeah. So you want more of just sort of a more up market read of what's going on.
Right.
Yeah sure. So why don't we take it in in both divisions in a panic and pile on in case I missed some stocks, but first on health plan you know as we talked about last year.
Or and in prior earnings calls.
Health plans, if you put yourself in the in the seat of a health plan CEO they've had to get through Covid.
SCOTUS decision and then obviously shifting demographics.
I'm a graphics in the U S like retiree markets et cetera in our discussions with our health plan customers, they're very and we referenced it in the earnings call. We have incredibly high customer sat is whether the company was founded 21 years ago, We've really you know privileged relationships with.
Those customers, which are you know to your point allows us to have dialogues with them around current needs and prospective needs I'd say that in our core business rounding enrollment quoting et cetera, we're still seeing you know.
You know the renewals feel really good to us that is not a business segment that that they are shying away from but the growth areas. We're finding are in new areas that we're excited about so you know we spent some time talking to you in the past around some quoting things that we're bringing to market which will allow.
Our health plan customers to particularly like single state Blue plans to compete more effectively by bundling their health and welfare programs with other ancillary benefits from other providers and to provide that in a bundled quote are that they can offer a side by side to a broker with some of the Nash.
Uh huh.
Payers and that's gaining real traction, it's a product that we put in market today and so far so good other.
Similar plans are sharing interest in it and we're pretty excited about it.
I'd say prospectively the opportunity that we have is on a couple of different dimensions, and we're doing what I I have done earlier in my career, which is really having.
These customers talk to us about our product Roadmaps and what we want to build going forward and in those regards we see tons of opportunities to I'll give you a couple of quick examples a big issue for our customers our what we call agents. So that's.
When we do enrollment for a customer, let's imagine that the enrollee of 64 years old over the course of the year there'll be retiree eligible and those health plans want to be able to retain that.
Remember without them going outside of plan or at least being able to interact with them effectively.
We are seeing other opportunities in non HCA individual markets.
So for example, there how can you have an ACA plan bundled with other ancillary benefits and create a more customized or catered.
You know product for that member are the opportunity for US going forward is you know as we talked about in our prepared remarks, how do we continue on our product roadmaps today around enrollment I'm, quoting et cetera, and then layer in some of these other offerings, but I'd say that the real opportunity on health plan, but I would say.
A lot of sort of the COVID-19 .
Wins et cetera, I believe are largely behind us and they are very focused on some of these growth sectors I don't want to work with us on that.
The employer side.
You know it is if you put yourself in the seat of a benefits manager and what you've had to live through over the past couple of years everything from Covid to now great resignation.
Mobile workforce et cetera, and we made comments around this before we saw a slower buying decisions, particularly upmarket last year I am cautiously optimistic and this is not just based on our own experience in talking with our customers and prospects, but also talking with brokers and third party.
Evaluate or as etc, others, who influenced buying decisions in the market and we're seeing the velocity of meetings and discussions around benefits lineups increasing.
So I think you know for us and we talked about this a little bit in our prepared remarks, I'm really glad we made the investments we did in some of our service programs. So in our dialogues with customers now it's much less around service and it's much more around how we can serve.
You know prospects et cetera, with our technology, and increasing ancillary services and I I'm.
And I'll turn I talked about in her comments I am very.
Excited about the upcoming sales season, and I feel really bullish about the future I do think most of the headwinds that we had over the past couple of years are largely behind us from a market perspective. So.
Like I said in my remarks, we just got to stay the course I feel like we're gonna get our at bats.
A much greater velocity than we had in the past and if we get our at bats, and we get our fair share of conversions I really feel good about how we're gonna finished the year end.
What next year is going to shape up to look like.
Got it thanks, thanks for the detail I'm sure and also thank you for giving US the contribution from Tango help for Mexico for 'twenty between two was there any contribution for Q4 or how do we think about the contribution for Q1 as well.
Yeah, all I'll give you a little bit of a first from Q4 and Q1.
Very little contribution from a Q4 perspective, you know we closed on that transaction mid quarter and so there's a fraction of the border. That's included and then what I would say from a full year perspective, as I mentioned in my comments.
To give you some sizing you know its about three points of contribution year over year and I would just think of that as a very.
Our subscription business that youre going to see kind of evenly spread not a lot of seasonality to.
To that revenue.
Got it thank you.
And we have reached the end of the question and answer session and I'll now turn the call back over to President and CEO , Matt Eichmann for closing remarks.
Thank you and thanks, everybody for the questions today before closing out the call I'd like to quickly summarize a couple of things.
Around the roadmap and how we are how we plan to continue to deliver value to our shareholders.
For the past eight months, we quickly addressed many of the underlying issues that impacted our past performance with a priority on achieving service excellence I'm incredibly proud of our team and what they have accomplished in a short period of time, we are already seeing the green shoots of that work best exemplified by our strong open enrollment and the upcoming selection.
These benefits panels that we talked about.
With a stronger foundation in place we are entering a new phase, we're getting more at bats in the selling season more referrals and our reputation in the market is becoming stronger as a result, we are confident we are on track to return to growth by the fourth quarter.
As we stay the course on service excellence, our momentum will continue.
On this we know that we need.
To do to drive further differentiation and accelerate our progress we know what capabilities, we need to build and we know what we need to buy we are already starting to put these pieces in place for this phase and we are already seeing early signs of client demands.
We also know we have a lot of work to do but we are confident that we have the right team and the right strategy to get there with that thank you for your time today, we look forward to our next call in the Investor day in May Thank you.
And this concludes today's conference and you may disconnect your lines at this time.
Thank you for your participation.
Yeah.
[music].
Yes.
[music].
Okay.
Okay.
Yeah.