Castlight Health, Inc.
Q3 2017 Earnings Call Transcript

Published: 26 Oct 2017

[Operator:]

Good afternoon, and welcome to Castlight's Third Quarter 2017 Results 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 take your questions. Our press release, webcast and PowerPoint presentation are available on our website. This call contains forward-looking statements such as our guidance for the full-year of 2017 and expected timing of cash flow breakeven. All such statements are made as of today and reflect management's current views and expectations, and are subject to various risks, uncertainties and assumptions. Please refer to the press release and our filings with the SEC for a discussion of important factors that may cause actual results or events to differ materially from those contained in our forward-looking statements. You should not place undue reliance on these forward-looking statements and we disclaim any obligation to update or revise any forward-looking statements. If the call is replayed or the presentation is viewed after today, the information may no longer be current or accurate. We will provide guidance on today’s call, but we will not provide any further guidance or updates to our performance during the quarter unless we do so in a public forum. This presentation also includes certain non-GAAP metrics, that we believe aid in the understanding of our financial results. More information about our use of non-GAAP metrics and a reconciliation to comparable GAAP metrics on a historical basis can be found in our press release. In addition, please remember the close date of the Jiff acquisition was April 3, 2017. Accordingly, deferred revenue fair value adjustment discussed on this call, our preliminary estimates and subject to change upon the completion of purchase price accounting. With that, I'll turn the call over to John.

[John Doyle:]

Thank you, and good afternoon. At Castlight, we strive to make it as easy as humanly possible for people to navigate healthcare. This is the mission that drives us. We want to eliminate the random walk that most people default to when they seek healthcare. When we do this well, we save money for employers and we help employees and their families live healthier, happier and more productive lives. Over the last 18 months, we've driven major initiatives aimed at winning more new customers, managing churn, and strengthening our financial profile. By merging Castlight and Jiff to deliver a solution that helps employees navigate the entire healthcare landscape and going to market with one of the largest health plans in the United States, we believe we can drive broader adoption of our integrated healthcare navigation platform and improve customer value and retention. After a solid performance in Q2, our third quarter results provide more evidence that we're making great progress. We won a significant amount of new business, increased the proportion of multi-product relationships among existing customers, and drove operating efficiencies that make us confident that we will breakeven on a non-GAAP operating basis by Q4 next year, which is an accelerated timetable compared to our prior expectations. These trends speak to the exciting potential of our integrated platform and we are increasingly confident that we have the right long-term strategy and business model in place to accomplish our mission. That said, while we are driving revenue growth with our integrated platform, we are facing tough headwinds from churn among our transparency customers. While we continue to track above our mid-90% NDR target for the year as a result of strong cross-selling activity, transparency churn was higher than planned in Q3. As we have discussed previously, the healthcare navigation market is gaining steam, so we are truly in a Tale of Two Cities moment at Castlight. I’ll spend some time on the current state of each and what we're doing to build on our successes while mitigating the impact of transparency churn going forward. Let's start with Q3 sales, which provide the best evidence yet that our integrated platform is resonating in the market. On a gross basis, we added 26 new customers in the third quarter. This is the highest number of new customers in a quarter since we began our evolution to the platform almost three years ago. We ended Q3 with more than 255 customers including 80 in the Fortune 500. Q3 was also our best gross new bookings quarter in nearly three years, so it was a strong performance on the heels of a solid Q2. Annualized recurring revenue or ARR, which includes the effects of churn was $157 million as of September 30, up more than $6 million sequentially. Over the last two quarters, we increased ARR by more than $16 million. This increase compares favorably to the $11.6 million in ARR Castlight generated in all of last year. Clearly, the growth engine at Castlight is improving. This progress has been driven primarily by our direct business where we continued to see excellent cross sales of our well-being solutions and sales of our core platform to large new customers. Broadly speaking, platform customers are responding positively to being able to address priorities in care guidance, well-being, and engagement hub in a single integrated platform solution with Castlight rather than cobbling together point solutions individually. By the end of Q3, 17% of our customers have purchased both Castlight and Jiff products up from 10% at the end of Q2. Overall, 56% of our customers have purchased three or more products from us. These are key performance indicators that we believe show our broadening product footprint with customers. This is a critical piece of delivering great results and sustaining these relationships over time. Also exciting, Q3 logo velocity was strong as well driven largely by uptick of Anthem Engage. Our first product to combine elements of Jiff and Castlight functionality in a single app. Our Anthem partnership enables deep integrations with clinical programs and customer support that will make it easier than ever for users to find and access the right programs and providers for them. More than half of our new logos and about 30% of new bookings in Q3 were Anthem Engage sales, and once again we saw much shorter sales cycles in many of these deals than in our direct business. We are encouraged by the increased momentum for Anthem Engage in its first selling season in the market. We are optimistic that successful launches of the initial wave of more than 20 customers in Q1 2018 will provide important proof points to support next year's selling season. Importantly, as we look ahead to 2018 and beyond, we were pleased to see Anthem's recent announcements that together we are making Anthem Engage available to large group customers, self insured and fully insured in Anthem’s individual local markets. In January, we will launch a purpose built version of Engage in California and Colorado, two of Anthem’s 14 state markets with the potential to expand to other states over time. This is an exciting new dimension of the Anthem partnership for us because we will be delivering healthcare navigation capabilities to fully insured members for the first time. We are excited about the progress in our partnership with Anthem and we continue to see it as an important multi-year growth driver for our business. Our key sales initiatives are taking hold, which are the drivers of long-term revenue growth, another important driver is reducing churn, which I noted a moment ago is running higher than expected, in particular with our legacy transparency customers. Although this functionality is an essential piece of healthcare navigation, the market for standalone transparency is not strong. During Q3, this dynamic as well as successful migration of some transparency customers to our integrated platform helped reduce transparency only ARR to 23% of total ARR from more than 30% at the end of Q2. We expect this trend to continue and our goal is for ARR from transparency customers to represent less than 15% of total ARR by the end of next year. As we reach this level, we expect our overall churn rate to improve in later 2018, which will benefit our longer-term revenue growth. The increasing importance of our platform business should also help lower churn to healthy levels. The integrated platform drives higher engagement and broader more effective steerage at a lower price point than we previously charge for transparency alone. This translates into higher and more consistent ROI for customers. Cross-selling of our wellbeing solutions is also important because these products are relevant to all employees, which gives us the ability to engage an employer’s entire population and to service it’s hub for third-party solutions. Importantly, we enable customers to purchase third-party point solutions through Castlight and we help drive engagement with these solutions using pre-established integrations to our platform. During Q3, we completed more than 20 sales of the ecosystem partner solution on Castlight paper. Overall, we are pleased about the strong demand for our integrated platform and the signs that our Jiff acquisition and Anthem partnership are helping improve ARR growth compared to 2016. As we work to drive sustainable growth, we are also maintaining our focus on strengthening Castlight’s financial profile. We made great progress in Q3 reducing our non-GAAP operating loss sequentially by one-third to $6.6 million. Everyone on the team has played a role in making smart trade-offs and continuously seeking ways to do our work more efficiently. As we finalize our plans for 2018, the path to profitability for Castlight is clearer than ever before. Finally, I'd like to comment on today's announcement about changes on our board. Gio Colella and James Currier, co-founders of Castlight and Jiff respectively stepped down from the Board and Seth Cohen currently Vice President of Sales and Alliances of Castlight will join the Board effective 1/1/2018. Gio and James are outstanding entrepreneurs and integral members of the Castlight family. All of us are deeply grateful to both of them for all they've done to help Castlight to achieve our mission. We are also excited to add Seth to the board. In closing, we continued a strong positive trend in new business acquisition that began in Q2 and took another big step toward profitability. We also broadened our customer relationships with sales of our integrated platform and strong cross-selling of well-being solutions to existing customers. We are all excited about the progress we have made together and the opportunities that lie ahead of us. With that, I'll turn the call over to Siobhan. Siobhan?

[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 Q3 results and then discuss our 2017 outlook. After that, we'll open up the call to questions. Please note that the Jiff acquisition closed on April 3. So Jiff’s financial performance is included in our reported results starting in Q2 2017. With our new logo growth, strong sequential dollar increase in ARR and sequential decrease in non-GAAP operating expenses, our third quarter results reflect continued execution on our initiatives to drive net new business and improve our operating performance. As John discussed, net annualized recurring revenue or ARR totaled $157 million at the end of Q3, a sequential increase of $6.2 million. Our major go-to-market initiatives continue to show traction in Q3 as the majority of our growth would comprise of Anthem and Jiff sales. We are pleased by the trends within our net new business including the continued mix shift towards the platform and multi-product relationships, which are stickier than our legacy transparency business. At the end of the third quarter, 23% of our ARR was from transparency customers, down from over 30% at the end of Q2, and 55% in the year-ago period. This is due in part to our ability to move legacy transparency clients to the platform, including eight such migrations in Q3 alone. And our proactive approach towards addressing out of period transparency renewal. The attach rate of our action platform product is now approximately 42%, 17% of our customers have purchased some combination at the Castlight and Jiff offerings, and 56% of our customers now have three or more products. With a significant reduction in transparency customers, we are well on our way to migrating our customer base to a stickier foundation with a stronger long-term value proposition with Castlight. Total revenue for the third quarter was $34.6 million, which was an increase of 36% year-over-year on a reported basis. Subscription revenue was 91% of total revenue and increased 31% year-over-year. Reported revenue is a function of completed implementations and getting Q3 is seasonally a lighter quarter for launches for us, we had six new customers launch on Castlight. The 96% year-over-year increase in services revenue reflects revenues associated with supporting the new Anthem local business initiative John discussed. We expect professional services revenue from this initiative to continue through mid-2018. Without the S&P, professional services year-over-year revenue growth would have been 49% driven primarily by an increase in launch activity. Now let’s turn to the third quarter non-GAAP financials. Q3 non-GAAP gross margin was flat year-over-year at 67% compared to 72% in the year-ago period. This is in line with our previously disclosed expectations that we expect gross margins to temporarily dip below our 70% to 75% long-term target range due to just earlier stage of launching customers and our expected need to scale our customer support function as we prepared to launch customers at the start of 2018. Outdoor investment in a solid consumer delivery foundation in 2017, we continue to expect overall gross margin for the combined Company to return to our long-term target range in mid-2018. Total non-GAAP operating expense is $29.8 million in Q3, up 24% year-over-year on a reported basis. While we continue to invest in R&D to support the product roadmap and drive future innovation, we are particularly pleased to show leverage across all operating expense line. In particular, we saw continued efficiencies in sales and marketing from our channel-based go-to-market initiative. On a sequential basis, non-GAAP operating expenses declined $1.6 million or 5%. All operating expense line items decreased quarter-over-quarter reflecting a broad-based nature of our ability to capture operating synergies post Jiff. We are very pleased with our efforts to capture synergies quickly and expect R&D and sales and marketing expense to grow slightly from their Q3 levels to support the ongoing growth of the business. As a result of the revenue growth and operating expense efficiencies, Q3 non-GAAP operating loss improved $3.2 million sequentially to $6.6 million. We continue to execute on driving the operating model. On a sequential basis, we increased ARR by $6.2 million and revenue by $2.5 million, and non-GAAP OpEx declined $1.6 million. We ended the quarter with $87 million of cash, cash equivalents, and marketable securities. Cash used in operations was $8.4 million in the third quarter. With that, I’ll turn to the outlook. For the full-year 2017, we now expect GAAP revenue above $130 million, which is slightly below our prior guidance of $132 million to $136 million. Last quarter, we indicated that we were tracking the low-end of the range due to the timing of a handful of customer go live days to the end of Q4, which is when revenue recognition begins. The slight modification we are sharing today is due to the above planned churn levels that John reviewed earlier. Overall, we continue to believe we have set the foundation for sustainable growth in 2018 and beyond. As we look forward, our customer launches continue to go well and we expect our churn rate to improve. Based on our ARR growth and increasing proportion of ARR associated with the integrated platform, we believe we are well-positioned to drive long-term sustainable growth. Based on our rapidly achieved expense synergies, we now expect to beat our full-year 2017 non-GAAP operating loss range of $31 million to $35 million. As a result, we also expect to beat our non-GAAP net loss per share of approximately $0.24 to $0.28 based on approximately 125 million to 127 million shares. Because of the progress we've made this year with operating expenses and the modest OpEx growth we forecast in 2018. We are now confident that Castlight will hit non-GAAP operating breakeven by the fourth quarter of 2018. We are pleased to be driving Castlight to breakeven at a larger scale with stronger ARR growth than we were a year-ago. We continue to expect cash used in operations to be in the mid-$30 range for the full-year 2017, which includes approximately $10 million in Castlight’s acquisition and integration-related cost. Based on our year-to-date performance, we are increasingly confident that we will reach cash flow breakeven at the end of Q4 2018 and have more than $60 million of cash on the balance sheet at that time. In summary, we believe our Q3 performance illustrates that our strategy is working to position us for long-term sustainable growth. We’re pleased to see the positive market reaction to our product and go-to-market initiatives, and remained focused on delivering consistent execution to drive value for all of our stakeholders. Thank you. And we will now take your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Jamie Stockton from Wells Fargo. Your line is open.

[Jamie Stockton:]

Hey. Good evening, and thanks for taking my questions. I guess maybe the first one; you guys are great in giving us some transparency on the metrics around the transparency solution, how much of ARR it is at this point? Is there anyway for us to broadly think about how we should bucket the decline as a percent of ARR between, hey, we've got customers that are moving to the platform versus the attrition piece just because I'm sure that that's going to get a fair amount of attention?

[Siobhan Nolan Mangini:]

Yes, Jamie. This is Siobhan. It’s nice to hear from you. Absolutely, so there has been obviously decline over the course of the year that we've been trying to have folks see as the migration of the transparency ARR. The majority of the decline has come through churn. So when we talk about churn rates, the majority of churn is coming from transparency and the decline in ARR that you're seeing is coming from churn, and then I'd say a smaller percentage is migration over to the full platform. So think about it like two-third, one-third in terms of churn versus migration.

[Jamie Stockton:]

Okay. That’s great. And a quick one on the income statement. I saw that you guys, it looked like you wrote up how much contingent consideration you expect to pay out, I assume that that's related to the Jiff transaction and then that drove an expense during the quarter? Is that basically tied to them, I think hitting $25 million of revenue this year on a calendar basis, maybe not that you consolidated, but the business would do maybe ex any purchasing and any adjustments or anything like that?

[Siobhan Nolan Mangini:]

Sure. Yes, so there's two components to the earn out for Jiff. The first is the revenue earn out of $25 million, which you just mentioned. There’s a million shares associated with that. The second piece is $25 million of net bookings. There’s 3 million shares associated with that. At this point, we don’t expect that the revenue earn out will be hit, but we still see – we’re looking to see how it’s going to play out in terms of net bookings through the end of Q4, and that probability adjustment is what you see flowing through G&A for the contingent consideration.

[Jamie Stockton:]

Okay. And then just one more, I mean, it seems like you guys have really great momentum with Anthem. I think that it sounds like maybe you’ve had four customers who signed up in Q2 and another incremental, maybe 16 in Q3, if I’m looking at the press release right. Like, how many more customers do you think is basically I assume that things are pretty much shutting down in Q4 as far as the selling season is concerned? Is that an accurate assumption just so people don't get over their skis as far as how many incremental customers are signed up in Q4? And then maybe the other question would be when the Jiff platform and the legacy Castlight platform are fully integrated, would you expect that to be a catalyst that would accelerate the pace of new customers there?

[John Doyle:]

Thanks, Jamie. This is John. First on the Anthem question, we’re really pleased as we said in the script with momentum on new logos in particular in Q3. And as we look ahead, the Anthem Engage pipeline is very healthy. As you suggested, the selling season is concentrated in Q2 and Q3. So we don't expect a lot of uplift in Q4. But as we look ahead to next year’s selling season in Q2 and Q3, we think we're really well-positioned to grow that part of the business meaningfully. In particular, because one of the things that's going to happen between now and then is we're launching more than 20 Anthem Engage customers in Q1, which sets us up with a bunch of referenceable proof points heading into the selling season that we didn't have this first time around. So we feel great about that and like the trajectory of that business. The other big contributor to growth that I think is incremental next year to your point is the fully integrated Castlight Jiff solution, which will be launching in the second half of 2018. But from a selling perspective, we’re working hard on the pricing and packaging and enablement of field teams heading into to the early part of 2018, when we’re going to be building that pipeline in earnest, including migrating, dialogs that are ongoing today on to the combined solution as kind of an end point for the launch product. And so yes, absolutely we think we're going to be in a great competitive position in the market, healthcare navigation broadly is absolutely gaining momentum across the employer landscape as we meet with folks, and so we're excited about it.

[Jamie Stockton:]

Okay, thank you.

[John Doyle:]

Thanks.

[Operator:]

Your next question comes from the line of Steven Wardell from Chardan. Your line is open.

[Steven Wardell:]

Thank you. I'm very interested in the cost synergies that you've mentioned in the earnings release and in the call so far. Can you tell us more about the cost synergies and maybe for example where they're most coming from and they seem to be also on track or going very well, so your confidence about the cost synergies? Thank you.

[Siobhan Nolan Mangini:]

Sure. This is Siobhan, Steven. Overall I think we're really pleased with the rate that we've been able to capture synergies I think it's a great example of how well the teams are working together and being really thoughtful about making the smart tradeoffs. I’d say the area that we’ve seen the most rapid synergies across the business is in sales and marketing, and that's partially from targeting the same buyer. I think we saw very quickly marketing synergies and programmatic spend, and then the next area has really been around the actual direct sales team itself. So just to put it into perspective, we have the same number of ramp perhaps that we did at the beginning of 2015. I think what we're seeing with the leverage of the channel both Anthem Engage as well as the benefit consultants is much more consistent contribution from the reps. so it’s a smaller team, but a much more effective sales team and we're really pleased with that. As we look forward and this is helpful in terms of where we're heading in terms of ranges as we talk about getting to operating breakeven. G&A we expect to hit the long-term target range. We set at 8% to 12% of revenue at 2018. In sales and marketing, I think we're going to continue to see good leverage we’ll be investing a bit more as I mentioned in the call in Q4 and Q1. But we think we're going to hit our long-term range of 30% to 32% as a percentage of revenue at the end of 2018. And then R&D is going to be an area that we continue to invest in. This given the early innings that we are in terms of the product roadmap, That being said as John was talking about we are in the midst of replatforming and so we expect to see some additional synergies in the second half of the 2018 as we launch Castlight complete and actually complete the replatforming in that area.

[Steven Wardell:]

Okay. Thank you. And also thinking about the 2017 selling season, how would you describe the strength of the selling season now and confidence about the future of now as you pick up from prospects and from clients? Do you have any thoughts about now with the 2017 selling season is mostly or nearly over about the strength in the market of buyers going forward, is it about the same or is it greater or less?

[John Doyle:]

Absolutely greater, Castlight really on our front foot again, and it’s an exciting place to be from a growth perspective because if you look back to January, when we announced the merger of Jiff and Castlight, the goal backed in as we said was to build a bigger, faster growing business with the broadest solutions in the healthcare navigation space and that's absolutely what we're doing. I think the momentum that we showed in the growth of the platform business in the third quarter is just unmistakable. And that's coming from – we talked about coming off the Q2 calls, it was a very strong pipeline build in that part of the business. As we look ahead to 2018, the pipeline build is coming from the two places, I was mentioning in response to Jamie's question. We're seeing the Anthem Engage pipeline moving and we're very excited about the trajectory of the direct business as well as we begin to put together new packages and pricing that we think offers outstanding value to the market in a space that itself is getting more and more exciting and growing quickly. So this is been a pretty notable change in the growth trajectory in the core of the business and we look forward to next year.

[Steven Wardell:]

Great. Thank you.

[John Doyle:]

Thank you.

[Operator:]

Your next question comes from the line of Robert Jones from Goldman Sachs. Your line is open.

[Robert Jones:]

Great. Thanks for the question. I appreciate all the numbers you guys have shared around churn, but trying to get a little bit more insight into the actual attrition. So just a few questions I guess around that. I guess one, anything – any commonalities you'd be willing to share as far as why customers have cited the reason for leaving? Are they just not using transparency? Are they choosing a different transparency product? And then I guess just one other one that would be helpful. Anything that you can share as far as how you would characterize the folks that are deciding to not keep up with the product to leave Castlight? Is it your larger kind of more original customers? Is it people who maybe came on later? Just any more insight into the actual churn itself would be helpful?

[John Doyle:]

Yes. Thanks Robert. And very important to distinguish, you're right because transparency is essential functionality in healthcare navigation. So when we talk about the strength of the healthcare navigation market, which really comes out of a) the breadth of that platform from wellbeing to care guidance to engagement hub, but also the deep personalization of the user experience, integration with clinical programs, and the much more powerful levers you have across that platform to drive steerage, super important to point out that part of that steerage is curated search, pre-populated search, leveraging that transparency asset as a channel for communications with the employee. When you talk about transparency as a standalone product, that characteristics of that market have absolutely eroded. And in particular to your point, the conversations we've had over time stretching back years now about the actions of Health Plan teams developing transparency solutions that were becoming more and more able to address the part of the market that's looking to “check the box on transparency.” That has occurred and it didn't just dawn on us. I know you know this, but it didn't just dawn on us that that's occurring. This is why we began to ship to the platform, it's why we did the merger with Jiff and why we're excited about the migration to that part of the business. And so the answer to the second part of your question, what types of customers are choosing to churn rather than migrate. I think while the stories are idiosyncratic, one common theme is this notion that there is a segment of the market that today from a high deductible health plan change management perspective is looking just to check the box on transparency. And today as opposed to three years ago, there are viable ways to do that at very little cost. And so even when we think, we can compete successfully on a standalone basis head-to-head in terms of the quality of the user experience et cetera, et cetera, it's just a very difficult market environment. And so as you looking forward to next year, we have about $37 million in remaining transparency ARR and we do think we're going to see significant churn in that part of the customer base. We do think we're also going to be successful and continuing to migrate some of those customers. And then finally, we think there's going to be a population less than 15% that will stay on transparency through the next renewal cycle. And so hopefully that gives you a little more context on what's going on there.

[Robert Jones:]

That's really helpful. And I guess just along those lines John, you mentioned renewals, I think you guys had talked about having 80% of the 2017 renewals done as of 2Q, wondering now as we pass this quarter what if anything is left. And then probably more importantly as we look out to 2018, any sense you can give us of the portion of the book that might be up for overall renewals next year would be helpful?

[Siobhan Nolan Mangini:]

Sure. This is Siobhan, Bob. So I think one thing that we've done this year is really build an operational muscle around renewals. And so just to put into perspective, we went from 30 plus renewals last year to over 90, this year as a combined company. And so we've gotten much better at proactively touching customers. You're right, we’re about 80% the way through. We have one top 10 customer that remains at this point for 2017. When we talk about elevated levels of churn that we saw, this was actually because of us proactively touching 2018 and 2019 customers, predominantly transparency customers as John was talking about, and that's actually what drove the churn forecast above what we’re initially planning was this proactive outreach to other customers beyond the 2017 renewal year, and we're planning to continue to do that as we're trying to push the migration of these customers over to the full platform. As we look forward to next year, it's another major renewal year for us. We're thinking along the lines of 30% of ARR right now is up for renewal. Similar number of customers is what we saw in 2017. And I think we're in a really good spot in terms of having the operational components in place of already having those conversations with customers and really working ahead of schedule in terms of getting that base renewed.

[John Doyle:]

And Bob, I think one piece of context from Q3 that's anomalous, but important for understanding the guide on revenue. We had a large seven figure Jiff customer whose scope of work in the contract was highly customized, unusual relative to the rest of the portfolio. And through the second quarter and into the third quarter, I was actually having direct conversations with this customer about migrating that scope of work to better alignment with our forward product roadmap, which we think is obviously where everybody ought to be. And ultimately those conversations while earnest and in good faith on both sides, didn't come to fruition and so we ended up in a situation where we were being forced to choose between short-term revenue which would have kept us in the guidance range versus freeing up that capacity to focus on what we think are critical innovations for the broader portfolio coming in 2018. And so as a public company, it's tough to make those calls, but we thought the trade-off was an important one, and so we did make the call on that led to this revenue downdraft in Q4. But again, an anomalous situation and so that's why I think the focus is rightly placed on the transparency dynamic that Siobhan talked about.

[Robert Jones:]

Got it. Thanks guys. Appreciate all the detail.

[John Doyle:]

Thanks Bob.

[Operator:]

Your next question comes from the line of Brian Peterson from Raymond James. Your line is open.

[Brian Peterson:]

Hi, guys. Thanks for the taking the question. So just – obviously, you’ve had a lot of success with Anthem. John, I don't know if you could – because now you're going to be selling into the fully insured base. Is there anyway you can help us potentially size that broader opportunity?

[John Doyle:]

Well, so let me start from the highest level, 150 million Americans get their coverage from employer-based plans and about half of those are self insured, the rest are fully insured. And so historically in our business as we have focused on self insured, we've talked about 70 million employees and adult dependence who are our core segments. And very literally the answer to your question is that number doubles as we get into solving healthcare navigation issues for the fully insured. Now having said that, I think the direct line here and the opportunity is in the Anthem Engage business with Anthem specifically aware that local business if you look at their public filings about 13 million or 14 million lives and a number of those are adult dependants. So we look at it as about 7 million employee lives that we now have direct access to with this product that we didn't before to give you a sense for size.

[Brian Peterson:]

Got it, okay. And then one for you, Siobhan, just on the churn, so I'm trying to understand when we're actually going to see that and it sounds like you’re proactively engaging customers. But is that a number that's actually reflected in the 3Q ARR or should we expect that to come in the fourth quarter or the first quarter of this, I’m just trying to understand the timing of that churn that you referenced?

[Siobhan Nolan Mangini:]

Yes, great question. So we take churn as soon as it notified. So we've tried to be a conservative possible, so the $170 million of ARR right now that we reported had churn included that we've been notified. Where it plays through in terms of the 157 million of ARR that we have, it includes churn that’s been notified. How it plays through in terms of the P&L is when it becomes effective. And so that's what John was just talking about in terms of that seven figure customer that became effective in Q3. But typically what we see is that churn consolidates at the end of the benefits year. So while we’ve been taken it out of ARR as of Q3. We expect it to play through Q4 and Q1 and then you can imagine as we launch these Anthem Engage customers as well as other customers that we sold thus far. You see a reacceleration in revenues in Q2 of 2018.

[Brian Peterson:]

Got it, but I think the bigger dynamic there is actually on the gross bookings, right. So I mean if you took the full-year 2017 guidance down by 2 million were 4 million annualized is that right to read that it as gross ARR was up your 10 billion or more?

[Siobhan Nolan Mangini:]

Yes, I think that that's exactly the right thing. We take growth bookings last any notified subscription ARR to get to that net ARR figure that we report in given quarter.

[John Doyle:]

Yes, Brian gross bookings were significantly higher than $10 million in the…

[Brian Peterson:]

Okay, good.

[John Doyle:]

So when you think about that, it’s an important distinction right because when you think about that on the book of platform ARR, it's a really significant. Really significant flow through that we're – that we think distinguishes this quarter from the recent past pretty cleanly.

[Brian Peterson:]

Okay, maybe one more, I know you guys mentioned the renewal, it’s 30% of ARR, kind of similar with last year and I know historically we've seen pricing pressure just kind of on the transparency business. But if we think about the portfolio now as it is relates to pricing and renewals this year versus prior years. Would you think about pricing holding increasing on a high level, how should we think about pricing trends as we get up to renewals in 2018?

[John Doyle:]

I think holding is a good way to think about it. And remember the comments that I made earlier about the value proposition of the customer are the fundamental driver of the pricing dynamic and because we're in a position now broadly in the portfolio, where we can sit with a customer and very confidently show them the ROI on the investment that they're making and that's a function again of the increased power of the platform solution and where we move the price point over time. We're just in a fundamentally different place in these conversations. So I think there's a remaining churn in the transparency book, which were still working through and we've talked about that a ton. But broadly in the portfolio, we've got a much healthier book of business in that non-transparency portfolio than we've ever had before in my opinion.

[Brian Peterson:]

Understood, thanks John.

[John Doyle:]

Thanks a lot, Brian.

[Operator:]

Your next question comes from the line of Brian Essex from Morgan Stanley. Your line is open.

[Unidentified Analyst:]

Hi, guys. It’s Thomas in for Brian. Thanks for taking my questions. I wanted to kind of dig into the Anthem. I guess partnership a little bit more. So I think we kind of read online was – you guys have 1 million users, so what's kind of the pipeline to expand to their full user base and like how do you penetrate the rest of their lives? And then so I guess like how do to the economics work on that? Are you guys I guess like paid for life or is that kind of like a – I guess like a one fee for you guys. And then I guess, you're going off that too. How are the Anthem reps compensated for this? Thanks.

[John Doyle:]

Sure. So the fees that we generate our per employee, per month fees just like in our core business, and the economics are very comparable to what we do in the direct business. There's obviously a benefit to the customer of doing business through Anthem, so they're not 100% of what we do in the direct business, but they’re very good economics for us. The reason that that's possible to be clear is that the overall economic relationship that Anthem is able to bring to those customers is a favorable one because of the savings and ROI and efficiency that Anthem Engage is able to drive. So remember that by partnering as closely as we have with Anthem, we aren't just enhancing the go-to-market motion and reducing friction for the customer. We are much more deeply integrated with clinical programs, much more able to drive utilization and steer folks into these efficient settings for care. And when you save money in a demonstrable way, you carve out the space for the economics that we derive from selling these products. So that's how the pricing works there and how Castlight makes our revenue in the relationship. In terms of how the Anthem reps are compensated, you have to distinguish between and I won't get very deeply into how they compensate their reps, but distinguish between net new sales through their sales team, which are comparatively a fewer on a year-to-year basis versus the renewal business which is much more significant. And there are incentive compensation structures for folks to accelerate the penetration of Anthem Engage over time. And I think the biggest factor actually in driving that is while incentive compensation is important is the goodwill and reference ability of those initial launches and how we serve those customers and users on an ongoing basis, when an Anthem customer can talk to a previous Anthem customers having a great experience with Engage, we're going to have a much easier time in the market penetrating that book of business, and so that's where all of our attention is focused right now.

[Unidentified Analyst:]

Okay. And then maybe just one more. I think you guys signed up, I guess correct me, Walmart last quarter are expanded to Jiff. How is their relationship going and are there any other big customers we should kind of see ramping on the platform soon? Thanks.

[John Doyle:]

So the cross-sells, in general in 2017 have been skewed to a larger customers among our book of business, which is exciting for a number of reasons. They tend to leave the market, but also as we've broadened those relationships, our opportunity for all the reasons we've already talked about to add value for those customers expands the probability over time that we have a long successful relationship with those customers as a consequence of that. I think increases and all of that is very positive. As you look forward to 2018 and think about the ongoing cross-sell opportunity, I would expect that because we've skewed that business to the higher end of the size range in our customer portfolio, you're going to see comparatively less of that cross-selling next year and more of the growth driven by Anthem Engage and sales of the fully integrated Castlight Jiff product in the direct business in the second half of the next – or at least getting deployed in the second half of next year, but sales beginning early in the year as I said.

[Unidentified Analyst:]

Got it. Thank you.

[John Doyle:]

Thanks, Thomas.

[Operator:]

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

[Richard Close:]

Great. Thanks for the time here. I just want to be clear on the revenue guidance adjustment. It sounds like a most of the chunk was related to this Jiff customer, can you just sort of clarify the change in the revenue guidance? Just to make sure we have that correct.

[John Doyle:]

Yes. Richard, so I'll comment a little bit on context if that's helpful and then Siobhan can talk about the actual change in guidance. Is that your question or did you just want the actual numbers?

[Richard Close:]

No the context of it. What was the main driver?

[John Doyle:]

Yes, absolutely. So when we gave guidance early in the year, we obviously are looking to incorporate the go-forward risks that we see at the time, and we do that very diligently I think in particular back then investors had been very focused on Castlight getting to cash flow breakeven. And so I'm pleased that we've been able to accelerate our progress on that dimension relative to the guidance we gave at that time. On the revenue line, we talked in the second quarter about implementations that had moved out with some large customers and felt like that would put us towards the bottom end of the range. What we didn't anticipate at the beginning of the year when we gave guidance or even when we updated recently on the last quarterly call was as we combine the businesses and evaluated the innovations that we wanted to be building for 2018 and the effort that was going to be required to kind of re-platform the products and get everything on to the same technology stack, which is going to add to productivity and accelerate our innovation as Siobhan was saying earlier all super important. As we scoped all of that work out, the stretch that was going to be required of our R&D resources to cover all of that was pretty significant. And so we went through a process to look at all of the commitments that we had made across the development landscape. We decided to for example, turn off features that weren't getting a lot of use in some cases. We evaluated projects on the roadmaps that Castlight and Jiff that seen redundant and we eliminated those redundancies. And then we evaluated all of our various customer commitments. And in particular the customer I referenced had a highly customized scope of work, which is something young companies sometimes agree to do as you get your company started and you're trying to figure out where the market momentum is going to be, and that's what had occurred. But given the extra pressure on R&D resources, we took another look at those kinds of commitments and ultimately I made a different decision in Q3 about whether we could go forward with meaningful R&D resources focused on our project like that that was really going to just benefit a single customer. And the bottom line is it didn't make sense from a long-term perspective, and so as frustrating as it is to be on this call with so many good things happening in the business and talking about a revenue guide that's below that range. I really think it was the right call for where we're headed overall.

[Richard Close:]

Okay. I guess there were some comments on professional services revenue. Can you guys go over that again? That was pretty fast.

[Siobhan Nolan Mangini:]

Yes, absolutely. This is Siobhan, Richard. Professional services there is a fee related to the Anthem local build-out that John talked about in the call. So that us moving into the State of Colorado and California into the small group and fully insured business, there’s some configuration that's required for Anthem Engage to deliver solution there. And so you saw a peanut in Q3 that was hitting professional services. We expect a similar amount to be hitting over the next three quarters through Q2 of 2018.

[Richard Close:]

Okay. And just to be clear on ARR, as we look at the fourth quarter just not to get too far ahead or raise the bar too high for you guys. Is there anything we should think about additional churn timing of churn I guess in the fourth quarter? Is there any reason we would see a decline in ARR sequentially in fourth quarter just so we're not surprised or any thoughts there?

[Siobhan Nolan Mangini:]

Yes. No, that’s really declined. I think we are trying to be as transparent as possible that this is a dynamic, so that we will see through this year. So the headwind in terms of churn notification we anticipate in Q4 as well.

[Richard Close:]

Okay.

[John Doyle:]

And I think Richard, importantly and Siobhan talked a little bit about this in her remarks. We are being proactive about these dialogues and trying to accelerate migration of customers to the platform because we think it's really important to get as much of the business concentrated in the place where we're most able to drive value. And one consequence of these conversations is if a customer decides no in response to a proactive question that can turn into notification of churn happening more quickly then it might have if you just let the contract run its normal course. And so I think we're in a good position for Q4 to continue growing, but I add that context because again, the important thing for the business is to advance this migration as quickly as we can, and so we're going to continue to drive those conversations.

[Richard Close:]

So that begs my next question then, so you're being proactive with these renewables or trying to move people to the platform or Jiff as well. But I guess your commentary in terms of target – in terms of timeline when the churn you get through this. It seems this is – though you moved it out a little bit into the second half of 2018 where before I think you had comments of mid-2018. So is there any clarification there?

[Siobhan Nolan Mangini:]

No, I think I'm happy to start and John has any comments. What we were talking about with actually the churn rate for the full-year 2018. So I think because we made that strong progress of reducing our exposure to transparency ARR this year. We've got a much smaller base in terms of where the exposure level is. So as we head into 2018, we actually believe the overall rate for the year, should be down year-over-year versus what we’re experiencing this year in 2017.

[John Doyle:]

Yes, so to build on that Richard, if you just think about the gradient from the start of this year looking ahead to the end of this year in the proportion of ARR that relates to the transparency business we came into 2017 at 50%. And we're now coming out of Q3 at 23% presumably at the end of Q4. It's going to be lower than 23% and we think by the end of next year we'll be below 15%. But just in terms of the gross amount of ARR at stake in these conversations on a very, very different place in 2018 and 2017 and we do expect that will reduce the churn rate in the business. So we didn't intend to communicate a change in timeline on that.

[Richard Close:]

Okay, with respect to add some customers compare the second quarter versus the third quarter, any difference in the size of those customers or any type of I guess details in terms of industries or where you've seen success and difference second quarter versus third quarter with the Anthem?

[John Doyle:]

Not so much, healthcare navigation as we said gaining momentum across the ecosystem just conceptually as a way for employers to begin, taking a stronger hand in guiding folks to efficient, care settings and we're seeing that across industries, across customer sizes, I think it's important to note that historically Castlight’s cost of customer acquisition and costs to serve. We’re pretty high and made those small customer relationships, not economically very powerful for us certainly in their early days and then as churn emerged in that part of the business. You'd ask why sell to small customers at all. One of the things that's enabled by the Anthem relationship is much more efficient, customer acquisition we're seeing that in the efficiencies Siobhan talked about in sales and marketing and ultimately much more efficient deployment and support going forward, which opens up those smaller group fully insured opportunities as economically attractive business for Castlight. And so we probably saw a few more of those smaller customers in the third quarter. I know we did than in the second quarter. But I wouldn't make anything more out of that then I would think over time, we're going to continue to do more of that type of business going forward with Anthem then we do in our direct business.

[Operator:]

Your next question comes from the line of Gene Mannheimer from Dougherty & Company. Your line is open.

[Gene Mannheimer:]

Thanks, good afternoon. Congrats in all the good progress and the color here. So just – so I can think about that the net logo account, it looks – it sounds like you added 26, but lost 11. Is that the right way to look at that your next customer count?

[Siobhan Nolan Mangini:]

Yes, it’s about right.

[Gene Mannheimer:]

Okay, okay and I know we don't want to be that dead horse on the churn issue, but given that the rate of churns going to come down meaningfully next year? When do the optics really begin new improve relative to what we've been seeing here is it your best guess around the middle of the year, when do we start to see that acceleration if you will?

[Siobhan Nolan Mangini:]

Yes. And this is I think what I was talking about a bit earlier ago is, return is notified. So we're taking it out in Q3 of this year and it plays through the P&L in terms of actually turning off, this revenue turning off in Q4 and Q1 of next year. And so we do expect as we launched the Anthem Engage customers, other customers who bought the full platform and we’re preparing for that first quarter launched that in Q2 of 2018 you’ll start to see a reacceleration in revenue as we're working our way through changing the shifting composition of our revenue base.

[Gene Mannheimer:]

Okay, great. Very helpful, and that’s sounds consistent with your prior expectations. And then last thing, any update on the SAP relationship or warrant agreement that you can share with us?

[John Doyle:]

Thanks, Gene. When we originally started talking SAP almost two years now, I don't have the exact date, but was part of a very distinct strategic shift in the business to focus on channel relationships to drive velocity. And a couple of things have changed over that period of time. Most notably now we have great confidence in the power of this Anthem relationship to drive velocity and we're allocating significant resources across the business to make the most of that relationship and we're getting super reciprocation on that from Anthem, and so very excited. And when you think about why that would be in comparison to SAP where the dialogue has been compatibly slow and at this point, I really don't see a significant contribution from that relationship from a bookings perspective next year, which is a change. I think that the fundamental reason for that is that when you think about healthcare navigation, the notion of driving a personalized integrated experience that guides folks into efficient care settings. That is right in the heart of and Anthem’s business, and it's right in the heart of the relationships that they build with their customers. Whereas in my conversations with SAP, when you talk to them about how they build their customer relationships and what their strategic focus is? It just isn't as natural a match and so I think that fundamentally is the reason that we haven't seen as productive a dialogue by any stretch there as we've had with Anthem. And so I think the good news is just to finish up on the question is that we have begun to see a great results from the Anthem Engage relationship and are able to deploy resources there in a very powerful way without the distraction of another perhaps less productive relationship.

[Gene Mannheimer:]

Sure. Okay. Very helpful. Thanks.

[John Doyle:]

Thanks, Gene.

[Operator:]

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

[Charles Rhyee:]

Yes. Thanks for taking the question. Can I just to clarify, what you're saying is that when we're talking about will it be less than 15% of transparency only by the end of 2018. We're talking about the ARR or we’re talking about reported revenue?

[John Doyle:]

That's the ARR.

[Charles Rhyee:]

Okay. And so – and just so that I understand it, what we're saying, part of the reason you’ve had higher level of churn is that you reached out to renewals for 2018 and 2019. So when you talked about the 30% up for renewal next year, how much of that is transparency only at this point since you've already been practically reaching out to people?

[Siobhan Nolan Mangini:]

Yes. It’s a great question. It’s about less than 25% of the total ARR that for renewal in 2018.

[Charles Rhyee:]

Okay. And that's the reason why we feel like the rate of decline which was 50% down to less than 23% this year will only drop maybe to less than 15% next year?

[John Doyle:]

Actually it's a great question. I'm glad you raised it. So not quite. When we have these conversations with transparency customers, I've historically said it's a sorting exercise at the highest level, you end up either sorting a customer, and this is obviously the hope for outcome into the platform business or they terminate. There's actually a third potential outcome which is that they renew as a transparency customer. On a head-to-head basis, Castlight offers the best transparency solution in the market bar none. It’s very clear. And so there are customers and there will continue to be customers who will pay a premium to deliver to their users. A great consumer great experience in transparency, and so I think exiting 2018, when we say less 15% of ARR is transparency. What we’re really saying is we think about that number of customers is going to want to continue with transparency as their core Castlight product. And so the risk of elevated churn beyond that point in the transparency business even should be meaningfully lower than what we've seen historically.

[Charles Rhyee:]

.Okay that's helpful. And then going back to Anthem, and if we think about sort of these 20 new clients that were going to be on boarding, can you give us a sense of how many potential targets you brought into with Anthem in this selling season? So just trying to get a sense on the hit rate, you made some comments that you have more referenceable sense next year. Just trying to get a sense on what the success rate was this year, so we can kind of calibrate maybe next year with more reference capabilities.

[John Doyle:]

It's a good question and I don't have statistics to share with you, but what I would remind everybody is Anthem Engage was just launched from a sales perspective this year and we have been working on sales enablement and field team enablement over the course of the year. And so there are number of moving parts when you think about conversion. We definitely see higher conversion rates in the Anthem conversations than we do in our direct business by a meaningful degree and much shorter sales cycles. We expect heading into next year not only do you have tailwinds from successful launches, but also much greater awareness and efficacy across the Anthem teams that by that time will be much more familiar with the products and the value proposition and so forth. So I think we're headed in a good direction on that dimension as well.

[Operator:]

Your next question comes from the line of Frank Sparacino from First Analysis. Your line is open.

[Frank Sparacino:]

Hi, guys. I'll keep it short given the time. I just want to go back to the comment around the adoption of the base that has to grow more products. And perhaps give a little bit more color on what that product maybe, particularly since we haven't had much discussion in the last quarter or two around Elevate that maybe just talk about outside the core platform and action what you’re seeing?

[Siobhan Nolan Mangini:]

Sure. Thanks Frank for the question. So at this point pharmacy is getting bundled in with the decision to support solution, so we've got north of 75% of all customers regardless of Jiff or Castlight that have pharmacy, dental is actually increasing quite a bit because it’s packaged actually in the Anthem Engage solutions. So we’re seeing 30% of all of our customers have dental. Jiff, while we talk about 17% having a combination of Jiff or Castlight functionality, there's 30% of the entire book of business had Jiff. And then Elevate is still in the mid-teens, and I would say that has actually been a specific packaging decision to preserve it. It’s a very robust set of functionality to preserve that is a bias, so then when you go back into renewals or other times being able to preserve the price points associated with that product specifically.

[Frank Sparacino:]

Thank you.

[John Doyle:]

Thanks, Frank. Operator, we’ll take one more question please.

[Operator:]

Thank you. Your last question comes from the line of Jeff Captain from Stifel. Your line is open.

[Jeffrey Captain:]

Hi, guys. Thanks for taking the question. Just had a quick another one on product I guess, just given how you've talked about how your R&D resources have been kind of more constrained than you expected following Jiff. Just curious what your plans – if you have any – what your plans are for future product roadmap if you're looking at introducing any new more – new modules if you're kind of focusing primarily on integrating Jiff and Castlight?

[John Doyle:]

Well, I think first of all, a little bit with the premise. So as we integrate Castlight and Jiff, we're leapfrogging the market in terms of the breadth of the product itself on a number of dimensions including our ability to leverage data across claims and now metrics from connected devices and so forth and search data, very powerful user experience, very powerful ability to steer traffic that we think is highly innovative and market leading. In terms of new products and functionality, absolutely while the merger with Jiff has been the focus and I think we've made wonderful progress as a team with Anthem Engage getting launched in Q1 with combined functionality. The scale of our R&D operation is significant and so as we complete the integration of the platforms and get the companies and products onto a single technology stack. The boost and productivity and the acceleration of innovation from there is one of the key reasons we're making that investment. And so we have a very lengthy list of innovations that we are excited to be launching on top of the platform and it's premature to be talking about those now, but I can reassure you that that we will have much to say about those things in the future.

[Jeffrey Captain:]

Great. Thanks for the color.

[John Doyle:]

Thanks. End of Q&A

[Operator:]

This concludes our Q&A session. Mr. John Doyle, CEO I turn the call back over to you.

[John Doyle:]

Thanks everybody for joining us on the call today. Castlight made great progress in Q3 was strong sales growth in our platform business overall and acceleration of our path to breakeven. And we're excited about the opportunities ahead and we hope to see you at upcoming investor conferences with Piper Jaffrey and Raymond James in November and December. Have a super evening.

[Operator:]

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