Castlight Health, Inc.
Q1 2020 Earnings Call Transcript

Published: 9 May 2020

[Operator:]

Good afternoon and welcome to the Castlight Health First Quarter 2020 Conference Call. Leading today's call are Maeve O'Meara, Chief Executive Officer and Will Bondurant, Chief Financial Officer. Maeve and Will, will offer their prepared remarks, and then they will take your questions. The Castlight press release webcast link and other related materials are available on the Investor Relations section in Castlight's website.The call contains forward-looking statements regarding trends, strategies and anticipated performance of the Castlight business including but not limited to guidance for the full-year 2020, new sales, our ability to bring new innovation, the opportunities and impact of COVID on our own operations, our ability to sell our operating results, opportunities and the impact of COVID on our customers' business and their decisions to buy certain benefits or Institute workforce reductions retention of existing customers, gross margins and operating expense trends, cash use, future cash positions and the impact of management charges and changes in the growth strategy of the company's performance.The statements are made as of May 7, 2020, and reflect management's views and expectations at this time and are subject to various risks, uncertainties and assumptions. This call is replayed after May 7, 2020, the information in the call may no longer be current or accurate. 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 in a public forum. 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.Today's presentation also includes certain non-GAAP metrics such as non-GAAP gross margin, operating expenses, operating loss and net loss per diluted share that the company believes aid in the understanding of Castlight's financial results. A reconciliation to comparable GAAP measures on a historical basis can be found in the appendix section of the earnings release filed before the call.With that, I will turn the call over to Maeve O'Meara, CEO of Castlight. Maeve?

[Maeve O'Meara:]

Thank you all for joining us. Before getting into a review of the quarter, I want to take a minute to recognize that these are extraordinary times as the country enters its first public health crisis in more than a century. It is critical that we acknowledge the uncertainty, but act quickly to enable the business to drive even greater impact in our mission of helping consumers navigate health care.I want to thank the entire Castlight team for the focus and the fortitude that they have demonstrated through such difficult times. Our team's rapid response to COVID-19 over the last eight weeks has had real measurable impact and is a demonstration of the company's ability to innovate, execute and drive business momentum.Looking forward, Castlight is uniquely positioned to leverage our core technology to help our customers and the broader community to navigate not only this public health crisis but the new world that COVID-19 created in a matter of months. It is imperative that we evolve our solutions to serve customers and users in the extended post-COVID-19 outbreak world. With a clear focus on the needs of our customers, we are confident that our technology advantage, innovative thinking and nimble execution will generate positive business outcomes.Our first priority over the last eight weeks and going forward is of course on keeping our team safe, while also ensuring business continuity. Our entire staff has been working remotely since mid-March, including our call center employees. Despite the change in conditions we have experienced no impact to our ongoing operations including support and site reliability.Our customers are very much at the forefront of driving the employer response to the pandemic. We have supported them in multiple ways including COVID-19 employee education and communication, analytics and support for vulnerable populations and rapid access to free digital health resources from our ecosystem.COVID-19 has put a spotlight on the value of a single place to provide timely personalized information and access the full breadth of virtual care solutions. It has simultaneously demonstrated the power of coupling the rich data underpinning the platform with the consultative approach. We realized in the early stages of the COVID-19 crisis that many of our resources, including our symptom checker and importantly our testing site finder, would be relevant to all Americans.We identified at the start of the outbreak that testing would be critical to enable a restart of the economy and thus the team rallied to develop the most comprehensive test insight database available, which is now being used by health plans, state health departments and providers to increase access to COVID-19 testing. Our solution is also helping power the Google Maps COVID-19 testing solution.COVID-19 is eliminating and intensifying health care navigation challenges for all Americans. We believe we are uniquely positioned to support our employer, customers and their employees as they return to work and navigate a new normal. We are optimistic that despite pressures to cut costs, that employers will place greater value on a platform that can both provide trusted credible information but also enables frictionless access to the growing number of virtual care solutions that are for the first time truly converging with traditional healthcare delivery.I will now turn to our first quarter results. Our reported financials for Q1 were strong and in line with our expectations, which Will will discuss in more detail shortly. We ended the first quarter with annualized recurring revenue or ARR of $142.4 million. This number is a result of light sales and one early termination.In the quarter, we made progress against all of the priorities we identified on our last call. Number one, revitalizing our direct-to-employer business; number two, launching Care Guides; number three, signing an additional health plan partnership; and number four, continuing towards financial sustainability.With regards to our direct-to-employer business, the first quarter has traditionally been a seasonally light sales quarter but it was particularly light this year due to several key prospect sales cycles being elongated as a result of benefit leaders focus moving to their internal COVID-19 response. We are optimistic that the majority of delayed deals will close but recognize the additional risk that comes with the economic climate. We have also experienced a slowdown in pipeline development as key industry conferences were canceled.We are addressing pipeline headwinds with both strategic and tactical action. Strategically, we have shifted to providing the free services I detailed earlier such as the site finder, symptom checker and analyzes to prospects. These have been well received and implemented by several employers. Tactically, we’ve moved planned events to virtual webinars, one of which produced record attendance.Turning to retention, we were pleased to renew several of our key large clients in Q1. That said, it's important to note that we face two unplanned challenges going forward. The first is a reduction in workforce among existing clients. The second is potential acceleration of churn due to budgetary pressure to conserve cash by eliminating benefits regardless of ROI.That said, we have made demonstrable progress on the fundamentals of retention that we have highlighted as priorities on past calls. First, operational excellence. This quarter was strong operationally and we exceeded our support SLAs even while navigating COVID-19 in March. We’ve also made significant strides in streamlining some of our data pipelines, which we expect to continue to reduce operational friction.Secondly, ROI. We continue to both create and validate our ROI with new case studies. We shared that we have hired a new VP of Analytics on our last call and her impact has been significant in just a quarter. She has implemented expanded technology to help us enable clinical condition based ROI analysis. In preliminary analysis, we expect to share with customers this quarter. We are seeing medical cost savings of approximately 2% for low-risk users and 7% for high-risk cohorts. This represents a real step forward for us and measuring ROI which will be critical during this time of economic hardship.Third, innovation. Our rapid delivery of COVID-19 solutions and foresight around the criticality of testing and return to work support has been noticed and appreciated by our customers. We are actively engaged in partnering with employers to support fit for work and return to work strategies with technology.Finally, relationships. We have made significant strides with our Executive engagement program bolstered by our COVID-19 efforts that have included a weekly digest customer-specific analysis and weekly forums where around 20 customers have come to share response strategies.The second priority we highlighted in the last call with our strategy to launch Care Guides, a high touch complement to our navigation solution. In Q1, we achieved three key milestones. Number one, we completed the delivery of the guide facing technology. Number two, we successfully launched our first set of clinical use cases. And number three, we finished the build-out of our Salt Lake City facility.In addition to meeting our development milestones, we were also able to successfully add Care Guides COVID-19 support. These use cases included plan coverage education, medication adherence support, symptom review and navigation to COVID-19 testing sites or telehealth services.Approximately 30 customers have taken advantage of the opportunity to offer a bundle of COVID-19 specific Care Guidance services at no cost, to their most vulnerable populations. Approximately 80% of Care Guidance calls have been directly related to COVID-19 including benefit coverage symptom checker and testing. The other 20% included guidance related to delayed elective care and pharmacy management.We chose to pause some of the outbound Care Guidance support for services related to gaps in care and other services impacted by the delays in elective care. From a new health plan partnership perspective, we were seeing positive momentum in early Q1 but similar to our employer business, we have seen a slowdown in deals moving through the pipeline since March.Similarly, we have had our pipeline building events canceled or shifted to a virtual format. We have supported health plans with access to our testing site and specific analysis on vulnerable populations including medication-adherence support.We continue to believe in our ability to support plans and deliver real value. But we have observed some health plans push out planned RFPs. We are actively engaged in multiple opportunities and believe that COVID-19 has created more visibility on the need for digital platforms by putting increased focus on partners that can support virtual care delivery in differentiated ways.Our discussions have involved to include a heightened focus on our ability to support a plug and play ecosystem. On our last call, we discussed our priority around establishing financial sustainability, specifically the goals of maintaining gross margins and improving our operating loss profile as compared to 2019.Given the sales headwinds, we're facing and potential churn risk, we took proactive measures to ensure we are reducing our cost structure and setting ourselves up well for the post COVID-19 environment. We have implemented a tiered across company salary reduction as well as restructured parts of the team that were more directly impacted by COVID-19, or where there is an opportunity to run a leaner, flatter organization to enable more rapid decision making.Our Board is also reducing their cash compensation by 50% for the duration of the company's salary reductions. In aggregate, these actions will allow us to conserve more than $10 million of cash this year. These were difficult decisions, but we are committed to exercising operational discipline to ensure that Castlight is well positioned to deliver on its mission.The COVID-19 crisis has changed many aspects of the year we had planned. But we feel confident that we have acted quickly to ensure the company is well positioned to meet the needs of our customers and users, while taking the appropriate measures to ensure operational discipline and a strong balance sheet.We believe that the market need for digital navigation has been accelerated but acknowledge our exposure to customer layoffs and intense cost cutting measures. We believe companies are made in moments like these, and I’m deeply grateful to the entire Castlight team for rising to this challenge with such grace and determination.I will now turn the call over to Will to review the financials. Will?

[Will Bondurant:]

Thanks, Maeve. When we spoke in late February, we were confident in our 2020 plan and our key metrics were trending in line with or ahead of our expectations. As Maeve mentioned, COVID-19 has affected us directly. And we have the opportunity to leverage our solutions to support our customers and users while driving value for the business in a more digital world.However, while our recurring revenue model and long-term contracts provide visibility to 2020, we also expect near term headwinds and closely evaluated the impact of COVID on our business. Maeve provided a summary of those impacts, which I will discuss further, but it's important to emphasize that we still feel confident about the strategy and the long-term goals of our business. Our mission has never been more important.Turning to a review of the financials. Annualized recurring revenue or ARR totaled $142.4 million at the end of the quarter, down approximately $4.6 million sequentially. As Maeve mentioned, Q1 is normally a seasonally light sales quarter for us. In this quarter, we also had several deals that we anticipated with closing Q1 push out as our buyers focus turned to managing the early stage of the pandemic for their employees.Each deal that pushed from Q1 continues in contracting today. As a reminder, last quarter, we signed a small number of customers to short-term extensions that allowed us to continue our renewal dialog with them. I'm pleased to report that we successfully retained the majority of the customers and also secured long-term extensions from several marquee clients.We did experience the termination of one large care guidance client that chose to exit their agreement at a contractual termination point. This customer was on the Care Guidance point solution, a part of our book that we acknowledge has higher risk of churn. While this customer loss was impactful this quarter, the point solution book of business accounts for less than 25% of our total ARR.Revenue was $39 million in the first quarter, an increase of 10% year-over-year. Subscription revenue accounted for 98% of total revenue as expected. Importantly, this quarter included several one-time items including a multimillion dollar termination fee associated with the client, I discussed above, as well as performance bonuses, which combined totaled just over $3 million.This one-time total does not include the regular subscription revenue from the terminated customer. And as we mentioned in February, we continue to expect not to see the revenue growth sequentially in each quarter over the course of the year that we have seen historically given the new Anthem relationship. Our professional services and other revenue of $700,000 was in line with our expectations.Turning to our non-GAAP financials in the first quarter, gross margin of 65% was driven by higher revenue, reflecting the one-time items I just mentioned. Our subscription gross margin of 75% was in line with the expectations we shared in February. Non-GAAP operating expenses of $27.6 million were flat compared to a year ago and declined as a percentage of revenue from 78% in Q1 of 2019 to 71% this year.As Maeve discussed, given the impact of COVID19 on our expectations for the year, we have taken proactive measures around our cost structure to align our team and investment against the new world that I will discuss later. Based on these factors, first quarter non-GAAP operating loss was $2.2 million compared to $5.3 million in Q1 of 2019, principally driven by the one-time revenue mentioned earlier.While I don't normally comment on our GAAP income statement, it's worth noting that our GAAP operating loss of $56.6 million includes a $50.3 million write-off of goodwill associated with the Jiff acquisition in 2017.Our cash used in operations was $14.4 million in the first quarter. Q1 is seasonally our highest use of cash, due to year-end bonuses and other payroll related items. In addition, we had timing dynamics related to vendor payments and collections from customers. We expect cash usage to be substantially lower for the remainder of the year and we will approach cash flow breakeven in the second half of the year.We ended the first quarter with approximately $44 million in cash and marketable securities. With that, given COVID-19, I will now provide an update to our outlook, reflecting that expected impact. Given our recurring revenue model and long-term customer contracts, we’ve visibility into about 90% of our revenue entering any particular year.Given that visibility and our actions around cost structure, we still feel confident in our ability to deliver against our 2020 expectations. Our updated outlook reflects the uncertainty of the duration and overall impact of COVID-19 that Maeve outlined against each of our priorities. We’ve lowered the bottom end of our ranges to reflect that uncertainty.For 2020, we now expect revenue in the range of $127 million to $135 million. Non-GAAP operating loss between $17 million and $24 million and a non-GAAP loss per share between $0.11 and $0.16 per share based on 150 million to 151 million shares outstanding.This outlook is inclusive of the following cost structure actions. Temporary salary reductions for all employees making $100,000 or more tiered by base salary. Our CEO will take a 30% salary reduction, CFO will take a 25% salary reduction and our senior management team will take a 20% reduction in salary. A voluntary 50% reduction in the cash compensation for our Board through the duration of our team's salary reductions. Role eliminations focused on positions most impacted by COVID or where we could run a leaner, flatter organization.Management of a focused hiring program to only recruit critical roles and evaluation of all non-personnel and third-party spend for opportunities to eliminate expense. In aggregate, we think these actions will allow us to conserve more than $10 million of cash this year and ensure we have the resources available to support our customers as well as align against strategic opportunities introduced by COVID.Looking forward, we will continue to evaluate the needs of the business, balancing careful expense management against opportunities to drive growth. With these efforts, we expect cash used from operations to be in the range of $12 million to $20 million and expect to end 2020 with around $40 million in cash as we approach cash flow breakeven in the second half of 2020.To conclude, we are deeply proud of our team and our efforts in supporting our customers and all Americans as we face this pandemic. And we are optimistic about the role that we will play in helping our customers navigate future healthcare needs. I cannot thank my colleagues at Castlight enough for their efforts each day during these unusual and challenging times.Looking at the big picture, we feel confident in our 2020 financial goals as our revenue model is anchored by strong forward visibility. While the decisions we've had to take are incredibly hard, we believe the decisive capital preservation actions will put the company in the best position to return to sustainable growth.Operator, we will now take your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Jeff Garro from William Blair. Your line is open.

[Jeff Garro:]

Yes. Good afternoon and thanks for taking the questions. I think I will start asking about visibility from here into 2020 results. You mentioned two areas that could have an impact on the rest of the year, the client headcount reductions and possible benefit reductions. First on client headcount reductions. Did you see any of that by the end of Q1 and then any more so far in Q2? And then, what have you built into the guidance for the rest of the year out of conservatism?

[Maeve O'Meara:]

Great. Hey, Jeff, good to hear your voice. Thanks for the question. So I will start off and then Will can comment specifically. So as you mentioned, we've highlighted two potential risks to churn specific headcount reduction and then just overall pressure on budgets. So taking a step back, we do feel that we are in a fortunate position because of the stability of our revenue with the long-term customer contracts and recurring revenue model specifically also including Anthem. So, to answer your question very directly, we have not had any reductions on the headcount side to date. We are also fortunate because of the diversity of our customer base, so only 20% -- actually less than 20% of our customer base are in industries that would be considered to be acutely impacted by COVID. It's really not something that we've experienced to date. Will, do you want to add a few comments?

[Will Bondurant:]

Yes, absolutely. Thanks, Jeff. So as you think about 2020 outlook specifically, revenue guidance is built on the recurring revenue model with long-term contracts we have. The flow through that would come from workforce reductions or changes happen at defined periods contractually-- audit periods where they get trued up. And so we've incorporated conservatism around potential reductions in our customers' workforces into our updated outlook that we discussed today. But we do feel very confident about our ability to achieve the financial goals for 2020.

[Jeff Garro:]

Great. That's helpful. The second part on visibility and benefit reductions, clearly likely [indiscernible] decision by your clients, but given the value that you provide around health care, I would think simply having the conversation with your clients around the bottom line impact and the employee benefit that you're solution provides could help swing the decision. So two parts, what are you doing from a customer engagement perspective to make sure that you’ve a chance to have that conversation before a decision is made and again on this component as well, what have you built into your guidance conservatism on potential benefit reductions?

[Maeve O'Meara:]

Sure. I will take the first part of the question and I think you're absolutely right, Jeff, that in many ways COVID has brought us closer to our customers than I think we've been probably in years. So we actually do, I mentioned in the script, have a weekly touchpoint with our customers specifically around a lot of the things that we are doing as it relates to COVID that brings a group of them together. It's been incredibly well attended. That's in addition to the digest that we are sending out. I mentioned the expansion of the executive engagement program. So kind of on the highest level, we are being really communicative to your point as it relates to the innovation focused on COVID. We are also bringing them into some of the ROI work that I mentioned. That's certainly not something that's being worked on without their visibility and frankly partnership and then that bridge to customer community. So what I would say is just from a touchpoint perspective, certainly, we aren't able to connect with them in person the way that we would like to, but we have had a much higher cadence of engagement with all of our key customers really by virtue of how we’ve shown up to support them during COVID.

[Will Bondurant:]

And then as you think about how that’s reflected in our 2020 outlook, Jeff, the broader discussion with customers around their renewals happen typically over the course of the summer and into the fall. And so, we don't expect material decisions to happen quickly here, especially given how close we are to customers and how valuable we are to them in this specific period as their employees navigate health care and in the face of COVID-19.

[Jeff Garro:]

That makes a lot of sense. I will sneak one more in asking about the pipeline and on the payer side. I know I'm simply oversimplifying to some degree, but it seems that your ability to plug and play and say Google Search and other organizations which translate well to your plugging and playing into payer technology and you've already done that with Anthem. So, I guess the sales cycle might elongate, but how has your response to COVID impacted your thoughts on the payers as a growth factor and building out that pipeline?

[Maeve O'Meara:]

Yes, great question, Jeff. So I guess on the highest level, what I would say is that my confidence in our relevance to the health plan market has absolutely increased during this time. What you appropriately called out as the difficulty in pinpointing timeline has also increased, given that the whole healthcare world is consumed by COVID. But what has changed is that we are engaged in a much higher volume of strategic conversations with health plans, certainly due to some of the things that you mentioned and that goes certainly beyond formal RFPs, and we actually have seen an overall increase in our health plan pipeline, really as a result of some of the nimble actions and builds that we took in response to COVID and what we are observing is that our strategic relevance to health plans has increased, particularly in the face of this convergence of digital and traditional care. You can imagine that there is a lot of the strategic relevance of someone who can help them do that, has become much more short-term, high priority. So we are actually quite optimistic but to your point, of course, the timeline has certainly, I think, then potentially elongated.

[Jeff Garro:]

Understood. Thanks for taking the questions.

[Maeve O'Meara:]

Good.

[Operator:]

[Operator Instructions] Your next question comes from the line of Charles Rhyee from Cowen. Your line is open. [Operator Instructions] There are no other questions at this time. I will turn the call back over to the presenters.

[Will Bondurant:]

All right. Charles, I guess you might have been on mute. Turning back over to you, Maeve.

[Maeve O'Meara:]

Great. Thank you all for joining us today. We remain focused on leveraging our technology to help customers in the broader community navigate not only the public health crisis, but the new world COVID-19 has created. We believe that our proactive decisive measures will help us build a stronger Castlight. I look forward to updating you on our progress in July. Thank you.

[Operator:]

This concludes today’s conference call. You may now disconnect.