Q2 2022 Benefitfocus Inc Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the benefit focus second quarter of 2022 earnings call. During the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question answer session at that time. If you have a question. Please press the one followed by the four on your telephone if at any time during the conference.
Do you need to reach an operator, please press star and zero as a reminder, this conference is being recorded I would now like to turn the call over to Mr. Doug Chuckled Lin head of Investor Relations. Please go ahead.
Thank you operator, good afternoon, and welcome to benefit focus as second quarter 2022 earnings call. Joining me today are Matt Levine, President and Chief Executive Officer, and Al Panel Wagner, Chief Financial Officer, Matt now panel will offer some prepared remarks, and then we'll open for questions before we begin.
We remind you that today's discussion will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from those statements, including market developments and opportunities the execution of our growth strategy and integration and reliance on key personnel for more information.
Please refer to risk factors 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 in an 8-K, which you can also find on our Investor Relations website at Investor Dot benefit focus dot com with that I'll turn the call over to Matt.
Thank you, Doug and good afternoon, everyone.
Today, I will provide an update on our commercial achievements cover our progress to date against our strategic plan.
And provide further insights on what to expect from our product roadmap during the second half of the year after that al Panna will discuss our second quarter results.
I want to first recognize and share my deep appreciation for the entire benefit focus team for their steadfast focus on executing our transformation plan.
Tireless efforts put forward by this team have ensured that we remain a safe set of hands for our customers and for that I am personally grateful.
During the second quarter. The team also demonstrated our ability to deliver on our financial commitments and I am encouraged by the continued signs that our collective work is setting us up to create long term shareholder value.
While our at bats continued to improve in the second quarter and we are seeing early indications of win rates improving for the year, we had pushes and timing for some of the larger deals in the pipeline, which are on track to close in the third quarter that said the growth in leads in our improving win rates are a testament to the fact that our.
Unwavering focus on service excellence and our go to market strategy is working well.
We had a number of sizable new employer wins that we expect will drive revenue starting in the second half of 2022 and into next year. This includes a large global food packaging manufacturer, a fortune 500, global electronics manufacturer and a large regional bank to name just a few.
In addition to our direct sales efforts. The SAP sales channel has continued to be a solid growth driver for our business. We see positive momentum in this channel with both closed deals in the first half of the year and two X pipeline growth going into the second half of the year. The SAP relationship remains a huge.
<unk>, an important revenue generating partnership for us and we expect to see continued benefits as we move through the remainder of 'twenty two.
We continue to see demand returning and our health plan pipeline for up sells to existing customers as well as new pursuits.
As a reminder, there is seasonality in our business, particularly in the sales cycle. The employer sales season normally takes place in the first half of each year, while the health plan public sector and sales through our SAP P channel occur throughout the entire year.
We remain optimistic about our deal pipeline. The current market sentiment is not lost on US we have seen a lengthening of the sales cycles and a shift in timing for closed sales, particularly driven by a mix shift towards S. A pea in the public sector, which comprise larger and more complex deals at this point our lead.
Adding sales indicators are positive we expect to close deals across our various sales channels as we move through the balance of the year and we continue to anticipate an inflection point.
Both towards the end of 2022.
Turning to slide five I'd like to share an update on delivering against our strategy and commitments.
In the second quarter, we continued to demonstrate a high say do ratio against our three pillar transformation plan proof.
Proof points. This quarter include delivering on our financial commitments. The successful launch of our enhanced Cobra features further bolstering our administrative services offerings and bringing to market an innovative new data offering called claims audit and recovery services as.
As we have talked about in the past it is important to both me and El Panna.
As well as the rest of our team that when we say, we're going to do something we make it happen.
As an organization we maintained our focus on service excellence to further strengthen our core.
We put in place what I believe is the best team in the industry and they are delivering.
We are seeing the impacts of this focus and investments in many aspects of our customer service operations, including implementations in case resolution trends to provide some additional color case turnaround times are trending down in case counts across our customer base were down approximately 30% year over year through the <unk>.
First half of the year. These improvements have set us up well for open enrollment season, which starts in the second half of the year.
Service Excellence is also critical to brokers and third party evaluated key players in our ecosystem.
As they need to have confidence and service levels to refer business to us last quarter, we announced our inclusion in Annes connected benefit solutions panel are.
A key listing from one of the top brokers in the world.
I am pleased to share that last month, we entered into a new strategic partnership with Lockton.
Another one of the world's largest insurance brokers furthering our reach across the broker channel.
Similar to our relationship with E. On we expect the locked in partnership will support and augment our go to market sales efforts, especially with larger customers with more lives.
This seal of approval along with referrals from other industry, leading brokers and third party Valuator van.
Alidades, our strategy and execution efforts, we anticipate this partnership will help facilitate additional business from both existing and new customers and our employer segment <unk>.
Importantly, our broker channel sales activity has grown more than 60% year over year, which has resulted in a greater number of conversions from this channel and gives us continued confidence in our expected revenue trajectory.
And our progress on our broker channel efforts I am equally pleased to share that our investments to improve our core product bundles, a key component of our go to market strategy are paying off.
Tango health our most recent bolt on acquisition is already delivering increased value to our customers. During the first half of the year, we successfully bundled tango suite of ACI offerings, and new customer contracts and started cross selling it to our current customer base.
More robust and comprehensive solutions platform is starting to drive improvement in attach rates. We are just getting started and are confident.
That tango is best in class ACI appliance offerings will continue to be a key component of our products at <unk>.
Regarding our efforts to grow with intent, we are thoughtfully deploying capital to expand our product offerings, leveraging our data assets and moving up market.
We recently launched a new product called claims audit and recovery services our cars.
With our current product, we will be in a position to deliver additional value to our customers through our ability to not only analyze all of their claims data to identify errors in the claims and go back to providers to recover the lost money on our clients' behalf for background approximately 20% of all medical claims contained errors, including.
<unk> data entry errors and MS coding each year billions of dollars' worth of bills are paid incorrectly and while third party administrators and carriers do their best to catch these areas. Many are not identified are corrected.
The new cars product is designed to address this known issue and a preliminary feedback from customers has been positive. This is another example of our ability to quickly innovate and gain market traction with product offerings that take advantage of our data assets.
Another example of our growth initiatives is the recent release of enhancements to our enrollment experience. These enhancements are designed to make it easier for customers to engage with and select a voluntary benefits offerings, starting with the upcoming open enrollment season. We expect this will help drive increased participation rates, which will grow our.
Platform revenues.
Finally regarding our third pillar related to operating efficiencies, we made technology investments that we believe will help us increase customer satisfaction and net promoter scores. We expect that these efficiencies across our organization will lower our cost of revenue and improve our margins later in the year. For example, our work in this area focused on service.
Automation and process improvement and our call center.
This effort is designed to facilitate a more seamless open enrolment experience.
Through further incorporation of AI technologies and advanced Interactive voice response technology. These.
These improvements support and enhanced customer service experience, enabling our associates to focus on the in person customer cases, where interactions. Our most critical we're also leveraging third party technology to monitor associate calls and address quality issues in real time, all of which support improvements in customer satisfaction.
Of course. These efforts are designed to improve both the user experience, but also to help drive operational and cost efficiencies.
Turning to slide six as I have said before we believe we have a compelling value proposition as we grow our presence in the large and growing benefits administration market, we are well underway in delivering on the strategy that we outlined at our May Investor day. During the second half of 2022, you can expect us to follow through on our <unk>.
<unk> to launch our employer large market offerings launch health insights to Plano and launch our enhanced billing features our seasoned team of industry leaders continue to execute against our transformational growth strategy.
And we are seeing the momentum build in the business before turning it over to al Panna to walk through the financial results I'd like to announce our new Chief Technology Officer, Ed Rumsey, who will begin working with us on August eight.
Ed and I worked together at Hewitt Associates and in my view. He is amongst the most experienced and credentialed CTO is in the industry and brings more than 30 years of industry experience, having most recently served as the CTO at be Swift.
He is a well respected technology leader and the benefits administration industry and has worked to expand the scope and scale of the Swift service offerings as well as his contributions and leadership at TIAA Cref.
Iraq's Acs accelerate a churro and Hewitt associates make him a valuable addition to our team.
As I've said before one of my earliest priorities was to assemble a first class team.
We believe the tenure and domain experience of our team is unrivaled in the industry.
It continues to fuel and support ongoing execution against our strategy, enabling us to reposition benefit focus and establish our foundation for the future.
With that I'd like to hand, it over to Al Panna, who will cover our financial performance.
Thanks, Matt I'll start with the highlights of our second quarter financial results and then I will cover our guidance for the third quarter and expectations for the remainder of the year.
Turning to slide eight.
Let's take a closer look at our second quarter revenue.
I am pleased to report that we once again delivered results at the high end of our guidance range.
Revenue for the second quarter with $56 6 million compared to $60 9 million in the second quarter last year.
This 7% year over year decline was in line with our expectation and related primarily to previously discussed health plan partial renewals that would cover on last quarter's earnings call.
As a reminder.
Appreciate the scope of their engagement with us in Q4 of 2021, and we expect to continue to see the year over year impact in software services revenue.
Through the first three quarters of 2022.
Total software services revenue was $48 6 million down 3% year over year.
Software services revenues include subscription revenue of 42, 9% and platform revenue of $6 six 9%.
Yes.
Subscription revenue was down as expected, 5% year over year and our contracted annual recurring revenue was 201 million at June 32022.
Which is down 4% year over year, driven by the health plan attrition discussed up there.
Platform revenue was up 12% year over year.
Primarily due to timing as Neil are relatively flat first half of the year.
Professional services revenue was down 25% or $2 7 million year over year, which is primarily due to ongoing customer projects. The deliberate later in the year as well as the shift implementations associated with new customer bookings in the year.
Looking at our margin results on slide nine.
GAAP gross margins were 49% versus 54% in the prior year period.
non-GAAP gross margins were 51% versus 56% in the prior period.
Software services GAAP gross margins were 62% in second quarter up 34% in the prior period.
And software services non-GAAP margins were 64% versus 65% from the prior year.
Margins were impacted by the planned ongoing investments in automation and process improvements, which we are putting in place to drive an improved customer experience and generate sustainable efficiencies beginning with the upcoming open enrollment later this year.
As a reminder, given the seasonality of our business.
Gross margins can fluctuate from one quarter to the next based on our sales and delivery cycles.
For the full year, we continue to expect to preserve our gross margins as we realize the contributions from the implementations of new customers later in the year timing of our platform revenue growth in Q4 and realization of efficiencies and open enrollment.
GAAP net loss available to common shareholders was $13 8 million and GAAP net loss.
Per weighted average share on a basic and diluted basis was 40 cents.
Compared to GAAP net loss available to common shareholders.
$16 6 million with GAAP net loss per weighted average common share on a basic and diluted basis.
50 cents in Q2 of last year.
Adjusted EBITDA was $6 2 million during the second quarter slightly above the high end of our guidance range.
Our adjusted EBITDA margin for the quarter was 11%, primarily driven by the timing of costs, which pushed from the first quarter. The second quarter, our year to date adjusted EBITDA margin is 15%, which is in line with our expectations through the first half of the year.
Moving onto our balance sheet and capital allocation on slide 10.
We ended the second quarter with approximately $51 million in cash and cash equivalents, a decline of approximately $7 million inclusive of restricted cash from the first quarter.
Timing of working capital changes.
During the quarter, our free cash flow was negative $2 1 million driven by the timing of customer collections and vendor payments as.
As a reminder, given the seasonality of our business the free cash flow generation on a quarterly basis can fluctuate.
We continue to expect to deliver free cash flow guide on full year basis of $18 million to $24 million.
Also note that our full $50 million line of credit remains available to us.
As we think about future uses of cash we plan to continue prioritizing our customers service experience accelerating our product roadmap and pursuing select tuck in acquisitions to accelerate our growth.
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Shifting to slide 11, and discuss our outlook for Q3, the third quarter of 2022, we expect revenue between 55 and 57 billion with.
With the largest year over year decline in subscription revenue.
Adjusted EBITDA between four and $6 million.
non-GAAP net loss available to common stockholders.
<unk> 6 million and $4 million, which represents non-GAAP net loss per share of 18th and 12 said based on 34 million basic shares outstanding.
As we look ahead, our expectations for the full year of 2022.
Our revenue growth inflection point near the end of the year and a return to low single digit growth in 2023.
<unk> unchanged.
We are closely watching the macro economic trends in particular labor market and the buying behaviors of our customers and prospects.
Given our diversified customer base and our long term contract.
We have not seen a significant impact to our business or prospects.
And our current expectations and outlook reflect that based on what we know today.
In closing I am pleased we delivered against our financial commitments and with the progress we're making on executing our strategy to drive sustainable breath I continue to believe in our ability to unlock.
Long term value for our shareholders.
With that Matt and I are happy to take your questions operator.
Thank you and if you really try to start a question. Please press the one followed by the four on a telephone.
Really three Tom prompt technology request.
My questions have been answered and you'd like to withdraw your registration. Please first note one followed by the screen.
One moment. Please my first question, which comes from the last name of Samuel with Jpmorgan. Please go ahead.
Hi, Thanks for taking my question.
I know you talked a little bit about macro but was hoping maybe you could just delve a little bit further and talk about what conversations are like right now with your employers.
And what their expectations are you know are you seeing any hesitancy from them yet.
Okay.
Yeah, Hey, it's nice to hear your voice thanks for the question.
So great question.
I suspect if we'd get a few macro questions today so.
I know that everyone's sort of looking for the Canary in the coal mine right now.
Given the overall.
GDP numbers.
Corporate confidence CEO confidence et cetera.
But as you know.
Labor markets tend to lag with GDP numbers.
And I would say that having been in the industry and having watched things like pls.
The various reports that the payroll guys put out and we track all this stuff very carefully along with.
Our own participant base and move and movements in it and as we said before we're really not seeing that Canary in the coal mine are that leading indicator around labor market stress.
Our observations both in our current book with our current clients and with prospects.
Labor market still tends to be pretty tight there still labor shortages the war for talent, great resignations fill those scenarios are still out there.
To answer your question directly in terms of our discussions with prospects and in a solid cycle.
We are not hearing any slowdowns in decision, making we made a couple of comments around our.
Oh are.
Sales pursuits.
And in.
A slight delay in some of them and those are really just due to contracting issues.
Normal course.
Sales processes similar to what we had last year and the year before so I'd say overall, our we're really not seeing clients.
Talking about.
Macro factors impacting their buying decisions with us I'd also say and I say this both based on.
Discussions I'm, having with customers and prospects right now, but also just from my own experience having been at this for a while.
That's a really critical.
Both in boom markets because.
They are particularly post COVID-19 because there are an important vehicle to attract and retain associates than in downturns.
Health benefits really matter as well and they are.
A key component.
<unk>.
Associates.
And at.
At least for now and I look I wake up every morning with the <unk>.
I'm sort of uncertainty that you probably do and just looking at.
GDP and other macro factors, but on a day to day basis, we're just not seeing it just yet but.
But of course as things change and if we do see the Canary in the coal mine that will be very vocal about it.
And share with what we're seeing right now.
It's really business as usual as it relates to this.
As the sales side of the sales season and sales cycles right now.
That's great to hear and really helpful color.
I was hoping maybe to follow up on something a little bit different I was wondering if you could speak a little bit more to the claims audit and recovery services business launch.
<unk> decided to launch this business and who are you competing against there.
Yeah, Great question so.
I'm really proud of the work that our product team is doing Tina and her team.
Our are proving it what I mean by that as well.
We are a technology company and a hallmark of a technology company is to be able to take things like the data assets that underpin our platform based on the transactions, we do everyday and finding new uses and purposes for that data. So we've announced we've launched products last year.
The advantage of our datasets last year, we launched a product around our savings in this year.
The team and the reason I I'm really proud of it is from ideation to product.
<unk> to end market. These are getting done and these cycles are going to done within a year or so.
Basically listening to customers and from our own experience, we know that.
With every transaction that happens in the health care industry, there is upwards of 20% errors.
Because we sit on top of the claims information along with the enrollment information we have a pretty good sense for our customers.
Or there could be incidences of improper billing fraud et cetera.
And as a result, we.
We mine the data and then go to the client and basically say look.
We feel we do estimates around potential cost savings based on the data that we see and then we get into a gain share with them around the recovery.
In terms of competition to.
To answer your question directly most of our pure play Ben Admin competitors do not offer. These services. Most of these services are offered by stand alone.
Claims.
Claims oriented technology, our HC IC companies.
And some of those may partner with.
Benefits administrator like us, but at least to my knowledge, none of our direct competitors have this capability natively.
Great. Thank you.
Thank you for your questions.
As a reminder to register for a question. Please press the one followed by the four on the telephone keypad.
The next question comes from the last time of Tucson with Piper Sandler. Please go ahead.
Hi, Thank you so much for taking my questions.
So I wanted to just kind.
Kind of follow up on the enhanced employer offering can you just describe a little bit.
What exactly that entails and then just as the intent to launch that offering.
At some point in the first half of 'twenty three to drive revenue and 24.
Or should we expect it sooner and then just kind of what are the direct incremental costs that you're factoring into guidance associated with the development launch and marketing of that offering.
Sure and thanks for the question I'll offer you sort of.
I'll address the first answer your question then I'll, let al talk about the second part of your question. So as we talked about really since I've been here a goal of mine that within the first 18 months of being on the job I wanted to be able to say and this is we're not talking about the employer business. We also have.
Product initiatives on the health plan side, which are important too, but your question was about employer.
What was very important to me was within the first 18 months of being on the job, which takes me through December the core bundle for employers.
Wanted to make sure it was equal to or superior to our core.
Direct competitors and to do that I felt very good about where we were in.
Our core enrollment engine and as we've talked about before the UI and UX always gets great reviews people find it very intuitive we get lots of positive feedback the areas that we needed to improve we're in administrative services, we define those as HCA, which we addressed that.
Our tango acquisition, which we're really pleased with.
Over the past few months, we've been coming to market with a revised Cobra solution that is native.
And by the end of the year, we plan to round that out with having.
Our billing solutions are derived from consolidated billing solutions.
Equal to or better than market. So we're roughly two thirds of the way.
Fixing our admin services bundle.
Hope to have all of it completed by the end of the year, which we think will further provide.
Our ability to compete more effectively in addition to that and to address your question. We've also.
Made some.
We use the word investments I would say slight tweaks to our <unk> offerings.
And the point, there is and working with our carrier partners. We constantly are trying to evolve.
How we.
Offer VB two our participants.
To be.
To directly address some of their issues and as you know these are products like critical illness hospital indemnity et cetera.
And what we're trying to do is make sure that those products.
<unk> prominently during the enrollment experience.
So that those who are most eligible for those products.
Where relevant.
By them, along with third core health health and welfare products. So that's sort of rounded out what's really important is to me is by the end of this year enrollment admin services VB as the core bundle form for employers should be equal to or better it will be equal to or better than our competitors.
And that's really what we're talking about in those comments in our prepared remarks, but I'll, let al Pan and make a few comments on cost of development distribution.
So.
And in terms of the.
Investments as Matt said.
They're they're organic in terms of what.
What we've been able to bring to market for Cobra and for the voluntary benefits, obviously panga with an acquisition that we did last year and so that was an inorganic investment from a product standpoint, and what I would say is that.
We've mentioned.
<unk> mentioned in the past, we're making investments within the business that we expect to continue to gain whether it's in our growth strategy advancement of that strategy and our operational efficiencies as it relates to some of the technology investments that Matt referenced and so I would say that it's included in our.
Outlook for 2022.
These these areas from a product enhancement perspective were contemplated in our strategy that we shared and so they are they are on point with what we've been targeting and what our overall outlook is for all set for 2023.
Okay. That's really helpful. Thank you and then maybe just following up on prior questions.
With respect to the employer market I guess.
Included in 2022 kind of can you help us understand your expectations for sales of ancillary.
Benefits products and then just in order to get to that low single digits year over year revenue growth and 23, what is the incremental growth expected on that.
22 number again for the ancillary benefit sales.
In 2000 and Tim Thank you.
Yeah, we certainly yes, I'm happy to answer that.
As you know our platform revenue is heavily anchored on open enrollment and the activities that take place with the participants of the lives on our platform and how they.
Re enroll or enrolling in products like you said the life and ancillary.
Product base, and our product catalog and sue.
In terms of what we're seeing right now it kind of anchors back to what Matt was saying on on what we're seeing from a labor market perspective, the driver for US there is the lives on the platform and our employer base year over year.
It is growing.
Our overall and those are down and I think we've shared that in the past. It's as a result of the health plans partial terminations, but within that the employer base is continuing to grow and so as we see the growth in that base, we would expect that to translate.
For Matt from a voluntary benefits enrollment perspective in the fourth quarter, assuming flat participation year over year and so.
That's kind of how we think about it right now in terms of the outlook and unless we start to see some indicators within.
The lives on our platform that show a different trend.
We continue.
Continue to be confident in our outlook for this year and then in terms of 2023, we're really not providing any specific guidance at this point.
We've shared that our expectations and continue to be low single digit growth and that would contemplate what we believe will take place in 2022, and <unk> and how that translates into 2023 revenue for us.
Okay got it that's helpful. So just to verify it we're assuming for 'twenty two it's flat participation relative to historical on a lower total number of lives in the base.
Participating on in terms of percent and revenue.
Per person, so flat, yes flat participations correct higher lives for employer total lives, which would be inclusive of health plan are down.
But as you know I think.
We've talked about before at health plan has effectively kind of a de minimis participation at this point in time.
In the voluntary benefits catalog.
Got it.
Really.
That's an important distinction that these products are primarily bought.
So the total caught and bells are less relevant for this calculation.
Okay.
Yes.
Okay.
Yeah.
There are no further questions at this time I will now turn the call back to you. Please continue with your presentation <unk> closing remarks.
Thank you and thanks, everybody for joining today and really appreciate the really good questions. We got before closing out the call I'm just going to quickly summarize our plans and progress to create value for our shareholders.
As we talked about over the past year, we have strategically address many of the underlying issues that impacted our past performance with a priority on improving and delivering consistent service excellence. We are seeing the benefits of our efforts, including increased sales activity with key brokers, indicating our go to market strategy is working and improved customer service.
This metrics year over year as we head into the open enrollment season, we're getting more add backs with prospects more referrals and our reputation in the market is strengthening while there is still plenty of work to do we remain confident that we have the right team in place to continue executing on our transformation strategy and we are pleased with the progress.
To date with that I just wanted to say thanks again for your time today, thanks to our associates for all they do for US every day and for all of their hard work.
And we look forward to the next quarterly update.
Thanks.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.
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