Benefitfocus, Inc.
Q4 2016 Earnings Call Transcript

Published: 24 Feb 2017

[Operator:]

Greetings and welcome to the Benefitfocus Fourth Quarter 2016 Earnings Call. At this time all participants are in a listen only mode. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host Mr. Michael Bauer. Thank you, sir. Please begin.

[Michael Bauer:]

Thank you, Operator. Good afternoon and welcome to Benefitfocus's fourth quarter 2016 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 Jeff Laborde, our Chief Financial Officer. Shawn and Jeff will offer some prepared remarks and then we'll open the call for Q&A session. As a reminder, today's discussion will include forward-looking statements such as first quarter and full-year 2017 guidance and other predictions, expectations and information that might be considered forward-looking under federal security laws. These statements reflect our views as of today only and should not be considered as representing our views as 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 a changing regulatory environment that could cause actual results to differ materially from our expectations. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to our annual report on Form 10-K and our 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. The fourth quarter capped a strong year for the Benefitfocus team deal with strategic and financial accomplishments. With an expanding product portfolio, the largest health course in the Company's history and long-term specular and industry tailwinds at our back, we are well positioned as we head into 2017. Looking back at the full year 2016, it was a very successful period for Benefitfocus and validation of our business model and strategic positioning. In addition to our continued market-leading pace of innovation and the rollout of our enhanced go-to-market strategy, we are very proud of our strong financial performance which includes total revenue of $233.3 million, annual revenue growth of 26%, gross margin improvement of nearly 400 basis points and achieving adjusted EBITDA profitability for the second half of the year. Additionally our customer relationships remain strong, as evidenced by revenue retention rate that once again exceeded 95% for the year and fourth quarter. In the fourth quarter we delivered total revenue growth of 15% year-over-year and adjusted EBITDA of $2.9 million or 5% of revenue further demonstrating the benefits of our growing operational and financial scale. Also during the quarter our employer revenue segment increased 21% over the prior year as our installed base of large employer customers increased to 833. The growth in our employer business reflect continued momentum with enterprise accounts and solid traction from our expanded portfolio products from both new and existing customers resulting in continued PEPM expansion. However we did see the impact of the presidential election of new customer addition in our seasonally light fourth quarter. As healthcare was a major theme of election, we saw employers pause their decisions as we process the likely changes to the Affordable Care Act, a dynamic that also impacted contributions from our private exchange segment. While the timing of regulatory changes impacting the near-term, we believe these changes will be a tailwind to our business as we have seen in prior election cycles. 2016 was a milestone year for Benefitfocus as measured by a progress across each of our primary corporate objectives for the year. Our first goal was profitability. In 2016 we achieved adjusted EBITDA profitability in Q3, a full quarter ahead of our target and expanded on that trend with additional EBITDA improvement in Q4. These results demonstrate the financial benefits from our growing operational scale which we expect to continue into 2017 and beyond. I'm very proud of the Benefitfocus team as they completed this transition of profitability while continuing to grow our business. Our second goal was to implement a new segmented employer sales structure. To execute on our land and expense sales strategy we moved to a multi-tiered sales model for employer business at the start of 2016. Our new segmented model allows us to better address our diverse employer market with the following recently rebranded sales coverage team. Enterprise accounts which focused on employers with over 10,000 employees, strategic accounts which sell to employers with between 1,000 and 10,000 employees and our back to base team which sells to our large and growing installed base of employer customers. And a third objective was to drive product enhancements and platform efficiencies to unlock the benefits of operational scale. The open enrollment period remains the most important performance gauge for Benefitfocus and I was very proud of how our platform responded this year with our vast open enrollment to-date. We delivered a 52% improvement in system response times, system uptime in excess of 99.9% and zero unplanned hardware downtime during open enrollment. For multiple benefits of our solutions performance includes positive customer experiences particularly enterprise accounts, higher revenue retention rates and continued expansion of our gross margins. As we exited 2016 with an annual revenue run rate in excess of $250 million, we believe our business model has passed a significant threshold one which reflects the dividends from our technology investment, market momentum in business scale and together position Benefitfocus to drive long-term value to our shareholders from both topline growth and profit expansion. Let me now share two key customer wins from the quarter. Within our employer segment, a large manufacture with nearly 13,000 employees selected Benefitfocus marketplace, BenefitStore Benefit Service Center and core analytics. This enterprise account choose our platform to provide a better overall user experience and to help their employees make better decisions, reduce administrative complexity in manual processes and promote the value of the total rewards offering which contributes to their goal of being an employer of choice. In our carrier segment, we engage with an existing single state BlueCross BlueShield customer who is utilizing our platform for roughly 10% of the membership with the remaining 90% supported by legacy in-house systems. The customer conducted an application rationalization study and elected to migrate all of their membership volumes to the Benefitfocus platform. The carrier will benefit from improved functionality, faster time to market, reduced operational expenses, and a unified customer experience as they consolidate their enrollment and billing systems onto our platform. This transaction and similar ones from throughout 2016 not only drive meaningful recurring revenue growth but also serve as templates for our refreshed carrier sales process, one focused on cross-selling into our installed base and implementing adoption strategies to increase our Company's share of membership volumes. In Q4 we also took two very important invalidating steps towards establishing Benefitfocus as the market standard. You may recall in early 2016 we introduce the certified carrier program to provide our carrier and employer customers access to this pre-established product configurations and integrations across leading life and ancillary carriers. The program drives up operational efficiency for all participants lowering distribution costs, and increase the sales of voluntary products across our installed base of employers and carriers. During the quarter, Accord the global data standards setting body for the insurance industry adopted our technology as the industry first standard file format for the life and ancillary insurance carriers. This is a significant achievement when it provides an independent validation of the flexibility and completeness of our technology standards and Benefitfocus is increasing market leadership position. In another key validation achievement, the Hartford signed on as our first certified carrier program customer. The Hartford selected Benefitfocus for the overall group set-up, operational efficiencies and ability to increase product sales on the Benefitfocus platform to sponsored enrollment distribution channels. Once fully deployed, we believe that the certified carrier program will generate meaningful recurring revenue for our business. Moving on to our product initiatives, in the fourth quarter we demonstrated that innovation remains core to our culture. We announced a number of new features including our premium billing capability which streamlines Benefits Administration for large employers by providing additional visibility to reconcile carrier billing. And speaking of innovation, in just a few short weeks we will showcase our terrific new product roadmap at our annual One Place User Conference in Orlando. Our keynote will be webcast on March 14 and encourage you to join to get a glimpse of some of this year's exciting advancement. Turning to 2017, the Company continues to be well-positioned to benefit from a number of important market dynamics. We believe that our platform scale is a competitive advantage and that we are becoming the platform standard. This is evidenced by both our employer and carrier adoption, our strong open enrollment system performance and our continued R&D investments. Additionally we have made significant strides in growing and improving our employer sales teams and remain optimistic that the private exchange market holds the potential to return to meaningful growth in future periods. However as mentioned earlier, in the near-term we are incorporating a more cautious approach to our 2017 outlook which reflects the timing of the implementation of the new administration's healthcare policies. Let me address several of these items in more depth, starting with an industry perspective. As we saw with the new Affordable Care Act in 2009 and 2010, there was a short-term impact to new customer signing where employers and carriers digested the regulatory industry changes. That period was followed by significant acceleration in both of our businesses as employers and carriers moved away from their legacy systems to our cloud-based software to service platform. Because we deploy our software in one co-base with new releases of functionality four times per year, our customers were able to more rapidly and cost-effectively adapt to these large industry changes. As in the past, we expect complexity and change to drive growth in our business. We also believe employer-sponsored benefits will be even more valued and favored in the coming environment. One example is that an emphasis on consumer directed healthcare, high deductible health plan, health savings account and voluntary benefit will combine in the new powerful way to shift to a more personalization a benefit will put additional stream on legacy systems and paper-based processes further highlighting the tremendous value of the Benefitfocus platform. Given the new administration's enthusiastic support consumer directed healthcare and tax reform we believe that employer-sponsored benefits will only grow in importance of our market segment. This positions us well to capture additional market share over time. Also as noted last quarter, private exchange growth was muted in 2016. We remain positive about the long-term value proposition of private exchanges, we've increased our joint sales activities with these partners. Entering 2017 our partners to fine-tune certain product offering, heightened care integrations and focused on personalization Benefit Designs for each employee in their family. From a company perspective, we're focused on expanding and strengthening our sales and partner channel. As we mentioned on our last call, the last year's employer sales model changes successfully accelerate our results in both enterprise and back to base account, longer enterprise account implementation timelines, and fewer strategic account sales reps during 2016 will impact our 2017 revenue growth trajectory. Importantly however, we achieved our Q4 sales hiring target and now have the largest sales force in our Company's history. This includes growing our strategic account team which now stands at over 35% more wrapped than at the end of Q2 2016. Similarly we have expanded the size of both our enterprise accounts and back to base team to support the strong momentum achieved by both of these teams in 2016. Now that we have the team in place, we have accelerated our investment in our new and existing sales associate enablement program and remain confident that as our team continues to ramp and build tenure, we have position Benefitfocus for a successful 2017 selling season. Additionally, building a vibrant partner ecosystem remains a major focus and we have made substantial enhancement that should begin to benefit the company in 2017. In Q4 we formalized our BenefitStore preferred partner program to increase our sales velocity within the brokerage community. We've launched a program with two large brokerage agencies. We feel that this is an important milestone for our company as we build our brand within the brokerage and consulting community with a formal set of programs to serve them and their clients. The size and attractiveness of the Benefitfocus market opportunity remain exceptionally compelling and in the year ahead we're focused on the following three priorities that will position us for continued long-term success. Our first priority is to grow our business. We have made significant investments in our strategic enterprise and back to base sales team and believe we have the right group in place to have a very successful 2017 selling season. Our second goal is to continue to improve profitability as well to achieve positive free cash flow by the fourth quarter of this year. With our technology platform and services demonstrating operational scale, we also expect both gross margin and EBITDA margin to improve meaningfully with the growing size of our business which in turn will drive positive free cash flow over time. And our third objective is to drive continuous innovation and efficiencies in our world-class products and platform for our customers. The Benefits Administration market is massive, complex and evolving. The wider array of health plan and the growing importance of cost management for both employers and employees in a dynamic environment underscore the value proposition of our flexible, modern and cloud-based software platform for both employers and carriers. Embedded in our best-in-class platform are more than 1500 data exchange connections and unmatched partner ecosystem that has been built over the last 16 years. These represent huge strategic advantages that not only create significant competitive differentiation but also enable our business to enjoy growing profitability while still being at an early stage of massive market opportunity. With 833 employer customers out of 18,000 large employers in U.S., we have a long runway to expand in front of us. I want to take a moment to thank all of the Benefitfocus Associates who made 2016 such a terrific year. Thank you for all that you do to make Benefitfocus such a great company. Before I hand the call over to Jeff, we are announcing today that Jeff has decided to leave Benefitfocus in return for role in private equity backed business. Jeff will continue to be our CFO through the end of April to assist in an orderly transition and the closing of our first quarter. I want to thank Jeff for his many contributions. In his short tenure, Jeff has had a meaningful impact on the business including assisting us on our path to profitable revenue growth. We wish him well in his future endeavors. With that, I'll hand it over to Jeff.

[Jeff Laborde:]

Thank you, Shawn. It has been a difficult decision making process for me while striking the balance between personal and professional commitment is rarely easy. I believe the requirements of the high-growth public company environment, when coupled with my weekly commute from Atlanta make a return to private equity a better match for me at this stage in my career. I want to thank you Shawn and the rest of the Benefitfocus team for your partnership in my time here. As Shawn mentioned I will be with the company through the end of April to assist in an orderly transition and the closing of our first quarter. Now moving on to our financial results, I am pleased with our strong Q4 results including the early traction from the recent improvements we made within our sales organization which represent important input and positioning us for a successful 2017 selling season. I'll start with the details of our financial performance for the fourth quarter and full-year 2016 and then I’ll finish with guidance for Q1 and the full year 2017. Total revenue for the fourth quarter was $62.6 million, an increase of 15% compared to the fourth quarter of 2015. This result was within our guidance and reflects contribution from sales of new products to both new and existing customers, I revenue retention, and strong professional services performance. However, as we have discussed our growth in the quarter was partially offset by the timing of certain new enterprise customer deployment, the impact of our employer sales force transition, muted private exchange growth and the dynamics of modeling BenefitStore's contribution. Employer revenue for the quarter was $36.7 million up 21% compared to the year ago period. Carrier revenue of $26 million was up 8% compared to the same period last benefiting from accelerated revenue recognition from a professional services contract in the quarter. Removing this professional services impact, our carrier revenue growth would have been more in line with the prior quarter's performance as the carrier wins we have highlighted throughout 2016 will not start generating meaningful revenue until 2017. In aggregate, both our employer and carrier segment performed in line with the expectations we provided during the call, our Q3 call in November. Breaking revenue down further, total software subscription revenue was $52.5 million representing 84% of total revenue and growing 13% year-over-year. Employer software subscription revenue was $34.7 million and grew 25% year-over-year. The growth in both employer and total software subscription revenue was in line with our expectation. Total professional services revenue was $10.2 million representing 16% of total revenue and up 26% over Q4 2015. Non-GAAP gross profit totaled $30.9 million representing a 49% non-GAAP gross margin which compares favorably to the 45% non-GAAP gross margin in Q4 of 2015. This is nearly 400 basis point improvement over last year reflects the benefit of ongoing revenue growth, increased operating efficiency and cost management efforts. The non-GAAP software gross margin of 57% was down from the prior quarter and year ago period while the professional services gross margin improved to 9%. The sequential and year-over-year improvement in professional services gross margin reflects the continued benefits of efficiencies in several areas of our services organization specifically higher capacity utilization, emerging of certain product specific delivery teams, continued privatization of our implementation services, and improve billing discipline continue to drive substantial improvement in professional services mark. Consistent with our typical seasonality, we open enrollment drive higher software costs. The year-over-year decrease in software gross margin was primarily due to product revenue mix, a higher allocation support and infrastructure cost to our software services and certain nonrecurring charges. As our platform investments and innovation drive greater efficiencies within software services and the profitability of professional services improve, we remain confident in our ability to achieve 300 to 400 basis points of consolidated gross margin improvement again this year. While satisfying the demands of our growing business. Similar to last quarter, I continue to be particularly pleased with our strong year-over-year and sequential improvements in adjusted EBITDA results. Q4 adjusted EBITDA was 2.9 million or 5% revenue which is above our guidance and reflects significant progress from 2% of revenue in the prior quarter and negative 9% of revenue in Q4 of 2015. Our adjusted EBITDA was positively impacted by a revenue growth in the quarter and gross margin expansion that reflected the benefits of our scale, the strength of our platform and revenue retention. Indicative of our increasing operational scale, during the fourth quarter total operating expense continue to decline as a percentage of revenue on a sequential and year-over-year basis. Importantly, Benefitfocus is committed to thoughtfully balancing investments in our business to drive meaningful growth in both revenue and profitability. Non-GAAP net loss per share was $0.09 based on a $30 million weighted average shares outstanding count and was above our guidance for a loss of $0.14 to $0.11 per share and a year ago period loss of $0.33 per share. GAAP results for the quarter include gross profit of $30.1 million representing a margin of 48% and an operating loss of $5.1 million translating into a net loss per share of $0.24. For the full year 2016, our total revenue increased 26% to $233.3 million. Our non-GAAP gross margin improved to 50% up from 46% in 2015 and our adjusted EBITDA improved to a negative 1.1 million for a negative 0.5% of revenue from a negative 32.2 million or a negative 17% of revenue in 2015. Moving to the balance sheet, we ended Q4 with cash, cash equivalents and marketable securities of $58.9 million. Total deferred revenue declined by $3.9 million sequentially to $75.8 million. As discussed in prior quarter, the decline in deferred revenue largely reflects our shift away from lower margin carrier professional services engagements. On the statement of cash flows, cash used in operations totaled $2 million for the quarter and compares favorably to the $5.9 million used in operations during the year ago period. With our cash flow trajectory strengthening and as we continue to grow our business with our improving margin profile, Benefitfocus is on track to become free cash flow positive by the fourth quarter of this year. Turning to guidance. As Shawn previously highlighted, we believe we are well-positioned to gain share in a massive Benefits Administration market and experience the benefits of our growing operational scale. We anticipate the first half of 2017 to be constrained by the factors we had previously highlighted. In addition, we expect Q2 growth rate comparisons will be impacted by the shift of ACA revenue in Q1 from Q2. However as we begin to recognize revenue from certain enterprise accounts we signed in 2016, and generate new orders from our expanded sales force during the 2017 selling season, we anticipate a higher second half revenue growth rate. Now moving on to guidance for 2017, for the full year we are targeting revenue in the range of $263.5 million to $268.5. From a profitability perspective we expect adjusted EBITDA of $13 million to $790 million. Our non-GAAP net loss of $11.5 million $7.5 million and a non-GAAP net loss per share of $0.37 to $0.24 based on 30.9 million weighted-average shares outstanding. Additionally we expect free cash flow which we defined as cash provided by or used in operations, less capital expenditure to be positive by the fourth quarter of 2017. For the first quarter of 2017 we are targeting revenue of $62.5 million to $63.5 million. We expect adjusted EBITDA of $2 million to $3 million and non-GAAP net loss of $4.5 million to $3.5 million and a non-GAAP net loss per share of $0.15 to $0.11 based on 30.6 million weighted-average shares outstanding. In summary, 2016 was a milestone year for Benefitfocus, one that positions the company to accelerate the benefits of operational scale and strengthen our leadership position in the multibillion dollar benefits management market. In 2017, we are focused on driving long-term shareholder value through topline growth and improve profitability which together we forecast will drive to a positive free cash flow result for the company by the fourth quarter. With that, we're now ready to take your questions. Operator, please begin the question-and-answer session at this time.

[Operator:]

[Operator Instructions] Our first question comes from Richard Davis of Canaccord. Please proceed with your question.

[Richard Davis:]

Working with brokerage on that side of the equation and the partners and all that. Is there any kind of threading the needle is not the right word, but just in terms of channel, relationships with regard to your existing customers that you need to navigate there. And then the second question is, I know you can't guide but just notionally does it feel like it's a business that something that could be 20% plus growing or is it really kind of the 15% to 20% growing longer-term. I mean you've outlined all of the opportunities so that self-evident so that does to kind of questions I normally have.

[Shawn Jenkins:]

Thanks, Richard. Yes, we just completed I think a terrific year in 2016 and for me as a founder and watching Benefitfocus grow over the years, I think the management team has done a great job of getting the company profitable again, and now we focused on that - profitable from adjusted EBITDA standpoint in 2017 and beyond, and getting to free cash flow a positive is a great milestone for us. So we are really proud about that. And as we updated our employer sales team last year as we've outlined on the last couple calls, our enterprise team is 10,000 plus is really surging so we had a terrific year. The timing of some of those larger deals obviously they go live a little bit longer than our midsize employers. So that's having a little bit of near-term impact as we talked about in the BenefitStore the way we've begun to work with brokers. So those things that we talked about in the last call I think the management team is really addressed significantly increased our sales team, our strategic accounts which were now calling it thousand to 10,000 account groups is over 35% larger than it was the middle part of last year. So all the things that we knew about as we came to that transitional year to profitability, the management team I think has done a terrific job of setting up for success in 2017. The thing that changed since the last call is really the presidential election, I think that was something that got attention obviously from our entire country and as the new administration new Congress lay out their proposals to change some of the Affordable Care Act interestingly enough, Richard, the actual proposed I would say updates and changes are all very pro-Benefitfocus, they would be very positive for our company things like moving to more consumerism and healthcare more consumer directed health plans high deductibles, bigger emphasis on health savings accounts and those all need to be wrapped with voluntary benefits another programs which we think is a recipe for great success for Benefitfocus as our modern platform software to service delivery model and we think it's going to put a lot of strain on legacy platforms. We did see this in 2009 and 2010 as the Affordable Care Act was designed and implemented, a little bit of slowdown I would call it followed by an acceleration. So yes, your point about what should the growth rate be going forward for the company as we come through this, I call it short-term or near-term macro environment with healthcare. We definitely believe the company in the market size would line up for a 20 plus percent growth rate absolutely. We only have 833 out of 18,000 large employers we've got approaching 5% the runway is long, we clearly are reaching incredible milestones 250 million revenue run rate, the system performance for open enrollment was just fantastic. So we are very optimistic about the business in the long term and appreciate you asking that question because it's something we really have thought a lot about as we prepared our plan for 2017. Your quick question about the partnership's, we did introduce the new preferred partner program in the quarter, as we roll out the BenefitStore we've seen a lot of excitement by brokers around the country, so we want to formalize the program for them that would give them insight into the Benefitfocus BenefitStore products, help them work with their customers, give them a way to use the Benefitfocus platform and the BenefitStore to their customers advantage. And we thought that through we've been very patient and the design of that and it might actually be a little bit of the opposite of the way you ask the question, we think it actually might - we think it will remove some of the overlap of the way brokers work with Benefitfocus today and provide them a nice on ramp to recommend our company to work with the consulting community and we think it fits nicely with our ecosystem of carrier partners, and the other channels that we have. So again we're – thoughtful question Richard and I appreciate it.

[Richard Davis:]

That's very helpful. Thank you so much.

[Operator:]

Your next question comes from Frank Sparacino of First Analysis. Please proceed with your question.

[Frank Sparacino:]

Hi, guys. Maybe first off, just on the climate obviously '16 in terms of the absent number down from what we saw in 2015 Shawn I don't know if you can provide some color in terms of I assume the average client size was higher this year versus last year, maybe with respect to the total life that the platform any comments you can make there.

[Shawn Jenkins:]

Sure. As we talked about the last couple of quarters, and really leading into 2016 a year ago, this time we announced we had a new enterprise sales team focused on calling on 10,000 or more employees. And that was a result of really some key wins we had in 2014 and 2015 as larger and larger customers. We are learning about Benefitfocus. I think as a result of our IPO, building our brand, our sales force was getting bigger. And as we took portion of our sales force and really dedicated them to that market they had a terrific year. So the overall number of client ads was in this, it wasn't as great that the actual size of the customers were materially bigger we talked about on the last two quarters of when customers over 120,000 employees double over 50,000 employees, overall we're seeing the average size go up, we’re also seeing employers attach more products or PEPM has gone up consistently which we think definitely translates them even higher retention rates although we already have I think probably industry high, better margin, over time margin expansion. And really at the end of the day customers driving more, more value from the Benefitfocus platform. Now, the thing that we did in this last two quarters was go back into that strategic accounts team which is 1,000 to 10,000 lives and really increase that team significantly with some internal promotions which we're always very proud of. We have great management team in there and that teams lager we've done a lot with our onboarding training and working with the team to make sure they all get ramped up for this year's a selling season. So I think all very good moves for the company in the long term. In the near-term I think coupled with the election and in the whole healthcare dynamic as we mentioned in the remarks as - we’ve laid out little bit more cautious outlook for 2017 but as we get into the second half of 2017 we would be revenue growth rate accelerating from all the factors that we're discussing.

[Jeff Laborde:]

The only other thing I think I’d add Frank just from a numerical perspective on the average deal sizes, they were up slightly in the quarter continue progress there and then up more significantly obviously year-over-year when you take all four quarters together, continued momentum on that front specifically.

[Frank Sparacino:]

Thank you, guys. I’ll jump back in the queue.

[Operator:]

[Operator Instructions] Our next question comes from Ross MacMillan of RBC Capital Markets. Please proceed with your question.

[Ross MacMillan:]

Thanks for taking my questions. Shawn I just curious given the Q4 customer adds obviously were little bit below your expectation and you mentioned the election any signs of that beginning to fall or any signs as we sit here in mid to late temporary that were sort of moving past that freeze.

[Shawn Jenkins:]

Yes, I would describe it as our pipeline in our activity is really growing very well with the combination of our - the number of sales people that we have, the increased size of the team and the brand awareness that we now have to clean the enterprise market in the back to base team. So I would say very good activity in the sales pipeline. Another maybe more qualitative thing that we're seeing Roth is, we as many folks now do our annual user conference recall one places, its where all of our customers come together. Our registrations are up year-over-year which is great sign of our customers to me but also prospects. We do a local version that we call it one place local and demand for these local events has really increased substantially. So, we have made a commitment to do 56 One Place local events around the country and the ones that are in the first quarter have -- I would characterize it as terrific participation, in fact it one in New York City tonight, if - New York anybody One Place local you can check that out, this is where group of folks get together and hear about the Benefitfocus platform, our state of employee benefits, industry-leading research. So, there's a lot of great activity in the benefits space. I think it's just a matter of time before the employers begin to, make their decisions of how they’re going to implement any changes that are coming with the new policy.

[Ross MacMillan:]

That's helpful. And just to be clear so, I think Jeff last quarter you said, you would hope to grow a bit better in 2017 than your fiscal Q4 2016 growth rate turned out it’s at least at the midpoint slightly lower, is all of that just a reflection of the bookings environment that you saw in Q4. Are there any other factors that has contributed to that and slightly lower growth outlook.

[Jeff Laborde:]

Ross when we spoke last quarter on the potential trends coming out of at the point at which we are in Q4 of 2016 and looking ahead into 2017, I think our commentary specifically was that we anticipated a second half higher growth rate on that front. So and I think we still envision that and that is reflected in the projections we provided, I think the one meaningful variable that we have talked about that happened after we gave that guidance specifically was the outcome of the election that Shawn talked about on the call.

[Ross MacMillan:]

And then just one follow-up maybe Jeff on gross margins for the software line those were slightly lower but you made some comments suggesting that that was going to turn around maybe you could just drill down on that and get a little bit of color as to why those trended down and maybe why and when they will begin to improve again? Thanks.

[Jeff Laborde:]

Sure. I think we are in aggregate very pleased with the gross margin performance of the business up 400 basis points for the quarter and for the year and up over 1200 basis points over the last couple of years, we like what we are seeing when we look ahead if you kind of by a rough rule of thumb and just look at our incremental revenue what margin is that coming in at i.e. what additional costs are we having to add to support that revenue in Q4 and for 2016, that was somewhere around 65% to 75% of metric. Again just a yardstick there but it gives us encouragement, I think in something that we have proven the ability to do over time and we do expect to continue to see for software specifically as we talked about while we have some product and revenue mix dynamics as well as some overhead absorption is we continue to see scale in the rest of the business but grow our software team more in line with revenue. We do expect some meaningful economies of scale and efficiencies to kick in, in addition to the overall scale of the software and related support side of the business just getting bigger, getting more efficient, making better use of the tools and the resources that we have available to us, we do anticipate increased automation that is on our technology roadmap continuing to take a manual elements out of aspects of the product out of it and then infrastructure is another major media that we believe that there's room for improvement. So there's no shortage of opportunities and I think we are very optimistic about being able to continue to we pointed that out as well in our forward-looking commentary about adding another 300 to 400 basis points to the overall gross margin in 2017.

[Ross MacMillan:]

Thanks so much.

[Operator:]

Our next question comes from Brian Peterson of Raymond James. Please proceed with your question.

[Brian Peterson:]

Thanks gentlemen. So Shawn I just wanted to be clear on your election related comments, are you seeing a delay in potential prospects making a buying decision or is that also a dynamic customers are actually delaying implementation?

[Shawn Jenkins:]

Good question, thanks for clarifying. There is no delays in implementations net effective customer community is very active and our back to base selling team has had a terrific 2016 and already up to really good start in 2017, it's more around the prospect community and I think this is pretty broad-based in the benefits in healthcare space, we don't see anything different in the competitive environment matter of fact I think we are in our strongest position that we've been as a public company given the size, the scale, the performance of our system during the open enrollment period was just best we've ever seen which is a testament to our engineering team really terrific system uptime 99.9% and a great distance speed though. I think what we've seen is just a I will call it short-term and near-term pause as prospects evaluate talk internally interact with their company management about their strategy around benefit to all of it is really leading to I believe it will be a very nice tailwind leading to consumerism, a wide array of benefits more emphasis on shared cost model, health savings account adoption but also other types of account-based products, those will require more voluntary benefit programs to fill gaps which are purposely built for I think that will put strain on legacy systems and legacy vendors who operate more on calls model or paper based systems or on-prem and so definitely it's just the timing of how the implementation of the some of these things come.

[Brian Peterson:]

Got it. Thanks for clarification. So if I think about how that relates to the 2017 revenue outlook how much of visibility do you have into that number maybe asked differently if I look at the first quarter guidance versus the full year guidance, how much of that you already have under contract?

[Shawn Jenkins:]

First quarter I mean we have almost all of it and very high degree of 2017 revenue.

[Jeff Laborde:]

And then I think as you work into the year as you would expect that visibility goes down as it is driven by not to the tune of the majority of our business but the new incremental contribution from a revenue standpoint to or 2017 result is driven by the new business we're adding in, we have the dynamic of a busy season, our peak selling cycle comes in Q2, calendar Q2, a lot of other companies will see that more in attritional enterprise sales cycle in Q4 and in that kind of scenario, we would arguably have more visibility if we were calendar year because we would just be coming out of that in calendar Q4. But we are we have that Q2 point which is an important period for us heading then into Q3 as part of additional revenue contribution, what we do have is as you would expect what we do have visibility into and as far as leading indicators goes our pipeline. And the dialogs that our salespeople are having out in the market and active sales cycle of the day for those certainly provided and that is up in terms of activity levels from where we were last year.

[Shawn Jenkins:]

And I would add another important component you achieving EBITDA profitability and being free cash flow profitability or positive free cash by the end of the year have great visibility and to how the business is functioning, the margins are improving, the profitability is improving, so as we look out through 2017, I think we've got some great levers and we as a management team always plan this once we got through $250 million in run rate or so is to add revenue plus the profitability together and have both those levers to drive and create value into business, so we are really proud of the accomplishments and the path that we're on and we think that's going to make the company much more valuable over time.

[Brian Peterson:]

Got it, thanks guys.

[Operator:]

Our next question comes from John DiFucci of Jefferies. Please proceed with your question.

[John DiFucci:]

Thank you, it maybe this answer is implied and what you said about free cash flow being positive by the fourth quarter but will it would you expect free cash flow profitability be sustained from the fourth quarter onwards guys or is it or is it do you expect it to be on an annual basis like how should we be thinking about that going forward?

[Shawn Jenkins:]

Good question John, it's a milestone for us that we are very excited about just as we pass the EBITDA milestone this year and its one as with EBITDA that was newer for the company at least since coming public. And I think we have quickly become very comfortable with it, have good line of sight visibility into it and view EBITDA based on our guidance is something that we certainly expect to stay positive in EBITDA focusing on EBITDA just obviously as a proxy for our free cash flow guidance and we do expect that free cash flow as albeit lagging EBITDA by about a year to be positive in terms of it staying positive, it does have a bit more of a seasonality to it particularly Q1 for us, calendar Q1 for us is more of a cash expenditure heavy period of time. We have just a lot of in addition to things like bonus and what you would expect to see from a compensation cost impact in Q1, we also pay for a lot of our software services subscriptions, enterprise systems et cetera in Q1. So Q1 for us is typically a low negative cash flow period of the year, while we expect that to be less of a cash use certainly as we head on from the Q4 milestone next year we are anticipating as we get into beyond those periods for that to be a sustained positive number when you look at it across the period of time. So, put differently we would expect it to be positive for 2018.

[John DiFucci:]

Okay, great. That's really helpful Jeff. And the second question I have - and last question I have is for both Shawn and Jeff and sort of difficult question ask, Jeff you are the second CFO to leave after only a very short stint, rather than us are trying to guess some more on this tomorrow, especially given the guidance for this year, is there any more detail you can give us on this just because it just - I'm sure it's going to make people question it a lot.

[Jeff Laborde:]

No, I understand and thanks for asking the question John, I appreciate the candor, and in all candor in my response this was important for me to articulate, this was a very difficult decision. I was attracted that the company - and remain very enthusiastic about its prospects, the market opportunity, the franchise in its position within this market were are and will be very compelling to me. Fundamentally though when I married the dynamics of for me of commute from Atlanta and the demands of the public company, and kind of the personal sense of duty and obligation to be here as much as possible as is part of this team in making the company success going forward. That really had to start a way to trade off that I was making on the personal front and I do think our return to PE provides, for me at this stage in my career a more balanced and matching up with some of those dynamics for me going forward but lot of the teams here I have enjoyed my time here and will be here through the end of April to close out here in Q1 and do what I can to make the transition smooth as possible.

[John DiFucci:]

Okay. Yes go ahead Shawn with your comments.

[Shawn Jenkins:]

I would just add I mean first of all, Jeff has done a great job, he really helped us with his private equity background look at the company differently, I would say as really enjoyed, working together even through our tenure was short the results have been strong, the way that we look at the company is through just lands in his eyes that have really helped us I think you're seeing that in the profitability, the updated EBITDA forecast and free cash flow and so forth. It’s been a good but at the end of the day the dynamic with having an opportunity really mention but his next opportunity has base in Atlanta so it will be able to home lot more with his family. In the demands of the public company, I think this is first time Jeff he is worked in a public company setting like Benefitfocus and just big job and it requires a lot - I would complement Jeff on his work ethic and his commitment to the company I think is matching all it up and having an opportunity to closer to home, it's unfortunate timing but I think the Company's better off with a relationship that we had albeit a short.

[John DiFucci:]

Okay. Thank you guys for addressing that.

[Operator:]

Our next question comes from the Stephen Wardell of Chardan Capital Markets. Please proceed with your questions.

[Stephen Wardell:]

Hi guys, just wondering can you tell us about what you're seeing in the market so far from different size employers and carriers, what are the differences in their interest in the product for that - in the coming selling season any comments on the how their behavior this year is different from last year.

[Shawn Jenkins:]

Yes good question. I think even though we can talked about the election in a little bit the near-term caution the maybe that's bringing, our sense already even it's early in the year is that having the election settled and being a direction coming is I would say actually putting energy in the market. We did some really great carrier deals in the second half of the year. We did one really large across the shield of the arrangement at the end of fourth quarter in December, existing customer that really expanded the relationship with Benefitfocus significantly. Our care team has a lot of stuff in their pipelines. So on the carrier market, I think you’re going to see them begin to implement technology that is going to get them closer to their customers, more consumer oriented to healthcare, it’s going to work better with health savings accounts and how that whole dynamic of sallying works stuff out. I'm certain that the carriers like ancillary carriers are wanting to move and have a whole set of products around voluntary benefit programs. We are really proud of announcing the Hartford is our first certified carrier partner which is another signal of carrier stepping into the technology and particularly the benefit focused platform in an expanded way. On the employer side, I would kind of characterize it similarly. They have the election results now, they know that there's going to be some change to the Affordable Care Act. I don't believe people think it’s going to be totally repealed at all. I think people think it's going to be changed and altered. Some aspects of it that are good will remain, and some aspects that are able to change will be more consumer oriented. All of that historically has been very good for Benefitfocus because the legacy systems are hardcoded, they are single instance, they are hard to maintain, and they don’t modernize well. At the same time, we’re engineering four software releases a year. I think we got one this weekend and they bring a whole great fresh new set of technology mobile enrollment for example and data science to our customers. So as we interact with the employers, there's - I’d say, a growing interest in moving to the cloud now, and now being the next couple of quarters to next year or so. And we think it’s going to be ultimately very good for the company.

[Stephen Wardell:]

Great, thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of our question-and-answer session. I'd like to turn the call back over to Mr. Shawn Jenkins for closing remarks.

[Shawn Jenkins:]

Great. Well, thanks everyone for joining us tonight. We’re really proud of the results of 2016, and I want to give a special shout out to all of our Benefitfocus Associates. You guys are just incredible, your blaster work you’re building a terrific company. Thank you for the best of enrollment that we’ve had, and the system performance, the engineering of great products. And really look forward to seeing our entire customer community at One Place in Orlando in a couple weeks, in Orlando on March 14. So thanks again, and here's to a great year.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.