Castlight Health, Inc.
Q4 2019 Earnings Call Transcript

Published: 26 Feb 2020

[Operator:]

Good afternoon. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Castlight Health Q4 Earnings Results Conference Call. [Operator Instructions] Thank you.I will now turn the call over to the Castlight Health management team.

[Gary Fuges:]

Good afternoon, and welcome to the Castlight Health fourth quarter and full year 2019 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 we will take your questions.Our press release, webcast link, and other related materials are available on the Investor Relations section of our website. This call contains forward-looking statements regarding our trends, strategies and the anticipated performance of our business, including but not limited to our guidance for full year 2020, new sales, retention of existing customers, gross margin and operating expense trends, cash use, future cash position, and the impact of management changes and changes in our growth strategy on the company’s performance.These statements are made as of February 25, 2020, and reflect management’s views and expectations at this time, and are subject to various risks, uncertainties and assumptions. If this call is replayed after February 25, 2020, the information in the call may no longer be current or accurate. We disclaim any obligation to update or revise any forward-looking statements.This call contains financial guidance, but we will not provide any further guidance or updates on our performance during the quarter unless we do so 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 discussion of important factors that may cause actual events or results to differ materially from those contained in our 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 we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics, on a historical basis, can be found in the appendix section of our earnings release filed before the call.With that, I’ll turn the call over to Maeve O'Meara, CEO of Castlight. Maeve?

[Maeve O'Meara:]

Thank you for joining us on today’s call.Q4 was another strong quarter of delivery against the top priorities I laid out in July after stepping into the CEO role

[Will Bondurant:]

Thanks, Maeve. Good afternoon and thank you for joining us today.Our fourth quarter’s financial results reflect continued progress and investments associated with our second-half priorities. We drove sequential ARR growth and improved the stability of our customer book while making targeted and careful investments in the right leadership, technology and infrastructure to accomplish the strategy Maeve just outlined

[Operator:]

[Operator Instructions] The first question comes from Jeff Garro of William Blair. Please go ahead. Your line is open.

[Jeff Garro:]

Thanks for taking the questions. First I'll ask about retention, sounds like retention somewhat improved in the fourth quarter? And there has been some positive events over the last seven months. So maybe you could help us set expectations for retention in 2020. And describe what's different about the retention conversations versus say a year ago?

[Maeve O'Meara:]

So, as Will mentioned, we're pleased to be sitting in a position where we have 75% of our customers on a health navigation solution versus last year we were in the mid 50s. All of that said, we've said it before churn is a lagging indicator. And with a 25% on point solutions, we want to be pragmatic so that we're continuing to assume elevated churn.That said, we are confident that we're taking the right steps and that our rate of attrition is going to decrease over time. And to your point, some of the things that we've put in place certainly contributed to Q4 and the extensions that we talked about. So, we've said our principles around having a healthy focused business include operational excellence, delivering credible value, continuous innovation and having relationships at every level of the organization.We've done really concrete things against those. So recently, we put out a press release on our complete results, which have been extremely well received by our customers in the market those from a methodology and results point of view. We also shared on the last call that we are going to include customers, on customer councils. And we are now close to 50% of our direct ARR participating. And we've really transformed the level of executive engagement. And a lot of that has been under Keith's leadership.So a lot of things look pretty different in these retention conversations. And we do think we're positioned to improve.

[Jeff Garro:]

Maybe a follow up, just to clarify in the short-term extension, are those clients that have been on point solutions, or the clients that are on complete and are looking at the results and outcome and engagement of their clients? Any comment throughout among those that are signing short-term extensions?

[Will Bondurant:]

Yes Jeff absolutely, it's a good question thanks for the question. As you think about those clients that signed short-term extensions, the small number of them at the end of the year - we were able to engage them with the strategy Maeve outlined, the vast majority of that ARR and the clients are on point solutions. And so we do think there is elevated risk of churn in that book even as we've been able to bring them forward in the conversation, because they are on point solutions.

[Jeff Garro:]

Got it. And then I'll ask about the small number of deals you mentioned signed in Q4. I know it's a typically a seasonally light quarter but was wondering whether those deals were competitive or not, and maybe a little more color on why they chose Castlight? And what type of expectations or performance metrics that that you need to achieve with the new business that you've signed? I know you guys have been emphasizing more of a partnership relationship. So curious how that's evolved in those new customer wins.

[Will Bondurant:]

Absolutely, I'll quickly answer the numbers and then I think Maeve probably has a lot more to add on the market. Q4 is a heavy renewals quarter, light sales quarter, as you mentioned. And so we were on plan with our direct sales, relatively small number of customers. But happy to be on plan and the majority of those were competitive situations, and so Maeve maybe you can kind of weigh on the broader market and what they're looking for.

[Maeve O'Meara:]

Thanks, Jeff. So these were actually hyper competitive deals. And they were competing - we are competing with effectively everyone in the competitive ecosystem. And I think that what differentiated us was actually the complete offering and the willingness to partner. And I'm speaking to some of the larger deals, specifically, but I think the ability to cover the full care spectrum to do it in a personalized way.And frankly, the technology that we're developing from a high touch perspective played a big role in the dialogue as well. But very competitive deals and complete was really what got those across the finish line.

[Jeff Garro:]

And one more for me just to hit on the guidance, we talked about retention which is historically been the biggest driver of any variants into your performance versus the guidance. But I want to give you the opportunity to call out anything that could lead to variance in your performance in 2020, versus the guidance that you just outlined?

[Will Bondurant:]

Absolutely Jeff. First I'd say 2020 will be a year of transformation for the business you heard that in Maeve prepared remarks. And given that, we've taken a pragmatic approach towards setting expectations for the business, financial outcomes, we understand, kindly, we're in a position where we need to earn trust. As you think about the pieces that could cause this challenge or kind of, maybe we wouldn't hit the guidance but could go wrong. The real element that could and has gone wrong in the past is the in-period churn terminations where customers have given us notice in the course of the year.Looking into 2020, though, we benefit from the Anthem agreement and the ratable revenue recognition there that solidifies a tremendous portion of the revenue and we don't have a high number of in-period launches. So we really feel like, you know, in-period churn is, beyond our expectations, resource downside, but they were poised to execute against those expectations and has managed it in a pragmatic way.

[Jeff Garro:]

And then I know, launches typically don't occur in year, but anything that could lead to the upside from the guidance?

[Will Bondurant:]

There is always a small number of launch activities or changes that happened in our businesses, our clients made acquisitions or add membership and the like. And so there's some upside, incorporated there. But in general, we entered the year with a pretty clear view of the ARR conversion into revenue. And that's especially true this year given frankly, are relatively light 2019 sales that mean we have fewer in year launches than we might have had in years past.

[Operator:]

Your next question comes from Charles Rhyee of Cowen. Please go ahead. Your line is open.

[Unidentified Analyst:]

It’s James on for Charles. Can you give us some more color on the progress of the health plan strategy maybe perhaps, the feedback we're getting from health plans and what the pipeline looks like?

[Maeve O'Meara:]

So love to talk about it. So this is one of the areas where we made the greatest progress in the second half of the year. So since July, we've put in place an experienced leader, a dedicated team, we've totally refreshed our go-to-market process, and as you mentioned, built the pipeline. One of the reasons we've been able to move quickly is because of the strength of the technology and product and the fact that that's been validated by our Anthem partnership.So what we've seen in the pipeline is a lot of momentum and interest and over the course of those six months, we've started moving deals down the pipe into active proposals, which is effectively why we're optimistic that we can achieve our goal of signing a health plan deal in 2020.

[Unidentified Analyst:]

And you talked about subscription margins, being pressured going into 4Q given Care Guides, but looks like professional services cause for maybe a bit higher than we were expecting. Is that in any way related and how we should think about that going into 2020?

[Will Bondurant:]

Yes, it's not an all related professional services costs are typically high and have been higher in the fourth quarter, because 1/1 is a heavy launch cycle for us. And so as you think about 2020, we expect professional services costs to kind of return to where they've been or actually decreased. The place that we expect frankly, a little bit of margin degradation and the first quarter related to Utah and Care Guides is the subscription line cost of subscription.We do expect though, and we talked about in the prepared remarks the margins to end of the year in the low 60s on the total gross margin and mid 70s in the subscription side.

[Unidentified Analyst:]

Okay, great. And what was the total number of customers in 4Q?

[Will Bondurant:]

Yes, we ended the year in lines with our plans on customer accounts. Given the new Anthem Enterprise license agreement which goes into effect on January 1, we really believe that ARR is the best forward measure of our business and plan to disclose and talk about ARR going forward. But you can know that we ended the year where we said we would in Q3 on customer account.

[Operator:]

Your next question comes from Brian Hoffman of Canaccord Genuity. Please go ahead. Your line is open.

[Brian Hoffman:]

This is Brian on for Richard Close. Can you just remind us on the go-to-market strategy for Care Guides, will that be sold as a standalone product to new customers? Or will it be more of an upsell to existing customers or could it be a combination of both? And then, specifically, with respect to the Fortune 500 manufacturing customer you mentioned, is that a new or existing customer?

[Maeve O'Meara:]

Hi, Brian thanks for the question. So to kind of take a step back for Care Guides, the overall strategy is that ultimately extending the technology to enable high touch is going to allow us to deliver more value to our users and buyers. And since announcing this, I think that's become even just more apparent that that piece is really playing out in the market just from what we're seeing from both interest and then in the pilot.So to answer your question directly, it's available to those new customers as well as existing customers. In the case of the pilot, it was an existing complete customer, and we're observing and learning as best. The thesis here was that the technology and the investments we've made there would allow us to really have head start in building the solution. Specifically our personalization engine and so far that's really kind of been borne out in the pilot.

[Brian Hoffman:]

And then I know you're only giving guidance for 2020. But can you give us your thoughts around timing as to when you're expect to turn back to positive non-GAAP operating income. Is that something we could see in 2021 or is that more of a 2022 event?

[Will Bondurant:]

Yes, absolutely Brian, we're focused today on 2020. And Maeve has talked about the transformation underway in the last six months what we've accomplished then and what we're focused on doing this year. We are both committed, Maeve and I are very committed to returning the business to sustainable growth that's a core focus of ours. But we're really focused on 2020 laser focused on getting there today.

[Brian Hoffman:]

And then last one from me. Can you quantify in terms of ARR the amount of the point solution contracts that signed the short extension in 4Q?

[Will Bondurant:]

Yes, absolutely I can give you some help there. So as you think about, the fourth quarter, we ended the year at 147 million. We had talked about a range of 140 million to 145 million as being our expectation. If you exclude those short-term extensions, we would have ended toward the high end of the range. So, you can think of that point solution based in that range.

[Operator:]

Your next question comes from Steve Halper of Cantor Fitzgerald. Please go ahead. Your line is open.

[Steve Halper:]

Yes, just to follow-up on the previous question. So what you're saying is that you're assuming a high rate of churn within that - the dollars that short - the clients that signed short-term extensions correct?

[Will Bondurant:]

I think we'd say that we're very pleased to have engage these customers in the conversation made strategy around value returned innovation partnership is starting to pay off. But we do know that some of these customers will choose to renew with us some will churn or will renew, but at a degradaded price in the course of the first quarter.

[Steve Halper:]

And is there an expectation for a year-end ARR at this point or would you prefer not to talk about that just yet?

[Will Bondurant:]

Yes, we only provide guidance on our reported financials ARR is a key metric, but there's no kind of forward view of that.

[Steve Halper:]

And then the last question going forward, are you going to continue to disclose the number of customers or are we done with that?

[Will Bondurant:]

Given the Anthem relationship is, you know 45% or so of our ARR and customer account is not relevant there. And we expect health plans to contribute in similar ways going forward. We don't believe that customer counts a material indicator for forward business and we would point you to ARR.

[Operator:]

Your next question comes from Gene Mannheimer of Dougherty & Company. Please go ahead. Your line is open.

[Eugene Mannheimer:]

Thanks for taking the questions. So Will two key drivers in delivering ARR above the top of your range this quarter, the Anthem agreement and the renewal activity. It sounds like from your prior comments that the greater contributor to the over attainment was the renewal activity. Is that or were they roughly balanced? How do we think about that?

[Will Bondurant:]

Yes, stepping back there were kind of three pieces there, the Anthem Enterprise license agreement, kind of their on planned direct sales and then the improved performance relative to plan on renewals. What I would say is that, the range we provided was one when we knew the impact of Anthem Enterprise license agreement, we signed that in October. In fact, we signed it prior to our Q3 call and talked about it then.And so as you think about our performance relative to the range, it really is a function of renewals. But I want to be clear that the Anthem impact itself was a meaningful portion of the ARR in Q4 sequentially growing over Q3.

[Eugene Mannheimer:]

Sure, make sense. And in terms of the 25% of the installed base that is still on point solutions, and I guess, exposed. How should we think about that going forward? I mean would - we take the middle ground and say, half will convert or a third will convert any color around that?

[Maeve O'Meara:]

I mean our strategy on the point solutions in many cases is to get them on to the navigation solution. And as we talked about executing against those principles, a number of the reasons that those renewals extended is that they are considering navigation and broader solutions. So, I think that - with all of those were the strategy that we're implementing against those principles is having an effect. We still feel better if they were on the navigation solution today.

[Operator:]

There are no further questions at this time. I will turn the call back over to the CEO, Maeve O'Meara for closing remarks.

[Maeve O'Meara:]

Thank you for joining us today. We're excited to continue the transformation in 2020 and look forward to updating you on our progress. Have a good evening.

[Operator:]

This concludes today's conference calls. Thank you for your participation. You may now disconnect.