Castlight Health, Inc.
Q1 2021 Earnings Call Transcript

Published: 2 May 2021

[Tiah Davis:]

Leading today’s call are Maeve O’Meara, Chief Executive Officer; and Will Bondurant, Chief Financial Officer. Maeve and Will will offer prepared remarks, and then they will take questions. The Castlight press release, webcast link and other related materials are available on the Investor Relations section of Castlight’s website. This call contains forward-looking statements regarding trends, strategies and anticipated performance of the Castlight business, including, but not limited to, guidance for 2021, new sales, our ability to bring new innovation, the opportunities and impact of COVID on our own operations, our ability to sell in our operating results, opportunities and the impact of COVID on our customers’ businesses and their decisions to buy certain benefits or institute workforce reductions, retention of existing customers, gross margin and operating expense trends, cash use, future cash position and the changes in the growth strategy and the company’s performance. These statements are made as of April 29, 2021, and reflect management’s views and expectations at this time and are subject to various risks, uncertainties and assumptions. If any of these risks or uncertainties develop or if any of the assumptions prove incorrect, actual results could differ materially from the expressed or implied by our forward-looking statements. The company disclaims any obligation to update or revise any forward-looking statements. This call contains financial guidance, but the company will not provide any further guidance or updates on performance during the quarter unless the regulation FD complaint form. Please refer to today’s press release and the risk factors included in the company’s filings with the Securities and Exchange Commission for a discussion of important factors that may cause actual events or results to differ materially from those contained in Castlight’s forward-looking statements.

[Maeve O’Meara:]

Thank you all for joining us. On the call today, I’ll discuss our achievements in the first quarter, including progress against the three goals we shared on our last call

[Will Bondurant:]

Thanks, Maeve. I’ll start by reviewing our first quarter results, and then we’ll discuss our outlook for second quarter and the full year. Beginning with annualized recurring revenue, or ARR, we were pleased ARR increased $1.3 million sequentially from 12/31 and ended the quarter at $128 million. As Maeve mentioned, the first quarter is seasonally a light sales and renewals quarter for our industry, and the ARR increase was principally a result of the expanded Blue Cross Blue Shield of Alabama relationship and Q1 being the lowest churn quarter we’ve experienced since 2016. Total revenue in the first quarter was $35.1 million which exceeded our quarterly guidance range with the upside driven by performance guarantee achievement and our Boston Children’s Hospital relationship. Revenue represented a decrease of 10% compared to a year ago, which was driven by the ARR decline we saw in 2020 and around $3 million of onetime revenue in the prior year quarter. Subscription revenue accounted for 92% of total revenue and professional services revenue accounted for 8% of total revenue this quarter, including the contribution from our Boston Children’s Hospital/CDC relationship. Turning to non-GAAP measures, our gross margin in the quarter of 66.8% compared favorably to 65.1% a year ago. Subscription gross margin was 77.5%, continuing to come in, in line with our expectations. Non-GAAP operating expenses as a percentage of revenue were 63.5% in the quarter compared to 70.8% in the first quarter a year ago. This year-over-year improvement reflects our ongoing commitment to financial sustainability, even as we have made targeted investments to return to ARR growth this year. Non-GAAP operating income of $1.2 million represented our fourth straight quarter of positive non-GAAP operating income. Similarly, our cash flow from operations was $7.6 million in the first quarter, which was a record level for Castlight. Though it is worth noting that cash flow benefited from more than $3 million of favorable payment timing in Q1, we ended the first quarter with $56.5 million in cash on the balance sheet.

[Operator:]

Your first question is from Charles Rhyee with Cowen.

[Charles Rhyee:]

Yes. Hey, thanks guys for taking the questions. Just real quickly on Boston Children’s, how much of the revenue – is it fair to say that the revenue increase that we’re expecting for the full year is all Boston Children’s or is there anything else to think about that? And then in terms of the contribution, is the first quarter when we look at the professional services line, is that the right runway or should we assume that kind of increases here and kind of runs at a certain level and is that a consistent amount that goes to the first half of next year and then we kind of drop back to what we kind of saw beforehand?

[Will Bondurant:]

Yes. Hey, Charles, first of all, we’re –I should say, we’re really pleased to have the expanded and extended Boston Children’s Hospital relationship and pleased for the leadership role, it shows us playing and helping in the COVID-19 pandemic quite candidly. On the questions itself, the principal driver of the increased guidance was the expanded Boston Children’s Hospital relationship. So you’re right on that point. In terms of contribution, what the agreement does is it essentially extend us from an original agreement that went through mid-’21 to the mid-’22 time frame, really kind of the expected duration of the COVID-19 vaccination effort. What that means is you’ll see that kind of run rate that was similar to Q1 running forward though we did say in the prepared remarks that Q2 of ‘21 and this quarter will be slightly higher given some added deliverables that were part of the expanded agreement.

[Charles Rhyee:]

Okay. So the contribution in this year will be probably a little bit more than what we should expect in the first half of next year on a quarterly basis?

[Will Bondurant:]

I would say the contribution in Q2 will be a little bit outsized. But other than that, it should be fairly consistent with each of the other quarters from that start time frame in the mid part of Q4 through the middle part of next year.

[Charles Rhyee:]

Okay, got it. And then in terms of the core – the ARR side, maybe you talked about the pipeline here and particularly the health plan side. Should we still expect – is it your view, we’ll get another – at least one health plan across the finish line by year end? And I know the target is to return to ARR growth. Are you guys prepared at this point to kind of give a kind of a magnitude of where you think that ARR growth range will look as we get to the end of the year?

[Maeve O’Meara:]

Sure. Thanks for the question, Charles. So I’ll just start by saying that we were obviously pleased to be able to report an increase in ARR this quarter. Obviously, Q1 is typically a lighter sales and renewal quarter, but pleased to see it moving in the direction that we want. And as you have commented, we are committed to returning to ARR growth in 2021, and we’re confident that we’re going to do that and that we’re set up well to deliver on that commitment. As you know, ARR is a function of three things, so it’s a function of health plan sales, employer sales and customer churn. And to your commentary on pipeline, we’re feeling good about those, the health plan pipeline as well as some of the data that I shared on the employer pipeline. So I shared that we saw a 5x increase in RFPs. We also were at 130% of our Stage 1 pipeline target. And then of course, we had our lowest churn year since 2016. So if you think about those three pieces coming together, we feel that all three are going to be drivers of our return to ARR growth. And that’s really the commitment that we’ve made and the commitment that we intent to keep. I don’t know, Will, if you want to add anything to that?

[Will Bondurant:]

No. And I think on the health plan side, the piece that you started on Charles, we feel really good about that pipeline. You heard that in Maeve’s prepared remarks. The nice thing that we have this year is the ability to add ARR through both new business, new plans coming onboard and through expansion of existing relationships. And certainly, we’ve made progress in the expansion already, but expect to have both of those contribute this year.

[Charles Rhyee:]

Okay. And last question for me is, if we look at the expense lines, you guys have done a really good job in this area on OpEx. As we think about returning to ARR growth this year and, obviously, going into next year, should we think of our operating expenses starting to grow more in line with ARR growth again after kind of years of kind of cutting back here to manage expenses? And then a quick second part is, you reported a non-GAAP operating profit. We didn’t book an income tax provision. Is it right to think we shouldn’t be booking any kind of income tax provision even as we generate a non-GAAP operating profit at least this year? Thanks.

[Will Bondurant:]

Yes. On the latter point, that’s the right way to think about this year. In terms of the OpEx kind of more broadly, you’ve heard from Maeve, really since she took the role of that, helping the organization show operating discipline, has been an important priority, and we’re glad that, that’s played out over the last four quarters, four straight quarters of non-GAAP profit, four straight quarters of positive cash flow. We do expect to make target investments on the OpEx line as we return to growth. We’ve talked before about those in the sales and marketing line, specifically in the health plan business, where we’ve got a real opportunity to capture share and then also in our Care Guides program, which is kind of R&D and also cost revenue. But in general, we don’t expect to see the OpEx lines kind of scale in a meaningful way as ARR growth scales. We’d expect to see that on the cost revenue lines, but feel like we’re in a reasonably good position to make target investments but not need to see meaningful step-ups over the course of, call, the next 8 to 24 months as we return to that ARR growth.

[Charles Rhyee:]

Okay. That’s helpful. Thanks guys.

[Will Bondurant:]

Of course. Thanks, Charles.

[Maeve O’Meara:]

Thanks, Charles.

[Operator:]

There are no further questions in queue at this time.

[Maeve O’Meara:]

So with that, thank you all for joining us today. We’re glad to share the progress we’ve made against our 2021 priorities. Have a great evening.

[Operator:]

This concludes today’s conference call. Thank you for participating. You may now disconnect.