Castlight Health, Inc.
Q4 2018 Earnings Call Transcript

Published: 1 Mar 2019

[Operator:]

Good afternoon. My name is Jeffrey and I will be your conference operator today. At this time, I would like to welcome everyone to the Castlight Q4 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] Thank you. Gary Fuges, Head of Investor Relations, you may begin your conference.

[Gary Fuges:]

Good afternoon and welcome to Castlight Health Fourth Quarter and Full Year 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 slide 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 2019, expected ARR growth, timing platform migrations, timing of cash flow and non-GAAP operating breakeven, cost saving efforts, impact of non-renewals, direct and channel sales momentum, our ability to add additional channel partners, future churn risk and future cash position. These statements were made as of February 28, 2019 and reflect management's views and expectations at that time and are subject to various risks, uncertainties and assumptions. If this call is replayed after February 28, 2019, 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 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 our forward-looking statements. Finally, today's presentation also includes certain non-GAAP metrics such as non-GAAP gross margin, operating expenses, operating loss, operating income profitability, earnings per share 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 today's call. With that, I'll turn the call over to John Doyle, Chief Executive Officer of Castlight. John?

[John Doyle:]

Thank you for joining us on the call today. 2018 capped the four-year evolution of Castlight from our history as a transparency solution provider for innovator buyers to our leadership position in digital health navigation. The technology in place today that serves 20 million users. Our thesis for focusing on health navigation is simple. By offering a comprehensive platform that guides users to the right resource at the right time, we could address the large market opportunity associated with the employers' rising health costs and the users related inability to navigate their benefits effectively. Executing on this opportunity has been complex, requiring multi-year investments in R&D and go-to market partnerships against the backdrop of customer retention issues associated with legacy products. In 2018, we performed extremely well against our mission-critical product milestones and channel sales objectives. Further, we fully proved out our business model, delivering full-year revenue and bottom line performance that exceeded our guidance ranges and generating $7.5 million in cash flow from operations in Q4, our first cash flow positive quarter in Castlight's history. Based on these accomplishments, we crossed a major threshold in the transformation of our business and believe we are in a strong position as the clear leader in digital health navigation. As a result of our new product offerings, in 2019, we are on-track to reaccelerate ARR growth through new sales and improved customer retention, deliver positive cash flows from operations and further extend our lead in the market with increased investments in product invasion. On the call today, I will review highlights to 2018 and our plans for 2019. Then after Siobhan covers our Q4 financial performance in 2019 financial outlook, we'll take your questions. We ended 2019 with annualized recurring revenue of $150.5 million and annual net dollar retention of 82%. Adjusting for the loss of a major customer in July, ARR was essentially flat year-over-year. While these metrics did not meet the growth goals we set for ourselves in 2018, the tough sales headwinds we faced last year are behind us with the highly-successful launch of Castlight Complete in Q4. The impact has been clear. Our bookings forecast in Q1 in on track to be our best first quarter since the Jiff acquisition. On top of this, churn is sharply down as well at less than half the level we've seen by this time last year. The bottom line is that although year-end ARR was below our goal, Castlight has begun 2019 with a stronger foundation for growth than we have ever had. We took a tremendous amount of work to get here. At the beginning of last year, we told you about four key objectives for 2018, accelerating growth in channel sales, achieving our financial sustainability goals, launching our flagship product Castlight Complete and driving increased logo velocity in direct-to-employer sales. We delivered on the first three in spades. Siobhan will discuss the financial sustainability goals, so I'll focus on our performance against the sales in product goals starting with the channel. In 2019, we delivered outstanding results from the channel initiative we began more than two years ago, doubling new channel sales and adding more than 60 new logos. It is now clear that by bundling our first help navigation offering engaged into employers' health plan relationships, we dramatically accelerated our penetration of the early majority buyer's segment in our market. Some of the most encouraging results we have seen in this part of our business are consistently shorter sale cycles and higher conversion rates which further validate the idea that many customers prefer to buy health navigation in an integrated package. Most importantly for the long run, engage is proving that a deeply-personalized user experience that combines Care Guidance and Wellbeing capabilities in an integrated solution drives large gains and engagement and value for both users and employers that neither capability achieves alone. This was the core idea behind our decision to acquire JIFF in 2017 and the evidence was clear. Users are delighted. We have seen a meaningful uptick in monthly active users which is translated into improvement in key metrics such as a 30% increase in gaps and care closure rates. While channel sales were strong in 2018, direct-to-employer sales were well-below our goals for the year. We have discussed the challenges we face with legacy products at length on previous calls. These challenges cost many prospects and benefit consultants to adapt a wait-and-see perspective on Castlight Complete before it went live successfully and became available for hands-on testing. Since its launch, we have been thrilled to see strong improvements in user engagement and satisfaction across all the key metrics we track. With mobile user MPS north of 70 and MAU above 40%, completed the most powerful platform for ROI and behavior change that we have ever launched. Of course, the best proof that we're turning the corner on growth is ultimately closed-deals. Although our core selling season as Q2 and Q3, we're excited by the momentum we've seen already in Q1. The keys to achieving our sales goals this year are continued good execution on our channel business and stronger conversion rates on our direct pipeline. We're pleased to be seeing evidence of both already this year. We are continuing to make great progress as well on the initiative we kicked off last summer to add a new channel partnership that would begin contributing to new sales next year. We are in late stage discussions on that front and hope to share more information with you soon. Importantly, we plan to leverage the platform investments we've made over the last two years to stand up to new channel relationship. This means the timeline and startup cost will be readily manageable with an existing R&D spend. As I mentioned, we are also seeing much lower churns so far this year than we did during the same period in each of the last two years. We're pleased as we anticipated the improving trend and we expect it to continue. There are several reasons for this. Fewer ARR dollars are up for renewal versus 2018, the positive buyer and user response, to our new platform offerings and the improved health of our book of business. Specifically, 89% of total ARR is from customers either signed up for the platform offerings or committed to migrate to them this year and we've already begun the migration process at most accounts. The remaining 11% of ARR is from transparency-only customers, down from over 20% at the end of 2017. And these customers have all renewed at current market prices. As part of our continued focus on improving the user-end customer experience, we've hired a Vice President of Customer Support with more than 25 years of experience optimizing customer support team's performance at leading telecom companies. Based on this mix and the value proposition of our platform products and our increased investment in customer support, we believe the book is the healthiest it's been in the company's history and that elevated churn headwinds are behind us. In terms of product innovation, we are poised to accelerate our pace significantly in the second half of this year as we complete all but a small handful of customer migrations and end support of our legacy products. This will free up an additional 20% of R&D capacity beginning after June 30 to focus on extending our product lead in the health navigation market. To sum up, 2018 was a pivotal year for our business. The rapid growth of our engaged channel relationship, the successful launch of Castlight Complete and reaching profitability created a new dawn for the company. As the leader in health navigation, we have an enormous opportunity ahead of us to make it simpler than ever before for tens of millions of users to find the right care at the right time. This is the goal that motivates us every day at Castlight. I am deeply grateful that every one of my colleagues at the company for the dedication they have shown to improving our business every day. I'll now turn the call over to Siobhan.

[Siobhan Mangini:]

Thanks, John. Good afternoon, everyone and let me also thank all of you for joining us on today's call. I'll review our Q4 results in 2019 outlook. After that, we'll take your questions. Q4 built on our execution trends in Q3 and included solid revenue generation and our second consecutive quarter of non-GAAP operating profitability. Additionally in the fourth quarter, we delivered on our goal of generating cash flow from operations in the quarter. We ended the quarter with net annualized occurring revenue or ARR of $150.5 million. As John mentioned, ARR was essentially flat year-over-year adjusting for Wal-Mart. We are proud to be at the end of a transformation of our business as compared to where we stood four years ago and today, nearly 90% of our book is either on or committed to our platform. In particular, our newest products are delighting and engaging our end users and priced to deliver meaningful value to our buyer. The success launch is about Complete, our direct-to-employer product and engage our channel platform offering in 2018 has provided to us referencable accounts in users who love our products. This is translated into 20% growth in ARR from customers at our Care Guidance and Wellbeing platform products. As John mentioned above, as a result of this industrial grade innovation, we expect to see an acceleration of new business as well significant improvements in customer retention. Total revenue in the fourth quarter was $42.1 million which increased 13% year-over-year. Subscription revenue was 94% of total revenue, an increase 17% year-over-year. Q4 [indiscernible] approximately $1.5 million of non-recurring revenue, related to the end of customer contracts and performance guarantees. As you may recall, we had a similar dynamic last year as well with $500,000 of non-recurring revenue in Q4 2017. Excluding the non-recurring amounts, subscription revenues grew to 14% in Q4 2018 compared with the year-ago period. Revenues are a function of completed implementations and our successful launch activity in the second half of the year drove subscription revenue growth. Professional services revenue declined 23% year-over-year primarily due to the ending of one-time professional services fees associated with the development of the Anthem local product. Now let's turn to our fourth quarter non-GAAP financials. Q4 non-GAAP gross margin was 68%, consistent to levels in Q3 and the year-ago period. Gross margin was in-line with our expectations and we continue to expect to hit our long-term growth margin range of 70% to 75% in the second half of this year as most legacy Wellbeing customers will be successfully migrated to the platform offering by mid-2019. Total non-GAAP operating expenses in the fourth quarter was $27.1 million, down 9% year-over-year compared to revenue growth of 13% during the period. We saw continued solid execution against our operating model with all three operating expense lines improving sequentially and year-over-year as a percentage of revenue. In the fourth quarter, the sales in marketing and G&A were within the respective long term target ranges of 20% to 24% and 8% to 12% of revenue. While we continue to invest in R&D above our 20% to 24% target range to support platform innovation and future growth. Based on the revenue performance and expense discipline, we delivered our second consecutive quarter of non-GAAP operating profitability in Q4, generating income of approximately $1.6 million compared to a loss of $4.4 million in the year ago period. For the full year 2018, revenue, non-GAAP operating loss and non-GAAP EPS all beat the high-end of their respective guidance ranges. We ended the year with $77.3 million of cash, cash equivalents and marketable securities. Cash used in operations was $18.6 million in 2018, which beat our mid-$20 million target. This was highlighted by $7.5 million of cash flow from operations in Q4. This performance speaks to the improved levels of operating execution across Castlight. The team performed admirably and maintain their focus throughout the year. With that, I will turn to our 2019 outlook. We currently expect 2019 revenue in the range of $153 million to $158 million. In terms of seasonality, we expect the first half for contribution to full year 2019 revenue to be in the mid-40% range with a remainder in the second half of the year. Similar to 2017 and 2018, we expect Q1 2019 revenue to decline due to the impact of Q4 one-time revenue and 2018 notified churn becoming effective at year end, all while first quarter customer launches ramp the revenue contribution. As a result, we expect Q1 2019 revenue to decline by almost $7 million sequentially. Later in 2019 due to customers we have under contract as well as the improved implementation timeline we have already seen with both engaged and complete, we expect to see year-over-year revenue growth in second half of 2018. 2018 was a critical year to prove we can deliver scalable products including the on-schedule launches of Castlight Complete and Anthem Engage. We expect 2019 non-GAAP operating income to be in the range of breakeven to positive $5 million and non-GAAP earnings per share to be in the range of $0.00 to $0.03 based on 145 million to 146 million shares. Drilling down further, we expect the sequential dip in Q1 gross margin as we invest to support a record-number of launches in the first quarter with growth margin starting to improve over the course of the year in Q2. We expect to hit our long term growth margin targets of 70% to 75% in the second half of 2019 as we complete the majority of migrations off the legacy Wellbeing infrastructure. For the full year in 2019 we expect the sales in marketing and G&A to be within their long term target ranges. Given our conviction around the market opportunity in the uptick of our recent new product introductions, we plan to continue to over-invest in R&D relative to its long term target range again in 2019. Finally, we expect 2019 cash flow from operations to be between $3 million and $8 million with cash usage occurring in the first and third quarters due to the timing of certain payments. We expect to have more than $80 million of cash on hand by year end. In summary, we ended the year on a strong note, highlighted by record revenue and our first cash flow from operation's quarter in the company's history. The product launches in 2018 position us well to accelerate sales growth and improve retention in 2019 and the financial model should generate cash from operations on an annual basis going forward. All while we continue to invest in our platform. Thank you, Operator and we'll now take your questions.

[Operator:]

[Operator Instructions] Your first question comes from Jeff Garro with William Blair & Co. Your line is open.

[Jeff Garro:]

Yes, good afternoon. Thanks for taking the question. I want to ask about renewals and building the pipeline in the context of the single platform. You guys have done a nice job detail in the money benefits of the single platform. If I understand it correctly there, there are still different configurations of that one platform and clients can choose some options there. So one, is there any meaningful theme so far in how clients are selecting and deploying the single platform?

[John Doyle:]

Thank you, Jeff. First, I want to touch on pipeline because the beginning of the year is an important period every year in the pipeline bill and one of the really important differences this year versus last year and the year before is we're going to be out on the conference circuit with all of the customers who launched Castlight Complete in the fall, talking about their experiences and the successes that we've had with those launches. So the pipeline bill during this prime period should be the strongest we've seen in years and that's off to a great start. So we're excited about that. In terms of the theme among prospects, I would say that the focus of every one of the conversations we have in the market is about the power of combining Care Guidance and Wellbeing together in a single platform and in particular, the benefits you get in terms of utilization, engagement and then ultimately ROI by doing that. So while we have some customers who might choose to start with one of the configured packages in either Wellbeing or Care Guidance, I would say in virtually every case, a key reason we've been selected and the trajectory of that relationship over time is headed towards a full deployment of Castlight Complete and that is the dominant selection that our employer-customers are making today. So in most cases, we are actually selling the full platform.

[Siobhan Mangini:]

And Jeff, maybe just to put some numbers against it. This is Siobhan. 54% of the ARR we have under contract now is in some form or fashion the combined suite. So it is offering those Wellbeing and Care Guidance functionality in a single application. In terms of renewals, we do have opportunities obviously then to be able to bring people over to that combined suite for the other 46% of the ARR. I think just another piece to put a fine point on it -- John mentioned this on his script -- is renewals are smaller this year than what we saw in 2018. It's about 20% less on an absolute dollar basis for ARR and it's just a different composition as well. We don't have necessarily the 8-digit renewals like we did across the couple customers in 2018. So I think we're in a really strong position with the customers that are up for renewal and we've obviously worked through the migrations that we talked about and we're in a really exciting spot now that we've got this single stat architecture to be able to get folks renewed on and migrates over, too.

[Jeff Garro:]

Got it. That helps a lot. To follow up, I'll ask about the schedule migrations that you have for Castlight Complete. I was wondering if there was any update on the remaining top four customers that have planned to migrate and then maybe more broadly, any material moves up or back in the implementation schedule since the last call broadly for the customer base and I guess should we think of those implementations as firmly scheduled and highly visible at this point?

[John Doyle:]

Yes. We've had great progress and the headline is very much on-track. So in some cases -- this question actually has overlapped with your first question -- we've had a couple of customers who are migrating Wellbeing business actually taking that opportunity to add Care Guidance to the overall relationship and actually migrate from a legacy Wellbeing experience to a full Castlight Complete experience post-migration. In terms of the progress that we've made, we now completed three migrations successfully and when I say successfully, means on-time with a full migration of user data from the previous experience into the new experience and a capture of all of the previous engagement very successfully in the registration on the new product. So we're very excited about the progress there, continue to be on track to have all but a handful of the migrations completed by the middle of the year and I think as you're well aware, at that point, we'd free up about 20% of R&D capacity as I said in the prepared remarks, and it's a really exciting time for the company to be making that transition.

[Siobhan Mangini:]

And maybe just to follow up in terms of how that place through the P&L, we're obviously very focused on these migrations. It's a high degree of visibility across the business. We are investing as you can imagine, in our services, professional services, organization to support these migrations. So, that is part of the impact that you're seeing in terms of quarter-over-quarter decline in growth margin. But also as we've finished those migrations or the majority of them in the first half of the year, driving that increase in margins to our long term target range of 70% to 75% in the second half of the year.

[Jeff Garro:]

Got it. Thanks again, guys.

[John Doyle:]

Thanks, Jeff.

[Operator:]

Your next question comes from Charles Rhyee with Cowen. Your line is open.

[Charles Rhyee:]

Thanks for the question. When we think about the guidance here with the step down in the first quarter, obviously as we think about Wal-Mart transitioning away, can you talk about how we should think about the full year EBITDA guidance, $0 million to $5 million. Should we think about the first quarter being the biggest loss? Should it have been down year-over-year and then kind of turning back up -- I'm sorry, operating profits. I guess the question being, how should we think about any kind of deleverage issues. Obviously you talked about the gross margin, but just trying to think about across sales marketing G&A on the operating expenses. If you can give us any kind of color on how we should think about progression through the year? Thanks.

[Siobhan Mangini:]

Super. Absolutely. Let me start with the top line and then I can move into the P&L. I'd say overall, really excited about how we perform this year as a team and obviously outperform revenue guidance as well as driving to profitability. And that was the function of launching, Complete and Engage all while obviously executing our sustainability. So when we enter into a year just to think about our business, we have over 90% visibility as we start a year and the variance is driven by customer launches. The fact is that we essentially have the same amount of identical amount actually of ARR that's launched. One, 2019 as we did a year ago, it's the beginning of 2018. So we're expecting a subscription revenue cadence. It's very similar in 2019 as to what you saw in 2018. So the great news is we've done this before. What our 2019 revenue guidance incorporates is the plain launch of the customers who have signed and then product launching. I'd say what's difference this year, our implementation timeline are faster than ever. So we've actually launched. I mentioned at record levels in Q1, but also on a weighted average basis, the timelines are under five months. Sometimes it's fast as three months in terms of how quickly we're locking customers. So that's just a function as a scalability of the technology. The other piece is that we've got intra-year bookings to revenue conversion in the second half of '19. We talked a little bit about this, but we had deals from Q4 moved over into Q1. Some of those have closed already and then we've got some late-stage deals that we're tapering [ph] and they have planned 2019 implementations and that's incorporated into our forecast. I think the great news is because we've got products like Engage and Complete out there, we can launch customers very quickly. That, incorporated into the top line guidance, I think we're really excited in terms of restoring growth and driving the business possibly. In terms of I think the second part of your question, in terms of what's happening on the operating expense lines, the good news is we have been positioning ourselves to be able to sell fund innovation and growth. So we're in a position to do that. You're right, there will be in Q1, an operating loss, but then you'll see very strong progression from there on out. We expect to see a bit more savings from the Q4 run rate in sales and marketing and there are some restructuring of contracts that we'll be incorporating into hitting that 20% to 24% of revenues range from the full year. R&D, there will be a slight bit of investment as I think John and I both mentioned. Not significant, but you can think on a full year basis, they're similar to what we had in 2018. And then G&A were effectively at the run rate after the restructuring that we had in the third quarter and hitting 8% to 12% of revenues for the full year. That in effect, that will drive that $0 million to $5 million operating gain that I talked about in terms of guidance.

[Charles Rhyee:]

Any way you can kind of give us a sense what you would expect for the operating loss in the first quarter to be so that we can kind of build off of as we ramp through the course of the year?

[Siobhan Mangini:]

It would be in any order of couple of million dollars. In terms of the loss, nothing over -- you can kind of think in terms of if you're getting to the quarter-over-quarter of the seven-ish million dollars and that's off PS as well as subscription, then you're going to see I think all of the rest are the lying items that they just walk through almost at their steady state in Q1 and that's to give you a slight operating loss. And then from there on out being able to drive strong improvements.

[Charles Rhyee:]

Great. And just one more follow up here. You talk about the fast implementation time. Historically talked about as we model this in terms of their recognition periods for ARR and our models. Should we take that to mean that with Castlight Complete and ability of the scalability and technology as we look beyond 2019, we should be able to recognize our ARR on a faster clip? Should we start to build that into a model as you're thinking [ph]?

[Siobhan Mangini:]

Yes. I would say it's twofold. You're absolutely right, we are seeing improvement in ARR conversion. We have started to talk about that last quarter. I think we're starting to very much prove it out in terms of seeing accelerated time lines in Q1 of this year. And we've seen those launch time lines stabilize on average in terms of like I mentioned, about five months on average in terms of the time to launch for customers in the first quarter this year. As they just mentioned, as it pertains to the top line guidance and its worth, just talking about how close to ARR conversion, we did have a handful of deals that move from Q4 into Q1. Some of them have already closed, some of them, we've been selecting more minutes of tapering and they all had anticipated launch time lines in 2019. That's incorporated into our guidance forecast. As a function of that, that means that we are going to see improved ARR conversion time lines, ARR through subscription revenue time lines and you can think of that as almost moving three to four quarters as opposed to four to five quarters that we've seen in the past.

[Charles Rhyee:]

Okay. Did you give total customer at the close quarter? At year end?

[Siobhan Mangini:]

It's around 270 customers. Little less than 30% are fortune 500.

[Charles Rhyee:]

Great. Thanks, guys.

[John Doyle:]

Thank you, Charles.

[Operator:]

Your next question comes from Richard Close with Canaccord Genuity. Your line is open.

[Richard Close:]

Great. Thanks. Congratulations on the progress throughout the year here.

[John Doyle:]

Thanks, Rich.

[Richard Close:]

I guess my first question is on the freeing up on R&D. Is there any way for you guys to go into maybe a little bit more detail in terms of as you think about innovation, where you want to spend your time, what makes sense from additional add-on product? Just any details around that that would help us conceptualize that.

[John Doyle:]

Yes, absolutely and it gives me an opportunity first of all that Trumpet, a very recent innovation that we launched in the fourth quarter which is Castlight's Q score methodology, which is a proprietary quality metric that we generate using 17 third part quality data sources as well as insights and analytics from our own internal data claims and so forth. And we're using those Q scores to help our users distinguish clinical quality among providers. Coverage with that metric is terrific across our book of business and represents a real advance in Care Guidance that we're excited about. Now as we look forward, the high level frame work here is that the winner in health navigation is going to be the company that is most effective at driving sustained engagement and ROI. So when we think about investing the capacity that frees up in the second half of the year, we're very focused on specific elements of the product that we believe will contribute to those two goals and in particular, sustain engagement at levels that are higher than we've ever seen coming out of these launches of Castlight Complete. And when we think about that question, there are good analogies in other industries that can be a guide, we think, to better engagement in healthcare. These industries include examples like airlines, financial services or even retail where consumers have come to expect frankly deeply personalized experiences where they complete the basic transaction that those domains typically involve. So take the banking example. You don't have anybody going to use their banking app specifically because it's got a compelling user interface or a bunch of exciting content. They're going to use the banking app because they deposit a check with their camera and it makes their lives easier and more convenient. We think the next threshold in health navigation is to bring transactions into the platform so that users can be executing the core things that they're trying to get accomplished. Whether it be something like appointment scheduling or bill pay. We have pilots on both of those activities in the second half of the year and they represent a significant focus for that additional capacity. So I think it would be helpful to give you some of the context for how we think about it and then the specifics.

[Richard Close:]

And then what do you think about -- let's say you add functionality along those lines eventually. What that does in terms of customers and increasing the wallet share. Is there any thought in around that?

[John Doyle:]

Well, pricing in our space is ultimately all about ROI. So looking backwards at the Care Guidance business, we're driving a validated ROI of 2x to 3x. That from our point of view only increases now as you look forward given that the leading indicator is engagement and search rates, all of which have improved dramatically with the launch of Castlight Complete. As ROI goes up, so does differentiation and pricing power in a market where ROI for many has been elusive. And when you think about something like appointment scheduling or bill pay, or any number of other capabilities that are in the same genre, you turn a healthcare navigation product from a nice to have very helpful product into something that more and more consumers view as a must-have to execute the things that they want to be doing in their health and health care experiences. And we think that step function in engagement that would expect with the addition of those capabilities leads to very clearly greater ROI. How does it do that? Well, one of the things we've observed in user data behaviorally is that folks tend to follow the path of least resistance in the choices that they make. And if you imagine a world where you've introduced levers like appointment scheduling and bill pay and you marry that with the kind of curation that Castlight is able to do at the network level such that essentially we're delivering virtual networks for many of our customers, if you're making the path of least resistance in terms of the options you show and then the way users can engage those options, you have those paths of least resistance leading to the highest ROI activities, we think that becomes a super charger of the value that users and employers get out of the process [ph] which ultimately again supports greater differentiation and pricing power. So that's how we see it translating into top line.

[Richard Close:]

Okay. Very helpful. I wanted to dive in on the second channel partners late stage commentary there. The commentary on the channel partner, you said maybe a shorter timeline or something along the lines of a timeline in the startup expenses. If you can dive into that a little bit deeper and then just remind us back in terms of the timeline for engage and end theme relationship and how to do with Compare?

[John Doyle:]

Absolutely. Very important question. I'll start with what we're not interested in doing at this point in the business, nor do we think it's necessary and that is embarking on a large build of net new product for a channel partner whose needs don't overlap well with the things we already do at Castlight. When you go back to the days that we were building Anthem Engage, that product was absolutely a net new build. We devoted most of our resources for almost an entire year to deliver Anthem Engage. What that gave us thought was the start on the build of the health navigation platform that is Castlight Complete that we believe can satisfy the needs of a large number of potential channel partners, I would say most immediately, regional health plans. And if you think about the challenges that regional health plans have to confront in the area of digital health navigation, these products are complex products to build and support. The investments are significant. They're generally not the kind of investments that plans operating at that scale can imagine making could possibly fit into their economic models. So that makes a partnered approach much more economically interesting for those kinds of groups. So in contrast to the experience building out Anthem Engage which was net new product and this was the core point I was trying to get to in my remarks. We are absolutely in a position now where we can leverage product that we built previously. We can configure capabilities out of the single-stack that we use to deliver Anthem Engage and Castlight Complete to deliver another flavor of those capabilities for each net new partner. So when we talk about the timelines for standing up a new partner and the cost associated doing that, it's a much faster process and a much lower cost than the Anthem Engage example as a comparator. Does that help with your question?

[Richard Close:]

Yes. That's helpful. But just one final on that. As we think about -- okay, let's say you find your second channel partner, when do you think you would be able to have initial sales and then incremental ARR from that?

[John Doyle:]

Well, our plan all along has been that 2019 sales were about continuing to support the success of existing channel relationships and I think we've demonstrated very clearly in our results from 2018 that those existing relationships are working very effectively and we certainly expect that to continue. On the direct side of the business, we think Castlight Complete and the pipeline we've got in place in our programs there to drive conversion rates set us up for everything that we need to achieve our growth goals for this year. So the new channel relationship is really about sales in 2020 and revenue in 2021. I think there's the potential to go faster than that, certainly, but from a planning perspective, that's what's assumed in our modeling.

[Richard Close:]

Okay. Thank you very much for the information.

[John Doyle:]

Thank you.

[Operator:]

Your next question comes from Steve Halper with Cantor Fitzgerald. Your line is open.

[Steven Halper:]

All right. Just two quick questions. You went through a cost reduction program in 2018, obviously had count what was impacted. What are your 2019 headcount plans and then unrelated to that, in the guidance, you talk about a higher share count and what's behind that, please?

[Siobhan Mangini:]

Sure. So, in terms of headcount, we were at 474 employees at the end of 2018 and to your point that was post a restructuring. In terms of headcount, there's minimal growth from there. We've certainly taken into account all of the headcount from the restructuring. What they are cost-savings to be had and I alluded to this a little bit in terms of my discussion with Charles is stilled in marketing. There were some restructuring of for example channel agreements and what have you, that will also play to the P&L and get us a little more benefit in the sales marketing line item -- non-FTE related. I would say for your question, is have definitely moved through the restructuring in terms of personnel. It's a little bit of savings to be had in sales and marketing, non-FTE related and then nominal growth in headcount from here on out. In terms of that higher share count, it's really effectively a similar level to what we saw on 2018. We actually had almost a similar amount of range. In terms of our expected growth, it's really just based off of the grants that we've given to date and expected that's been scheduled for that. So nothing out of the ordinary.

[Steven Halper:]

Thank you.

[Operator:]

[Operator Instructions] Your next question comes from Gene Mannheimer with Dougherty. Your line is open.

[Eugene Mannheimer:]

Hey, thanks. Good afternoon and congrats on a good finish to 2018.

[John Doyle:]

Thanks, Gene.

[Eugene Mannheimer:]

Two questions. Just looking at this at a high level. If ARR is flat this year with last at the same time as seeing of faster conversion of the ARR to revenue, wouldn't that suggest we're going to see little bit of growth this year versus the flattish outlook that you provided or is there an area of conservatism built in here?

[Siobhan Mangini:]

Yes. It's nice to talk to you, Eugene. It goes back to what I've talked about. I think we're feeling really confident in terms of the success we've had in 2018 launching, Engage and Complete, but what we're incorporating into the guidance is having a strong launch quarter in Q1. I am really pleased that we're seeing that. We're going to have almost 40 new customers launched in Q1 and then two, that some of these deals that I've been talking about that have moved into Q1 are launching into a year. And then to your point, we've done it, I think we're seeing the timelines come down and we're feeling really good in terms of the position we are to deliver and this mix of complete engaged and launch them on time and in a timely fashion. So I think of it as guidance in terms of us repeating what we've seen ourselves do in 2018.

[Eugene Mannheimer:]

And with respect to services, would you expect professional services revenue to grow in 2019 and why does the cause of services continue to be about 2x the revenue you receive and when would we expect that to moderate?

[Siobhan Mangini:]

All great questions. I think the first piece in terms of services revenues, we did have one-time series of revenues associated with the build of our lower cost product that we distribute into some of the fully-insured business we've engaged and so we do expect and you saw the step down in services revenue in Q4. We do expect slightly lower services revenue, sort of not necessarily growth. Not changed, but definitely not at the level that you thought the beginning of 2018 in terms of revenues. In terms of a cost structure, it's a great question. I'd say there's a couple pieces why there's the cost associated with launching customers and that is one activity that the team is doing. There has also been historically the cost of supporting some of these latency platforms. So when I've alluded to the fact that we're making an investment in services to support the legacy platform, from an accounting perspective, you actually extend that immediately. There is cost in that services bucket that's related to frankly supporting legacy customers and legacy platforms. So we do expect to see efficiencies in the cost of revenue services bucket over the cost of the year as we're finished migrating customers off the legacy architecture.

[Eugene Mannheimer:]

Okay, great. Thank you.

[John Doyle:]

Thanks, Gene.

[Operator:]

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

[John Doyle:]

Thank you for joining us on today's call. We're excited about the foundation that we built at Castlight to deliver the most scalable and powerful digital help navigation solutions in the market. We hope to see some of you at the Cowen Healthcare Conference in March. Have a great evening.

[Operator:]

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