Castlight Health, Inc.
Q2 2018 Earnings Call Transcript

Published: 31 Jul 2018

[Operator:]

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Castlight Health Q2 2018 Financial Results 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] I will now turn the call over to Gary Fuges, Head of Investor Relations. You may begin your conference.

[Gary Fuges:]

Good afternoon and welcome to Castlight Health's second quarter 2018 conference call. Joining me on the call today are John Doyle, Chief Executive Officer, and Siobhan Nolan Mangini, Chief Financial Officer. John and Siobhan will offer their prepared remarks and then we will open the call to take your questions. Our press release, webcast and PowerPoint presentation are available on our website. This call contains forward-looking statements regarding our trends, our strategies and the anticipated performance of our business, including our guidance for the full year of 2018, timing of cash flows and non-GAAP operating breakeven, cost savings efforts impact of non-renewals and future cash position. These statements are made as of July 30, 2018 and reflect management's views and expectations at that time and are subject to various risks, uncertainties and assumptions. If the call is replayed after July 30, 2018, the information in the call may no longer be current or accurate. We disclaim any obligation to update or revise any forward-looking statements. We provide guidance on this call, 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 the company's July 30, 2018 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. Our 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. 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 John Doyle, Castlight's Chief Executive Officer. John?

[John Doyle:]

Thank you for joining us on the call today. At Castlight, we strongly believe that as individuals take more direct responsibility for their healthcare, they'll increasingly rely on technologies like ours that integrate, personalize, and simplify the fragmented healthcare ecosystem. Just as apps and verticals like airlines and banking have become must have tools for consumers, which make them ideal for engaging and influencing users, the same thing is happening in healthcare. Large employers, health plans and provider organizations increasingly seek to leverage technology to make it as easy as humanly possible for their employee, members and patients to navigate to their best healthcare options. Castlight is at the center of this trend. Our Q2 results offer strong evidence that our focus on health navigation and closed collaboration with channel partners is the right formula to drive Castlight's business into the main stream. We achieved record high revenues of almost $38 million in the quarter and we signed 17 new customers compared with 11 new customers in the same quarter last year. A 55% increase in new logos that translated into a 40% increase in ARR for new customers versus the year ago period. Net of churn, we ended Q2 with $166.4 million in ARR and more than 260 total customers for the first time. Approximately 30% of which are Fortune 500 companies. These results underscore the progress we've made with our efforts to improve new business momentum and we're well positioned to continue the trend. While recognizing our successes, it is equally important to face challenges head on and make course corrections when needed to position us for success in changing circumstances. Behind the headline results for Q2, two factors have led us to a difficult but necessary decision to restructure the company. First, sales to non-Anthem customers are below our forecast. While enthusiasm is high many prospects are taking a wait and see approach rather than purchasing Castlight Complete prior to general availability of the product. This headwind was compounded recently when one of our largest customers Wal-Mart informed us that they will not migrate to Castlight Complete in 2019 and will instead let their contract with us expire at the end of this year. This was unexpected news, but does not align with the broader market needs we're seeing, but the financial impact from these developments is a reality that weren't suggesting our cost structure promptly. Our plan is to reduce operating expenses by 10% to 15%. The bottom line is that although we intend to grow revenue in 2019, it will not be at the rate it would have been otherwise and clearly not enough to meet our previously forecasted spending rules. In the wake of this change in circumstances we remain strongly committed to reaching cash flow breakeven by Q4 this year and non-GAAP operating breakeven for full year 2019, as we reestablish our healthy growth trajectory in the business. Refocusing our efforts on leveraging our channel relationships including with Anthem, benefits, consultants and new partners will be the main enablers of cost savings in our planned restructuring, which we will complete this quarter. I'll say more about this plan shortly, but first as context it's important to touch on the initial success of Engage and our confidence in the successful launch of Complete on schedule later this quarter. Siobhan will follow with a discussion of our Q2 financial results and 2018 outlook and then we'll take your questions. As we expected employers have been purchasing Engage at twice the rate they did last year. Importantly, many of these customers are businesses that had previously been unwilling to purchase our solutions directly. Engage is highly personalized mobile first combination of care guidance and wellbeing capabilities, delivers the most comprehensive health navigation solution in the market. The product is also our most advanced to date in terms of integrations including Anthem clinical programs that's been health guides, click to chat interactions, tele-health and appointment scheduling for labs to name a few. Across virtually every dimension from customer response to frequency of the usage to user satisfaction in the form of NPS and app store ratings and impact on member behavior, Engage is off to a great start. For large self-insured employers that do business with Anthem, we believe no competitor offering comes close to the value that Engage delivers. Castlight Complete leverages the same technology infrastructure as Engage and will enable us to deliver a highly configurable health navigation solution to large employers regardless of which health plans they work with. With development work for the initial launch is now finished, we are on track to launch our first Complete customers on schedule late this quarter. Complete will be our most powerful product to date giving customers a platform of which they can assemble, integrate, personalize and deploy best agreed digital health solutions through a single vendor. Returning to Wal-Mart's decision not renew with us beyond 2018, it is important to draw the right learning's for our business. First, we have great respect for the Wal-Mart team and Castlight has benefited enormously from our six year partnership. We also believe very strongly that Castlight was adding value for Wal-Mart and their associates and that there was significant untapped opportunity to add more as their benefits leadership team and priorities have evolved. While this is disappointing, our long-term success depends on the delivering scalable products that solve important needs for the thousands of large employers that have not yet adopted a health navigation solution. We are very confident that Castlight Complete is the product to do it. For us this experience also reinforces the critical importance of implementing our full solution, including wellbeing, functionality and deeply integrated ecosystem partners, which drives more value for customers and users and makes Castlight a stickier solution in the enterprise. It also supports what we've learned from our early success with Engage, the most powerful way for Castlight to deliver and support our products to our channel partners that offer broader solutions and more efficient distribution capabilities than we have alone. With these in mind, we're moving forward and taking necessary steps to attack our long-term opportunity by focusing on three priorities, supporting one core platform, adding channels to our go to market strategy for Complete and controlling our financial destiny. Before I turn the call over to Siobhan, I want to thank everyone at Castlight for their dedication to our mission, where a strong resilient group of people committed to making a difference in healthcare. The corporate decisions discussed on today's call are not easy and we take them very seriously. But we are determined to control our destiny as we build and deliver the most comprehensive health navigation solutions in the market. I'll now turn the call over to Siobhan, who will review your Q2 financial results and outlook.

[Siobhan Nolan Mangini:]

Thanks, John. Good afternoon everyone and let me also thank all of you for joining us on today's call. I'll start by reviewing our Q2 results and then discuss our 2018 outlook, after that we'll take your questions. Starting with the quarter, our Q2 results track to our overall expectations for 2018 revenue, non-GAAP operating loss and cash used from operations. At the end of Q2, net annualized recurring revenue or ARR totaled $166.4 million. This does not include the negative impact of the Wal-Mart non-renewal. We continue to convert customers to our platform and now only 17% of ARR is from transparency only customers. Total revenue for the second quarter was $37.8 million, which increased 16% year-over-year. Subscription revenue was 92% of total revenue and increased 15% year-over-year. Services revenue increased 33% year-over-year, which reflects revenues from launching customers and the Anthem local fees. Services revenue was down sequentially as expected due primarily to approximately $500,000 in Q1 onetime revenue associated with the development of the Anthem local product, which we launched in January. Q2 is the last quarter of the Anthem development fee is recognized and as a result we expect Q3 professional services revenue to decline further on a sequential basis. Now, let's turn to our second quarter non-GAAP financials. Q2 non-GAAP gross margin was 62% compared to 63% in the prior quarter and 67% a year ago. While our expectation at the time of our last call with the gross margin to improve sequentially, we made a tactical decision in Q2 to investing additional post profound support for the legacy wellbeing platform. As a result, gross margin was down quarter-over-quarter. We have concluded it is infeasible for us to continue to support legacy platforms beyond the middle of next year. For customers the migrations are for more powerful scalable solutions, for user Engage and Complete represent a major leap forward in personal vision, ease of use and comprehensiveness. And for Castlight, executing on these migrations will make our business more efficient and sets the stage for accelerating innovation and delivering on our health navigation mission. As the result of these changes, we now expect to hit our long-term gross margin of 70% to 75% after we migrates most legacy wellbeing customers to our integrated platform by mid 2019. Total non-GAAP operating expense for the second quarter was $30.4 million down 1% year-over-year compared to revenue growth of 16% during the period. We maintain operating expense discipline in the quarter, at the same time we continue to invest in R&D for future innovation such as our Complete offering. Q2 non-GAAP operating losses at $6.9 million, was an improvement compared to the loss of $8.7 million in the year ago period. This is a result of revenue growth and operating expense reduction partially offset by the impact of legacy wellbeing support on gross margin. We ended the quarter with $74.5 million of cash, cash equivalents and marketable securities essentially flat compared with the end of the prior quarter. Cash used in operations was approximately $1.1million in Q2, which benefited from a large multimillion dollar prepayment for the Rewards marketplace. We remain on track to be breakeven on a cash flow from operations basis in Q4. With that, let me provide some thoughts regarding outlook for 2018. We continue to expect revenue between $150 million and $155 million and non-GAAP operating loss between $15 million and $20 million. We also continue to expect to have more than $65 million in cash at year-end. We will reserve guidance for 2019 until our 2018 year-end call. However, we already know that our 2019 revenue performance will be negatively impacted by approximately $13 million due to Wal-Mart's decision. At the same time, our Q3 2018 restructuring efforts are expected to provide $15 million to $20 million in operating cost savings for the full-year 2019. As a result, while there would be quarter-to-quarter fluctuations, our goal is to at least from the business to breakeven on a non-GAAP operating basis for the full-year 2019. As we do so the key priorities are to bring our Complete and Engage offerings to market through a broadening channel sales model and to restore long-term growth to the business. In summary, Q2 provided additional positive signals that our product and channels initiatives aligned with the market. We have a lot of work in front of us, but we have the strategy and products in place to capitalize on the market opportunity. Finally, it is important for me to acknowledge our dedicated colleague at Castlight. I especially want to thank those who will be directly impacted by the job eliminations that are happening as part of the restructuring we announced today. These are difficult decisions to make and we're grateful for their many contributions and their commitments to Castlight and our mission, without our employees we would not be able to pursue our mission and help navigation. Thank you. Operator, we'll now take your questions.

[Operator:]

[Operator Instructions] Your first question comes from Charles Rhyee with Cowen & Company.

[Charles Rhyee:]

Yeah. Hey, thanks for taking the questions. Maybe start with the Wal-Mart decision, when you think about this client and the decisions they made here. Can you talk about sort of what the - sort of what the characteristic that they were looking for a platform? My understanding I think where they went to - what you what were the capabilities that they were seeking out that you think –that they think that they're going to get from their new vendor versus what they think maybe you weren't able to supply them?

[John Doyle:]

Thanks, Charles. This is John. Really can't speak for Wal-Mart here, I'm sure you understand, but I'll tell you a little bit about where we've been in that dialogue. So we've spent a number of months working closely with Wal-Mart on go forward plans until last week fully expected to be migrating to Castlight Complete. As we said on the conference call we think we know for a fact we've been adding lots of value at Wal-Mart for a number of years and we're really excited to get on to the new platform and they've decided to go a different direction. I don't have perfect insight into what that new direction is, but I think there's a little context here that's important because obviously we want to understand very clearly those reasons as well. If 260 customers, Wal-Mart was one of the two that are really an outside scale relative to the broader customer base. That other very large customer already in the process of migrating and user acceptance testing for Castlight Complete is going really well. In fact, the other four of our top five customers are all moving forward with Castlight Complete. And so I think it's important not to drop too many inferences from this experience Wal-Mart is a huge employer an outlier in a number of ways and I think certainly capable of pursuing its own priorities in a very aggressive way with the resources of that company. Whereas our focus is on building products that we think speak to the heart of the issues in the mainstream market where there are thousands of employers that we think ultimately need to be using health navigation solutions. So we think that the learning here is absolutely that as we move to that mainstream market there can be some tradeoffs that happen in the business some that require us to make some pretty big adjustments and I think this one falls into that category.

[Charles Rhyee:]

Are the capabilities at this point obviously just enhance a lot of things you're doing in, would that - we're seeing now with Castlight Complete as well as early on with the Engage product. And if anything else in the products we did, do you think that you need not have been more competitive, but that can help you think down the road that maybe you don't have to do it, it's only other competitors but emerging to do?

[John Doyle:]

Yeah. I mean digital health in general is a very fragmented space you see a lot of companies doing a lot of different things and one of the reasons for that is that particularly among large employers you have bespoke needs that employers look for solutions on and they're able to find small vendors that will focus a lot of their resources. And as we think about broadening our platform, we've got to be very disciplined about choosing new capabilities that are broadly applicable in the market. So for example, when we purchased Jiff for wellbeing solution we were purchasing a company that was aimed at a market that was roughly 90% adopted across this large employer population and that has opened up a bunch of new conversations and sales opportunities for us and I think the success of Anthem Engage, 17 new logos in the second quarter kind of speaks for itself in terms of the mainstream appeal of these broader capabilities. And so we are excited about the products that we are building right now Castlight Complete will bring all of the functionality and more that Anthem Engage offers to the large number of employers who don't happen to work with Anthem. And so we think we're really well position in the market for the foreseeable future of course we're going to need to add capabilities overtime and we will do that very aggressively but I don't see something today even in light of this news that we would feel an urgent need to that.

[Charles Rhyee:]

Great, thank you. If I could just speak one last one and you said 17 Engage quite so far you're citing that sort of two as compares last year it's 40 sort of the target we're looking at for the full-year in terms of Engage of the next year?

[John Doyle:]

So 17 logos was our total number of logos in the second quarter well about half of those were Engage logos, twice the rate for engage that we had seen in the second quarter last year which if you remember is the first of our two main selling quarters of Q2 and Q3 are the main selling season for us and in terms so to see that volume with Engage and have a pipeline in Q3 and even Q4 that we're feeling pretty excited about with Engage is terrific, don't want to get into forecasting specific logos for the balance of the year but we do expect sequential improvement in Q3 relative to Q2.

[Charles Rhyee:]

Great, thank you.

[John Doyle:]

Thank you, Charles.

[Operator:]

Your next question comes from Jeff Gale [ph] from William Blair & Company.

[Unidentified Analyst:]

Yeah. Good afternoon. Thanks for taking the questions. I want to ask a little bit about Castlight's own sales force, if you just expand what's working and what isn't within back group and maybe help that expectation for the new we are announcing ROI guarantee to provide a catalyst there?

[John Doyle:]

Yeah. I'll start with the ROI guarantees. It's an exciting time for our business for folks who've been following us for a long time. The rigor of ROI commitments in our industry in general has not been what it needs to be I think customers and consultants have been frustrated by the kind of bridge to it is ROI claims that get made pretty broadly. And so we decided to change that to use a very robust modeling approach validated actuarially and shared with customers in our quarterly business reviews and annual business reviews and as we did that we were able to develop a model of all of the savings that we've generated across the portfolio by customers that enabled us to put an ROI guarantee in the market that's been well received by consultants and customers alike. I think the reason our belief about the reason that Castlight Complete sales are ramping more slowly than we've planned is really about the need among customers and consultants for many of them anyway. To see a product already in the market they can test in production and get very comfortable that it's going to be a good change for their populations. The experience we've had with Anthem Engage certainly gives Castlight a great deal of confidence that it will be and as we talked about we're already in user acceptance testing with Castlight completing a few cases, so we're not far. But I do think more of the market than we'd like is going to take a wait and see approach. Importantly, we haven't seen losses in those cases. We competitively their losses from time to time but we're not seeing deals that are going away the complete pipeline is exciting lots of great companies in there and deals that will be terrific for Castlight and opportunities for us to add a ton of value obviously for customers but I do think there's a little bit of a delay here. Now important to point out, this is not a statement about sales force effectiveness in the sense that even in the Anthem book of business our sales people are out selling the value propositions and Anthem, customers partnering with Anthem in many cases to do that and that's been a super effective model. I think without that partner in the complete side of the business while I think our folks do a good job putting the value proposition forward again that inability to point to already installed customers who can act as references just makes it tough.

[Unidentified Analyst:]

That's helpful. Maybe two more of the follow-up though. The first would be around having a product that customers can really get their hands on and see and experience. What why is the initial launch of Engage not providing that type of more hands on experience for prospect than it was in customers looking to convert? And then second as you look to expand channel partnerships what type of channel partners are you exploring where do you see the most opportunity there?

[John Doyle:]

Sure. So first of all, we again we think and advocate for Engage being an excellent predictor of the experience that customers will have with Castlight Complete. One important difference is that in the Anthem Engage case, we've invested enormous resources in integrating very deeply with Anthem clinical programs which makes that offering the especially powerful for Anthem customers. When you start to get outside of that population and you're selling to customers that have a variety of different health plans, the promise of integrations relates to a very diverse set of integrations with third party ecosystem partners, most of which many of which we've already built the integrations some of which we haven't and so our ability to demo a full solution with the integrated partners reflected in that user experience and testable including flow through of incentives and data and other attributes of the experience that customers view as material, is just not there yet. As I said it will be soon here over the next couple of months but that wasn't soon enough to really drive the same ramp in Q2 for complete that we saw with Engage. On the channel partner's question, I think that as I said in the script it's very clear to us that every one of the health plans is going to need to deliver a much more robust user experience than they do today. Now with Anthem that means a roadmap for Engage that ultimately ties in a great deal more functionality even and we have today and I think we're leading the market with that product. As we think about other partners there are no restrictions on our ability to partner with other health plans with Castlight Complete and so that's one group of folks that we're speaking to. I think benefits consultants in a different kind of a way create some interesting opportunities for us and then the third category another set of companies were already speaking to our companies that sell into benefits teams with other capabilities technology and products and we think there are nice synergies there. And the overall message I think from Castlight Complete is that the product is a really important part of getting across the chasm, but the channel relationship is equally important because the buyers in this segment are looking to do business with the entities that they've done business with for a long time where a lot of their business is already consolidated. And so second quarter is the is marks for us with Anthem kind of a really strong proof point and so we're going to implement the same approach with Castlight Complete as quickly as we can.

[Unidentified Analyst:]

Great, I'll jump back in the queue. Thanks.

[John Doyle:]

Thanks, Jeff.

[Operator:]

Your next question comes from Richard Close from Canaccord Genuity.

[Richard Close:]

Great, thanks for the questions. First I'd just clarify the ARR for the quarter I missed that specifically. And then with respect to the delays in the Castlight channel I guess, are we saying that these delays they impacted the second quarter how does that relate to the third quarter selling season and are we talking about really here that as the year along delay that these come back next year or are they going to contribute to potentially contribute at all to ARR as we head into 20 [indiscernible]

[John Doyle:]

Thanks, Richard. Siobhan can address the ARR question and then I will take on channel.

[Siobhan Nolan Mangini:]

Yeah, Richard, so ARR at the end of Q2 with $166.4 million and then John - and that does not include the impact of Wal-Mart and then John will talk about the - what we're talking about in terms of the channels versus direct as a business.

[John Doyle:]

And the adjusted the number with Wal-Mart?

[Siobhan Nolan Mangini:]

Oh, I'm sorry. Adjusted number is $153 million of ARR.

[Richard Close:]

So I guess I'm just I'm interested in the Castlight direct channel. I mean are we just saying that these the delays are going away can completely for the - this year's selling season?

[John Doyle:]

Richard, I'm probably being secure but can you expand on which the lays are talking about?

[Richard Close:]

Where you just - some people are putting off decisions right now. And I'm just trying to gauge do you get this one customer up on completely and then all of a sudden people are comfortable and they start signing on the dotted line or are we just pushing out really like 2017 or 2018 I should say is sort of a throw away here and we're looking more as complete really picks up in 2019.

[John Doyle:]

Yeah let me be a little bit more clear. So we always anticipated that year one of the launch of Castlight Complete just with every other product that we've ever launched, was only going to be an opportunity with a certain set of buyers that are inclined to make a quick move with new products willing to kind of take that risk. And so I think that what we're communicating is that more customers are choosing to wait than we expected in our forecasts. As far as how quickly that dynamic begins to change I think we're working on a continuum here. We've always felt that 2019 was going to be in the first meaningfully big year with Castlight Complete but we still see meaningful opportunity here and 218 to drive additional Castlight Complete sales we certainly think Q3 is going to be stronger than Q2, and the pipeline for Q4 looks reasonable as well. So what I don't want to do is suggest that we see a path here that's going to make up for the financial impact in particular of the Wal-Mart set back in a really short period of time. But as it relates to the momentum for the product, this is not a throw away year to use your expression we expect the next couple of quarters to look good relative to the comparative periods.

[Richard Close:]

Excellent. Hitting on the target margin discussion or commentary that you threw out and then talking about not supporting the old products migrating. Can you just go over that again the thought process when the margins do pop is it like all of the sudden mid 2019 you stop supporting in the margins pop there, if you can just go over that?

[Siobhan Nolan Mangini:]

Difficult question and I talked about that a little bit last quarter but we talked about ramping up both the professional services team as well as their user support functions, to really both once customers and stabilize in particular the wellbeing at platform. And so we will get more efficient overtime and you will see quarter-over-quarter progress with margins at starting in the next quarter or two. It's just that there is an ongoing need to provide support and in both like I said user support in professional services, pretty wellbeing customers and so as they migrate over to complete which is as we said a much more scalable architecture, we expect will start to really hit at 70% to 75% long term target margins in the second half of 2019. I would say it's actually less than the path because this is happening over a period of time that you and you'll see progression and starting in a second half of this year working our way through the second half of 2019.

[John Doyle:]

Richard I think some context that is generally important to understand as we talk about margins and some of the additional investments that we made in supporting the wellbeing launches on to the legacy product. When we purchased Jiff in 2017, the strategic rationale for that purchase I think you're familiar with was to broaden our offering into an area that is as I was saying earlier widely adopted in our target markets to make Castlight a leader in the health navigation space as we brought wellbeing and care guidance together and built out this ecosystem which we believe creates a very unique offering in the space. All of that was critically important and was the basis for the product that became an Anthem Engage and then is the basis for the product that's becoming Castlight Complete. I think that what we underestimated in the acquisition if we reflect on the lessons that can be learned is just how much work and resource we were going to have to dedicate to porting that functionality into the Castlight technology stack. And so as we have been doing that two things have been true, one is we've had to make bigger investments in supporting legacy products and that has impacted margins as we were just talking about. And number two, it made us make a decision or it led to a decision not to sell more of the legacy product this quarter as we're making the product transition because we do want to rotate out of that install base as quickly as we can we think we can provide a more scalable reliable robust solution to those former wellbeing customers by doing that which is critical to the future of the business. And so that they give you a little bit more color for why Siobhan guides on you no cost to revenue here we've had some numbers move in a different direction that we have than we expected and it's the reason that the return of healthy margins is so tightly linked to those migrations.

[Richard Close:]

Great, thank you.

[John Doyle:]

Thanks.

[Operator:]

The next question comes from Stephen Wardle from Sheridan Capital Markets.

[Stephen Wardle:]

Hey, guys. Thanks for taking my question.

[John Doyle:]

Thanks, Steve.

[Stephen Wardle:]

So can you tell to about demand that you're seeing among prospects and customers what are you seeing from prospects for Jiff. What are they looking at? What what's their interest level? How strong is their interest this year compared to this time last year? And Castlight Engage what are you hearing from prospects from customers about interest level and the future functionality that they're interested in?

[John Doyle:]

So we start with Engage and then and then come back to Jiff. On the Engage side, we've now been and quite a few competitive situations with our partners at Anthem and it's quite an experience because when our product is bundled with Anthem and we're in competing against vendors that are not bundled there for kind of operating on a standalone basis. And our functionality is broader and deeper than competitors are bringing to the table. It just makes us a very formidable competitor in that context and we're losing really almost no business when that's the setup. On the specific question you asked about Jiff wellbeing, going back to the comments I was making in response to Richard, we're not technically selling Jiff wellbeing at all anymore. What we are offering is complete in multiple packages one of those packages is a wellbeing package. And I would say that the wellbeing the standalone wellbeing business is not strong right now, we don't see a lot of RFPs for standalone wellness we're not in our conversations with employers and consultants than saying that there's a lot of - a lot more to go in that standalone wellness business you've seen in our space some consolidation of traditional wellness businesses taking out new capabilities. We think these things are linked and we believe that the market is on a very steady march towards more consolidation broader product offerings and so we think we're well positioned with multiple packages to be able to support the particularly needs of any one customer but our belief is that the dominant product for us going forward is going to be the fall Castlight Complete solution. And there were work cited because the conversations again with the influencers in the market consultants benefits consultants and what our prospects convinces us that health navigation is a very real category and that we're in a terrific position to own it as it grows and so very excited about that.

[Stephen Wardle:]

Great, thank you.

[John Doyle:]

Thanks.

[Operator:]

Your next question comes from Frank Sparacino from First Analysis.

[Frank Sparacino:]

Hi, guys. Siobhan, maybe just starting with you, on the Q2 ARR I know it doesn't have Wal-Mart in there. But in terms of modest sequential growth, was that a function of both the churn and weakness of the logo side of things or how would you characterize that?

[Siobhan Nolan Mangini:]

Sure. It was actually more driven and John talked a bit about that, on that I would say that the non-Anthem business. So we had talked about last quarter where a year ago we had a tremendous amount of cross sale activity of Jiff into the Castlight base and we knew that that was going to come down and so the factors for growth which are Engage and through selling new customers complete. And in Q2 we saw Anthem performing to our plans but on the new customer complete side that really being the driver as the ARR, the incremental ARR growth.

[John Doyle:]

And Frank I think something that is just it's just the fact is that until last week we were preparing for this call and we're going to be in a position of talking about churn being lower than it been in two years. We actually had a very good quarter. In Q2, we turn perspective obviously can trumpet that as a big improvement today with the Wal-Mart news but I do think it's important again circling back to Wal-Mart, the purchased a broad set of our capabilities had not deployed wellbeing had not purchased or integrated any ecosystem vendors that we work with. Of the five engagement fundamentals that we view as critical to driving our allied long term value they'd implemented one and so as I. As I said this is a setback don't want to minimize it but I think it's really important as we think about the underlying health of the business. We are seeing setting aside for a moment a number of very positive developments relative to things we've been working on a long time including return.

[Frank Sparacino:]

Suppose I'm just following-up on that I guess your earlier commentary around if we put Wal-Mart aside and talk to us for the other four top accounts, we're moving forward with complete. And yeah I'm curious when you say moving forward complete what does that mean right are they and be there maybe just how you characterize the risk profile of both of those other major accounts?

[John Doyle:]

Yeah. So two of the four are in or we'll be launching this year. The work is already underway and including our first to second largest customer. So we're very pleased about that the others are all in planning phases for launches after that most of them by middle of 2019. So I guess what I'm reflecting with those comments is just that the enthusiasm we have for the capability of Castlight Complete is absolutely translating with these customers who are excited about making that migration I think. From a risk standpoint, we'll continue to talk about renewals that we have ahead of us and how much of the business is contracted in a given year and those kinds of things will continue to be relevant and so my comments on the migration was just that the buy into the value proposition among those customers is very strong.

[Frank Sparacino:]

Great, thank you.

[John Doyle:]

Thanks, Frank.

[Operator:]

[Operator Instructions] The next question is from Eugene Mannheimer from Dougherty & Company.

[Eugene Mannheimer:]

Thanks, good afternoon. Can you share with us what percent of your bookings are ARR is through channel partners today and how you might expect that to look two to three years out as you increase your efforts in that area?

[John Doyle:]

Yeah. Well virtually one level if we take a broad view of what channel partners are certainly Anthem is a particularly close relationship but we also we have a channels team that spends a fair amount of time with all the large benefits consultants I speak to them on a regular basis myself, when you when you take that view virtually all of the deals that we do get influenced in one way or another by channels. The Anthem channel has been a bigger contributor to growth in the first half of the year than we anticipated it. On a standalone basis it's tracking to the plans we had for Anthem which are about roughly doubling that business relative to last year but because of the dynamics we've talked about Castlight Complete the numbers work out that it's a bigger proportion. Looking forward, I want to be clear I think there continues to be an interesting direct selling opportunity in our business I think the majority of customers so if you imagine that the number of large employers in the United States and by that I'm talking about employers with more than 2000 employees is somewhere between 4000 and 5000 companies. About in my opinion 400 or 500 of those are willing to carve out to individual vendors on a direct basis and if you think about our market share in kind of that category it's very, very high and I think the opportunity there exists but it's more limited given our penetration. I think as soon as you start to work with health plans and larger benefits, vendors and you are part of those broader solutions, you're dealing with a sales motion that is already being accepted by the rest of those 4000, 5000 employers and so I think you're just in a much lower friction environment. And so as we look forward to 2019 and 2020 with a stronger partner relationship on Castlight Complete we'd certainly expect well about half of our business to be coming through channel partners working in close partnership with Castlight's our sales people.

[Eugene Mannheimer:]

Okay. It makes good sense, John. Thank you. And is there any further color you can provide around the reduction in force in terms of where the cuts are being made in the re-org and any sales cuts there? Thanks.

[Siobhan Nolan Mangini:]

Eugene, the goal of this restructuring is obviously where position of business to be self-funding and we think we can we can do that. I guess some directional color commentary that hopefully can help you in terms of your model. We're expecting in Q4 to be at a run rate in terms of OpEx above - fairly above $100 million run rate. The most significant investments are going to be made in sales and marketing. We are going to be driving a revised long term target at 20% to 23% of revenues and targeting hitting that range in Q4. As this thought here is that channels really do amplify the sale team and were able to get more leverage through channels. As I previously share SG&A is targeting 8% to 12% revenue be also anticipated in that in Q4 this year. And then we're going to continue to keep R&D relatively steady state from what you saw from the first half of 2018 and eventually heading onetime target at 22% to 24% in the outer years, so really keeping that at more of a steady state from the first half of the year. And that combination of an adjustment is putting business behalf the profitability and breakeven both in Q4 in 2019.

[Eugene Mannheimer:]

Well that's great color. Thanks, Siobhan. Thanks John.

[John Doyle:]

Thanks, Eugene.

[Operator:]

There are no further questions at this time. I will turn the call back over to John Doyle, CEO.

[John Doyle:]

Thanks again everybody for joining us on the call today. While we have some urgent adjustments to make in our business, the facts are that our team and products have never been stronger nor better aligned with a large opportunity ahead of us and help navigation. We're eager to meet with our investors to discuss our plans and address your questions in person. We look forward to seeing you very soon. Thank you.

[Operator:]

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