Q1 2022 Benefitfocus Inc Earnings Call
Greetings and welcome to the benefits Turkish first quarter of 2022 earnings call.
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A brief question and answer session will follow the formal presentation.
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I'm not actually had the pleasure of introducing.
Still a couple of men head of Investor Relations.
You operator, good afternoon, and welcome to benefit focus is first quarter 2022 earnings call. Joining me today are Matt Levin, President and Chief Executive Officer, and El Pen of Wagner, Chief Financial Officer, Matt Now panel will offer some prepared remarks, then we'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 that opportunities and the impact of our growth strategy that could cause actual results to differ materially for more information. Please refer to risk factors discussed in our most recently filed Form 10-K, we also will refer to certain non-GAAP.
GAAP financial measures important disclosures about those measures can be found in today's earnings press release Lastly, we will reference a presentation furnished in an 8-K, which you can also find on our Investor Relations website at Investor Doc benefits focused dot com with that I'll turn the call over to Matt.
Thank you, Doug and good afternoon, everyone.
As I approach my one year anniversary with benefit focus I have never been more confident that our company is on a path to achieve sustained growth. We are focused on making the necessary changes to create long term value for our customers and shareholders.
Today, I will cover our progress to date against our strategic plan and provide further insights on what to expect in the coming months after that al Panna will discuss our first quarter results.
Looking back at our work that started in the second half of 2021 I am proud of our team for taking decisive actions necessary to address a number of challenges to reposition the company for a return to growth and importantly to be a safe set of hands for our customers the impact of our efforts to execute.
Route on our three pillar strategy, which involves strengthening the core.
Growing with intent and increasing operational efficiency can already be seen.
We identified and began improving many aspects of our customer service function with a specific focus on implementations and case resolutions. We also focused on platform enhancements for better data interoperability and expanding product offerings. These efforts have improved our go to market channel.
And chips and created meaningful leads and new prospects for future business. We believe all of these efforts will enable us to grow market share and solidify our position as an industry leader.
We look forward to providing additional insight into our strategy, our accomplishments and longer term financial targets at our Investor Day next week on May 10th.
Turning to slide five I would like to provide an operational update of the quarter, where we hit a number of strategic milestones I'd also like to give some insight into the selling season and discuss how we are delivering on our plan.
Starting with our efforts to strengthen the core we have concentrated on service excellence and we have been delivering on our commitments as I have said in the past our associates' dedication to our customers is a unique competitive advantage and I am grateful for all they do every day.
End to end service excellence is key to strengthening customer relationships fueling a flywheel effect for a sustainable growth having.
Having delivered the best open enrollment in our history at the end of 'twenty 'twenty. One we now expect to begin seeing the results through improved customer retention and increased customer references, which we anticipate will translate into a growing <unk> base.
One of our investments to strengthen the core the Tango health acquisition is off to a terrific start tango is already delivering greater levels of value to our customers with our expanded suite of administrative services more advanced data management and delivery processes. We are now bundling tango suite.
Offerings in the new customer contracts and have started to cross sell it with our current customer base.
We believe this more robust and comprehensive solutions platform will help us improve attachment rates and grow our revenue.
I'm pleased to share that this quarter tango achieved another year of 100% on time filing of all HCA forms with the IRS and the applicable states I want to thank and recognize our team the execution on this was stellar even in the midst of the acquisition integration efforts. We are now beginning.
To migrate legacy benefit focus clients to the tango offering, which we expect will enable us to deliver even stronger customer performance going forward.
Service Excellence is also critical to brokers and third party evaluate or <unk>, who are key players in our ecosystem as they need to have confidence in service levels to refer business to us.
As a result of our efforts to improve our go to market strategy through stronger channel relationships. We were recently included in and connected benefit solutions panel.
Key listing from one of the top brokers in the World. This seal of approval along with referrals from other industry, leading brokers and third party evaluated validates our work and should help to drive more business from both existing and new customers, particularly in our employer segment.
I am grateful that our broker partners has helped us shift our company's narrative.
Moving to our efforts to grow within tests through capital deployment investing thoughtfully on the right opportunities at the right time, we're doing this through expanded product offerings, leveraging our data assets and moving up market during.
During the first quarter, we conducted extensive technology in product research and discovery with our customers. This feedback drove decisions related to our product roadmap for both health plans and employers.
We have in place a number of innovative customer product pilots in the area of engagement.
The initial feedback from customers has been very positive we will have more to say about our product roadmap and pilot programs at our upcoming Investor day.
Lastly, we continue to automate service and implementation processes to improve the customer experience and drive increased operating efficiencies.
These cost savings are being reinvested in the organization to support our revenue growth strategy, while preserving our margins on a full year basis.
We have a solid sales pipeline stemming from direct sales activities improved broker channel relationships and S. E P.
We are optimistic that this plus our strong 2021 open enrollment will result in a successful sale season over the next several months. Our teams are now working through the most critical part of the sales season for employer, where final decisions are made by both current and prospective customers as a reminder.
Under much of our employer market sales season generally runs through August and it'll have a meaningful impact on our revenues for 2023, whereas our health plan sales go throughout the year here too we continue to see improvement in the overall market, but these are longer sales cycles.
Given the nature of the business cycle in our industry and our subscription recurring revenue model. The majority of our sales made in 2022 will begin being reflected in our financials in Q4.
Next year, we look forward to reporting out on the results of the sale season on next quarter's earnings call.
Turning to slide six.
We are on track against our transformation plans and could not be more excited about the unique opportunity ahead of us. We believe we have a compelling value proposition as we grow our presence in a large and increasingly complex market with more than 20 years of domain expertise and a unique technology platform our investments in server.
Excellence are fueling our growth strategy, our seasoned team of industry leaders is focused on executing against our transformation plan.
I am proud of the progress we've made in the last 11 months and I'm confident that we are on track to achieve our goals.
Before turning it over to al Panna to walk through the financial results I'd like to welcome our new Chief people Officer, Kristin atoms to our leadership team.
I met Christian when she worked at Morgan Stanley and I'm really excited to have her on the team.
Christian has ambitious plans to continue to make benefit focus an even better place to work and will support efforts to make sure. We deliver an exceptional associate experience, which is a top priority for us, particularly in the current talent environment.
One of my early priorities was to put in place a first class team. We believe the tenure and domain expertise of our team is unrivaled in our industry and it will drive our continued execution of our strategy to reposition benefit focus and set the foundation for future success. I'm also pleased that as I approach my one year anniversary.
Worse, yet benefit focus our leadership team is largely complete.
With that I'd like to hand, it over to al Pan out who will cover our financial performance.
Thanks, Matt I'll start with highlights of our first quarter financial results and then I'll cover our guidance for the second quarter.
Turning to slide eight to take a closer look at our first quarter revenue I'm pleased to report that we once again results at the high end of our guidance range. This marks the eighth consecutive quarter in which we have either met or beat our revenue guidance.
Revenue for the quarter was $61 2 million the 6% year over year decline was driven primarily by software services revenue.
Which were partially offset by the addition of tango revenues this quarter.
Total software services revenue was $49 7 million down 7% year over year software services revenue includes subscription revenue of $43 1 million and platform revenue of $6 6 million.
Subscription revenue was down 5% year over year, driven primarily by the health plan attrition, we experienced at the end of 2021 and discussed last quarter with you.
As a reminder to health plans reduced the scope of their engagement with us and we continue to expect to see the year over year impact as we move through the first three quarters of 2022.
Platform revenue was down 16% year over year, primarily driven by the accelerated timing of trips to platform revenue in the first quarter of 2021. These trips and historically taken place later in the year and the timing of which in 2021 or something to a difficult year over year compare.
Professional services revenue performed as expected down 1% year over year.
Looking at our margin results on slide nine GAAP gross margins for 51% versus 56% in the prior year period.
non-GAAP gross margins were 53% versus 57% in the prior year period.
Software services GAAP gross margins were 64% in the first quarter versus 67% in the prior year period and software services non-GAAP gross margins were 65% versus 68% in the prior year period.
Our margins were impacted by planned ongoing investments in automation and process improvements, which we have put in place to generate sustainable efficiencies beginning with the upcoming open enrollment later this year in the fourth quarter.
As a reminder, given the seasonality of our business our gross margins can fluctuate from one quarter to the next based on our sales and delivery cycles.
Do you expect to preserve our gross margins on a full year basis as we continue to reposition our business for growth.
Adjusted EBITDA was $11 2 million during the first quarter approximately $2 million above the high end of our guidance range. We expect that this adjusted EBITDA over achievement in the first quarter was the result of timing of expenses that were pushed to the second quarter, our adjusted EBITDA margin for the quarter was 18% a decline.
From 23% last year, primarily driven by the investments in automation and process improvement I just discussed.
GAAP net loss available to common stockholders.
With $3 9 million.
And GAAP net loss per weighted average common share on a basic and diluted basis with schwab.
This compares to GAAP net loss available to common shareholders of $3 7 million.
With GAAP net loss per weighted average common share on a basic and diluted basis of <unk> 11 in Q1 of last year.
non-GAAP net income available to common stockholders, the first quarter of 2022 and the same period in 2021 was <unk> 4 million and non-GAAP net income per weighted average common share for basic and diluted was one set for each of the periods.
We exceeded the high end of our guidance range for non-GAAP EPS due to the over achievement in adjusted EBITDA discussed earlier as well as a change in accounting treatment for our convertible notes and the associated noncash interest expense that was favorable to net income in the first quarter.
Sure.
Moving onto our balance sheet and capital allocation on slide 10.
We ended the first quarter was approximately 59 million in cash cash equivalents and restricted cash a decline of approximately $10 million from the fourth quarter, reflecting the timing of working capital changes.
During the quarter, our free cash flow was negative $4 2 million driven by the timing of customer collections and vendor payments as a reminder, given the seasonality of our business the free cash flow generation on a quarterly basis. It can fluctuate. We are confident we are on track to deliver our free cash flow guidance on it.
Full year basis of 18 to 24 million.
As we think about future uses of cash we plan to 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 March 31st our debt to adjusted EBITDA ratio was four four times I'll also note that our full $50 million line of credit remains available to us.
Shifting to slide 11 to discuss our outlook for the second quarter.
We expect revenue between 55, and 57 million again with the largest year over decline in subscription revenue.
Adjusted EBITDA between four and 6 million, reflecting the timing of expenses shifting from Q1 to Q2.
non-GAAP net loss available to common stockholders, it's clean.
$6 million, and 4 million, which represents a non-GAAP net loss per share of between <unk> 17 cents 11 cents based on 34 million basic shares outstanding.
Okay.
As we look ahead, our expectations for the full year 2022, our revenue growth inflection point near the end of the year and our return to low single digit growth in 2023 remains unchanged.
As a reminder, our 2023 outlook is predicated on three factors one momentum in our employer market, having reestablished our industry credibility with both brokers and third party evaluators.
To a recovery in demand from health plan customers for new solutions.
In.
Recognition of service improvements leading to improved levels of software revenue retention.
We plan to provide additional details on our longer term financial targets during our Investor Day next week.
I am pleased with the progress, we're making on executing our strategy to drive 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 I'll turn it back over to you operator.
Thank you, ladies and gentlemen, you'll now be conducting a question answer session.
Because it talks also Christian pastries talking one on your telephone keypad.
A confirmation tone will indicate that your line is in the question queue.
Yeah.
If you.
I wanted to withdraw your question or to lose yourself from the question queue Youre welcome Grace talking too.
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We'll pause a moment, while we poll for questions.
The first question comes from Jessica Kesten of Piper Sandler. Please go ahead and ask your question.
Hi, Thanks for taking my question.
So for the two health plans to reduce the scope of their engagement with you guys can you just.
Help us frame, how large their remaining contribution to revenue and EBITDA is and what you expect to happen for the remainder of a contract.
Yeah, why don't I and hi, Jessica Thanks for the question why don't I talk I'll answer the second part of the question and then I'll have Mel panic.
The first part of the question.
So of.
The two health plans.
Clients that you talked about.
They.
They are still with us obviously and they re scope.
Without getting into a ton of detail about it.
D.
Our feedback from both of those clients is that the pieces that remain with us which are variations of enrollment services.
We will stay with us for the foreseeable future, we havent had any indication of that.
Either one of those will be re scoped.
Yeah, and just in terms of quantifying them.
That's sort of the size and the ongoing contribution what I'd say is that what we've provided is that the overall impact to 2022 is a.
It's three points from a year over year growth.
2021 'twenty two.
And where we're really not giving any additional guidance as we think about 2023 and forward it's really.
In our guide for 2022, and we would you know what.
We wouldn't expect as Matt said, those relationships or just recently sort of restructured and we wouldn't expect any fluctuations there in the near term.
Got it and then just.
This is that kind of higher level question, but did you see a pause in contract being rebid or going out to RFP in 2020 in 2021.
Specifically in the employer market just because you.
Because people were distracted with Covid and did that effectively paused attrition in those markets.
And mean that there is going to be a catch up sort of RFP process that is much larger.
During open enrollment or site during yourself.
Mike.
All right now.
Sure.
To be clear we are in the middle of the songs isn't but just to be clear on that one of its largest employer part of our business, which has been selling season and even within the employer segment. It's the portion of that where we go direct to clients or we sell through brokers and you obviously heard some comments around.
Apparently.
A lot of us have been repaired at.
Brokers are an increasingly important part of our distribution channel in terms of your question about 2020 one.
The answer is that during <unk>.
During Covid you saw a lot of activity, particularly employer just slow down if you put your self and sort of the head.
If its manager at the time, where our head of HR.
We're a slammed with work round hybrid works well.
Work from home.
Providing COVID-19 benefits if you remember just the magnitude of the total magnitude.
<unk> of Covid in the labor markets basically the entire expansion in the economy from the great recession, leading up to Covid all of the jobs created during that period of time, roughly 20 million jobs plus evaporated in the span of six weeks in April of 'twenty, so and that sort of economic context.
Bidding out.
Ben Admin platform was just not a priority.
We're seeing now is definitely a return to a more normalized level of sales activity. However.
Still in the jumbo market.
You really have to segment.
The employer market between $10.
And.
And then 2000 and below and I say in where we focus really two to 10, and then kind of up to two to 10 market feels like it is coming back nicely.
But the jumbo the 10 plus.
In my view still not back to pre Covid.
Covid levels of activity, but.
We are seeing a much more vibrant.
Sales.
So sales lease activity broker connectivity third party valuator connectivity.
And things are much more active than they've been in quite a while.
Yeah.
Got it. Thank you and then just last one is how are you defining the success of open enrollment like what what metrics should we be thinking about when you referred to it as such.
Yes sure.
As we talked about one of the biggest priorities from a customer service organization standpoint, one of the things I said on my first days here was that returning the company to a service excellence sort of mining that was one of my top priorities and then open enrollment.
How we measure satisfaction is on a couple of different dimensions on a quantitative basis, we send out surveys and the results of that are things like net promoter scores client SaaS scores et cetera, and then on a more qualitative basis I spend a lot of time personally with clients and they tell me about their experiences of their participants. So we've got a lot of <unk>.
Yes.
Back from people, who are using our platforms to enroll.
And they give us feedback that they feel like they made great decisions for themselves and their families. They talk about things like adoption of certain voluntary benefits and how that came to be very critical to them at moments in times of their life for example hospital visit cancer.
Diagnoses et cetera, so and so it's a mixture of quantitative and qualitative on when we when we say it was the best ever we had specific metrics going in which we're happy about where we are.
How we hit them and then we look at just how those metrics stack up year over year in all regards.
Open enrollment season was terrific for us.
Got it thank you.
Thanks for your questions. Thank you.
Our next question comes from Jonathan border of J P. Morgan.
Okay.
Hey, guys. This is already offer personal congrats on the quarter. Thanks for taking the question wanted to get your perspective on the current volatile macro environment that everyone's experiencing.
I see any impact from there whether in terms of direct business come back to just change in sentiment.
And does any of the kind of math.
The macro environment kind of.
It's Andrew off plan for our medium term plan mid single digit growth over the next couple of years.
Yeah, why don't I give you some qualitative observations first and then I'll have al Panna fill in.
What.
Filling some of the blanks I'll tell you that at a very high level in terms of macro.
Factors, the one that impacts us most as labor markets. So just ask during the recession you know based on Jessica's question before.
If you charge on a per participant or a per employee basis. When you have layoffs and bankruptcies, that's obviously a big problem.
Obviously, we're not seeing that right now what we're seeing right now are very tight labor market. So.
And that can be a net tailwind for us so what a lot of our clients are talking to us about and like I said, we're in the middle of sales season. So that we spent time with clients throughout the year, but this is a particularly intense period of time our clients are trying to figure out in addition to things like merit cycles in compensation.
And bonuses they are spending a lot of time on benefits lineups.
Everything from mental health hybrid work benefits et cetera, so they rely on us.
To give sort of a macro picture of what at a high level of other companies and industries are doing to help attract and retain boys because benefits are becoming an increasingly important component in terms of an employee value proposition, particularly with the adoption of things like chp's at higher deductible plans. So I would say that that is a.
Net.
Alan for Us I'll, let al kind of comment on some of our quantitative factors, but like everyone else I'll just be very direct with you.
Great resignation, and just talent wars et cetera has impacted everybody in the industry I wouldn't say that we're an outlier in that regard and I'm pretty happy with how we're managing it.
But I'd say labor issues are the big sort of macro factor for us, but with that El pen I'm sure I missed and stuff.
Yeah, No I think you covered most of it there Matt.
From our cost structure standpoint, certainly the labor costs are something we are.
Keeping close eye on in terms of that the labor market that Matt referenced and you.
We do have several areas of targeted focus in terms of efficiencies within the business that we feel like.
We will certainly allow us to offset some of those increasing costs I think for me.
Market perspective, and from a demand, we're very mindful of what the impacts of inflation.
Larry you know environments can do for us we do have some level of installation.
Not only from the way our contracts are structured with minimums, but also in just the diversity of our customer base. We saw some of that during COVID-19 and to Matt's point, our businesses on a P. P M basis, but we do have some insulation between the diversity of our customer base across.
Various industry sectors, we predominantly serve enterprise as opposed to.
Small business and then the minimums that are.
Put into our contracts give us some near term protection.
I would say that we haven't seen necessarily the impacts from a demand standpoint from the metrics that we look at in the selling season.
That's somewhat attributed to the fact that.
You know benefits and health care are something that are pervasive trends that.
We see it an ongoing need within the enterprise corporates in the health plan spaces that we serve.
We're super mindful of it we can't control the macro environment.
We're continuing to monitor it to ensure that we get as much forward look into it as we can.
Great. Thank you I appreciate that and then just a follow up on the on Tango any more color you guys can provide there just a little more detail it sounds like it's going well and are you guys sharing.
In terms of the contribution from that.
Yeah, we when we guided to 2020, we did share that tango would contribute about three points of growth year over year, they're very.
Our subscription based business and so that you can think of that as being spread evenly throughout the year and that business is performing as we expected. So we're very pleased with them.
This initial quarter of results and as Matt shared the service delivery was also very much in line with what we were expecting and our customers are seeing some really good outcomes.
Outcomes as a result of that addition to our product portfolio and the team that's delivering on it.
The thing I would add to that is yes.
Again, a huge shout out to.
So the team in Austin, and Scott and his leadership team there I'm sure they're listening, which is why I gave them a quick shout out.
The product is already being sold back to the base. We're bundling it in on new deals and in all regards I've done a lot of tuck in acquisitions of my career in this it was definitely in the top 10% of it.
So huge kudos to that team.
Okay.
Awesome.
Thank you.
Okay.
Thank you ladies and gentlemen.
We have reached the end of the question and answer session I would now hand, the floor back over to Mr. Mark Levin.
Zinc coming.
Thank you and thanks, everybody for attending today and thank you for your questions before closing out the call I'd like to quickly summarize our plans and progress to create shareholder value.
Over the past year, we quickly addressed many of the underlying issues that impacted our past performance with a priority on improving and delivering consistent service excellence. We believe we have made meaningful progress and are seeing the benefits of our efforts.
Getting more at bats in the selling season more referrals and our reputation in the market is strengthening we still have a lot of work to do but we are confident that we have the right place to execute on our transformation strategy and are pleased with the progress to date with that thank you again for your time today, we look forward to our next quarterly update and of course, we hope to see.
Many of you next week on Tuesday in New York for our Investor day with that operator, I'll hand, it back to you.
And thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect. Your lines. Thank you for your participation.
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