Q3 2022 Progyny Inc Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the <unk>, Inc. Third quarter 2022 earnings call.

At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.

It is now my pleasure to turn the floor over to your host James Hart, Sir the floor is yours.

Thank you Matthew and good afternoon, everyone welcome to our third quarter Conference call with me today are Peter <unk>.

CEO of <unk>, Michael <unk>, our president and CFO will begin with some prepared remarks before we open the call for your questions.

Before we begin I would like to remind you that our comments and responses to your questions.

<unk> views as of today.

<unk> related to our financial outlook for both the fourth quarter and full year 2022, and the assumptions and drivers underlying such guidance, including the impact of our sales season client launches and our expected utilization rates and mix are anticipated number of clients in covered lives for 2023, the impact of COVID-19, including various of our business.

Member activity and industry operations.

Fact of any shortages, where disruptions in the pharmacy medication supply chain on our business and our financial condition, our ability to acquire new clients and retain and upsell existing clients our market opportunity size and execution of long term growth our plans for the expansion of our business, including expansion into other markets and services offer our business performance.

Outlook strategy future investment plans and objectives with our forward looking statements under the federal Securities Law actual results may differ materially from those contained in or implied by these forward looking statements due to risks and uncertainties associated with our business as well as other important factors for a discussion of the material risks uncertainties and other important factors that could give.

In fact, our actual results please refer to our SEC filings and today's press release.

Can be found on our Investor Relations website any forward looking to make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.

During the call. We will also refer to non-GAAP financial measures such as adjusted EBITDA adjusted EBITDA margin gross margin, excluding stock based compensation and operating expenses, including stock based compensation.

Information about these non-GAAP financial measures, including reconciliations with the most comparable GAAP measures are available in the press release, which is available at investors that property Dot com I would now like to turn the call okay.

Thanks, Jamie and thanks, everyone for joining US today, we're pleased to report that <unk> had a very strong third quarter with record quarterly revenue of $205 million, reflecting 68% growth over the third quarter of 2021. In addition, our adjusted EBITDA more than doubled over the prior year to a record $35 million, yielding adjusted EBITDA.

Origin of 17%.

The positive momentum in revenue was driven primarily by both healthy member activity, which is fully returned to levels that are consistent with what we would expect to see.

As well as by a number of new client wins during the third quarter from accounts that were won in the current sales season.

Most of these launches where clients who wanted to make the project benefits available to their workforce as early as possible and if you chose not to wait until the start of their health plan year.

On one one.

There was also a large client who was during the quarter because of their plan year starts.

The third quarter, while early launches typically happened in every sale season, those using our with smaller clients. We've had more non January one starts overall this year and this has included some larger clients.

We view the enthusiasm with these clients and launching or benefit early as validation of both our market leadership as well as the confirmation that the demand for fertility and family building solutions as high as employers increasingly recognize that their benefits need to be both equitable and competitive even with the backdrop of some macro economic uncertainty.

While there are varying predictions as to whether recession will happen at all or how long. It will last companies are still relying on the productivity and satisfaction of their labor force and they are aware of what's actually happening in the market today, where unemployment remains at or near a 50 year low and labor continues to be extremely tight and there is a significant surplus of unfilled jobs.

The availability of fertility and family building benefits as well as the quality of those benefits is increasingly becoming a significant factor in prospective employees use when deciding whether to join or remain with the company.

And while these macro forces are providing a tailwind for facility as a category. We've seen our market share continue to grow as employers are increasingly choosing <unk> as their solution provider given our track record of success and helping companies more efficiently manage their healthcare spend while simultaneously enhancing the patient experience through our <unk>.

Clinical outcomes.

At this point in the year, our new sales and client renewal season is largely complete.

Last year's record setting sales season, which had been favorably impacted to some extent by carryover demand from Covid affected sales here in 2020 set a high bar for success in 2022, we continue that momentum and secured a record 105, new client commitments. During this selling season, representing an additional $1 2 million covered lives.

Accordingly, we expect to enter 2023 positioned for another year of strong growth with 370 clients and approximately $5 4 million covered lives, reflecting double the number of clients in covered lives from the start of 2021.

Before I go into greater detail about the selling season, let me first give a recap of our renewal activities and then briefly discuss employment growth within our existing customer base.

For the seventh consecutive year, we expect to retain 100% of our clients. We also continued to see very healthy appetite among existing clients, who are looking to expand their projecting relationship through upsells, including a handful of clients, we're adding coverage for the Canadian populations.

Altogether more than a quarter of our clients are increasingly benefit in some way in 2023.

We believe our extraordinarily high retention rate is one of the most underappreciated aspects of our business. Our clients include some of the most data driven and analytical companies in the world. We believe in our sustained success at both renewing those relationships year. After year. In addition to expanding with a large portion of the base each year demonstrates both the high levels of <unk>.

Satisfaction, we achieve as well as the strength of our client relationships, which is driven by the value that we continue to create for those.

By way of illustrating this point renewals. This year include one of our largest clients who chose to deepen the project relationship through a five year renewal as opposed to the more usual three year term and recognition of our track record of delivering substantial value both to the client and its workforce to our superior clinical outcomes and better member experience.

Although new sales activity has been the predominant driver to our growth historically employment growth at existing clients has been a contributor as well.

Looking to 2023 as it relates to employment growth within our base, while some of our clients, including some of our largest ones have made public comments about slowing the pace of hiring.

Or their expectations to keep head count flat one of our clients have indicated publicly.

And their conversations with us they're planning for any large scale reduction so that workforce at this point.

Accordingly, we currently anticipate that the employment levels of our existing clients to be relatively consistent versus 2022 with little or no contribution to revenue from organic growth in 2023.

Turning now to new sales, we believe the record number of new commitments. We have received demonstrates that our opportunities continue to be significant and the market remains substantially underpenetrated.

We believe these results.

Also show that project remains the provider of choice for the largest and most successful companies in the world and that we remain in our strongest and best competitive position given that no. Other benefit solution has been able to build a fully managed solution delivers high quality outcomes.

Margin five clients were adding represent the broadest and most diverse cohort our history, including aerospace and defense food and beverage health care Agriculture, Telecommunications energy cybersecurity financial services and more and as we discussed last quarter. We also want our initial clients and a number of industries.

Every large and underpenetrated, including hotels Airlines Labor unions University systems, and even our first professional sports team.

We expect this cohort of newest clients will further enhance the strength and diversity that already exist within our base as our clients in 2023 participate in more than 40 different industries.

Distant with prior seasons, we continue to see a broad range in the size of the newest clients, who span from 1000 lives to well in excess of 100000 lives.

We believe this demonstrates the relevance of fertility as an essential benefit for any type of employer, regardless of industry, they're in or the size of their operations.

Similar to last year approximately half of the newest clients had a previous fertility benefit before moving into <unk> and the other half of our newest clients are adding utility to their health benefits for the first time in 2023.

Given that the market overall is evenly divided with roughly half of large employers, providing some type of utility benefit and the other half not providing any coverage at all we believe our success with both groups. This year underscores our growth opportunities with larger employers.

As further evidence of the healthy appetite for fertility benefits and is resilient in this macro environment.

Our newest clients have also continued to select robust levels of coverage for their workforce with most choosing to provide two years or three smart cycles.

With our historical average we're also pleased to have achieved our strongest ever adoption rate of approximately Rx. This year of our newest clients, 97% are taking the pharmacy benefit driven by the savings we deliver over the traditional pbms as well as our superior member experience that amongst other advantages eliminates the risk of treatment delays.

After the newest cohort launches, we anticipate the 90% of our overall clients will have the integrated solution up from 84% today.

Before I turn the call over to Mark I wanted to provide a perspective on our recent development that's affecting the supply chain of a commonly prescribed facility medications.

Comparing the manufacturer of man of your one of the largest drugs in our formulary has notified us that they are temporarily paused delivery of that medication, thereby creating a shortage in supply as they.

The FDA to approve changes that were made in the manufacturing process by one of their suppliers.

Various review of their data to date indicates that the safety and efficacy of the product remains unaltered.

Ferring has indicated they're not aware of any evidence, indicating that the changing the manufacturing process pose any risk to patients.

Lastly, Brian has notified us that they are working with health authorities, including the FDA to resolve the situation as quickly as possible and will keep us informed.

In the meantime, clinicians are able to employ a combination of alternative medications to replicate the effective manner pure through the administration of these drugs, though the administration of these drugs is more complicated for the patient it's worth noting that this is the only drug of its kind in the U S. That's approved for use in the drug has been used widely in successfully with patients for many years.

It's also important to stress that neither <unk>, nor the FDA recall any doses of the medication that had already been distributed to the market.

Accordingly, looking at previous situations that have similarities to this one we believe it's reasonable for us to anticipate this situation can be resolved relatively quick.

While we don't anticipate the temporary disruption to have an impact on members' ability to pursue treatment. We do expect a slight financial impact as a result of using the alternate drugs given the different unit economics for these drugs, which the guidance we're issuing today already contemplate as mark will discuss in more detail shortly with.

Let me now turn the call over to Mark discussed the quarter in more detail and provide our expectations for the balance of the year.

Thank you Pete and good afternoon, everyone.

Begin by walking through our results for the third quarter, and then provide our expectations for the remainder of the year.

Third quarter revenue grew 68% over the prior year to $205 4 million, making this our first quarter to exceed $200 million in revenue to put this into perspective. After we launched our solution in 2016. It was five years before we reached our first 100 million quarter. Since then it's taken less than two years to add.

Add that next $100 million, we believe this underscores not only the momentum that's been driving the business, but also our ability to successfully and rapidly scale our operations.

Our growth in the quarter was primarily due to an increase in the number of clients in covered lives as compared to a year ago weighted average covered lives increased by more than 200000, driven by the launch of nine new clients at various points during the quarter and.

In every selling season, there are typically a handful of clients who want to launch their benefit sooner than the customary January 1st date as Pete discussed earlier, we view the higher than usual number of clients launching early this year as a strong validation of how relevant that fertility benefit is in the market. While also affirming the conviction employer.

We have to improve their health plans in this environment.

There was also a large client that we won in the current season, whose health benefit plan begins in the third quarter. So this was a natural go live date for them.

Accordingly, we had 282 clients as of September 30, representing an average of $4 5 million covered lives during the quarter. This compares to 188 clients and $2 9 million covered lives in the year ago period, reflecting 57% growth in lives over the past year.

Yes.

Looking at the components of the topline medical revenue grew 52% over the third quarter last year to $129 3 million, which again was due to the growth in clients and covered lives, while pharmacy revenue more than doubled in the quarter to $76 1 million or higher growth in pharmacy reflects an increase.

And the number of clients with the integrated solution as compared to a year ago.

Turning now to our utilization metrics more than 11000 art cycles were performed during the quarter, reflecting a 61% increase as compared to the year ago period.

Female utilization, which is the rate that most closely corresponds to our financial results was <unk>, 44% this compared to four 6% a year ago as.

As a reminder, utilization rates vary from quarter to quarter due to a number of factors, including the time of the year and the timing of new client launches as we typically see a ramp up period as our newest members begin to have access to the benefit.

Turning now to our margins and operating expenses gross profit increased 61% from the third quarter last year to 46 million, yielding a 22, 4% gross margin.

The 90 basis point decrease from gross margin in the year ago period, primarily reflects the impact of noncash stock based compensation, partially offset by efficiencies that we continue to realize and the delivery of our care management services.

As a reminder, our third quarter margins are typically higher than what we see in the fourth quarter as we onboard the incremental headcount that we need to successfully support the significant step up that we expect in covered lives in advance of January one.

Sales and marketing expense was five 4% of revenue in the third quarter as compared to three 6% in the year ago period.

The increase reflects higher noncash stock based compensation as well as continued investments we are making to expand our go to market resources.

G&A costs were 11, 5% of revenue this quarter, reflecting a slight improvement from the year ago period, we continued to realize efficiencies across our administrative functions, which more than offset the impact of higher stock comp expense in the current period.

The press release, we issued today reconciles the impact of noncash stock compensation on our gross margins and operating expenses.

With our strong topline performance and the efficiencies we've realized adjusted EBITDA more than doubled from the year ago period to $35 million this quarter.

The 17% adjusted EBITDA margin is our highest ever reflecting a 350 basis point expansion from the 13, 5% margin in the year ago period, adjusted EBITDA margin on incremental revenue was 22% this quarter, sorry, 22, 2% this quarter demonstrating the leverage that.

We continue to achieve as we build the business.

Third quarter net income was $13 2 million or <unk> 13 per diluted share this compared to net income of $16 8 million or <unk> 17 per share in the year ago period, the lower income in EPS as compared to a year ago, primarily reflects the higher stock comp expense in the current period as well as the higher <unk>.

Tax benefit recorded in the prior year period.

Turning now to our cash flow and balance sheet operating cash generated during the quarter was approximately 21 million. This compares to $24 2 million generated in the year ago period.

Over the first nine months of the year operating cash flow of $28 9 million compares to $17 2 million in the year ago period.

Our cash flow in both periods reflect the timing impact of certain working capital items, specifically as it relates to our pharmacy partner arrangements.

The substantial growth in pharmacy revenue, both on a year over year basis, as well as sequentially from the previous two quarters of this year and the payment terms associated with our rebate creates a lag when looking at current period cash flow versus adjusted EBITDA.

Additionally, given the large number of new clients and lives on boarded during the last couple of quarters cash flow also reflects that short term negative impact that we typically see with these new launches as it can take a quarter or so to get the integrations with the newest clients and their carriers running efficiently.

As of September 30, we had total working capital of $245 million, reflecting 141.

And cash cash equivalents and marketed marketable securities and no debt.

Turning now to our expectations for the fourth quarter and full year 2022.

Given the strong results we've achieved over the first three quarters of the year and the number of new clients. We have sold that have already gone live we're pleased to be in a position to raise our 2022 guidance for the third consecutive quarter.

For the full year, we are raising both the low and high end of the revenue range and now expect between 775 million to $785 million representing growth of between 55% and 57%.

On that basis for the fourth quarter, we are projecting revenue between $202 4 million to $212 4 million, reflecting growth of between <unk> 59 and 67%.

This anticipates the full quarter impact of the nine clients that launched in Q3 as well as a number of small clients that have launched in Q4, taking our expected average member count for the fourth quarter to $4 6 million.

The ranges for both the year and the fourth quarter also reflect an estimated negative impact of seven five to $12 5 million in revenue.

From the men appear shortage that Pete discussed earlier, assuming the shortage persist over the balance of the year.

Though we don't expect this shortage to negatively impact member utilization there are different unit economics with the ultimate combination of drugs that are being used during the shortage.

We are also raising our guidance on profitability for 2022, we now expect adjusted EBITDA of between 121% to $124 million for net income. We now expect between $26 3 million to $28 5 million or 26% and 29 cents earnings per share.

On the basis of approximately $100 million fully diluted shares.

For the fourth quarter adjusted EBITDA, we expect between $28 4 million to $31 4 million and.

Net income ranging from a loss of $700000 to and into income of $1 6 million or between a loss of one penny and <unk> of earnings per share based on approximately 100 million fully diluted shares.

This guidance reflects that we issued a broad based equity grant in the fourth quarter, which we expect will increase our stock compensation expense and which is reflected in our guidance ranges. We did a similar broad based grant a year ago, which in hindsight turned out to be when the market was at all time highs Accordingly, we issued.

The new grant to help ensure that the equity component of our compensation structure continues to serve as a retentive tool.

As a reminder, our net income range is do not contemplate any discrete income tax items, including any income tax benefit related to equity compensation activity.

To the extent that activity occurs we will continue to benefit from those discrete tax items over the remainder of 2022.

We now turn the call back over to Pete for some closing remarks.

Thanks, Mark as.

As we look to 2023 properties continues to distance itself from its competitors and demonstrate its market leadership, we expect to be managing fertility benefits for $5 4 million people and approximately 370 companies in 2023, a far greater scale than any other point solution provider.

As we think about continuing to grow our market share even with the record results in our most recent selling season. There are always a certain number of accounts. We decided this wasn't the right time for them to take the benefit in this selling season was no exception as in prior seasons. These prospects are choosing a competitive solution.

Rather they also we determined this was the right time for them to add or change their fertility solution generally because of some other need they have to address and their health plans to dialogue with those accounts remains very positive and a number of them have indicated they are eager to begin revisiting their discussions with us in January .

Sets us up with a larger and healthier pipeline than what we had at this time last year.

And as well to start next year selling season with momentum.

As we look into next year, we continue to believe that we are at a very early stage of penetrating our core market.

Once our new clients go live we will still have just a low single digit percentage of the 8000 employers in our target market to conclude we're pleased with both our results this quarter as well as the progress that we've made and the execution of our strategic initiatives, particularly as it relates to our success with our selling season and client retention, which affirmed the.

Project continues to be the provider of choice for many of the largest and most successful companies in the world with that we'd like to open up the call for your questions operator.

Ladies and gentlemen, the floor is now opened for questions. If you have any questions or comments. Please press star one on your phone at this time.

We do ask that will posing your question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.

Once again, if you have any questions or comments. Please press star one on your phone.

Your first question is coming from Anne Samuel from Jpmorgan. Your line is live.

Hi, congratulations on the terrific results and a great selling season.

You highlighted in the release you saw some early launches this year and I was just wondering what's driving that and then if we.

You should expect that to be the new normal going forward.

Yes.

I would never expected to be the new normal. Although we did have a number of new clients that went live and most of them that did go lives were went live ahead of their normal planning, which is one one.

For the most part we never plan for that because you cant predict how many there will or won't be one of the clients and the largest one that went live did go live on their plan year.

Our fiscal year not calendar year, and so that's why the number of clients in lives that went live earlier is bigger than normal that doesn't always happen and we don't plan for it but obviously it is a good indication of of where companies are thinking in terms of of wanting to watch this benefit earlier.

That's helpful. Thanks, and then just one question about you talked about the financial impact from the Medicare issues is that just on the RF side and then just wondering if you expect to see any impact utilization from that disruption and then also just how.

How quickly do you think it can be resolved.

Yes, we do.

We don't expect any impact on utilization from it that impact is only on the Rx side.

And.

We don't have any further insight into winter will be resolved, but as I said in my comments.

Historically when there are certain drugs that are the only drug in market.

Proved.

For a certain condition or treatment.

In the past these type of situations, where there's changes in manufacturing process has been resolved relatively quickly.

So our hope is that the case in this situation, but we don't have any further insight than what we provided.

Helpful. Thank you.

Thank you. Your next question is coming from Michael Cherny from Bank of America. Your line is live.

Hi, This is Charlotte on for Mike Congrats on the quarter and thanks for taking my question.

Following these results for 2023 can you talk a little bit more about the end of the selling season, particularly as it relates to your close rates and then any trends that you were seeing with our clients.

Sure.

It's hard to sort of distinguish close rates.

In different parts of the selling season, because you never know.

Exactly.

Why why they didn't mind when we look at as we look at our rates of close relative to deals we win one or lost to a competitor and those are really high but they're not now as are many different reasons why they do not know and those are much greater and set us up really nicely for next year.

Sometimes we get clarity on the not announce many times, we don't but they are just other priorities, but but for the most part we feel really well positioned for next year vis vis not announce.

Got it that's helpful. And then could you just talk a little bit more about what was driving the EBITDA margin expansion and then just any further color on the efficiencies that you mentioned.

Yes, so again we.

Sin.

Margin expansion really period over period as we've as we've grown.

And it's across each and all of the lines that we have I mean as our revenue has grown we've been able to.

Expand both through.

Care management services.

We don't need to hire as many people on a growth rate perspective is as the number of lives we bring onto the revenue that that generates.

Same thing also in terms of customer acquisition cost and sales and marketing and <unk>.

<unk> been quite efficient on G&A I would say that the.

The quarter did benefit a bit from some timing of expenses.

But.

Maybe a little bit of that would then come back in Q4, but I'm talking about relatively minor amounts here.

Nothing to call out as far as.

Some kind of special trend.

Great. Thank you.

Thank you. Your next question is coming from Julien.

<unk> Securities Your line is live.

Thanks, and thanks for taking my questions.

2023, now locked in at least from one one stock to your point of view, but I.

I wanted to get thoughts beyond 2022.

Understand it might be little early to talk about 2020 full selling season, but are you getting any indications from your conversation with employers that they need a job it implies Mike Theres, a pause button for 'twenty.

<unk> thousand 224 rollout in terms of benefit expansion order fertility benefits in particular, given the macro environment and recession concerns.

We really haven't had conversations with anybody about 2024 to speak of so I really can't comment on that all I could tell you is that if you look at all the indicators what happened in this selling season for 2023, whether it's the expansion of industries from 30 to 40, whether it's.

The number of clients being up 25% from what we sold in prior year.

Whether it's the fact that we sold half the clients never had the benefit before the other half.

Had some form of benefit the switch the progeny et cetera. All indications are what we were saying in our prepared remarks, which is the fact that it's a tight labor market and the fact that this is a really important benefit that people look for companies continue to acknowledge recognize and take action on and Thats why.

I believe that that will continue beyond 'twenty three.

Even with.

Some of the macroeconomic concerns that are out there.

Because they have been in the headlines as we know all year long and recently.

And even with that we still had a successful selling season. So so employers do you realize that even with some of those concerns. They may have to be smart about what they're doing but certainly adding this benefit doesn't appear to be something that that theyre eliminated their choices.

Great. That's helpful. And then my quick follow up on the general competitive landscape. There had been some large client wins and vitamins by some of your competitors I know you mentioned that your win rate has been pretty good but if you guys have not if you guys have not wanted to client in the selling season, specifically what was somewhat.

When you're being selective in rfps, although there are some cyclical things, which did not fit with your kind of focus area just trying to understand the reasons any different from prior years in terms of you not.

Not getting those claims.

Sure.

There's various reasons why I would say the most common reason for US is a lot of times.

We'll get prospects that will one who offer the benefit in a certain way that we don't view as a comprehensive benefit right. So that would be everything from.

Restrictions in terms of the amount of money they want to spend in terms of dollar Max's that will be everything from narrow networks that will be everything from.

Any limitations on access.

Treatment exclusions.

Medical necessity being added et cetera.

So all of those things make it make it both not a comprehensive benefit as well as a benefit that.

In many cases could potentially inequitable benefit right in our opinion and so many times. When we are asked to do the benefit of a different way that we believe is the best way to do it.

We try and talk to clients and convince them.

From our point of view, the right way to do the benefit and sometimes most of the time, we get them to agree it sometimes we don't so I'd say, that's probably the most common reason why.

Great. Thanks, a lot.

Thank you. Your next question is coming from Scott show in House from Keybanc. Your line is live.

Thanks, Congrats on the strong quarter of new client wins.

Just curious given the pull forward with a record number of clients launching early rather than Jan Jan one should we see utilization levels pick up in the fourth quarter, which would be seasonally abnormal as new members ramp with the services.

The utilization level, you wouldn't see a tick up in the utilization levels part of why we quantify the impact of amended pure.

If we didn't have that impact on the top line.

The overall sequential revenue growth would have been bigger and Thats, where you would have seen it. So if you think about utilization as a function of the number of lives that you have under management in a moment the utilization levels themselves as a percent wouldn't go up if that's what you're asking but certainly the overall cycles and volume is.

Going to go out because you have more lives under management I hope that answers your question yes.

Yes that does.

Question, you sort of quarter to quarter to be careful I think if you look at our full year guidance and sort of interpret what's there you are looking at sort of mid to upper 19 percentage or so for this year and that's probably that and maybe a little bit in that area is probably a better place to to be.

Thank you. Your next question is coming from Glen San Angelo from Jeffries. Your line is lives.

Thanks.

I just wanted to follow up on some comments you made with respect to overall.

Sort of penetration I think in your prepared remarks, you said the market remains substantially Underpenetrated I mean, clearly you had a great selling season, but a big question. We get from investors is what sort of the sustainability of this type of growth and so I was wondering if you could maybe put a finer point on those comments around penetration maybe.

<unk>, how many self insured clients you think are out there how many how many lines of that represent where you think we are in terms of penetration any any sort of statistics like that that you can give us.

Sure. If you look at there's a couple of buckets of addressable market that we talked about the one we referenced amongst is there is 8000 large self insured corporate companies in the USA represent roughly 80 million covered lives.

We have penetrated the.

The numbers that we sort of quota 370 or self insured clients and.

And next year, roughly $5 4 million covered lives right.

So that's sort of some idea from that market then there's an additional in terms of the labor market as an additional roughly 2000 25 million.

Lives.

Amongst across all the different types of of of labor that are in the U S that are a whole other market that we just started to penetrate this year.

So when we talk about the low penetration, we're referring to.

That universe and the last pieces as we talked about each year, we win a significant number of companies that are already covered the benefit in some form.

Primarily with their with their current traditional carrier.

As well as we win.

A significant number of clients last two years now almost half and half that coverage didn't cover the benefit at all and so it's really the combination of all of those things that.

Continue to reinforce.

Our belief that that we're still very low in early in terms of the penetration and the overall morph considered finally.

Continued trend of fertility rates in the us which are declining and had been declining that's.

That's the reason why the demand for the benefit and the awareness around the need for the benefit amongst millennials continues and grows and they're they're the folks that are are gonna be doomed.

Asking their HR department about this benefit whether they have it and it's not in my opinion or their opinion adequately covered or whether they don't have it at all and continue to push for getting covered in which is why I believe that.

Our growth and success will continue.

That's really helpful. Maybe I just ask one follow up on those statistics I mean, you said of the 8000 large employers there's 80 million covered lives any idea what percentage of those already have some type of benefit in place because it you're Windsor clearly coming from white space and from maybe some lives that are covered by the major carriers and I guess.

The concern that some investors have.

Managed care ultimately wakes up one day and stop seating. These lives to some of these you know I'm sure played facility players and so people are just really trying to understand like what's really the market opportunity. Thanks, Yeah, well, let me let me hit the second part of your question first well obviously the first part is because it's easy. So so based on studies that are out there by by the largest benefits consultants.

Of the larger employers that are out there only 40% cover this benefit in any form right. So, let's let's start with that that one first right.

As it relates to.

One of the questions.

As it relates to the health plans interestingly enough this past year.

The first year, we didn't see any change amongst the health plans trying to do anything around their offerings in our competitive situations. So if any did anything we weren't aware of so when I say that I mean in prior years. Some of the health plans tried to create some marketing around their solution.

Make a lot of changes to how they are doing the benefit or administer benefit but tried to put some marketing together to sort of feature what they're already doing in.

In the past.

Some some of the larger carriers put together programs and named them certain things to try and compete in this space.

There are large carriers that have and have had for years fertility solutions out there that we don't see that often competitively.

This is the first year, where we didn't see any new activity from any of the large carriers and my belief has been and continues to be the reason for that is that the azo model doesn't give them any financial incentive up or down to.

To offer this benefit or not.

And so and so and they have much bigger fish to Fry, if you will and the overall health care landscape that they don't seem to be that focused on changing their approach around this benefit.

Super helpful. Thanks, a lot.

Thank you. Your next question is coming from Sarah James from Barclays.

His life.

Thank you.

I was hoping you guys could touch on the timing of the pharmacy rebate.

Rolling out in practice.

If they have any impact on the sequential margin ipso and.

Phillippi ramp.

Helpful. If we could get some color on how much impact that's having on 2002 EBITDA or an annualized go forward EBITDA.

If you're talking about the impact of cash flows. It will always have an impact as we're growing so to this that that were growing year over year and to quit sequentially in quarters that drag related to cash those will continue because the payment terms of 108 180 day payment terms our current agree.

<unk> has another year in it.

I can't comment on the timing of when the negotiations will start but there is another year through the end of 2023 under our current arrangement.

But from a EBITDA standpoint.

The arrangements exist in it it's effectively part of our results in part of our guidance. There is no. There is no ramp up if you will associated with that within the year. It's really just the operating cash flow impact because of the delay between earning in receipt of six months and by the way we have been.

Getting all of this money and I'm pretty faithfully it just comes.

A couple of quarters later.

Got it.

I'm worried about that.

And I just thought it was tied to it.

Favorable terms negotiation Frank.

Mark said the terms are in effect for the full year. There are no. There are no sequential terms.

It's a three arrangement going through the end of 23.

Okay.

And then I need to unpack your comments on.

Getting.

Expense as it relates to your go to market strategy.

You guys have really high retention I know yourself.

So how should we think about increased funding for it.

Is that an indication that you're thinking of.

Like men's health or mental Marquette or just how should we read.

Read that strategic games.

Well, there's a couple of things right. Some of that is expansion, we've talked about standing up our benefit in Manhattan few small ourselves, but but positive upsells from our existing clients and the Canadian market. So so invested in the go to market strategy in Canada as part of it.

Some of it is continuing to develop our capabilities.

Across.

Different.

Channel partners and distribution borders and that's going to take some sales effort.

And then the rest of it is just as you continue to grow you do need a bigger marketing function 100 to support all of those things in terms of go to market, but you also need to.

Support <unk>.

Providers and all your clients and.

And the members from a marketing perspective, and all of those things required investments.

Okay. Thank you.

Oh, Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone at this time you are in.

Next question is coming from Stephanie Davis from Svd Securities. Your line is lives.

Hi, guys congrats on an awesome corner.

Thank you. Thanks question for Ya, you keep talking about shortages and drags on for me, Larry like such a guide and 90 per and then you're putting up record EBITDA quarters.

So is there a way T that out on site what your margins Clinton look like if you didn't have all of these have been or should we think of this rate is likely peak margin.

Let me, let me just clarify the timing of the manner of pure shortage. It just happened literally now so end of October .

And so the impact of it relative to the third quarter.

Results.

Didn't impact right the third quarter results Roger right I'm sorry.

Et cetera tide was there as well I think for the full quarter.

Was.

Net negligible shortage so for the most part most of the quarter. We were okay. There was a little bit but nothing meaningful not.

Not much to sort of quantify.

It was anticipated in our guts and was anticipated our guidance. So so the.

<unk> pure one of the bigger impact of it.

Is obviously the top line impact there is an impact on the margins.

Shortages are gonna happen from time to time, they don't always happen with drugs that are non formulary in terms of replacement drugs, but at the end of the day.

I could quantify it but to the extent that the shortages have been short term in nature.

I don't think it's disruptive because most of the time most of the drugs.

Significant majority.

Is is on formulary and all they're doing is impacting on a short term basis some of these.

Some of these.

Quarters.

As you receive guidance not in a really materialized.

And you said.

More of a housekeeping question out of me is there any way that I think about the <unk> of the new cohort that had the.

File a benefit versus non what would drive someone and not have it at this point.

It was very so the good news is there were very few were up to 97% in terms of the uptake of pharma.

Of our new clients highest everything last year was 92 or something I forgot. What you 90, 390, 293, but certainly appears to be 100%. The very few clients that don't take it has always been the same as in prior years, but as we continue to to perform and show.

Impact that's why I believe our uptake continues to grow but the reason why clients don't buy it usually is because there's two decision makers at client's relative to take you on the benefit one that represents the medical side.

Represents the pharmacy side and to the extent that boat one included for whatever reason and whenever other private priorities may be going on on the pharmacy side. There are at times existing and new clients that don't take both the entire benefit with pharmacy. That's the most common reason.

Now is there still an opportunity to expand in Nevada Bitcoin of should we think of this AD nearing the top get.

<unk>.

There is always a good opportunity to withstand it.

Last year, we had a sick.

Significant amount of and as evidenced by our the growth in pharmacy versus the growth in in medical this year.

Significant upsells there was a lot more opportunity.

It would have been more opportunity. This year, we have success at it again, we will always continue to to present the.

Positive impact.

Going with the private any arts programs, where existing clients and hope to win them all.

Awesome. Thank.

Thank you guys. Thank.

Thank you.

Thank you.

Coming from Deb.

From Bahrenburg your line is live.

Hey, Thank you for taking my question good quota here heading into Q for after the selling season I just Wanna put some context around a couple of things have been talked about already.

One penetration, which all indications kind of point to a market that's pretty early.

And then you mentioned kind of that cash on the salesforce slightly and.

And then the other thing is if you just look at the client and number of lines that you know all of this is good selling season, it's relatively in line with the 1.2 million lives ever added last year, I guess, you know as someone's sitting and looking at all of that together I would just expect if this penetration so early.

Four I kind of remember live adds to accelerate still.

To the next few years.

Do you think maybe it's kind of fat in terms of a year over year, because different softness from Mac or this year or is there a kind of a for the sales at first needed you'd think to drive further.

Member Liza given penetration solo just trying to bridge that gap. Thank you yeah, Here's how I would frame it and I can't quantify for you there.

There's two reasons why the year over year from our lives perspective is flat.

One is the macro environment has to have some impact I think the greater not now suggests that and so.

So that certainly is a thing right, but again hard to quantify it.

Because literally we had one or two of many many prospective clients that mentioned sort of budgets and that kind of thing as a concern and we heard that from nobody else. So I view that advantage of.

Not systematic and the second reason is that if you recall.

Last year selling season.

Benefit, although we could never quantified by how much by the muted.

Take from the 2020th season [noise] excuse me.

Because during that year, many companies chose not to make any changes to the benefits in terms of their employees for 2021, because they were dealing with the impact of Covid and a remote workforce. So if you look at sort of the.

Really excuse me I'm, just pretty much wrote for a second.

Yoga really low sales from 2020 as a result of Covid.

Average the two years and maybe wait a little bit more into 2021, because you would have expected some growth.

We view this year as growth considering that overhang that benefited last year selling season, but I would say, it's a combination of the two.

But but overall still significant success relative to the the base advising came into the U S and the base of lives into cancer eczema ear with.

Okay. That's helpful. I guess the next question just following up on that is.

It's certainly let's give it a bit more competitive.

Market standpoint, with with you know about well funded startups coming into the market.

From a growth commercial engine standpoint.

<unk> with the current scale or do you feel like you know.

Some acceleration would be helpful. Again, just putting it in contact so it's kind of the penetration being low.

Could that be beneficial I would love to get your thoughts on what you're thinking about in terms of commercial presence sure.

Every year, we reflect on the sales here and everywhere every year, we make investments some of them I mentioned already relative to both marketing and and feed on the street relative to.

Our salesforce, including how it's organized including.

How they work with a specific channel partners et cetera. This year is no different will make those investments for the next selling season, and we continue to invest in our go to market strategy and and this year will be no different and so.

And every year, we get smarter at how to approach the market and we are smarter at any changes in the market et cetera, and this year will be no different.

Already in the process of doing that hiring and.

And investing so that we are prepared for next year selling season.

Great. Thanks for taking my questions.

Thank you that concludes our Q&A session I will now hand, the conference back to James Hartford closing remarks. Please go ahead.

Thank you. Thank you everyone for joining us. This afternoon. If you have any questions feel free to reach out to you.

Thank you so much talk to you next quarter.

Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.

[music].

[music].

Mmm.

[music].

Good afternoon, ladies and gentlemen, and welcome to the progeny each third quarter of 2022 earnings call.

At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.

It is now my pleasure to turn the floor over to your host James Hart.

Yours.

Thank you Matthew and good afternoon, everyone and welcome to our third quarter Conference call with me today are heated up the CEO crossing Michael serve our President Martin.

We will begin with the prepared remarks before we open the call for your questions.

According to get by to remind you that our economy and responsive to your question.

View as of today.

<unk> related to our financial outlook for both the fourth quarter and full year 2022.

Function and drivers underlying such guidance, including the impact of our sales.

Marsha and are expected utilization rate mix are anticipated number of lines covered loss for 2023, the impact of COVID-19, including various.

Clients never activity and industry operation after.

Any shortages were disruptions in the pharmacy medication supply chain on our business and our financial condition, our ability to acquire new client entertainment upsell existing clients are market opportunity side and expectation for long term growth our plans for the expansion of our business.

Other marketing services offer our business performance industry outlook strategy future investments.

Jack.

More than statements under the federal Securities Law actual results may differ materially from those contained in or implied by these forward looking statements.

Risks.

Located with our business as well as other important factors for discussion of the material risks uncertainties and other important factors that impact our actual results reserved for MEP environment in today's press release.

We found on our Investor relations websites.

They got it covered based on assumptions as of today and we undertake no obligation to what these statements as a result of new information or future events.

During the call and will also refer to non-GAAP financial measures such an adjusted EBITDA adjusted EBITDA margin gross margin, including stock based compensation and operating expenses, including stock based compensation.

Information about these non-GAAP financial measures, including reconciliations with the most comfortable GAAP measures are available in the press release, which is available and investors that property Dot com I would now like to turn it off.

Thanks, Jamie Thanks, everyone for joining us today.

To report that project he had a very strong third quarter with record quarterly revenue of $205 million, reflecting 68% growth over the third quarter of 2021. In addition are adjusted EBITDA more than doubled over the prior year to a record $35 million, you'll be adjusted EBITDA margin of 17%.

Positive momentum and revenue was driven primarily by both healthy member activity, which is slowly returning to levels that are consistent with what we would expect to see.

As well as by number do client was it during the third quarter from accounts that were one and the current sale season.

Most of these launches where clients who wanted to make the project benefit available to their workforce as early as possible.

Who chose not to wait until the start of their health plan here.

One one.

There was also a large client who was during the quarter because of their plan year starts in the third quarter. While early launches typically happened in every sale season, those using our with smaller clients. We've had more non January one starts overall. This year. This is included some larger clients.

Review the enthusiasm of these clients and we want you to our benefit early as validation of both our market leadership as well as a confirmation that the demand for fertility and family building solutions as high as employers increasingly recognize that their benefits need to be both equitable and competitive even with the backdrop of some macro economic uncertainty.

While there are varying predictions as to whether a recession will happen at all or how long last companies are still rely on the productivity and satisfaction of their labor force and they're aware of what's actually happening in the market today, where unemployment remains at or near a 50 year low and labor continues to be extremely tight and there is a significant surplus of unfilled jobs.

The availability of fertility and family building benefits as well as the quality of those benefits is increasingly becoming a significant factor a prospective employees used when deciding whether to join or remain with the company.

And lobbies macro forces are providing a tailwind for facilities a category we've seen our market share continue to grow as employers are increasingly choosing progeny is there a solution provider given our track record of success in helping companies more efficiently manage their healthcare spend while simultaneously enhancing the patient experience who are severe.

Clinical outcomes.

At this point in the year, our new sales and client renewal season is largely complete.

The last year's record setting sail season, which had been favorably impacted to some extent by carryover demand from Covid affected sales here in 2020 setup high bar for success in 2022, we continue that momentum and secured a record 105, new client commitments during the selling season, representing an additional 1.2 million covered lives.

The quarterly would expect to enter 2023 position for another year of strong growth with 370 clients and approximately five 4 million covered lives, reflecting double the number of clients and covered lives from the start of 2021.

Before I go into greater detail about the selling season, let me first get a recap of a renewal activities and briefly discuss employment growth within our existing customer base.

For the seventh consecutive year, we expect to retain nearly 100% of our clients. We also continued to see very healthy appetite among existing clients, who are working to expand their projecting relationship to ourselves, including the handful of clients who are adding coverage for the Canadian populations.

Altogether more than a quarter of our clients are increasingly a benefit in some way in 2023.

We believe are extraordinarily high retention rate is one of the most under appreciated aspect of our business. Our clients include some of the most data driven and analytical companies in the world. We believe in our sustained success at both renewing those relationships year. After year. In addition to expanding with a large portion of the base each year demonstrates both the high levels.

Satisfaction, we achieve as well as the strength of our client relationships, which is driven by the value that we continue to create for those.

By way of illustrating this point renewals. This year include one of our largest clients who chose to deepen the project relationship through a five year renewal as opposed to the more usual three year term in recognition of our track record of delivering substantial value both to the client and its workforce towards superior clinical outcomes and better remember experience.

Although new sales activity has been the predominant driver to our growth historically employment growth and existing clients, who has been a contributor as well.

Two 2023 as it relates to employment growth within our base, while some of our clients, including some of our largest ones had made public comments about slowing the pace of hiring or their expectations to keep headcount flat none of our clients have indicated publicly.

Or in their conversations with us, but they are planning for any large scale reduction to their workforce at this point.

Accordingly, we currently anticipate that the employment levels of our existing clients to be relatively consistent versus 2022 with little or no contributions revenue from organic growth in 2023.

Turning that a new sales we believe the record number of new commitments. We've received demonstrates that are opportunities continue to be significant in the market remains substantially underpenetrated.

We believe these results.

Also show that property remains the provider of choice for the largest and most successful companies in the world and that we remain in our strongest invest competitive position given that no. Other benefits solution has been able to build a fully man a solution that delivers high quality outcomes.

Oregon five clients, we're adding represent the broadest and most diverse cohort history, including aerospace and defense food and beverage healthcare agriculture, Telecommunications energy Cyber security financial services and more and as we discussed last quarter. We also want our initial clients and a number of industries.

Large and Underpenetrated, including hotels Airlines Labor unions University systems, and even our first professional sports team.

We expect this cohort of news clients will further enhance the strength and diversity that already exists within our base is our clients in 2023 participate in more than 40 different industries <unk>.

Consistent with prior seasons, we continue to see a broad range and the size of the newest clients who spanned from a thousand lives well in excess of 100000 lives. We believe this demonstrates the relevance of fertility as an essential benefit for any type of employer, regardless of the industry there in or the size of their operations.

Last year approximately half the newest clients had a previous utility benefit before moving into progeny and the other half of our newest clients are adding fertility to their health benefits for the first time in 2023.

Given that the market overall is evenly divided with roughly half of large employers, providing some type of utility benefit and the other half not providing any coverage at all we believe our success with both points. This year underscores our growth opportunities with large employers.

As further evidence of the healthy appetite from utility benefits and it's resilient and this macro environment.

Our newest clients have also continued to select robust levels of coverage for their workforce with most choosing to provide two or three small cycles, which is consistent with our historical average. We're also pleased to have achieved our strongest ever adoption rate for approximately orexis year of our newest clients, 97% are taken the pharmacy benefit driven by the sea.

<unk>, we deliver over the traditional pbms as well as our superior remember experience that amongst other advantages eliminates the risk of treatment delays.

After the newest cohort launches, we anticipate the 90 per cent of our overall clients were happy integrated solution up from 84% today.

Before I turn the call over to Mark I wanted to provide a perspective on a recent development is effecting the supply chain of the commonly prescribed facility medications.

Preparing the manufacturer of many fewer one of the largest trucks and our formulary has notify us that they are temporarily pause delivery of that medication, thereby creating a shortage in supply as they wait the FDA to approve changes that were made in the manufacturing process by one of their suppliers.

Ferry's review of their data to date indicates that the safety and efficacy of the product remains unaltered.

Barely has indicated that they're not aware of any evidence, indicating the change in the manufacturing process pose any rest of patients.

Lastly.

Brian is notified us that they are working with health authorities, including the FDA to resolve the situation as quickly as possible and will keep us informed.

In the meantime conditions are able to employ a combination of alternative medications to replicate the effective manner pure through the administration that these drugs, though the administration of these drugs is more complicated for the patient it's worth noting that this is the only drug this kind of the U S. That's approved for use in the drug has been used widely and successfully with patience for many years.

It's also important to stress that neither <unk>, nor the FDA recalled any doses of the medication that had already been distributed to the market.

Quarterly and looking at previous situations that have similarities to this one we believe it's reasonable for us to anticipate this situation can be resolved relatively quickly.

While we don't anticipate the temporary disruption to have an impact on members ability to pursue treatment. We do expect a slight financial impact as a result of using the alternate drugs given the different unit economics for these drugs, which the guidance ratio today already contemplate as Mark will discuss in more detail shortly with.

Let me now turn the call over to Mark discuss the quarter in more detail and provide our expectations for the balance of the year.

Pete and good afternoon, everyone I'll begin by walking through our results for the third quarter, and then provide our expectations for the remainder of the year.

Third quarter revenue grew 68% over the prior year to $205.4 million, making this our first quarter to exceed $200 million in revenue to put this into perspective. After we launched our solution in 2016. It was five years before we reached our first 100 million quarter. Since then it's taken less than two years to add.

The next $100 million, we believe this underscores not only the momentum that's been driving the business, but also our ability to successfully and rapidly scale our operations.

Our growth in the quarter was primarily due to an increase in the number of clients and covered lives as compared to a year ago weighted average covered lives increased by more than 200000, driven by the launch of nine new clients at various points during the quarter.

And every selling season, there are typically a handful of clients who want to launch their benefit sooner than the customary January 1st date as Pete discussed earlier, we view the higher than usual number of clients launching early this year as a strong validation of how relevant the fertility benefit is in the market by also affirming the conviction and player.

Have to improve their health plans in this environment.

There was also a large client that we want in the current season, whose health benefit plan begins in the third quarter. So this was a natural go live date for them.

Accordingly, we had 282 clients as of September 30th representing an average of 4.5 million covered lives during the quarter. This compares to 188 clients and 2.9 million covered lives in the year ago period, reflecting 57% growth and lives over the past year.

Looking at the components of the top line medical revenue grew 52% over the third quarter last year to $129 $3 million, which again was due to the growth and clients and covered lives.

The pharmacy revenue more than doubled in the quarter to $76 $1 million or higher growth in pharmacy reflects an increase in the number of clients with the integrated solution as compared to a year ago.

Turning now to our utilization metrics more than 11000 art cycles were performed during the quarter, reflecting a 61% increase as compared to the year ago period.

Female utilization, which is the rate that most closely corresponds to our financial results was 0.44% this compared to 0.46% a year ago.

As a reminder, utilization rates vary from quarter to quarter due to a number of factors, including the time of the year and the timing of new client launches as we typically see a ramp up period as our newest members begin to have access to the benefit.

Turning now to our margins and operating expenses gross profit increased 61% from the third quarter last year to 46 million, yielding a 22.4% gross margin the.

The 90 basis point decrease from gross margin in the year ago period, primarily reflects the impact of non-cash stock based compensation, partially offset by efficiencies that we continue to realize and the delivery of our care management services.

As a reminder, our third quarter margins are typically higher than what we see in the fourth quarter as we onboard the incremental head count that we need to successfully support the significant step up that we expect and covered lives in advance of January 1st.

Sales and marketing expense was five 4% of revenue in the third quarter as compared to 3.6% in the year ago period.

Increase reflects higher non-cash stock based compensation as well as continued investments we are making to expand our go to market resources.

G&A costs were 11.5% of revenue this quarter, reflecting a slight improvement from the year ago period, we continued to realise efficiencies across our administrative functions, which more than offset the impact of higher stock comp expense in the current period.

The press release, we issued today reconciles the impact of non-cash stock compensation on our gross margins in operating expenses.

With our strong top line performance and the efficiencies we've realized adjusted EBITDA more than doubled from the year ago period to 35 million this quarter.

17% adjusted EBITDA margin is our highest ever reflecting a 350 basis point expansion from the 13.5% margin and the year ago period.

Adjusted EBITDA margin on incremental revenue was 22% this quarter.

22.2% this quarter demonstrating the leverage that we continue to achieve as we build the business.

Third quarter net income was $13.2 million or 13 cents per diluted share this compared to net income of $16.8 million or 17 per share in the year ago period the <unk>.

Lower income and EPS as compared to a year ago, primarily reflects that higher stock comp expense in the current period as well as a higher tax benefit recorded in the prior year period.

Turning now to our cash flow and balance sheet operating cash generated during the quarter was approximately $21 million. This compares to $24 2 million generated in the year ago period.

Over the first nine months of the year operating cash flow of $28 $9 million compares to $17.2 million in the year ago period.

Our cash flow in both periods reflect the timing impact of certain working capital items, specifically as it relates to our pharmacy partner arrangements.

The substantial growth in pharmacy revenue, both on a year over year basis, as well as sequentially from the previous two quarters of this year and the payment terms associated with our rebate creates a lag when looking at current period cash flow versus adjusted EBITDA.

Additionally, given the large number of new clients and lies onboarded. During the last couple of quarters cash flow also reflects that short term negative impact that we typically see with these new launches as it can take a quarter or so to get the integrations with the newest clients and their carriers running efficiently.

As of September 30th we had total working capital of $245 million, reflecting 141.

And cash cash equivalents and marketed marketable securities and no debt.

Turning now to our expectations for the fourth quarter and full year 2022.

Even the strong results we've achieved over the first three quarters of the year and the number of new clients. We have sold that have already gone live we're pleased to be in a position to raise our 2022 guidance for the third consecutive quarter.

For the full year, we are raising both the low and high end of the revenue range and now expect between $775 million to $785 million representing growth of between 55 and 57%.

On that basis for the fourth quarter, we are projecting revenue between $202.4 million to $212.4 million, reflecting growth of between 59 and 67%.

This anticipate the full quarter impact of the nine clients that launched in Q3 as well as a number of small clients that have launched in queue for taking our expected average member account for the fourth quarter to four $6 million.

The ranges for both the year in the fourth quarter also reflect an estimated negative impact of seven $5 million to $12.5 million in revenue.

From the men appear shortage that Pete discussed earlier, assuming the shortage persists over the balance of the year.

Although we don't expect this shortage to negatively impact member utilization there are different unit economics with the alternate combination of drugs that are being used during the shortage.

We are also raising our guidance on profitability for 2022, we now expect adjusted EBITDA of between $121 million to $124 million for.

Net income, we now expect between $26 $3 million to $28 $5 million or 26, and 29 cents earnings per share on the basis of approximately $100 million fully diluted shares.

For the fourth quarter adjusted EBITDA, we expect between 2008 $4 million to 31.4 million.

And net income raging from a loss of $700000 to and into income of one $6 million or between the loss of one penny and two cents of earnings per share based on approximately $100 million fully diluted shares.

This guidance reflects that we issued a broad based equity grant and the fourth quarter, which we expect will increase our stock compensation expense and which is reflected in our guidance ranges. We did a similar broad based grand a year ago, which in hindsight turned out to be when the market was at all time highs Accordingly, we issued.

The new grant to help ensure that the equity component of our compensation structure continues to serve as a retentive tool.

As a reminder, our net income ranges do not contemplate any discrete income tax items, including any income tax benefit related to equity compensation activity to the extent that activity occurs we will continue to benefit from those discrete tax items over the remainder of 2022.

Let me now turn the call back over to Pete for some closing remarks.

Thanks Mark.

As we look to 2023 properties continued to distance itself from its competitors and demonstrate its market leadership, we expect to be managing fatuity benefits for $5 4 million people in approximately 370 companies in 2023, a far greater scale than any other point solution provider.

As we think about continuing to grow our market share even with the record results in our most recent selling season. There are always a certain number of accounts. We decided this wasn't the right time for them to take the benefit and the selling season was no exception as in prior seasons. These prospects of choosing a competitive solution.

Rather they alls, we determined this wasn't the right time for them to add or change their facilities solution generally because of some other need they have to be addressed and their health plans to dialogue with those accounts remains very positive and a number of them and indicated they are eager to begin revisiting notices discussion with us in January .

Sets us up with the larger healthier pipeline than what we had at this time last year and physicians as well to start next year selling season with moment.

As we look into next year will continue to believe that we are at a very early stage of penetrating our core market.

Once our newest clients go live we will still have just a low single digit percentage of the 8000 employers and our target market to conclude we're pleased with both our results this quarter as well as the progress that we've made and the execution of our strategic initiatives, particularly as it relates to our success with our selling season and client retention, which affirmed that.

<unk> continues to be the provider of choice for many of the largest and most successful companies of the world, but that we would like to open up the call for your questions operator.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.

We do ask that well posing your question. Please pick up your handset if you're listening on speakerphone to provide optimum sound quality.

Once again, if you have any questions or comments. Please press star one on your phone.

Your first question is coming from and Samuel from J P. Morgan Your line is live.

Hi, congratulations on the traffic results in a in a great filing season.

You highlighted in their release you saw some early launches this year and I was just wondering what's driving that I mean, if we should expect that to be the new normal going forward.

Yeah.

I would never expected to be the new normal. Although we did have a number of new clients that went live and most of them that did go I've were went live ahead of their normal plan, which is one one.

For the most part we never plan for that because you can't predict how many there will or won't be one of the clients and the largest one moment lives did go live on their plan year, which was a.

Fiscal year, not a calendar year and so that's why the number of clients and lives that one lives earlier is bigger than normal that doesn't always happen and we don't plan for it but obviously, it's a good indication of of where companies are thinking in terms of of wanting to watch his benefit earlier.

That's helpful. Thanks, and then just one question about you talked about the financial impact from the net up your issues is that just on the <unk> side and then just wondering if you expect to see any impact utilization from that disruption and then also just when how quickly you think it can be resolved.

Yeah, we don't we don't expect any impact on utilization from it.

Impact is only on the <unk> side.

And.

We don't have any further insight into winter will be resolved, but as I said in my comments.

Historically, when there are certain drugs that are the only drug and market.

Proved.

For a certain condition or treatment.

In the past these type of situations, where there is changes in manufacturing process has been resolved relatively quickly.

And so our hope is that the case in this situation, but we don't have any further insight than what we provided.

Oh, thank you.

Thank you. Your next question is coming from Michael Cherney from Bank of America. Your line is live.

Hi, This is Charlotte on for my congrats on the corner and thanks for taking my question.

Now that we have the following season results for 2023 can you talk a little bit more about the end of this filing season, particularly as it relates to your clothes rates and then any trends that you were seeing with not now client.

Sure.

It's hard to sort of distinguished closed rates.

In different parts of the selling season, because you never know.

Exactly.

You know why they why they didn't mind, where we look at as we look at our rates of close relative to deals we win one or loss to a competitor and those were really high but they're not now as are many different reasons why they do not know and those are much greater and set us up really nicely for next year.

Sometimes we get clarity on and not an ounce many times we don't.

But they're just other priorities, but but for the most part we feel really well positioned for next year visa visa not NASS.

Got it that's helpful. And then could you just talk a little bit more about what was driving the EBITDA margin expansion and then just any further color on the efficiencies that you mentioned.

Yeah, So again, we've seen.

Margin expansion really period over period as weak as we've grown.

And it and it's across each and all of the lines that we have I mean, as our revenues grown we've been able to.

Expand both through.

Care management services.

We don't need to hire as many people on a growth rate perspective as as the number of lives we bring honor the revenue that that generates.

Same thing also in terms of customer acquisition costs, and sales and marketing and where we've been quite efficient on G&A I would say that.

The quarter did benefit a bit from some timing of expenses.

But.

I mean, it may be a little bit of that would then.

Come back in queue for but I'm talking about relatively minor amounts here.

Nothing to call out as far as Ah some kind of special trend.

Great. Thank you.

Thank you. Your next question is coming from Jay Lynn.

Jewish Securities Your line is live.

Thanks, and thanks for taking my questions.

2023, now logged in at least from one one side of the appointment a few but I.

I wanted to make it part beyond 2023, and I understand it might've been an early to talk about $20 for selling season, but are you getting any indications from your conversation with employers.

The job that employers might pause button for the 23 or 24 O allowed in terms of benefit expansion in order for dirty minded person, particularly given the macro environment and recession concerns.

We really haven't had conversations with anybody about 2000 2004 to.

To speak of so I really can't comment on that all I could tell you is that if you look at all the indicators of what happened in this selling season for 2023, whether it's the expansion of industries from 30 to 40, whether it's the number of clients being up 25% from what we sold in prior year.

Whether it's the fact that we sold half the clients never had the benefit before the other half.

Had some form of benefit the switch the progeny et cetera.

All indications are what we were saying that and are prepared remarks, which is the fact that it's a tight labor market and the fact that this is a really important benefit that people look for companies continue to acknowledged recognized and take action on and that's why I.

I believe that that will continue beyond 23.

Even with you know.

Some of the macro economic concerns that are out there.

Because they've been in the headlines as we know all year long and recently.

And even with that we still had a successful selling season. So so employers do realize that even with some of those concerns that may have to be smart about what they're doing but certainly adding this benefit doesn't appear to be something that that they are eliminated from their choices.

Great. That's helpful than my quick follow up on the in general competitive landscape. There have been some large client than some vitamins by the time of your competitors. I know you mentioned that you would win they'd have some pretty good but if you guys have not if you guys have not won a client and the selling season, specifically what were some of that.

You know when you're being selective in Rfps already there was some spectacular things did not play video.

Focus area, just trying to understand the reasons any different from Friday is in terms of you not.

Not getting those lines.

Sure.

There's there's various reasons why I would say the most common reason for US is a lot of times.

We'll get prospect that will one who offer their benefit in a certain way that we don't view as a comprehensive benefit right. So that will be everything from.

Restrictions in terms of the amount of money they want to spend in terms of dollar Max's that'll be everything from narrow networks that will be everything from.

Any limitations on Geo access certain treatment exclusions.

Medical necessity being added et cetera.

And so all of those things make it make it both not a comprehensive benefit as well as a benefit that.

In many cases could potentially inequitable benefit right in our opinion and so many times. When we are asked to do the benefit of different way that we believe is the best way to do it.

We try and talk to clients and convince them.

From our point of view, the right way to do the benefit.

And sometimes most of the time, we get them to agree sometimes we don't so I would say that's probably the most common reason why.

Great. Thanks, a lot.

Your next question is coming from Scott.

From Keybanc your line is live.

Thanks, Congrats on the strong quarter, a new client wins, just curious given the pull forward with a record number of clients launching early rather than Jan Jan one should we see utilization levels pick up in the fourth quarter, which would be seasonally abnormal as new members ramp with the services.

The utilization level, you wouldn't see a ticket and the utilization levels part of why we quantify the impact of many pure.

If we didn't have that impact on the top line.

The overall sequential revenue growth would have been bigger and that's where you would have seen it. So if you think about utilization as a function of the number of lines that you have under management in a moment the utilization level themselves as a percent. We didn't go up if that's what you're asking but certainly the overall cycles and volume is.

Going to go out because you have more lives under management I hope that answers your question.

Then that does not take me to my next question. So you run writing around 16 per cent annually from an EBITDA margin perspective, excuse is a fair run rate for the business moving forward on an annual basis basis, realizing there's seasonality from quarter to quarter or the disruption in many of your distribution.

Moving towards alternative medications I think you mentioned the lower pricing unit economics, but is there any like cost structure and packed with having to procure these additional alternatives. Thanks.

There's a small cost structure impact, but again.

If you go back to my remarks.

Which is why I view my point of view in terms of housing how long I think this'll last I don't think this will be a long term disruption and so I don't I wouldn't think about I wouldn't think about this as an issue on a long term basis as a short term, but I would call a short term bump relative to.

Margin contribution.

And then I'll, let Marc at the first part of your question Yes.

Obviously each of the last several quarters in this quarter as well are we always sort of point to the margin on the incremental revenue that we're generating as being maybe.

Maybe a better indicator of the of the longed longer term.

EBITDA margin, so, but but I think I would also caution you sort of quarter to quarter to be careful I think if you look at our full year guidance and sort of interpret what's there you're looking at sort of mid to upper 19 percentage or so for this year, and that's probably that and maybe a little bit in that area.

Probably a better place to to be.

Thank you. Your next question is coming from Glen in San Angelo from Jeffries your lines lines.

Yeah. Thanks, Hey, I just wanted to follow up on some comments you made with respect to overall.

Penetration I think in your prepared remarks, you said the market remains substantially Underpenetrated I mean, clearly ahead, a grade selling season, but a big question, we get from investors.

What sort of the sustainability of this type of growth and so I was wondering if you could maybe put a finer point on those comments around penetration maybe to extend like how many self insured clients. You think are out there how many how many lives does that represent where you think we are in terms of penetration any any sort of statistics like that that you can give us.

<unk>.

Sure.

If you look at there's a couple of buckets of addressable market that we talked about the one we referenced the most is there is 8000 large self insured corporate companies in the U S to represent roughly 80 million covered lives.

We have penetrated.

The numbers that we sort of quoted 370 are self insured clients.

And next year, roughly $5 $4 million, however lives right.

So that's sort of some idea from that market then there's an additional in terms of the labor market as an additional roughly 2000 25 million lives.

Amongst across all the different types of of of labor that are in the U S that are a whole other market that we just started to penetrate this year.

So when we talk about the low penetration, we're referring to.

That universe and the last pieces as we talked about each year, we win the significant number of companies that already covered the benefit in some form.

Primarily with their with their current traditional carrier.

As well as we win.

A significant number of clients last two years now almost half and half that covered didn't cover the benefit at all and so it's really the combination of all of those things that.

Continue to reinforce.

Our belief that that we're still very raw and early in terms of the penetration and the overall marks consider finally, the continued trend of fertility rates at the U S, which are declining and had been declining.

That's the reason why the demand for the benefit and the awareness around the need for the benefit amongst millennials continues and grows and they're they're the folks that are are gonna be doomed.

Asking their HR department about this benefit whether they have it and it's not in my opinion or their opinion adequate hybrid or whether they don't have it at all and continue to push for getting covered in which is why I believe that.

Our growth and success will continue.

That's really helpful. Maybe I just have one follow up on those statistics I mean, you said of the 8000 large employers there's 80 million covered lives any idea what percentage of those already have some type of benefit in place because it you're Windsor clearly coming from white space and from maybe some lives that are covered by the major carriers and I guess.

The concern that some investors have.

Managed care ultimately wakes up one day and stop seating. These lives to some of these are you know if you ever played facility players and so people are just really trying to understand like what's really the market opportunity. Thanks, Yeah. Let me let me hit the second part of your question first while I think the first part is easy. So so based on studies that are out there by by the largest benefit consultants.

Of the larger employers that are out there only 40% cover this benefit in any form right. So, let's let's start with that that one first right.

As it relates to.

It was the second part of the question.

As it relates to the health plans.

Sure enough. This past year was the first year, we didn't see any change amongst the health plans trying to do anything around their offerings in our competitive situations. So if any did anything we weren't aware of so when I say that I mean in prior years. Some of the health plans tried to create some marketing around their solution.

Didn't make a lot of changes to how they are doing the benefit or administer benefit but tried to put some marketing together to sort of feature what they're already doing.

In the past.

Some some of the larger carriers put together programs and name them certain things to try and compete in this space.

There are large carriers that have and have had for years fertility solutions out there.

That we don't see that often competitively.

This is the first year, where we didn't see any new activity from any of the large carriers and my belief has been and continues to be the reason for that is that the azo model doesn't give them any financial incentive up or down.

To offer this benefit or not.

So and so and they have much bigger fish to Fry, if you will and the overall health care landscape that they don't seem to be that focused on changing their approach around this benefit.

Super helpful. Thanks, a lot.

Thank you. Your next question is coming from Sarah James from Barclays. Your line is lives.

Thank you.

I was hoping you guys could touch on the timing of the pharmacy rebate negotiations rolling out in practice.

Did they have any impact on the sequential margin ipso and why not Ram.

Graham.

It would be helpful. If we could get some color on how much impact that's having on 2000.

Or an annualized go forward EBITDA.

If you're talking about the impact of cash flows. It will always have an impact as we're growing. So today is that there were growing year over year, a secret sequentially in quarters that drag related to cash flows will continue because the payment terms of 108 180 day payment terms our current green.

Has another year in it.

I can't comment on the timing of when the negotiations will start but there is another year to the end of 2023 under current arrangement, but but from a EBITDA standpoint.

The arrangements exist in it it's effectively part of our results in part of our guidance there is no.

There is no ramp up if you will associated with that within the year. It's really just the operating cash flow impact because of the delay between earning in receipt of six months and by the way we have been.

Getting all of this money.

Faithfully it just comes.

A couple of quarters later.

Got it.

I wasn't worried about that.

Collection.

It was tied to it.

Favorable terms negotiations right.

Oh.

<unk> said the terms are ineffective if all year.

There are no there are no sequential terms.

It's a three year arrangement going through the end of 23.

Okay.

And then.

Unpack your comments on.

And marketing.

Expand as it relates to your go to market strategy.

You guys have really high retention I know yourself.

So how should we think about increased funding for it.

Strategy is that an indication that you are thinking of expansions like men.

Or just how should we.

Read that strategic teams.

Well, there's a couple of things right. Some of that is expansion, we've talked about standing up our benefit in Manhattan, a few small upsells, but but positive ourselves from our existing clients and the Canadian market. So so invested in the go to market strategy in Canada as part of it.

Some of it is continuing to develop our capabilities.

Across.

Different.

Channel partners and distribution borders and that's going to take some sales effort.

And then the rest of it is just as you continue to grow you do need a bigger marketing function to support all of those things in terms of go to market, but you also need to.

Support.

Providers and all your clients from a more and the members from a marketing perspective, and all of those things required investments.

Thank you.

Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone at this time.

Your next question is coming from Stephanie Davis from SBB Securities you're lying is lives.

Hi, guys congrats on <unk>.

Thank you thanks question for Ya.

Keep talking about shortages and drags on formulary leg et cetera.

And then you're putting up record EBITDA quarters.

Is there a way T that out on site what your margins Clinton look like if you didn't have all of these heartburn.

Or should we think of this right.

Likely peak margin.

Let me let me just clarify the timing of the men are pure shortage. It just happened literally now so end of October .

So the impact of it relative to the third quarter.

Results.

Didn't impact right the third quarter results Roger right I'm sorry.

You're tied with there as well I think for the full quarter.

Was.

Negligible shortage so for the most part most of the quarter. We were okay. There was a little bit but nothing meaningful.

Not much to sort of quantify advil.

It was anticipated in our guidance and was anticipated guidance. So so the demand pure one of the bigger impact of it.

Is obviously the top line impact there is an impact on the margins.

Shortages are going to happen from time to time, they don't always happen with drugs that are non formulary in terms of the replacement drugs, but at the end of the day.

I can quantify it but to the extent of the shortages have been short term in nature.

I don't think it's disruptive because most of the time most of the drugs.

The significant majority.

Is is on formulary and all they're doing is impacted on a short term basis some of these.

Some of these.

Quarters.

Cdc's guidance not in a really material.

And you said.

More of a housekeeping question out of me is there any way to think about the <unk> of the new cohort that had the.

Farmer benefit versus non what would drive someone to not have it at this point.

It was very it was so the good news is that we are very few were up to 97% in terms of the uptake of pharma of.

Of our new clients highest everything last year was 92 or something I forgot. What you 90, 390, 293, Victoria 100 present, the very few clients that don't take it has always been the same as in prior years, but as we continue to to perform and show.

Impact that's why I believe our uptake continues to grow but the reason why clients don't buy it usually is because there's two decision makers at client's relative to take you on the benefit one that represents the medical side the.

Represents the.

Pharmacy side and to the extent that both own included for whatever reason and whenever other private priorities may be going on on the pharmacy side. There are at times existing and new clients that don't take both the entire benefit with pharmacy. That's the most common reason.

Now is there still an opportunity to expand into that.

Alright.

Should we think of their dad nearing the top.

There's always an opportunity to withstand it.

Ah.

Last year, we had a significant amount of and as evidenced by our the growth in pharmacy versus the growth in in medical this year, we had significant upsells there was a lot more opportunity.

Would have been more opportunity this year, we have success at it again.

Always continue to to present the.

The positive impact.

Of going with the property arts programs, where existing clients and hope to win them all.

Awesome.

Thank you guys.

Thank you.

Thank you.

Coming from Deb, Syria from Baron Berg Your line is live.

Hey, Thank you for taking my question good quarter here heading into Q for after the selling season I just Wanna put some context around a couple of things have been talking about already.

One penetration, which.

All indications kind of point to a market that's pretty early.

And then you mentioned that crash on the Salesforce slightly and.

And then the other thing is if you just look at the client and number of lines that you know all of this is good selling season, it's relatively in line with the 1.2 million lives ever added last year, I guess as someone's sitting and looking at all of that together I would just expect this penetration so early.

Four I kind of remember live adds to accelerate.

In the next few years.

You know, maybe it's kind of flat in terms of the year over year, because different softness from macro this year or.

Is there a kind of a for the sales at first needed you think to drive further.

Remember lies odd given penetration solo just trying to bridge that gap. Thank you, yeah, Here's how I would frame it and I can't quantify it for Ya.

There's two reasons why the year over year from lives perspective is flat.

One is.

The macro environment has to have some impact I think the greater not now suggests that and so that certainly is a thing right, but again hard to quantify it because because literally we had one or two of many many prospective clients that mentioned sort of budgets and that kind of thing as a concern and we heard.

Nobody else, so I view that as anecdote.

Not systematic and the second reason is that if you recall.

Last year selling season.

Benefit, although we can divert quantified by how much by the muted.

Take from the 2020th season [noise] excuse me.

During that year, many companies chose not to make any changes benefits in terms of their employees for 2021, because they were dealing with the impact of Covid and a remote workforce. So if you look at sort of the.

Really excuse me I'm, just pretty retro per second.

Yoga really low sales from 2020 as a result of Covid.

Average the two years and maybe wait a little bit more into 2021, because you would have expected some growth.

We view this year as growth considering that overhang that benefited last year selling season, but I would say, it's a combination of the two.

Ah, but overall still significant success relative to the the base advising came into the year with and the base of lives in accounts are exiting the year lists.

Okay. That's helpful. I guess the next question is following up on that is.

It's certainly looks to be a little bit more competitive.

Market standpoint with with.

Well funded startups coming into the market.

From a growth commercial engine standpoint.

Comfortable you at the current scale or do you feel like you know some acceleration would be helpful. Again, just putting it in contact so it's kinda the penetration being low.

Could that be beneficial would love to get your thoughts on what you're thinking about in terms of commercial presence sure.

Every year, we reflect on the sales here and everywhere every year, we make investments.

That I mentioned already relative to both marketing and and feed on the street relative to.

Our salesforce, including how it's organized including.

How they work with a specific channel partners et cetera. This year is no different will make those investments for the next selling season.

Continue to invest in our go to market strategy and and this year will be no different and so.

And every year, we get smarter as how to approach the market and we are smarter at any changes in the market et cetera, and this year will be no different.

I already in the process of doing that hiring and.

And investing so that we are prepared for next year selling season.

Great. Thanks for taking my questions.

Thank you that concludes our Q&A session I will now hand, the conference back to James Hartford closing remarks. Please go ahead.

Thank you everyone for joining us. This afternoon, if you have any questions feel free to reach out.

No heavy.

Talk to you next quarter.

Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.