Benefitfocus, Inc.
Q3 2017 Earnings Call Transcript

Published: 4 Nov 2017

[Operator:]

Greetings, and welcome to the Benefitfocus’ Q3 2017 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Bauer, Director of IR. Thank you, Mr. Bauer. You may begin.

[Michael Bauer:]

Thank you, operator. Good afternoon, and welcome to Benefitfocus’ Third Quarter 2017 Earnings Call. We will be discussing the operating results announced in our press release issued after the close of market today. Joining me today are Shawn Jenkins, our Chief Executive Officer; and Jonathon Dassault, our Chief Financial Officer. Shawn and Jonathon will offer some prepared remarks, and then we will open the call up for a Q&A session. As a reminder, today’s discussion will include forward-looking statements such as fourth quarter guidance and other predictions, expectations and information that might be considered forward-looking under federal securities laws. These statements reflect our views as of today only and should not be considered as representative of any subsequent date. These statements are subject to a variety of risks and uncertainties, including the fluctuation of our financial results, recruitment and retention of key personnel, general economic risk, the early stage of our market, management of growth and changing regulatory environment that could cause actual results to differ materially from expectations. For a further discussion of the material risks and important factors that could affect our actual results, please refer to our annual report on Form 10-K and other SEC filings. During the course of today’s call, we will also refer to certain non-GAAP financial measures. You can find important disclosures about those measures in our press release. With that, let me turn the call over to Shawn.

[Shawn Jenkins:]

Thanks, Mike. Good afternoon, everyone, and thank you all for joining us today. From a P&L perspective, Benefitfocus delivered strong third quarter results that either exceeded or came in at the high end of our expectations. For the quarter, total revenue increased to $62.5 million, and our revenue retention rate once again exceeded 95%. Non-GAAP consolidated gross margin increased by over 115 basis points and adjusted EBITDA margin improved by over 620 basis points when compared to the third quarter of 2016. We ended the third quarter with 903 large employers and increased our insurance carrier customers to 54. These results demonstrate the inherent scale in our business and the benefits associated with our multiyear investment and operational excellence. 2017 has represented a challenging year for the benefits industry from a regulatory perspective. However, while the debate over the fate of the Affordable Care Act has gone on in Washington, I am proud of the significant progress we have made at Benefitfocus throughout the year on a number of important fronts. In particular, we believe the investment that we have made in our sales and marketing organizations, combined with our relentless focus on product innovation and becoming free cash flow positive in the fourth quarter will only further strengthen our competitive position. These investments will allow us to enter 2018 with our strongest slate of products yet and a sales organization that has significantly increased in its size and tenure compared to the start of 2017. The fundamentals of our market opportunity also remain strong. We operate in a large and complex market with roughly 18,000 large U.S. employers who invest significantly in employer-sponsored benefits. Today, we work with 5% of this market, which provides a very long runway ahead. The complexity of employer-sponsored benefits also continues to increase at a steady pace. In fact, the average employer on our platform now offers 15 different benefit types. And as a result of this complexity, we believe employers will increasingly shift benefits administration to our flexible cloud-based benefits management platform that can streamline their benefits investment. With over 900 large employers and 54 insurance carriers already on our platform, we are also uniquely positioned to take advantage of an emerging trend as a distribution platform for our insurance carrier customers. To prepare for this anticipated dynamic, you may recall that we introduced the Certified Carrier Program last year. This program enables life and ancillary carriers to standardize a suite of products for the Benefitfocus Platform. The benefits for both employers and carriers are significant. For employers, the program streamlines data integration, accelerates implementation and simplifies the enrollment experience for their employees. For carriers in the program, participation increases while operational costs are reduced. During the third quarter, we expanded our Certified Carrier Program to include Aflac, the largest provider of supplemental insurance in the United States. Along with The Hartford, these two early certified carriers provide a significant foundation for this program. I spoke last quarter of the emerging importance of the broker community and our investment in the partnership program to engage this community. We are continuing to invest here as we are adding new broker partners. We are also finding that as the Certified Carrier Program expands, the participating carriers are promoting Benefitfocus to their broker community. We believe this dynamic will streamline our employer acquisition rate over time and, in turn, the growth will attract additional carrier investment. We are in the early stages of this dynamic but we believe we have the right strategy in place, and the market is responding favorably. Another area of steady progress during the quarter has been our continued investment in our channel partnerships. During the second quarter, we piloted the SAP SuccessFactors ambassador program. This program provides a unique opportunity for SAP account executives to spend time on our Charleston campus, become certified on Benefitfocus and prioritize accounts with our channel sales team. The early results have been promising, and during the third quarter, we certified additional SAP SuccessFactors U.S. regions with Benefitfocus sales training. During the quarter, we also made substantial progress on an exciting new technical capability to unlock new channel opportunities with payroll providers. Thus far, we have expanded the Benefitfocus API to include a new API set for Ultimate Software in their UltiPro connect API. When available for early next year, the new capability will allow our team to quickly deliver best-in-class and near real-time connections with other leading payroll systems. While we feel very good about the great progress we have made during the quarter to position Benefitfocus for long-term success, our Q3 bookings performance was uneven. Continued strength in our back-to-base and channel teams, coupled with improvement in our carrier sales results, were offset by slower bookings in our direct employer segment. The dynamics that we experienced in the third quarter were similar to what we shared with you on our last earnings call. The continued regulatory uncertainty over the fate of the ACA, coupled with a less-tenured employer sales force, created challenges in moving transactions through the pipeline. Under the direction of our new sales leadership, we have taken a number of steps to improve our sales execution and position our team for success during the critical 2018 selling season. Let me highlight a few examples. During the quarter, we significantly increased our investment in sales training, development and operations. This includes refining our processes to identify best-in-class talent and our training programs and tools for developing our sales associates. Additionally, we have pulled forward our sales kickoff conference to November from January so that our teams hit the ground running and are ready to win in 2018. We believe this will help us develop our pipeline earlier in the year and will lead to productivity gains. Our sales team also took steps to better leverage the accelerating momentum in our channel organization. As previously mentioned, we recently increased our investment in our SAP channel and hired additional coverage across our broker community. Both strategic investments have boosted activity and productivity from our growing channel presence. Also during the quarter, our sales and marketing team worked closely together to drive high-quality pipeline growth for our direct sales team and cost-effectively increase our sales coverage. One of the ways our team drove pipeline growth in the quarter was increasing the number of our One Place Local events. These are proven events that are hosted by existing Benefitfocus customers to educate prospects about our best-in-class technology and strong ROI. To improve our sales coverage, in Q3, we also launched plans to hire additional inside sales development reps to improve the prospecting of our massive opportunity of 18,000 large U.S. employers as well as to modestly increase our direct sales executives in the field. While our 2017 selling season did not meet our expectations, we are extremely optimistic about our – in our ability to accelerate bookings growth in 2018. It’s important to understand that our performance this year was not the result of changes in the competitive environment or a fundamental shift in the largest driver of our business, which is the shift to the cloud. We are confident the processes our new sales leadership are implementing will enable us to perform significantly better in any type of market environment, particularly as regulatory uncertainty lessens over time. I will add a brief perspective on the regulatory environment. On September 30, the opportunity for the House and Senate to effectively repeal and replace the Affordable Care Act ended. Going forward, we would expect to see more incremental changes to the law. I believe that employers will now get back to business and implement their long-term benefit strategies, which I believe will require a move to the cloud for the benefits administration and communication. Further, I think that these past two selling seasons, through regulatory drama, have created a positive employer decision making, which has effectively become pent-up demand for our offerings. During this period, we have continued to invest in our products and platform and are now well-positioned to benefit from this coming tailwind. With the right leadership in place and a PEPM TAM that is approaching $12, up from $3.50 at the time of our IPO, we are excited about the potential of our sales organization as we continue to ramp the tenure and effectiveness across all our selling channels. From a research and development perspective, during the third quarter, our product and engineering teams made significant progress against our product roadmap, setting our customers up for a successful open enrollment while also equipping our sales teams with a great set of new products. From a new product perspective, I’m particularly excited about the new additions available through our recently announced Benefitfocus Account Services solution line. Benefitfocus Account Services is a suite of software and software-enabled services that allow our customers to streamline benefits management. The solution line initially addresses three critical areas of benefits administration for large employers

[Jonathon Dassault:]

Thanks for the introduction, Shawn. Since joining Benefitfocus nearly 2.5 months ago as CFO, I have been working closely with the leadership team to begin to obtain a deep understanding of the business. From my background in the healthcare technology universe, I was well aware of Benefitfocus’ reputation of offering best-in-class technology and its position as the market leader in a very large untapped market, factors that were key determinants to my decision to join the organization. I’d like to highlight a few initial observations. I have been very impressed with my interactions with associates from across the company. We have great talent across all functional areas, including finance. Benefitfocus has a strong product roadmap and commitment to technology leadership. And as our long-term business market matures, we are well-positioned for continued growth and market share gains in a very dynamic market. Turning to our Q3 results. I’ll begin by reviewing the details of our financial performance, and then I will conclude with updated guidance for Q4 and insights on 2018 and our longer-term performance objectives. Total revenue for the third quarter was $62.5 million, an increase of 8% compared to the third quarter of 2016. This is at the high end of our guidance range and reflects sales of products to both new and existing customers and the continuation of our high revenue retention. Breaking revenue down further. Employer revenue for the quarter was $40.1 million, up 14% compared to the year-ago period. Q3 carrier revenue of $22.3 million was down 2% compared to the same period last year and reflects a large carrier customer that had a segment transition off the platform to a homegrown internal solution and, as we have previously stated in prior quarters, accelerated professional service revenue from the second half of the year to the first half of the year. For the third quarter, total software services revenue was $53.1 million, representing 85% of total revenue and grew 8% year-over-year. Employer software services revenue was $36.5 million, an increase of 15% as compared to the third quarter of 2016. Total professional services revenue in Q3 was $9.3 million, representing 15% of total revenue and an increase of 7% over Q3 2016. GAAP results for the quarter include gross profit of $32 million, representing a margin of 51% and an operating loss of $3.6 million, contributing to a net loss per share of $0.21. Non-GAAP gross profit totaled $32.7 million or a 52% non-GAAP gross margin, which compares favorably to the 51% non-GAAP gross margin in Q3 2016. The over 115 basis point improvement over last year and over 350 basis point improvement year-to-date reflects revenue growth and the operational benefits of our increasing scale as well as steady progress in our infrastructure optimization and cost management efforts. Importantly, these improvements are also evident in our software gross margin. For the quarter, our non-GAAP software services gross margin of 63% was up over 210 basis points over the prior year. We also continue to drive consistent and impressive year-over-year improvements in our adjusted EBITDA results. Q3 adjusted EBITDA was $5.1 million or 8% of revenue. This was meaningfully above our guidance and up from 2% of revenue in Q3 2016. Our adjusted EBITDA was positively impacted by our revenue growth in the quarter and increasing operational scale. Non-GAAP net loss per share was $0.06, based on 31.2 million weighted average shares outstanding and exceeded our prior guidance for a loss of $0.16 to $0.13 per share and a year-ago period loss of $0.14 per share. Moving to the balance sheet. We ended Q3 with cash, cash equivalents and marketable securities of $54.6 million. Total deferred revenue declined $1.3 million sequentially to $63.8 million. As discussed in prior quarters, the decline in deferred revenue reflects the deemphasis of certain lower-margin carrier professional services engagements as well as the timing of deliveries and new sales in the carrier business. On the statement of cash flows, cash used in operations totaled $8.7 million for the quarter compared to $0.7 million used in the year-ago period. Free cash flow, a non-GAAP measure that we define as cash provided by or used in operations, less capital expenditures, was a negative $11 million compared to a negative $6.5 million in the year-ago period. As we’ve previously stated, our cash flow on a quarterly basis can be impacted by the timing of working capital changes. Importantly, our second half 2017 free cash flow forecast and our expectation to become free cash flow positive for Q4 remains unchanged. I will now turn to our outlook for the fourth quarter of 2017. For Q4, we are targeting revenue of $66 million to $67 million, which reaffirms our 2017 total revenue midpoint of $256.5 million. From a profitability perspective, we expect adjusted EBITDA of $4.5 million to $5.5 million, which puts full year adjusted EBITDA above the high end of our prior 2017 adjusted EBITDA outlook. We expect non-GAAP net loss of $2.5 million to $1.5 million and a non-GAAP net loss per share of $0.08 to $0.05, based on 31.3 million weighted average shares outstanding. Next, I will share some color on the new revenue recognition standard, our 2018 outlook and our longer-term operating targets. In terms of the new revenue standard, or ASC 606, we are deep into the process of assessing and quantifying the impact to our business. At present, we expect the following areas to be the most impacted. Deferred revenue is expected to decrease upon adoption due to a revised recognition period. This will likely impact professional service revenue, particularly in our carrier segment. We also expect the creation of assets upon adoption for costs to obtain contracts with customers, mostly comprised of sales commissions and bonuses as well as costs to fulfill certain contracts. We currently expense these items as incurred. As we complete the adoption of the new standard, we will continue to assess the timing of revenue recognition, including that of brokerage service commissions, the allocation between revenue streams, our transition approach and financial statement disclosures. We plan to provide a more detailed update on the impact of the new revenue standard on our next earnings call. Regarding 2018. Although we are early in my tenure and 2018 planning is still underway and still subject to ASC 606, I’d like to provide some high-level perspective on the upcoming year. As a reminder, the normal seasonal cadence of our business is such that the bulk of our selling occurs during Q2 and early part of Q3, with recognition of software services revenue beginning upon customer go-live, which typically occurs during the fourth quarter. With that in mind, software services bookings is an important indicator of future revenue. As such, we believe the combination of our recent employer bookings performance and the timing of enterprise deal go-lives will result in our total revenue growth rate for the first several quarters of 2018 to be similar to our total revenue growth rate experienced in the second half of 2017. However, as Shawn previously stated, we are confident that the right steps are being taken to reaccelerate software services bookings growth in 2018, which will drive improved revenue growth in 2019 and beyond. Over the longer term, our leadership team remains focused on revenue growth, improvement in gross margin, achieving sustainable free cash flow and making investments to drive growth and scale. In closing, I’m very excited to be a member of the Benefitfocus team, and I’m equally excited about the market opportunity in front of us. I believe the strength and versatility of our platform uniquely positions Benefitfocus to grow our leadership in a very large market and deliver long-term shareholder value. With that, we are now ready to take your questions. Operator, please begin the question-and-answer session at this time.

[Operator:]

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Nandan Amladi with Deutsche Bank. Please proceed with your question.

[Nandan Amladi:]

So Shawn, the first question for you is on the employer adds. On the second quarter call, you had talked about extended sales cycles and you signed up some larger employer customers. This quarter, the total number of employer adds was very, very modest. How much of it was the – just sales execution versus larger deal sizes, longer sales cycles and the regulatory environment that you touched on?

[Shawn Jenkins:]

Yes. Thanks, Nandan. During the third quarter, we had – across our teams, we had – we saw real continued strength in our back-to-base team, so our customers are buying more from Benefitfocus and the new products that we rolled out, like our account services, HSA, COBRA Administration, billing and advanced reporting that we showed earlier in the year is really strong. That team is strong. We’re expanding it. Our carrier team had a great quarter as well, and you can think of the deal that we announced in there, a new certified carrier partner and Aflac is kind of another enterprise deal. So a massive deal that we’re bringing employers on to the platform. So we’re – in addition, that carrier team had other good selling. And then on the employer side, as we’ve been going through our employer team, top-to-bottom operations, training with a fine-toothed comb with our new Head of Global Sales, Robert Dahdah, we’re very encouraged about what we’re seeing in the pipeline, in the team, the talent base. We brought on a lot of freshmen. So it was another mixed quarter. It was a combination of the drama around the Affordable Care Act repeal and replace. It went down to the wire. I think it just had employers paying attention to that. They ultimately – it did not replace the Affordable Care Act, and that window has closed on 9/30. So we are already seeing, I would call it, kind of a shift in the mood of employers to, I think, getting back to business. And so we feel very confident about what we’re seeing going forward. But the third quarter just wasn’t – it wasn’t – this is another one of those choppy quarters for our direct team. I would say – I’d add one other quick thing. Our channel is forming nicely, too, as we look going into 2018, so we’ve made additional investments in our channel sales team, our marketing product and integration kind of top to bottom with our channel partners, the largest ones being SAP and Mercer. But we see strength building there and confidence in those channels. But it’s just a matter of getting through this selling season, looking into 2018 at this point.

[Nandan Amladi:]

Thank you.

[Shawn Jenkins:]

Sure, thank you.

[Operator:]

Thank you. Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

[Unidentified Analyst:]

Kevin here, in for Brian. Can you talk a little bit more about your sales and marketing spend this quarter? And maybe going forward, do you see the potential for continued investments there? Or has it now turned to more of a focus on efficiency with the existing sales force?

[Shawn Jenkins:]

Yes, good question. We’ve brought on several big classes of new direct employer sales folks at the beginning of 2017, really the end of last year, 2016 and 2017, so a lot of freshmen. We’re very happy with that team. Rob Dahdah, as I mentioned, has really gone through and is investing – the key areas that he’s investing in early in his tenure in sales operations. We’ve got a much larger team so – around our training and development, around our analytics, around our pipeline generation. We are adding folks in the area of, what we call, coverage. So our inside sales reps who are – kind of straddle the marketing and the sales team, we’re increasing the size of that. So it’s a sales and marketing spend that you’ll see. What we’re really doing is building for scale. Yes, we’ve got scale on the number of the folks we have, but we’re building the infrastructure and the additional pipeline generation and coverage capabilities, things like our One Place Local. So we’re increasing those other regional events that take place hosted by a customer and we invite prospects. And we had a lot of success with pipeline generation in that area. So you will see us continue to invest. We won’t increase the headcount of our sales reps at the rate we did last year. It’s more, at this point, building the tenure. So going into 2018, our tenure will actually increase. Whereas coming into this current year, our tenure decreased with the freshman class. But we’ll invest modestly in the headcount, but a little bit more than modestly in the marketing and the infrastructure and the scale, which we would expect to see productivity from the tenure and the investments that we’ve made and just the – I’d call it, the clearing-up of the political environment and I think somewhat of a building of demand back in the employer business.

[Unidentified Analyst:]

Got it. And then secondly, as we think about deferred revenue going forward, that will obviously get impacted by some of the newer accounting standards. But maybe on a comparable basis, would you expect some continued pressure there going into 2018? Or how should we think about that?

[Jonathon Dassault:]

Kevin, it’s Jonathon here. Recall quickly that our deferred revenue is primarily comprised of professional services. And as you mentioned, we do anticipate some impacts as a result of the new revenue standard. But specifically, you’ll note, we have seen some decline in our deferred revenue, as we have for a few quarters here. And that’s really driven by deemphasis of lower margin carrier professional services work as well as the timing of deliveries in new sales in our carrier business. So that’s really key drivers behind the deferred revenue dynamics.

[Unidentified Analyst:]

Very helpful. Thanks, guys.

[Jonathon Dassault:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of John DiFucci with Jefferies. Please proceed with your question.

[Joe Gallo:]

Hey, guys. This is Joe, on for John. Thanks for the question. Jonathon, question for you. On the cash flow side, it was a bit below expectations, but deferred was relatively strong, and you mentioned network and capital swings. I was just wondering if you could give any more color there. And then can we expect that to reverse next quarter?

[Jonathon Dassault:]

Yes, Joe. Great question. We did see some fluctuations in our working capital, primarily driven by timing of some accounts payable and accounts receivable. I think important to note, as I stated in my prepared remarks, though, we do expect that the totality of the second half of the year, expectations from a cash flow perspective will be unchanged. And specifically and very important to us, we’re feeling very confident in our ability to deliver the positive free cash flow in the fourth quarter of the year.

[Joe Gallo:]

Okay. That’s helpful. And just it’s great to see the improvement on the gross margins, particularly on the software side despite the slowing top line growth. Can you just give what the long-term target is there? And I know you had some automation gains, but are there any other levers in the time frame to get to that long-term target?

[Jonathon Dassault:]

Yes, sure. We’re very proud and pleased with our gross margin performance during the quarter and year-to-date. It’s really a testament to significant effort across the organization to drive efficiencies and scale. Many examples from automation to infrastructure optimization et cetera. Over the long term, our ultimate targets are unchanged from what we’ve communicated before. And in the short term here in 2017, we still believe we’ll end the year in the range of 300 to 400 basis point improvement as we’ve shared publicly in the past.

[Joe Gallo:]

Thanks.

[Operator:]

Thank you. Our next question comes from the line of David Hynes with Canaccord Genuity. Please proceed with your question.

[David Hynes:]

So I wanted to ask little bit about bookings. So the only metric that we see attached to bookings is that net new customer number. And then you come on the call and you talk qualitatively around back-to-base success and success landing larger employers. I mean, is there any way you can help us quantify this? I mean, what does ARR look like, I guess, relative to kind of the 9% increase we see in customer count? Anything along those lines to give us comfort for how 2018 should look like from a rev rec perspective?

[Shawn Jenkins:]

Sure. Yes, let’s say that as we’ve talked about in the last couple of calls, our average deal size has gone up for two factors. Number one, the size of our average employer coming on the Benefitfocus platform in aggregate has gone up significantly every year for the last four years. That, combined with our PEPM opportunity, has expanded with our continued introduction of new products. And then we have a good attachment of those products, both in back-to-base and also in our new customers. Over 2/3 of our new customers add multiple products at the initial sale. So you could just look, I guess one way to size it to help you is year-to-date, through the third quarter, we’re up slightly in our bookings across the whole book, employer and carrier. And when you look at just the employer and subscribers, plus ARR bookings, it’s up year-to-date through 9/30, modestly, I would say. And that’s why you see the revenue in the fourth quarter in the range that it is. And until we get into 2018 and we get the selling season functioning, which we believe from the productivity gains, the tenure of the employees and the additional PEPM TAM that we have that we will see a nice lift in our bookings going into 2018 with all the things we’ve said on the call. But that should help you out a little bit as you size...

[David Hynes:]

Yes, yes. That’s helpful. And any changes at a high level in what you’re seeing in kind of retention across the base? And I guess it would be helpful to maybe get a little more color on – you mentioned the large carrier customers migrating a portion of the business off the platform. Just what is going on there and risk of future carrier customers kind of pursuing a similar strategy?

[Shawn Jenkins:]

Yes, good point. The one carrier deal that we called out was a known – it was an existing customer. Still an existing customer. They still do a lot of work with Benefitfocus. And this happens maybe every three or four years with the large customers that we have. They’ll sell a block of their business or they’ll have a different change of strategy and they’ll have a different competitive environment. And in this particular case, it was a small employer group of business for a regional carrier, and they’re retooling it, doing some different things, so it impacted a kind of a line item that we have with that carrier. We don’t think it’s any trend. We’re not seeing it with other carriers. We’re, in our overall retention, extremely strong. It continues to be over 95%. So it just – that one was enough that we wanted to call it out for you guys so you could understand what was happening in the carrier. But in the quarter, we had good carrier sales, good carrier bookings, and we added a new carrier in Aflac, and it’s a terrific relationship that we’re developing. So we’re optimistic about how the carrier and employer of those two markets are working.

[David Hynes:]

Got it. And then one last one for Jonathon, if I may. I know there’s going to be some changes in working capital accounts. You guys are working through in 2018 with 606. But absent that, would you expect the business to be free cash flow profitable in 2018?

[Jonathon Dassault:]

Yes, we do. Recognize there is a seasonality to our business, so the free cash flow may fluctuate a little bit by quarter. We’re assessing that as we finalize our 2018 planning, but we do anticipate to be free cash flow positive for 2018.

[Shawn Jenkins:]

One other thing I’d just quickly say as you hop off on the retention. And we mentioned this a little bit, but our open enrollment season, which is in full swing. It’s really our – it’s been building tremendous each year, our system performance, the stuff – what we’ve invested in automation, visibility of data. And we’re in the middle of the open enrollment season. We’re hearing the best feedback we’ve heard from our customers about preparedness, about the implementation, the renewal process, the visibility on the Requirements Navigator that we talked about. All these things help lower our costs. They help lower rework, but they really help delight our customer community. So we think that retention going into 2018 looks even better than it has in 2017 from what we’re feeling.

[David Hynes:]

That’s help, great. All right, great. Thanks, guys.

[Shawn Jenkins:]

All right, thanks.

[Operator:]

Thank you. Our next question comes from the line of Ross MacMillan with RBC Capital Markets. Please proceed with your question.

[Ross MacMillan:]

I jumped on a little late, so I apologize if you addressed this, Shawn. But as you’re thinking into next season, just at a high level, what are the changes that you’re planning for the sales or on the employer side? And maybe related to that, I saw you’d hired Chris Shee recently. And I was just curious as to kind of what role he’s playing in sales training, sales development, sales process et cetera.

[Shawn Jenkins:]

Sure. Thanks. Yes, I think the good news is, as Robert Dahdah, our new Head of Global Sales has come in, he’s liked what he’s seen from the talent. Actually, who you mentioned there, Chris Shee, is – Chris has been with us now for a number of years. One of our early employer salespeople as we built that business. He recently received a promotion to actually run our channel sales and developing our broker channel. So it’s great to see people’s careers progress, and we’re investing in that whole area. To kind of put the adjustments that we’re making going into 2018 in a couple of buckets, the first and foremost are really operational. So scaling up the platform to support the headcount that we have in the field, operational things like just the analytics. We’ve used Salesforce for years, and we have great visibility, but investing deeper in operational team, expanding that team and some of the tools that they have. Coverage, which is a category of really making sure that all 18,000 large employers know who Benefitfocus is. They have a demo, it’s a combination of inside sales and field events that are taking place. From a structure standpoint, we still love the large employer segment, employers who have 1,000 employees or more, enterprise class selling with feet on the street. Our strategic accounts remains intact, the 1,000 to 10,000. The enterprise remains intact. The 10,000 plus, we’re seeing actually strength building in both of those. We’ve invested in the channel pretty heavily, which is really an overlay of training our channel partners, bringing them to Charleston, certifying them, helping them develop their pipeline. And then I guess some of the things that I’ve seen the team working on and participating in myself is really, I’d call it, nuanced. So in the enterprise, there’s really the ultra enterprise. So on the top end, we have a team focused on that. We’ve never really been a vertical sales shop because all employers need to use – need great technology to communicate their benefits. But we have particular strength in certain areas like universities, for example, and tech companies, some other ones. So we have some specialization developing, which I think is healthy, which should further help us penetrate in those areas. But the good news is, no structural change that’s going to take time. It’s all just incremental, pretty quick improvement, a lot of wins that I think we’ll see. And then the last thing, and I’m getting long on this answer, but I’m passionate about this, we pulled our sales kickoff from January to November. So it’s actually in a couple of weeks. And so our sales team will be equipped two months earlier. Our contest will be two months faster, pipeline generation in November and December, hit the ground running in January, comp plans and so forth. So I think a lot of good things at Rob’s command and the team has worked with him on. So I’m really proud of the team. I couldn’t be more optimistic. I haven’t felt this strong about our sales opportunity since probably the IPO, when we were really bringing the employer business to market. And I’m excited about the next chapter for growth.

[Ross MacMillan:]

That’s great, Shawn. And just maybe related to all of this is, in terms of headcount growth, is it more about realizing more productivity from the sales force and reaping some leverage? Or is there a need to actually hire? Because this last year was obviously a bigger hiring year, but maybe there’s productivity opportunities. So I’m just curious as to how you’re thinking about that balance.

[Shawn Jenkins:]

Yes, we like the size of the team. Really, our tenure last year, for the first time, has gone down. So it had been – tenure had been building for about four, five years. It – with a number of freshmen that we brought in, the average tenure actually went down coming into 2017. And tenure will go back up in 2018. Where we are adding is really, as I mentioned, is supporting roles, infrastructure, ops, coverage generation, lead gen for the team. And then some specific areas, like the channel supporters, some segment focus. But primarily, the size of the team will be modestly increased. We think fairly strong gains are coming from productivity, from improvement in the overall market, and then just the support that we’re providing our team is best-in-class. And I’ll just mention a little bit more about Rob’s background. He ran sales ops globally for one of the largest sales teams, over 7,000 people. So he’s got tremendous operational experience with priorities being the benefits front.

[Ross MacMillan:]

Understood. Thank you so much.

[Shawn Jenkins:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Frank Sparacino with First Analysis. Please proceed with your question.

[Frank Sparacino:]

Hi, Shawn, you talked a little bit about just the enterprise segment, but curious if you could give us an update. I know last quarter, you talked about the specific number of accounts on the enterprise side that were signed through the first six months, but any update there in terms of the Q3 activity?

[Shawn Jenkins:]

Yes. We have one enterprise deal that was really more of a hybrid deal. It was the Aflac arrangement that we mentioned on the call. The other ones were in the strategic account area. Not a surprise to us, though. We – in the enterprise segment, they kind of come when they come. They’re a little bit – they don’t buy as much on the seasonality. That said, we did see a few things kind of push in the quarter with all the drama around repeal and replace and get ready for with enrollment, so nothing surprising there kind of as we thought they’d come in. And still good pipeline generation in the enterprise, real strength for us going forward.

[Frank Sparacino:]

And then maybe just following up. Jonathon, on the specific comments you made for 2018, I just want to be clear. So can you sort of repeat again what your expectation is around the revenue growth in the first part of 2018?

[Jonathon Dassault:]

Sure, Frank. I’d love to. Quick little caveat. Of course, we are still in the midst of our planning season, so there’s a lot of work to be done there, and subject to 606 as well. So our expectation for next year really starts with how we are ending this year. And our unevenness in our bookings is going to create a bit of a headwind as we head into 2018. So as a result, what we’re currently seeing from a visibility perspective is growth rate for the first few quarters in 2018 looking similar to our growth rate in the second half of this year. With that said, we, very importantly, are focused on and confident in our ability to accelerate our bookings next year and exit 2018 and enter 2019 at a higher growth rate than that.

[Frank Sparacino:]

Thank you.

[Jonathon Dassault:]

You’re welcome.

[Operator:]

Thank you. Our next question comes from the line of Nina Deka with Piper Jaffray. Please proceed with your question.

[Nina Deka:]

Hi, so you mentioned the TAM opportunity for the PEPM approaching around $12. And I was wondering if you could take us through some of the products that are available through the back-to-base offering, I guess. And which ones are you seeing the most traction with? And then the next couple of years, which products do you think that you’re going to continue to see the most traction with?

[Shawn Jenkins:]

Sure. Thanks, Nina. So at the time of our IPO, which was just four years ago now, we had really one product for employers, the Benefitfocus Marketplace, and we talked about that being in the $3.50 per employee per month range, and that marketplace has – we’ve introduced an enormous amount of new functionality. Our Idea Community now, our customers actually create new features through in – through our One Place 365 portal. Our engineering team builds those. So that is really the main platform, and it continues to get better, stronger, faster and people really rave about it, combined with our new Benefitfocus mobile app, which is for iOS and Android. We’re seeing tremendous tractions there. The kind of the relentless pursuit of additional products and innovation and R&D that you’ve seen, you can see in our P&L. We’ve been spending roughly $50 million a year in R&D in – purely on the Benefits platform. We brought to market the Benefitfocus Analytics, which provides employers, brokers and carriers the ability to see across their full benefits spend. Trends and their claims help them tune their plan design. And it also brings that claims information to the employees, so that’s very popular. The Benefitstore, which we’ve talked a lot about, which provides ancillary and voluntary benefits, which are becoming more and more popular, particularly with high deductible health plans, is extremely popular. Our Benefits Service Center, which is really a software-enabled service that helps employees through chat or through web and also through phone to make sure they’re selecting the right benefits, which is now employers have averaged 15 different benefit types on the Benefitfocus Platform, has become increasingly important. A couple of things that we introduced this year is our advanced reporting, which gives the employer deeper capability to get their hands on their own data, create their own reports. It’s extremely popular. Our billing and payment capabilities, so we do – we now provide consolidated billing to the employers so they can view one consolidated invoice across all their benefit types or admit one payment. And then what we announced on the call, we did a major release just a couple of weeks ago is our Account Services, which provides health statements accounts, health reimbursement accounts, some flexible spending account capability directly on the Benefitfocus Platform. So when you add all that stuff up, we’ve got ourselves out now up over $12. And the PEPM TAM significantly increased in the last couple of years, which gives – is more attractive to salespeople. It helps us recruit and retain our sales team, gives our back to base team a continued set of things to provide to our community. And really, our customer community, all our benefits in One Place, the power of their ideas and that network effect that we’ve been talking about for years and the data integration has really developed and come into its own at this time.

[Nina Deka:]

Great. And how should we think about the weighting of the first half of 2018 versus the second half of 2018 with revenue? Could you give us any direction on that?

[Jonathon Dassault:]

Yes. So we’re still, as we’ve said, in the midst of detailed planning, so it’s difficult to give specific guidance in that regard. As I mentioned in my prepared remarks, we’d anticipate the first few quarters of the year to look like the second half of this year. As we get through our selling season next year, which, as you know, is Q2 and the early part of Q3, and then go ahead and onboard those new bookings, we’d expect to see an improvement in our growth rate at the back half of the year when we enter 2019.

[Nina Deka:]

Okay, great. Thank you, that’s helpful.

[Jonathon Dassault:]

Thank you.

[Operator:]

Our next question comes from the line of Steve Wardell with Chardan. Please proceed with your question.

[Steve Wardell:]

Hey, guys. Thanks for taking my question. Your adjusted EBITDA margin was higher than expected. Can you tell us a little more about what went into that beat? And also did any parts of it seem to you to be recurring or nonrecurring?

[Jonathon Dassault:]

Yes. We feel great about our adjusted EBITDA performance. Thank you, Steve. In fact, the third quarter represented the fifth consecutive quarter of being adjusted EBITDA-positive. We did come in above the high end of our range as a result of many factors. Some of the operational improvements that I referred to before were key drivers. And we’re really proud of that performance. And it’s something we’ll continue to focus on, driving EBITDA margin expansion going forward.

[Steve Wardell:]

Thank you.

[Jonathon Dassault:]

Thank you.

[Operator:]

Ladies and gentlemen, that’s all the time we have for questions today. I’d like to turn the floor back to management for closing comments.

[Shawn Jenkins:]

Yes, thanks. Thanks, everybody, for joining us today. And a continued big shout-out to all of our Benefitfocus associates who are in the middle of our busiest part of the year. And the performance of our system is great. Thanks to our engineering team, and the great service that all of you are providing to our customers is creating a really powerful effect as we head into 2018. So thank you for creating a special company. And thanks to all our shareholders for dialing in today.

[Operator:]

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.