Benefitfocus, Inc.
Q2 2015 Earnings Call Transcript
Published:
- Operator:
- Good afternoon. My name is Robin and I will be your conference operator today. At this time, I would like to welcome everyone to the Benefitfocus Q2 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I'd now like to turn the conference over to Mr. Milt Alpern, Chief Financial Officer. You may begin your conference.
- Milt Alpern:
- Good afternoon everyone and welcome to Benefitfocus' second quarter 2015 earnings call. We will be discussing the operating results announced in our press release issued after the close of market today. I'm Milt Alpern, Chief Financial Officer of Benefitfocus; and with me on the call today is Shawn Jenkins, our Chief Executive Officer. As a reminder, today's discussion will include forward-looking statements, such as third quarter and full year 2015 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 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, general economic risks, the early stage of our market, management of growth, and a changing regulatory environment that could cause actual results to differ materially from 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 which is on file with the Securities and Exchange Commission, 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, and then I'll come back at the end to provide details regarding our second quarter results, as well as our updated guidance for the third quarter and full year 2015. Shawn?
- Shawn Jenkins:
- Thanks Milt, and thanks to all of you for joining us today. Benefitfocus had a record quarter and experienced significant demand across both business segments in the second quarter, which was highlighted by a record 94 net new large employer customers added. From a financial perspective, revenue and profitability exceeded the high end of our guidance range. Total revenue of $42.7 million increased 32% year-over-year and was driven by employer revenue growth of 45% and carrier revenue growth of 21%. Non-GAAP gross margin of 46% was up by 1,000 basis points year-over-year for the second consecutive quarter. Companies increasingly recognize that legacy benefits administration offering are ill equipped for the changing benefit landscape, and are embracing the enhanced flexibility and user experience of the cloud-based BENEFITFOCUS Marketplace platform. We are seeing a greater number of employers evaluate their long term benefit offerings, while they also realize the significant level of disruption occurring in the market, whether from new government regulations or the consumerization of IT and healthcare. These trends are driving the need for a more comprehensive solutions that give employers cost effective way to provide a broader range of employee benefits, while also gaining greater insight into benefits usage, in order to bend the cost curve of one of their largest expenses. Let's take a few minutes to review the progress we have made against our three strategic priorities halfway through the year. The first area of focus is expanding on employer product offerings. This was the first full quarter we had our five new employer products. The Benefits Store, Core and Advanced Analytics, e-billing, Benefits Service Center and Video available for sale to our employers. We are incredibly pleased with the demand we are seeing from both new and current customers, which validates there is a substantial upsell opportunity in our employer market, that can drive additional revenue growth over time. During the quarter, we had significant success selling additional products to our base and selling multiple products to new customers. In particular, Benefits Store is seeing strong customer adoption and is positioned to see strong participation rates during the upcoming open enrolment season. We are also focused on expanding the list of carrier partners offering partners in the Benefits Store, and I am pleased to share that we have doubled the number of carrier partners in the Benefits Stores of launch, including carriers such as Humana, Transamerica, Lincoln Financial Group, and MassMutual. Our second area of focus for the year is to further extend our leadership in the private exchange market. We continue to expand our private exchange base, by adding a large group marketplace for a big [indiscernible] carrier. This represents the 26th private exchange Benefitfocus has signed in only a few years. Our product platform and its market is also expanding in creating additional opportunities for us with both new and existing customers. During the second quarter, several of our private exchange customers purchased additional services and functionality, which demonstrate their long term commitment to the Marketplace model and the BENEFITFOCUS platform, as a way of interacting with and delivering value to their customers. Our third area of focus for 2015 is scaling the business' increasing margin. We made excellent progress in this area with our second consecutive quarter of generating 1,000 basis points of gross margin expansion. Particularly encouraging, was our ability to keep software gross margin equal to the first quarter, even as we begin to gear up for the upcoming open enrolment season. This reflects greater customer support efficiency, our continuously improving user experience, and an increasingly robust customer community program. We had our first successful third party system integrator implementation go live in the quarter, as we begin to have a greater percentage of implementations by our partners, that will further improve our margin profile. We are also leveraging our increased global sources to provide speed for our customers and flexibility for our teams. Turning to our carrier business, we had a very strong quarter, with a number of meaningful expansion wins in our existing customer base, including Metlife and United Healthcare. In addition, the notion of one platform, two markets really showed its power in the quarter, with the signing of our first carrier customer, a regional blue plan [ph], adding the Benefits Store to their private exchange. This is a tremendous testament to the network effect we are having in the market, how each of our products builds upon each other, and how we are a leading industry in a new model of marketplaces. The changing Benefits landscape also has profound implications for the insurance carrier market, which is seeing a generational shift in the distribution of payment for their products. Carriers recognize they need to significantly upgrade their technology, in order to compete in a market with more choice and more consumers than ever before. For example, during the second quarter, one of our carrier customers purchased our Advanced Analytics offering, allowing them to make more informed decisions, and ultimately be a stronger competitor in this growing and dynamic market. We have established deep relationships with many of the largest carriers in the market and are in a great position to grow with them over time. Taking a closer look at our second quarter performance, we find a record number of 94 new large employer customers, including American Eagle, Arctic Slope Regional Corporation, Biaggi's Ristorante Italiano, Credit Suisse Securities, Education Corporation of America, Gate Petroleum, Jim Beam Brands, Smashburger, and The University of Dayton, Ohio, among others. American Eagle is a young apparel and accessories company with over 40,000 employees. The company chose Benefitfocus to drive success of their strategic initiatives, things like increasing employee participation and wellness programs. Our track record of success with other large retail clients and their unique employee populations in need, as well as our expertise in employee communication were key differentiators in American Eagle decision making process. Credit Suisse, a leading global financial services company, was an exciting new customer win in the quarter, they purchased our Benefitfocus Advanced Analytics offerings, improved their Benefits process by getting better control over their data, and generating insightful reports that can drive savings. Our expanded product portfolio made it possible to provide value to a jumbo employer like Credit Suisse. Biaggi's casual Italian restaurant chain in the Midwest, with 1,700 employees in over 20 locations, selected the BENEFITFOCUS Marketplace to help them manage the significant change in the Benefits eligible employee population. The ACH coverage mandate for employees working more than 40 hours a week, and the related employee communication and compliance requirements, meant Biaggi's needed a more efficient way to manage Benefits for its multi-lingual and mobile workforce. In particular, our communications portal will significantly improve the Benefits' onboarding process for our new employees, which is a big issue in the industry, that has high volumes of new employees each year. Education Corporation of America, which owns and operates private colleges across United States as well as online, selected the BENEFITFOCUS Marketplace and our Benefits Store to make it easier for their diverse workforce of more than 3,000 Benefit Eligible Employees select and enroll in Benefits, that best suit their unique needs. Among some of the key reasons they chose Benefitfocus, are our seamless user interface, deep functionality, and consumer driven health plan support features. Gate Petroleum was another exciting Q2 win. Gate is one of the largest privately held companies in Florida, with over 3,000 employees. They chose BENEFITFOCUS Marketplace and our Communications package because of our exceptional user interface, something we hear very often and functionality, deep data integration and strong partner relationships with companies like WageWorks, SuccessFactors, Equifax and others. From a market perspective, the Supreme Court's recent decision in King v/s Burwell, which kept in place the existing subsidy structure for federally facilitated marketplaces; provides customers greater confidence that they can plan for their future benefits, needs, as part of the new Benefits landscape, and we are seeing the move forward. Our success in establishing BenefitFocus as the clear leader in cloud-based Benefits administration is also driving exciting partnership opportunities that expand our distribution reach, including last quarter's announcement of our strategic reseller agreement with SAP. We have gotten off to a strong start with SAP, including signing our first joint customers in the second quarter. We are still early in the process of establishing our joint go-to market efforts in building a pipeline, but these initial deals demonstrate the significant opportunity in SAP's install base. As we mentioned previously, SAP now has Benefitfocus products on their price list, which can be sold by SAP salespeople and contracted on SAP agreements. Its important to note, that historically, ERP vendors were some of our competitors, and now we are partnering with the industry's largest company. This is a significant shift in the competitive landscape, and we believe demonstrates the power of the Benefitfocus platform to scale these very large organizations and achieve flexible integration, with the in-place ERP and emerging cloud platforms. The changing Benefits landscape also has profound implications for the insurance carrier markets, which is seeing a generational shift in its distribution of payment for their products. The ACA's efforts to constrain the rising cost that healthcare is putting pressure on the profit margins of carriers and brokers, which is one of the driving factors behind the recent wave of the consolidation industry. Benefitfocus is well positioned to gaining from this consolidation for two reasons; first, we have very strong customer relationships with the largest carriers, who are positioning to become even larger over time through acquisitions. More importantly, our flexible cloud-based platform significantly improves the efficiency and accuracy of the carrier's billing and enrolment processes, wile also providing new distribution opportunities and an elegant consumer shopping experience to our marketplace offerings. We continue to push the pace of innovation during the quarter, with the release of the Benefitfocus platform summer release, which included more than 400 additional features, the most in our company's history. And while the sheer scale of our release was significant, three themes that we outlined in One Place 2015, back in March, remain intact; Marketplace, plus Administration, plus Analytics, continue to guide our investment decisions. Let me provide just a few examples; in our Marketplace's platform, we continue to work on reimagining our consumer experience that will go live for our employer customers in time for their open enrollment. Previewed at One Place 2015 in March, the new experience leverages behavioral design in a mobile responsive framework, to improve the enrollment workflow. More importantly, provide access to better information and highly personalized recommendations. For the employer, we have also included advanced branding capabilities that provide a level of configurability unmatched in the market. From an administration perspective, we continue to invest in our user experience for our Power users, the Benefits Administrators. We believe designing for this group helps take cost out of the system for employers and increases our client satisfaction. Two new features are worth mentioning here, our participation dashboard provides real time access to participation during open enrollment through dynamic shareable reports. Another new feature, our employee history timeline, provides point-in-time visibility in the Benefits eligibility, reducing the amount of time spent answering individual queries eligible in the audit for bill reconciliation. From an analytics perspective, our clients are looking to us to not only unlock their value trapped in the data, but also to simplify the way in which they share insights across the organization. In the summer release, we extended roll-based access across our reporting capabilities for employers, carriers and brokers, to enable them to have filters across multiple employers. In addition to our significant investment platform, we continue to make progress on our company-wide client experience initiatives, customers at the heart, including One Place 365, which is our new online customer engagement portal, and One Place Local, our new regional road show series. Both are off to a terrific start and build on our annual One Place Conference Framework. For One Place 365, we see a lot of excitement from our client base. This customer engagement portal supports a virtual community across our entire client base. We are using a platform to stay in touch with our users, solicit new product feedback, communicate new functionality and share best practices. In the first 45 days following the launch of the portal, we have seen over 10,000 unique logins from our Power users that benefits administrators. Supporting One Place 365 and our One Place User Conference is One Place local. This is our first year leading a new client road show and the early results are very exciting. We had eight One Place local events scheduled through the third quarter, and each of them is designed to bring our Power users together to share best practices, discuss challenges they are facing with regard to some of the larger trends like the Affordable Care Act, and network with our product leaders. All of our events are hosted by clients, and in there, certainly a Tier-1 list with clients such as Brooks Brothers in New York, New Balance in Boston, and Lincoln Financial in Philadelphia, just to name a few. To-date, we have scored very highly on these events, and they are clearly a great tool for engaging existing clients and generating new leads for our products. To summarize, our second quarter results were strong across the board, and reflect the impact of a paradigm shift in Benefits administration to cloud-based platform, such as Benefitfocus. Our expanded distribution and product portfolio have further increased our opportunities to drive significant growth in the foreseeable future. We believe, Benefitfocus is well positioned to become a significantly larger and more profitable company, over time, as we extend our leadership in this dynamic, multi-billion dollar market opportunity. With that, let me turn it back over to Milt. Milt, take it away.
- Milt Alpern:
- Thanks John. We are very pleased with our second quarter results, which exceeded our expectations from both a revenue and profitability perspective. I will begin by reviewing the details of our financial performance, and then I will finish with our updated guidance for the full year 2015, and our outlook for the third quarter. Total revenue for the second quarter was $42.7 million, an increase of 32% compared to the second quarter of 2014, and above the high end of our guidance range of $41.8 million to $42.3 million. Breaking revenue down further, software subscription revenue was $38.1 million, representing 89% of total revenue and growing 28% year-over-year, while professional service revenue was $4.6 million, representing 11% of total revenue and up 82% year-over-year. As a reminder, our professional services revenue is being positively impacted by the changing customer relationship period that we instituted at the beginning of 2015 for both the carrier and employer segment to seven years from 10 years. Looking at revenue by segment, employer revenue for the quarter was $20.8 million, up 45% to the year ago period, while carrier revenues were $21.9 million, up 21% from the year ago period. Let me now review the supplemental metrics that we report on a quarterly basis. We ended the second quarter with 662 large employer customers, an increase of 94 compared to 568 at the end of the last quarter and up from 448 in the second quarter of 2014. As a reminder, the second and third quarters are typically our largest selling quarters, as customers look ahead to the upcoming open enrolment season. We also ended the quarter with 52 carrier customers, up from the 43 in the second quarter of 2014, and consistent with the end of last quarter. As a reminder, we added nine incremental carrier relationships in the first quarter of this quarter, as a result of the expanded agreement with Anthem. Our software revenue retention rate was once again greater than 95% in the second quarter, which we believe is evident with the significant value our platform generates for our customers. Moving down to P&L, our non-GAAP gross profit was $19.6 million or a 46% non-GAAP gross margin. That represents a 1,000 basis point improvement from a year ago period. Software margins were up 800 basis points year-over-year, and flat sequentially, unless otherwise a seasonally weak quarter, which reflects more disciplined spending, as well as the increased scale in our business, among both our direct and indirect customers. Additionally, we are realizing the impact of increased efficiency in our professional services organization and accelerated revenue recognition, due to the change to our customer relationship periods. Adjusted EBITDA was negative $10.7 million or 25% of revenue, and is better than our guidance of an adjusted EBITDA loss of $11.2 million to $11.7 million, and compares to a negative $13.5 million in the second quarter of 2014. We continue to believe that we can achieve our targeted long term adjusted EBITDA margin of 20% over time. We are confident in our ability to scale our margin, due to the increased use of third party implementation partners, and increasing percentage of the sales that we expect to come through our indirect channel, and greater upsell activity with our new employer offerings, particularly Benefits Store. Non-GAAP net loss per share was $0.53, based on $28.6 million weighted average shares outstanding, significant better than our guidance at a loss of $0.57 to $0.59 per share, and compared to a per share loss of $0.65 on 25.2 million weighted average shares outstanding in the year ago period. Looking quickly at our GAAP results, gross profit was $19.1 million, operating loss was $16.4 million and our net loss per share was $0.64. Turning to the balance sheet, we ended the quarter with cash, cash equivalents and marketable securities of $88.5 million, compared to $107.4 million at the end of the first quarter. I'd now like to share an update on our progress towards establishing standalone for professional services. As expected, we established standalone value for professional services in our employer business at the beginning of the third quarter. We will now recognize professional services revenue in the employer business; at the time of implementation, as opposed to over the customer relationship period. As a reminder, a significant majority of our professional services revenue is related to our carrier business. So the overall P&L impacts and the establishment of standalone value in the employer business, will be relatively modest. Looking also decent, quarter-to-quarter variability and the timing of when professional services revenue is recognized, after we have established standalone value, based on the timing of go live. Lastly, as you may have seen last week, we filed a registration statement with the Securities and Exchange Commission, for a secondary offering of up to 2.87 million shares by Goldman Sachs, one of our long time shareholders. The offering is comprised entirely of secondary shares. Accordingly, Benefitfocus will not be receiving any proceeds from this offering. Turning to guidance, for the full year we expect revenues of $174.5 million to $176.5 million, which equates to year-over-year growth of 27% to 28%. We are targeting an adjusted EBITDA loss of $35 million to $37 million, and a net loss per share of $1.93 to $2, based on 28.2 million weighted average shares outstanding. For the third quarter, we were targeting revenues of $42.9 million to $43.4 million, which represents year-over-year growth of 25% to 27%. From a profitability perspective, we expect an adjusted EBITDA loss of $10.1 million to $10.6 million and a non-GAAP net loss per share of $0.53 to $0.55 based on 7 million weighted average shares outstanding. As a reminder, the impact from the decision to terminate certain unprofitable arrangements will start to be reflected in our results in the third quarter. In summary, Benefitfocus delivered extremely strong second quarter results that reflected the growing demand for our platform and the increasing scale of our business. We remain well positioned to help companies address the complexities of a changing Benefits administration landscape, and are confident that our ability to deliver strong growth and long term shareholder value. With that, we are now ready to take your questions. Operator, please begin the Q&A
- Operator:
- [Operator Instructions]. Your first question comes from the line of Nandan Amladi with Deutsche Bank.
- Nandan Amladi:
- Hi, good afternoon. Thanks for taking my question. Shawn, you touched upon the cross-sell and upsell opportunity among the carriers, employers, as well as your exchange customers. Can you characterize what the upsell pack looks for each of those? I am talking about exchange as a separate segment, just so you can highlight it?
- Shawn Jenkins:
- Sure. Thanks for the question. A big theme for us that we rolled out in one place was this idea of expanding our employer offering, and we introduced a series of new products for the employer market beginning of that expansion. And what we actually saw, with some of those new offerings being picked up by our private exchange customers, which is a really exciting development. So we operate 26 private exchanges now, and we actually had first couple of private exchanges pick up the Benefits Store, which is really exciting dynamic if you think about it. A lot of the private exchanges are individual carriers, health plans, offering their products and also subsidiaries and what not, and we are seeing a real desire for those exchange operators to introduce a series of other voluntary benefits. And so, we have taken our Benefits Store concept, which offers voluntary benefits to the employer. Employees can buy those benefits at their option rate volunteer, basically to buy them. We are having great success in the employer market. Specifically to your question, Nandan, about the private exchange, we saw an uptick of that benefit store there, really for the first time, and quite frankly, way ahead of our expectation. We also did some selling in the quarter, around Advanced Analytics, another employer offering that we rolled out at March at one place, and we are seeing the carriers beginning to attach that to their private exchange offering as well. Then a third bucket I would just say is, expanding the scope of the private exchange functionality of the operators. So now that the private exchange is in the market, whether its for small employers or large employers or individuals or retirees, we support all four on the Benefitfocus platform. We are beginning to see those partners, whether they are carriers or brokers, come back and add additional things that they want to offer to sell to their customers, extend the functionality around billing capabilities, do things like more real time, coding of certain products and what not. So I'd say, we are kind of going into the 2.0 phase of the private exchange, where these big entities are really standardizing on the Benefitfocus platform, investing heavier in it, which is always a good sign, as it kind of gives you a window into their thinking, how big the opportunity is going out in the future.
- Nandan Amladi:
- Right. And also if you could frame for us the per employee per month roadmap for segments that you just outlined?
- Shawn Jenkins:
- Sure. I will just give you a couple of additional data points that we had queued up. This is our first full quarter of the expanded product offering for the employer segment, and we actually saw a little bit better than a third of the employers attaching one or more products. And we haven't begun to break out yet, the PE/PM of those particular products, but I think it is really a healthy sign to see both new customers, and also a back to base selling of these offerings, as I mentioned a little bit over a third of the contracts that we did during the quarter, had one and many of them had more than one of the attached offerings. When you look at the carrier business specifically, that has been an expansion story for a number of years now, generally about 50% of our selling in any given year, is 50% to new carriers buying and about 50% of the selling is upsell, and those PMs are -- they vary depending on the service and the quantity of contracts and length of the term and what not.
- Nandan Amladi:
- Thank you.
- Shawn Jenkins:
- Sure.
- Operator:
- Your next question comes from the line of Terry Tillman with Raymond James.
- Terry Tillman:
- Hey, good afternoon. I had a couple of questions. I guess Shawn, the first question just relates to last quarter; I think you had talked a little bit about -- because you had gotten the question about employer wins, and could it have been higher. And I think you had said, that maybe some of the packaging of some of these new products and putting together some bundles, may have taken some time for customers and prospects, even at one place, to investigate that. So would you say, that some of the really strong new employer wins in 2Q, some of that was probably what would have been naturally occurring business in [indiscernible]. The reason why I ask this, I am just trying to get a sense on how we should think about an expectation for 3Q? Should we assume that you actually build on that 94, or could it maybe be down a little bit, but still seasonally strong, because its just artificially higher in 2Q?
- Shawn Jenkins:
- That's a great question. I will say Terry that, something that we are seeing this year, and I think it speaks of the phase of the market adoption that we are going in is -- historically, 2Q is our biggest quarter, as it was again this year 94 adds, and I will just pause for a minute and give a shout-out to our management team for building great client references and our sales team for winning so many, thousand plus employers, its just incredible to see that adoption. And we continue to see that, during the middle of the year, employers get ready for their open enrollments they need to buy in the second and third quarter. But I'd say, a fair amount of our pipeline now is looking out tow 2016, 2017, and 2018. Particularly as we go upmarket, we are seeing some larger and larger deals, both in our pipeline and in our wins. And those, along with our SAP arrangement, and that channel partner, tend to be a little less characteristic of signing in Q2 or Q3 to get ready for open enrolment, and they are really more around replatforming, moving to the cloud, generally connected to perhaps other projects that they have going on inside their IT shop, which I believe bodes well for benefit focus as we scale and grow and become a larger platform. So the idea of the acute timing of Q2 and how significant that is in the year, I think it has actually done a -- changed a little bit. I believe it will still be the dominant quarter for a number of years to come, but we are seeing -- more openness of employers to look at possibly signing later in the year even, and getting a headstart on next year or possibly starting earlier in the year and changing their implementation cadence up a little bit. Specifically to your question, we did land 94, a record number. I wouldn't over read that, as what it might mean for Q3. As I said, I think we are really starting to see a lot of conversation around employers getting ready for 2018 and the Cadillac tax, and even at that, we are moving around a little bit or a change in timing. We are hearing a lot of much more longer term strategy and those decisions tend to get made, once that strategy is set.
- Terry Tillman:
- Okay. And Shawn, you have proactively talked about the consolidation in the carrier market, and what that could mean for your business. You are probably on the winning side of many of the M&A trades that are being proposed, and you talked about efficiency, so your platform could be a value-add. But what I am curious about I mean, one of them being a question on Anthem; I mean, you have got a lot of business right now that's supposed to be rolling out. Have you seen in the near term impact though, the implementation schedules there. Is there anything that you've contemplated in terms of the outlook for the carrier business, because there could be some bumps in the road, if you will, because of some of these M&A trades? And then I have a quick follow-up for Milt. Thanks.
- Shawn Jenkins:
- Yeah, totally. Well certainly, our industry, the healthcare, in particular, Benefits largesse is going through a generational shift, with the affordable care act, and the regulatory environment and the cost pressures it puts on the carriers in their pricing. I think, with the recent set of announcements that we have heard just in the last 60 days or so, we are thankful to Benefitfocus that the acquiring companies, our customers at Benefitfocus and that historically has meant, that we are going to get more business, more subscribers come on to our platform would be the idea. And also, if you look into the strategy what's going on, kind of across the board, whether its in the health plan or the life companies or the other types of benefits, even wellness spenders, these companies are lining up additional products to sell into their base. And that means, they need a more sophisticated way to represent those products to handle that data to allow their members to see them and get build for them and pay in a consolidated fashion. So really, I would think they are wonderful themes for the use of the benefit focus platform, really across the board. But its clear that they are going to need flexible technology and they are going to want to invest, and I would say cloud-based technology, as they make these migrations. Specifically your question about Anthem, we are feeling very good about that implementation. We announced that earlier this year. Obviously they had been in talks with various parties, with what they were thinking throughout the -- for a year plus in their acquisition strategy. So I think their roll out and the timing with Benefitfocus was probably contemplated in that, and we haven't seen anything that would make us think its going to materially affect the rollout of the Anthem implementation.
- Terry Tillman:
- Okay. And then Milt, in terms of -- you talked about -- now you have hit that milestone, and congrats on the standalone value for PS on employer, but what about the carrier side? Because I think that was one of the strategies originally as well, some claim to have standalone value. is there any sense that could happen in 2016? Thank you.
- Milt Alpern:
- Yeah, thanks Terry. We did -- we were successful, as you have seen, in establishing standalone value in the employer segment. And as I said, most of the professional services work that we do is on the carrier side. The ability now to recognize revenue on the employer implementations over the implementation -- they are at the point of implementation, as opposed to recognizing over the customer relationship period, does provide some acceleration. But albeit, certainly modest, compared to what it would be in the carrier side. With regards to that, I think its possible, that at some point, maybe in the back half of 2016, that we are able to establish standalone value for carrier services. Clearly, as you know, those are more difficult, more complicated implementations, and it may take a little while longer to bring a partner up to speed to be able to perform an implementation. On a carrier, independently, Benefitfocus, which would be required best to establish standalone value in the carrier side of the business.
- Terry Tillman:
- Thanks.
- Operator:
- Our next question comes from the line of John DiFucci with Jefferies.
- John DiFucci:
- Thank you. I guess, I have just a couple. As you guys pointed out, you had a real nice uptick in the new large employer customers this quarter. Are you seeing any trends at all, in the size of those customers? Are they getting smaller or larger, or just staying about the same size?
- Shawn Jenkins:
- Great question. A couple of things. One of the things we are actually seeing is a lengthening of the agreements, and particularly among the larger ones. And we are seeing in our pipeline and actually in our wins, some bigger and bigger deals. We have got -- we added six employers in the first half that are over 20,000. And so, as we go upmarket, those deals are entering the pipe more than we have seen historically. I think also, the SAP relationship adds to that dynamic, in addition to just the Benefitfocus platform scale and our size and more people learning about the company that we have been public for two years now. So we do see both in the pipeline, and also in the wins, some larger and larger customers. Overall, the average size is incrementing up. However in any given question you know, we might sign a handful of sub 2000 accounts that would possibly skew that average in a particular quarter. But to us it feels and looks like the average size of the employers increasing. In addition to that, from this expansion strategy, we are now attaching more products to those deals, so they are getting bigger, both -- because their employees are getting bigger, but also because we are selling more products to them and the terms are getting longer or the length of the contracts, all really good signals for what we are seeing.
- John DiFucci:
- Great. Thanks Shawn. I have a follow-up for Milt. Milt, cash balance declined by about $20 million this quarter, and I wanted to just get ahead of this, and have you addressed this publicly, you thought -- just get a ton of questions tomorrow on it. How should we be thinking about that going forward?
- Milt Alpern:
- Yeah, good question John. I mean, it looks like the cash burn is around $20 million. Its probably just about $16 million, when you consider the $4 million repayment on the line of credit. And when you look at the cash burn that we have experienced in the first half o 2016, I mean, I wouldn't necessarily say its indicative of what to expect to see for the balance of the year. Remember, there are a couple of things that -- a couple of -- somewhat unique cash disbursements in the first half of the year. There was about $5 million worth building related cash disbursement that were made, and also remember that 2015 as the first year that we had one place in the first quarter as opposed to the second. So you might see that -- that reflects a little bit of a difference, although totally, your base is not. So I would say that, its not necessarily indicative of what you will see in the second half. I think there were some uniqueness in the first half of the year, in terms of cash disbursement. But certainly, as we look out in 2016, we are certainly expecting to make significant improvements towards our objective of an EBITDA breakeven in the middle of 2017, I think you will see leveraging from, not only our revenue growth, but also some operational efficiencies that we are certainly beginning to see, as we have seen recently, and we will continue to see as we move forward in our operations and some of the operational type of efficiencies and improvements that we have implemented. And also, the leveraging of now utilizing third party systems and integration partners to do implementation for us. It removes a lot of the -- we moved some cash, but also removes a lot of the unprofitableness from the model as well.
- John DiFucci:
- Great. That's helpful. If I could, just follow-up to that Milt. Can you just -- and I believe it sort of floats, but can you tell us about what the balance is on your line of credit, or what's available, as you so chose to? It sounds like you paid off some of it.
- Milt Alpern:
- Yeah. The line of credit right now, I think, was about $5 million balance that's outstanding at the end of June. The line of credit that we renegotiated with a consortium led by a Silicon Valley bank in the first quarter, basically was a $60 million line of credit that's predicated on a multiple of our recurring software revenues. Its four times our recurring software revenues, and certainly those have grown. So the $60 million line, albeit for the $5 million that's outstanding, is what's available to us.
- John DiFucci:
- Okay, great. Thanks a lot. Nice job guys.
- Milt Alpern:
- Thank you.
- Operator:
- Your next question comes from the line of Richard Davis with Canaccord.
- Richard Davis:
- Hey thanks. Two questions; so you have had a lot of success and you kind of touched a little bit on this in the previous discussion. But with SAP and SuccessFactors, is there any reason why you would not work with additional HR partners, whether its Ultimate, Workday, Oracle, or whatever, things like that? Or is it something that's more kind of semi-exclusive?
- Shawn Jenkins:
- Its not exclusive Richard, itβs a good question. I think as we get more and more customers with a particular -- that use a particular payroll company or ERP vendor or in Mercer's case, broker, we tend to win a really good reputation there. Those customers begin to talk about Benefitfocus, and allowing lending [ph] terms as we would expect and the data we ship back and forth really works out so well, and we build this kind of organic base, which is what happened with SuccessFactors and then SAP. We do have data integrations with really all the major payroll vendors and ERP vendors. We ship a ton of data back and forth, PeopleSoft, or Lawson or Ultimate Software, and are very good at that across the spectrum. So I think, hopefully in time, we will see ways to formalize those relationships, work with those customer communities. From us though, it starts more organically, and really just taking great care of our customers, regardless of the system we are using, and now our reputation tends to develop within that.
- Richard Davis:
- Got it. And as -- I think was it Ray that got promoted to President, was it last quarter as I recall? And has he done anything particularly different now, now that he's not COO? Or is there -- wearing different color shirts, or whatever?
- Shawn Jenkins:
- Itβs a good point, for those on the phone, for the first time listeners, this is Shawn speaking, I have been President and CEO for 15 years, and we promoted Ray August, our COO to take on the President's title. He has done a wonderful job as you can see, and Andy Howell is running sales, is just doing fantastic. I mean, imagine a quarter, where you grow by 32%. You have the record number of customers, 94 major enterprises, while you increase gross margin by 1,000 basis points. Actually in the quarter, when we tend to staff up a lot, getting ready for open enrollment. So the management team is just doing fantastic. One of the real benefits, I believe, to our customers and eventually to our shareholders, is its giving me even more time to spend on the product, the invention, the design of the products, the introduction of new products, and working with our ecosystem partners, to make sure that we have the absolute best array of products, both in the Benefits Store and in our app store. So really proud of what Ray has done, what Andy has done, Milt and the entire team, and the results are just across the board, spectacular.
- Richard Davis:
- Super. Thank you so much.
- Operator:
- The next question comes from the line of Adam Klauber with William Blair.
- Adam Klauber:
- Thanks. Good afternoon. Would you say the private exchange with Mercer. Is that business running ahead of what it was last year?
- Shawn Jenkins:
- That's a good question. Mercer does a good job of putting out a whole bunch of staff, as they go into the open enrollment season, and we really follow their lead on what they disclose in the numbers and what not. So I can't comment directly on their progress. I do know that, they are having a heck of a run with the Mercer marketplace and they are very proud of their relationship with us, as you saw early in the year, where they made an investment in the company and expanded their relationship. So we are feeling really good about the work that we are doing with them, but as far as their actual numbers, we defer to them to report on them.
- Adam Klauber:
- Okay. And then as far as larger clients, say 10,000 or above; would you say you're having more conversations during selling season this year than last year? And do those tend to be -- go later in the season?
- Shawn Jenkins:
- Well the first part, yes. Our 10,000 plus, 20,000 plus and 50,000 plus buckets are more active than they ever have been. And we historically have not had a specific national accounts team. We wanted to be in all regions and talking to all of the employers, and we felt like as we went public and the Benefitfocus brand grew and our scale grew and our larger customer wins grew, that we would naturally begin to move upstream, which is what's happening. Things like the SAP arrangement and their customers obviously are massive. And so that has brought us into a lot of large conversations as well. So we definitely have more activity in that pipe. That pipeline tends to buy a little less seasonal, so they will buy when they are ready, and when their strategy is set. I don't know that is necessarily later in the year, as much as it is. The bigger they are, they tend to be thinking already about 117 and getting ready for next year's open enrollment, and with multiple geographies and international -- and they might roll out in a specific area. So I think, as those come, they will come maybe a little bit more spread throughout the year.
- Adam Klauber:
- Okay. Thanks a lot.
- Shawn Jenkins:
- Sure.
- Operator:
- Your next question comes from the line of Sean Wieland with Piper Jaffray.
- Sean Wieland:
- Hi. Thanks. I thought that the HealthTap partnership was interesting, that you announced during the quarter. Can you comment on that at all, and specifically, what are the conversations among your employer customers like regarding telehealth? Why did you choose HealthTap, and then how do the economics work in this relationship?
- Shawn Jenkins:
- Yeah, good question. I will tell you what, just in general on the topic, Sean, I was with some great customers last week. And just spending some time with them, talking about their implementation and their roll out, and we spend a lot of time on their wellness initiatives, on telehealth, on new models of delivering. Cairns [ph] is the big employer, about 40,000 employees. And then I went to another meeting, and had the exact same conversation, different type of workforce and what not. And so, it sounds just like every conversation I am having with our customers now, they are looking to Benefitfocus to talk about, who works well in the wellness arena, who is innovating in telemedicine. Who can help us with our employee population that has more and more high deductible health plans. Who can coach people, through various scenarios? So we have, in our ecosystem, a very active set of individuals that work at Benefitfocus, that are taking inbound requests. Lot of partners want to partner with us, given the size of our audience, 25 million using the Benefitfocus platform. We put those through a filter of -- where do we already have common customers, where we can jointly work with an existing customer to do an advanced integration. And then as far as the economics go, on HealthTap in particular or most of our -- in the wellness area, it depends on -- if we bring the customer to them and we are attaching them to one of our contracts, they might be a referral fee or even a revenue share. In some cases, they are bringing us to their customer base, and there might be a referral fee going in the other direction. so the relationships -- we really try and maximize the flexibility for the customer, so they can buy the right paper. But a shift really about -- from last year and we are seeing it more this year, as more and more people, more and more customers want to buy from Benefitfocus. These additional services they want to attach into our service agreement, they want to attach a service level agreement, which should be an umbrella that Benefitfocus provides, and then in many cases, they actually want to pay Benefitfocus and then have us compensate the third parties through an arrangement. And in those cases, we generally do get paid, a fee for managing that whole relationship.
- Sean Wieland:
- All right. Thank you. And then, a quick one for Milt; the commentary around the revenue recognition and professional services. I mean, that was pegged as of January of this year, there was no incremental change to that during the quarter. So am I right in thinking that, those P&L impacts were factored into your guidance, or no?
- Milt Alpern:
- Yeah. I mean, we had basically anticipated, Sean, as we said, establishing standalone value in the employer space, in the middle of 2015, and we did. So going forward, the standalone value impact for the second half of the year is baked into our guidance, and had been, in the total year guidance, that we established at the beginning of the year as well.
- Sean Wieland:
- Got it. Thank you very much.
- Operator:
- Your next question comes from the line of Ross MacMillan with RBC Capital Markets.
- Ross MacMillan:
- Thanks a lot. Shawn, of the 94 employer customers added, any chance for how material Mercer is in that mix, or maybe, more broadly, the indirect channel in that mix?
- Shawn Jenkins:
- Sure. Somebody asked just a minute ago as far as the Mercer breakout. We don't break out their numbers, and quite frankly, the way they will report them, when they go into open enrollment. Sometimes the timing, or the way count on the signing, is a little bit different than they might. So just depends if they are an existing customer there, when they sign up with Benefitfocus and what not. So kind of triangulate between their numbers and ours, can be a little bit of a chore. But I will say that, as I mentioned before, we are obviously very happy with the production of the Mercer Marketplace, as illustrated by their investment in Benefitfocus earlier in the year, and expanding their agreement. We had a lot of great projects going on with Mercer, and looking out multiple years. So very exciting. We have said consistently thought, that that new customer account continues to be the majority, as our direct salesforce. So the bulk of that number is sold directly by the Benefitfocus staff.
- Ross MacMillan:
- Okay. And I think you made a mention of 20,000 plus employer customers. You said six in the first half. In total, what sort of portion of the employer base is in the 20,000 plus? Is that a lot more than six, could you maybe help us understand that dynamic?
- Shawn Jenkins:
- That's a good question. Ross, I don't have that number in front of me here. What actual count is of the 662, how many are 20,000 plus. I do know that, in our activity, in our pipeline now, we are seeing more and more of those show up, and we do have a team now focused on those larger employers more exclusively. They tend to be two, three year long cycles, so a lot of it is still yet to come. But adding six in the beginning of the year, and many more in the pipeline, we feel is a good strong bet. We may start breaking that out in the future quarters, but I don't have the actual total number, in front.
- Ross MacMillan:
- Okay, that's helpful. And then just one for Milt; just on the quarter itself, what was the CRP impact this quarter, do you have that in hand?
- Milt Alpern:
- It was about $1 million, and $1.3 million, Ross, on revenue.
- Ross MacMillan:
- Okay. And then just one last one for me, when you guided for calendar 2015 originally, you had made some commentary around on profitable customers, and that would have a dampening impact in the second half of the year. Is that still the assumption with the updated guidance and is the magnitude of those unprofitable customer revenues coming off, still consistent with what you said before? Thank you.
- Milt Alpern:
- Yeah. I mean, there was a small impact on unprofitable customers in the second quarter. But certainly, the balance or the bulk of what we had talked about at the beginning of the year, we will see in the third and fourth quarters of 2015. So yes, still in line, and certainly the majority of the impact was going to be in the second half of 2015.
- Ross MacMillan:
- Great. Thank you.
- Milt Alpern:
- Thanks.
- Operator:
- Your next question comes from the line of Stephen Lynch with Wells Fargo.
- Stephen Lynch:
- Hey guys, two quick questions. First, revenue per carrier client was up a fair amount year-over-year. I was just wondering, if you could talk about what's driving the improvement there? Whether its mostly expanded software adoption by the carrier clients, or is a large part of it being driven by growth in enrollment within the private exchange partnerships?
- Milt Alpern:
- I would say its both, Stephen. I mean, certainly we continue to see the carrier relationships increase through adoption. We have always said that about 50% of the growth that we see in the carrier business comes from the base, as well as the other 50% coming from new owners [ph]. So yes, with regards to that, and I guess the second part of your question is also true, what we are seeing in terms of carrier growth coming from more and more marketplace adoption. As we talked about, we now have 26 customers that we are powering marketplaces for, and certainly, many of those are carriers. So both areas are providing the growth in the carrier revenues that you're seeing.
- Stephen Lynch:
- Okay, thanks. And then next, maybe a big picture question for Shawn. I know in the past, you guys have mentioned that your employer client base has an above average adoption of high deductible health plans compared to the industry. So I was curious, if we could get your thoughts on, where you see overall high deductible health plan penetration going? I think most industry reports peg at somewhere around 20% of employer sponsored lives today. So, what's your best guess about where that could top out, and then, how long do you think it takes for us to get there? Thanks.
- Shawn Jenkins:
- Yeah, great question. I think that -- one thing that comes to mind, and the question is -- I think that there is so many things that are happening to make it easier for people to select a high deductible health plan. Whether itβs the influx of voluntary benefits, gap filler insurance, programs that can fill that whole -- between your deductible and when the insurance kicks in. A lot of those products didn't even exist a couple of years ago, where they weren't sold real effectively. And they're really just now coming on board. Combined with the markets -- the individual's ability to understand what they're being presented. If you just go back a couple of years, the presentation of what high deductible health plan was and how many options you had and what that really meant was so confusing and frustrating. Its almost -- its kind of surprising, even the industry has gotten as high as it has, given the difficulty with the legacy systems and paper-based enrollment. So in a sense, we have 662 large employers, we only have 4% of the addressable market, and we are growing rapidly. There are so many more employers yet that have really gotten, I'd say, a fresh way to communicate that. To me, it just feels like that there is a tailwind, that's going to continue to make it easier and easier for individuals to understand these programs, for carriers that innovate around how the programs will be designed to make them more flexible. And this idea, using data as the foundation, or data that you provide inside. So you can really understand, is this program going to be the right thing for me and my family. Those just feel like tailwinds are -- I think there is many years to go, the expansion of, not just high deductible plans, but really, I'd call it a more well-rounded program for the individual, which possibly means buying some less insurance in certain areas, but then, trading that with buying a bit more voluntary or appropriate insurance, given their fact pattern. As far as peg a percentage into the future, I don't have one that rolls off the top of my head. I think its going to be a higher percentage than it is today, and I think its going to continue to run for a number of years.
- Stephen Lynch:
- Thanks. That's great color.
- Operator:
- And there are no audio questions. I will turn the call back over to the presenter, for closing remarks.
- Shawn Jenkins:
- Okay, well thanks everybody. Glad, you tuned in for tour call, and we look forward to talking to you again next quarter. Thank you very much.
- Operator:
- Thank you for your participation. That does conclude today's conference call. You may now disconnect.
Other Benefitfocus, Inc. earnings call transcripts:
- Q2 (2022) BNFT earnings call transcript
- Q1 (2022) BNFT earnings call transcript
- Q4 (2021) BNFT earnings call transcript
- Q3 (2021) BNFT earnings call transcript
- Q2 (2021) BNFT earnings call transcript
- Q1 (2021) BNFT earnings call transcript
- Q4 (2020) BNFT earnings call transcript
- Q2 (2020) BNFT earnings call transcript
- Q1 (2020) BNFT earnings call transcript
- Q4 (2019) BNFT earnings call transcript