Castlight Health, Inc.
Q4 2017 Earnings Call Transcript

Published: 22 Feb 2018

[Operator:]

Good evening. My name is Chris and I'll be your conference operator today. At this time, I would like to welcome everyone to the Castlight Health Q4 2017 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.

[Gary Fuges:]

Good afternoon, and welcome to Castlight Health Fourth Quarter and full year 2017 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’ll take your questions. Our press release, webcast and PowerPoint presentation are available on our Web site. This call contains forward-looking statements regarding our trends, strategies and the anticipated performance of our business, including our guidance for the full year of 2018 timing of cash flow and non-GAAP operating breakeven, future cash position and the expected impact of changes of certain accounting standards. These statements were made as of February 21, 2018 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 21, 2018, the information in the call may no longer be current or accurate. We disclaim any obligation to update or revise any forward-looking statements. We provide guidance in this call, but we will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. Please refer to the Company's press release dated February 21, 2018 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. Our presentation also includes certain non-GAAP metrics, such as non-GAAP gross profit margin, operating expenses, operating loss and net loss per diluted share that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics on a historical basis can be found in the appendix section of our earnings release filed for this call. Please note the close date of the Jiff acquisition was April 3, 2017. Accordingly, deferred revenue fair value adjustment discussed in this call is a preliminary estimate and is subject to change upon the completion of purchase price accounting. Finally, note that the historical financial results in this call are in accordance with ASC 605. The Company is adopting ASC 606 at start of our new fiscal year beginning January 1, 2018. With that, I'll turn the call over to John Doyle, CEO of Castlight. John?

[John Doyle:]

Good afternoon and thank you for joining us on the call today. 2017 was a transformative year for Castlight as we executed on two key initiatives, our acquisition of Jiff and our partnership with Anthem, which led to the launch of Anthem Engage, our first product combining wellbeing and care guidance capabilities into a single app experience for users. With these initiatives, we strengthened our Company's financial profile and strategic position in the market. Financially, we scaled our business, improved the stickiness of our overall book and further proved out our business model. Strategically, we enhanced our ability to deliver in healthcare with consumers join other verticals, our mobile first end-to-end digital experience with data driven personalization and deep integrations with relevant services. We ended 2017 with $163 million in annualized recurring revenue or ARR compared with $122 million in reported ARR at the end of last year. On a pro forma basis, this represented a reacceleration of Castlight's ARR growth rate to 17% in 2017 from 11% in 2016. Importantly, while reaccelerating ARR growth we also improved our business mix. We expect the shifting mix to reduce churn over time. Transparency clients accounted for only 21% of total ARR at year end compared to more than 50% at the end of 2016. Further, net dollar retention was 104% in 2017 as many customers broadened our existing Castlight relationships to include wellbeing. As of year-end, we had more than 50 customers with both our care guidance and wellbeing offerings, up from five at the time of the acquisition. As we've grown ARR and improved our business mix, we've also established a clear path the profitability and sustainable growth. We expect to breakeven in Q4 this year at an annualized revenue run rate of approximately $170 million. Importantly, as we drive to profitability, we are also focused on execution and innovation as the foundation for future growth. Accordingly, we plan to maintain high levels of R&D investment relative to benchmarks for the foreseeable future as we complete the international of the Castlight and Jiff capabilities and deliver new innovations, aimed at making it as easy as humanly possible for our users to navigate healthcare. Certainly, the value of a comprehensive platform that combines wellbeing and care guidance as a parent is already more than a fifth of our customer base as purchased both products from us. Prospects and existing clients tell us they're increasingly focused on leveraging technology to simplify health navigation for their employees, and benefit management for their HR team. They want one solution that is both best of breed in wellbeing and care guidance, and deliver it through a comprehensive digital platform. We believe this trend is what drove navigation platform wins with new clients like Ford and ArcBest and legacy Castlight clients like US Foods and Land O’ Lakes. Reinforcing the drive toward a consolidated offering we also saw a dramatic increase in the number of third party ecosystem solutions that we sold on our paper last year. We sold 70 third-party digital health deals in 2017 compared to 20 on a pro forma basis in 2016. Building on our success in 2017, 14 ecosystem partners attended Castlight's annual sales kick up event in early January to participate in joint sales planning and enablement. The event was a key milestone for us as we work to establish Castlight's distribution and products as a platform for partners to grow their businesses and work with us to deliver more and more powerful solutions to our shared customers and users. Overall, I think we did a good job in 2017 improving both our financial profile and most importantly, our strategic position in a market that is increasingly central to the future of employer provided health benefits. In 2018, we’ll continue to focus on driving sustainable growth and delivering the most comprehensive health navigation solution in the market. On the growth front, we are focused on stronger direct sales to new customers and continued development of the Anthem channel. During 2017, we were very successful driving cross sales and we were pleased to see early momentum in our partnership with Anthem. In particular, we were excited to launch the Engage product on schedule in Q1 this year after a massive push by our R&D and delivery teams and their counterparts at Anthem during 2017. Turning to our direct business. Our sales and field teams are fully integrated following last year’s acquisition, and our go-to-market strategy and materials fully reflect the combined platform and modular offerings in wellbeing, care guidance and communication, as well as multiple configurations of third party ecosystem partners. We believe that we're well positioned to capture new customer business in health navigation. With the launch of Anthem Engage, which was our top R&D focus in 2017, we've shifted more R&D resources to focus on re-platforming the legacy just wellbeing offering under the Castlight architecture and we're on track to launch this all new platform with many exciting new capabilities in the second half of this year. When we complete this work, Castlight products will be more powerful and reliable and easier to launch, support and innovate on than ever before. They were also be available on a single app in the configurations of wellbeing, care guidance, communications and ecosystem partners our customers prefer and all with the ability to personalize the experience for users across the entire platform. Excitement about the new product is high among our customers and prospects. This is excellent news overall but one consequence is that several large customer have chosen to delay launches of well being capabilities until the single app experience is launch, which means revenue recognitions is being pushed back by one or two quarter on these implementations. We estimate these extended timelines will reduce 2018 revenue by approximately $5 million, which is built into the guidance that Siobhan will share with you later on the call. Although, near-term revenue is negatively impacted, we expect to exit the year in a strong position with an annual revenue run rate of approximately $170 million. The churn headwind in our real view mirror and the consolidated platform to serve health benefits consumers no matter where they are in their healthy journey. There has never been more exciting time in digital health. As we look ahead, we believe Castlight is in a great position to address critical needs of employers and employees as individuals plan increasingly central role in the healthcare system. I’ll now turn the call over to Siobhan who will discuss our financial results and 2018 outlook in detail.

[Siobhan 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 Q4 results and then discuss our 2018 outlook. After that, we'll open up the call to questions. Please note that the Jiff acquisition closed on April 3, 2017. So Jiff’s financial performance is included in our reported results starting in Q2 2017. Q4 was a solid finish to the year with positive sequential trends in ARR, revenue, gross margin and non-GAAP operating loss. In addition, we nearly reached cash flow from operations breakeven this quarter. As John shared, net annualized recurring revenue or ARR totaled $163.2 million at the end of Q4, a sequential increase of $6.2 million. We added approximately $42 million in net ARR since we closed the acquisition of Jiff in April. We closed the year with more than 250 signed customers of which over 30% are Fortune 500 companies. We continue to drive net new business growth through focusing on platform and multiproduct customer relationships, which are stickier than our legacy transparency business. At the end of 2017, platform customers now account for nearly 80% of our total ARR and 58% of customers have three or more products. Total revenues for the fourth quarter was $37 million, which increased 24% year-over-year on a reported basis. Subscription revenue was 91% of total revenue and increased 19% year-over-year. Q4 included approximately $0.5 million of non-recurring revenue related to the end of customer contracts. As you may recall, we had a similar dynamic last year as well with $1.7 million of non-recurring revenue in Q4 2016. Excluding the non-recurring amounts, total revenue grew 29% in Q4 2017 compared with the year ago period. Reported revenue as a function of completed implementations and we launched 14 products in the quarter. Services revenue doubled year-over-year, which reflects revenues from launching customers as well as revenues associated with supporting the Anthem local business we discussed on our prior call. Now, let’s turn to our fourth quarter non-GAAP financials. Q4 non-GAAP gross margin was 68% compared to 67% in the prior quarter. Gross margin is in line with our previously disclosed expectations that we expected as temporarily dip below our long-term target range due to just earlier stage of launching customers. Total non-GAAP operating expense was $30.8 million in Q4, an increase of 4% sequentially. We again showed sequential improvement in all operating expense lines as a percentage of revenue, while continuing to invest aggressively in R&D to drive future innovations. As a result of the revenue performance and continued operating efficiencies, Q4 non-GAAP operating loss improved sequentially to $5.8 million. We are pleased to cut our non-GAAP pro forma operating losses in half compared to the fourth quarter of 2016, and believe this illustrates our continued progress improving out the long-term scalability of our operating model. We ended the quarter with $93.3 million of cash, cash equivalents and marketable securities. Cash used in operations was approximately $100,000 in Q4, which was better than expected due to several early customer prepayments from the first quarter of 2018. Overall, we’re pleased that Jiff was a significant contributor to new business in 2017 and validated the strategic rationale behind combining our two companies. Even with this progress, Jiff did not meet the rapid growth earning out targets for revenue and net bookings in 2017 that were set at the time of the acquisition. As a result, we will not be issuing any earn out related to equity associated with the Jiff transaction. With that, I'll turn to our 2018 outlook and begin with some background and the expected impact of ASC 606. The new accounting standard we adopted effective January 1, 2018. Castlight will be using the full retrospective method in applying 606, which means it will fully adopt the 606 standard on a go forward basis and restate our financials for years 2016 and 2017. While the adoption of 606 will not change our cash flow, we do expect it will have a relatively modest impact on our income statement and some non-cash portions of our balance sheet. We are currently completing the implementation of a new revenue recognition system in this quarter and expect to publish supplemental presentation that provides restated results and illustrate 606’s effects on our financial statements and all restated periods next quarter. Today, we’re providing a preliminary high level view of 606’s expected impact on our 2018 outlook, so you can get a sense of how our business trends will look under this new accounting standard. For revenue, we currently expect to see an impact of a couple of million dollars in any given year. Based on our current work, we expect to see a positive impact on revenue in earlier period and a reduction in 2018 revenues of approximately $2 million compared to what would have been expected under the old 605 standard. We also expect cost of revenue and operating expense to be slightly lower in 2018 under 606 versus 605, as some launch fulfillment costs and commissions will now be capitalized and amortized over five years. With that, I'll provide our outlook for 2018 under the ASC 606 standard. We currently expect 2018 revenue in the range of $150 million to $155 million, which includes the approximately $2 million ASC 606 headwinds as well as the $5 million negative impact of finishing the Castlight complete platform build out that John previously discussed. These factors, in combination with working to our 2017 notified turn, is expected to result in an ARR to revenue conversion timeline in a six quarter range for the first half of 2018. We expect that to improve to a five quarter conversion rate in the second half of the year. We are confident in delivering this next gen integrated platform and we're setting Castlight up for long term success with a single integrated stack to launch and support our customers. In terms of revenue seasonality, we expect the first half contribution to full year 2018 revenue to be in the high 40% range with the remainder in the second half of the year. Similar to 2017, we expect Q1 2018 revenue to decline by about $1 million sequentially. This is due to the impact of Q4 2017 one time revenues, ASC 606 and 2017 notified churn becoming effective at year end, all while first quarter customer launches ramp the revenue contribution. Later in 2017, based on the current go-live schedule for customers already under contract, we expect to see revenue accelerate in Q4 2018, such that we would exit the year at an annualized run rate of nearly $170 million. We expect 2018 non-GAAP operating loss to be in the range of $15 million to $20 million under the 606 standard and non-GAAP loss per share to be in the range of $0.11 to $0.15 based on 137 million to 138 million shares. We continue to expect to achieve breakeven non-GAAP operating income in Q4 and are pleased that we are seeing strong operating leverage across Castlight ever driving growth. Drilling down further, we expect to see sequential dip in Q1 gross margin as we invest to support the large number of first quarter customer launches with gross margins starting to improve over the course of the year in Q2. We also expect op loss to increase sequentially in Q1 due to revenue seasonality and a typical seasonal front end loading at some operating expenses. We expect to hit our long term operating model targets for gross margin, sales and marketing and G&A in the fourth quarter of this year. Finally, we expect 2018 cash used in operations be in the mid $29 range with the majority of cash usage occurring in Q1 due to the timing of annual bonus payments and other cash uses that are typically frontend loaded in our fiscal year. Castlight is moving this year from an annual to semiannual bonus payments in the first and third quarter, which will change our quarterly cash flow pattern relative to prior year. Regardless, we’re confidently remain on track to be breakeven on the cash flow basis from operations in the fourth quarter of 2018, and now expect to have at least $65 million of cash on hand by the end of this year. In conclusion, we had a solid finish to 2017 and are positioned to execute well in 2018, our first full year as a leading health navigation platform provider. Our integrated platform is differentiated and serving a clear need in the marketplace. We believe we're on track to drive the business to sustainability without sacrificing investments in future innovations. Thank you. Operator, we'll now take your questions.

[Operator:]

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

[Jamie Stockton:]

I guess maybe the first one just so we're clear about the way that you guys see rolling out the integrated platform from a timing standpoint during the year and then that triggering revenue rec. I mean, it sounds like may be late Q2 or early Q3, if you could just be really explicit around that that’d be great.

[John Doyle:]

Jamie, just to be clear make sure everybody on the call understand what we're talking about. So today, Castlight supporting Castlight and legacy Jiff products, as well as Anthem Engage. So three different platforms really and too many, too costly hard to sustain quality, slows down innovation. And so there is a high priority on getting the products consolidated on a single platform. So that’s the project that we're talking about. In terms of timing, we're looking at later in the year, so late Q3 early Q4 for those launches. These were customers that at the time of the original sale were impending the launching on separate apps, so one app for wellbeing, one app for care guidance. And as those sales process evolved and the timing of the launch of Castlight complete, came into closer view, it just made sense to have folks launch on the combined platform, which again is late in the year.

[Jamie Stockton:]

And then may be just one more follow up with Jiff. I assume or at least it’s my understanding that all the earn out is mostly tied to the people that own Jiff before, not necessarily like the Jiff employees, but I think that as it should be asked like the lack of earn out. Do you anticipate any issues as far as the portion of Jiff’s management that stuck around or any employees any extra turnover anything like that?

[John Doyle:]

So every Jiff shareholder has some level of participation. But as a percentage of ongoing comp and equity incentives in the combined business, we're talking about de minimis numbers for people. So we don’t anticipate any impact along the lines of your question.

[Operator:]

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

[Steve Halper:]

Just to elaborate a little bit more on the $5 million. These were signed contracts. Did they have to get repapered, because the move to a single platform and is that all completed. Asked another way, is there any risk whatsoever that these contracts are not implemented?

[Siobhan Mangini:]

So these are actually Castlight complete customer that’s signed in the fourth quarter of 2017. And so this is a process that we really worked on its handful of customers, really determining what was best for them and what was best for Castlight and they will, as John mentioned, be launching end of Q3 beginning of Q4 at this point. And it’s one of the key priorities to forecast as a company is really building out this platform and getting it ready by the end of Q3.

[John Doyle:]

And something I would add is if you think about the alternative scenario where we launch two applications with wellbeing and care guidance, in those separate applications, the opportunity to keep those customers current with ongoing innovation and to support them in the way that we would want to was just such that it made sense for the customer and frankly for Castlight, despite the revenue impact in the short-term to guide and get them to the new platforms sooner rather than later. So really it's a good decision for the business.

[Steve Halper:]

And just a follow-up with your timeline, your expectation for the new platform. Has that changed at all or has that been pushed out?

[John Doyle:]

We've talked about second half of '18 all along. I think at one point, we may have been targeting early part of Q3 and now we're slipped about a quarter relative to that timing. But I think in terms of the revenue impacts just important to reiterate that the original expectation there I think based on those sales cycles was that those launches would happen earlier in the year on two separate apps, so it wasn’t so much the movement in the complete time line that lead for this as the decision to go ahead and launch for the first time in these cases on the combined apps.

[Operator:]

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

[Unidentified Analyst:]

This is Thomas on for Brian. John, I wanted to dig into the platform a little bit more. Do you guys have any metrics on what percentage of employees are using the platform, when the company actually buy it and maybe how that's trended overtime?

[John Doyle:]

It's an important question and I want to use it as an opportunity to start at a slightly higher level, because the question gets at how we accomplished the objectives we're trying to accomplish, but let me describe those objectives briefly. So we conceptualized the challenge in our industry as essentially a matching problem. You've got a large diverse set of employees with diverse needs, and you've got a large diverse set of options that they can be connected with. And today, the way resources are getting connected to people whether they’re providers or programs or whatever that supports it is at best the random lock and sometimes worse, intentional inefficiency is a charitable ways to describe it. And that dynamic results in a ton of waste. And so the solution ultimately, when you think about the problems at that level, has to be engaging employees, routing them to high quality fairly priced services. And that can be done with human beings in a concierge mode, it can be done with digital solutions, it could be done with phone calls, it doesn’t really matter except that you've got to find the mix of approaches that's economical for the buyer when you do this. And Castlight's focus has been on the digital layer. We are experts. We’ve been doing this for 10 years and the focus has been on engaging folks with digital solutions and routing them to the programs, providers, tools that they need and integrating very deeply with those programs. And the idea is to become must have infrastructure that provides users with easy to use navigation whether they are staying healthy, accessing care, managing a chronic condition. And from the employer point of view, doing this well is steerage, and steerage is the foundation of the economics that we're able to capture as we provide these solutions. And so your question gets at how are we engaging populations, how effective are we at doing that and how do we see it trend overtime. So we typically are seeing registration rates in the range of 40% to 60% of an employer population. We see examples above them and below that range, but that's pretty typical. And quarterly return usage rates around 30% to 40% across those registered population. And as we look ahead and think about the power of the combined solution we've been talking about, wellbeing and care guidance, one of the reasons it was so important to bring wellbeing into the platform is because that offers a substrate for much higher frequency of interaction with employees and a relationship of regular use that you build over time. So that when you have those needs and there's an opportunity and intercept somebody about to make a poor decision and we direct them, you've essentially earned the right to do that. And so longer answer to your question, but I think the context is important as we think about registration.

[Unidentified Analyst:]

And then I guess when you go to customers and they see the registration rates that you gave in the quarterly churn rates. Are those meaningful to them? Are they looking for those to improve longer term? I guess like what are the conversations with your partners around those metrics that you’re tracking?

[John Doyle:]

So customers are -- I spend even a majority of my time frankly most month on the road talking to customers. And there're lots of difference in individual customer situations, but one thing that's not different, is that everyone of them is looking for solutions that drive better engagement with their populations. And so the answer to your question depends on where they're starting from, what their objectives are and things as mundane as demographics of the population effect expectations. So I'll give you an example of where you tend to see lower engagement with healthcare is imagine a relatively young male population in Silicon Valley versus an older Midwestern more diverse from a gender perspective population in the Midwest. You're going to see much better engagement all else equal in the latter population. And so our goal when we go into a customer is to understand where they've been to be very rigorous about where we think the optimal level of registration engagement can be in that population given those factors. And uniformly, we're successful in driving improvements, massive improvements in many cases and customers look at that engagement as an enduring asset that they can leverage over time to drive additional efficiencies and a great employee experience.

[Operator:]

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

[Brian Peterson:]

I just wanted to understand for the projected ARR exiting 2018, if I think about that being up $7 million. Can you maybe walk through some of the factors that are really driving that just for us to get a sense of is that a churn dynamic or would the Anthem channel by itself be enough to deliver that or we're just getting more conservative because maybe platform will be the focus but it won't be ready in the major bookings times? So how should we think about some of the qualitative drivers there?

[Siobhan Mangini:]

Brian, just to make sure that I am touching -- I don't know we provided any guidance on ARR specifically. Are you referring to the revenue guidance?

[Brian Peterson:]

So I thought that there was some mention of the ARR exiting the fourth quarter of '18…

[Siobhan Mangini:]

That is actually the annualized revenue run rate. So as we are providing revenue guidance for 2018, we're trying to explain as customers launch on complete what the revenue rate will be but nothing pertain to ARR yet.

[Brian Peterson:]

So may be a follow up to that. So as we think about more of the platform and as that’s going to be ready in 2018. Are your conversations with customer now heading into big booking season in the second quarter or third quarter? Are most people talking about the platform or are they still talking about may be legacy Jiff or can you comment on that?

[John Doyle:]

So backing up a little bit, our selling season as you were just alluding to is Q2 and Q3 heavy and as we prepared for the year and prepared for those conversations and even in real time today, all of our enablement and go to market work is focused on the Castlight complete platform and/or Anthem Engage. So there is no scenario today where what we would be talking to a customer about are legacy platforms and that’s for a couple of reasons. But I think the most important one is that it’s very typical when we complete a sales cycle in Q2 or Q3 that what that customer is thinking about is a launch the following January 1 or at least late in the year, and Castlight complete will be the active launching product at that point. And so it actually fits quite nicely.

[Siobhan Mangini:]

And I would just add on that point, we're really pleased at the beginning of this year that we have an integrated sales team. We’ve trained everybody on complete. We have the new packages now, wellbeing, care guidance and complete along with the pricing there. And so I think we're really positioned well for the selling season with these new packages and the full integrated platform.

[Brian Peterson:]

And may be just a high level one, I don’t know if you want to take this, may be John. But there has been some news out there that there is the potential competitors that might be looking to get into the price transparency space. Can you elaborate a little bit on your value proposition? I’ve always thought that having a lot of the claims data in the integration with a lot of the carriers was a big differentiator for you. But could you talk about potential competitive threats and may be how you see the market evolving overtime. Thanks guys.

[John Doyle:]

So going back a little bit to the strategy discussion, where we talked about how we think about this market as a matching challenge essentially with a bunch of people on one side with needs and a bunch of resources on the other side. Well, transparency was the initial attempt to solve that matching problem. The idea was if you give consumers information, you can eliminate the random walk, because they will consult the information, make economically rational decisions at scale, problem solved. And this is 2014-2015 time frame when we were talking about the learnings in the Castlight business that told us pretty strongly that that approach to the problem while an important part of this solution was not going to get anywhere near achieving the steerage that’s required to really impact customers healthcare spending priorities the way that we wanted to. And so that was what drove our investments and building Castlight action and launching a product that could personalize and experience on the basis of an individual members, claims experience, their benefit selection and connect them with the resources that are available to them highly integrated resources in a much more proactive way than you can do with transparency where you’re essentially waiting for folks to come to the product and find their own way. Here what you are trying to do is figure out what employees ought to be doing, what kinds of program services and support they could benefit from, it could be smoking secession, it could be diabetes support, it could be a provider for a knee replacement, a whole range of solutions and get in front of them proactively to steer them for that solution. And so as we've looked at the competition and some of the recent announcements, do seem to focus on transparency. On the one hand, we think it's not surprising because digital solutions as we've talked about, we think are going to be a fundamental part of solving the big problems in healthcare but we think transparency again is just a start and we're years beyond that at this point. And so for us being health plans, big investments of IVCs and private equity and even large corporations getting much more aggressive, feel like more of a tailwind than a market that to this point we think has been under appreciated and under invested broadly in the ecosystem. So we think all of the additional investment and involvement by other folks creates a rising tide that should be helpful to Castlight as a leader in the industry.

[Operator:]

Your next question comes from Steven Wardell with Chardan Capital Markets. Your line is open.

[Steven Wardell:]

So I'm wondering, could you tell us more about the third party services or the point solutions that you are reselling. What do the economics look like to you, what kinds of services or products which are the most popular? Do you see this as a traditional line of business for you or just to wait to be competitive and meet your clients’ needs?

[John Doyle:]

So first of all, I think as we reflected on the things that the business accomplished in 2017, I'm really proud of the team and where we've come and those achievements included a significant acceleration of the success we've had selling third party solutions, what we describe often as our ecosystem partners. And the reason that’s such an important thing to highlight is that as we have migrated the product A, to provide a more integrated contracting solution for our customers and B, more integrated product, more powerful product for our users, bringing the ecosystem into the product and into our contracting flow has been a critical focus area for us. And so the increased volume there is really important. Another point to mention is that as we deploy ecosystem partners into our individual customer accounts, we’re becoming much more embedded in the benefit strategy and benefits infrastructure in that customer, if you will. And that we think, in addition to driving value, suggest a stickier product and longer lifetime for that customer relationship. And so strategically, the ecosystem has been really important to us. Siobhan can comment on the business model there.

[Siobhan Mangini:]

And so in terms of the economic, the goal for us right now is just to get these TFPs, these ecosystem partners into Castlight and contract for them and really just cover costs. We're not trying to drive economics from here. We want to see as many of the digital health ecosystems coming to Castlight as possible. And so it's really a minimal net revenue contribution at this point, think of it as like a couple percent of revenue, but it's nothing significant. Where we see the value is really the strategic vectors that John talked about driving customers stickiness and much more end to end value in terms of been able to help connecting users to even deeper services within digital health.

[John Doyle:]

Steven, as you know for the last several years, made a big investment in our distribution capabilities. And I think we really do have an effective channel now into large employers across the country and there're a lot of digital health businesses out there that would prefer not to have to duplicate that investment if they can avoid it. And so I think if the sales kick up where we convened a bunch of partners, it was really an opportunity to leverage the investment that we've made in that sales infrastructure over time. I think it's a really value added resource for these partners to access. And from the Castlight point of view, at the end of the day, the goal is to engage users, connect them with programs deliver a deeply integrated experience with the close collaboration with these partners is incredibly valuable for us. So it's really a great evolution in 2017.

[Operator:]

Your next question comes from Eugene Mannheimer with Dougherty & Company. Your line is open.

[Eugene Mannheimer:]

A couple of things, I understand your primary selling season is the second and third quarters. But did Anthem Engage contribute at all in the fourth quarter from an ARR perspective? And what's your expectation for Anthem bookings as a percent of total for 2018?

[Siobhan Mangini:]

In terms of Anthem Engage contribution, there was Anthem Engage contribution in terms of ARR in the fourth quarter of this year. It was smaller than the 40% and 30% of Q2 and Q3 sales that we saw. But there were sales and then that was all part of the 20 plus customer launches that we saw, launch on the Anthem Engage this quarter Q1 of 2018. So it was really exciting to see us sign customers and get them up and launch on the Anthem Engage too quickly.

[John Doyle:]

And I think as we look ahead, Greg, we've got about a third about our total ARR, a little bit less than actually, lined up with Anthem. We expect that number to move up over time. And so in 2018, I think as we go into Q2 and Q3, we’re looking to drive that business certainly. But most importantly with Anthem, the opportunity to integrate deeply with their clinical programs and capabilities is a really important vector for innovation and the impact we can have with users. So we’re now integrating 13 different relevant services and clinical programs that Anthem delivers to its customers. And so an Anthem Engage user right out of the box in addition to a personalized experience based on their claims history and their benefit selections is also now able to leverage those clinical programs very, very efficiently, whether that’s registering or click to chat with support or whatever it is, it’s a terrific user experience. So super important to keep in mind relative to Anthem.

[Eugene Mannheimer:]

So given that, as a good segue to my next question is I mean if the ARR from Anthem is on the rise at the same time you're transparency churn is on the decline. So would there be any reason that ARR wouldn’t increase in 2018 at a faster pace than what you saw last year?

[John Doyle:]

Well, I think there are a couple of dynamics there. Certainly, we're excited about the growth opportunity in 2018. And as we think about the evolution of the Anthem relationship, I think there is a clear opportunity to grow there and we’re certainly focused on it. In the direct part of the business, your cross sells will continue to be important but unlikely to make the same contribution to growth in 2018 that we saw in 2017 coming out of the acquisition where we were very successful driving cross sales into a number of our largest customers. And so I think the critical element of growth in 2018 is net new customer adds and business with new customer, we feel really well positioned on that and that’s what we’ll be focused on and talking to you about on future calls.

[Operator:]

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

[Charles Rhyee:]

Siobhan, you mentioned earlier that just didn’t hit the earn out, and so we're not issuing any of the contingencies. Could you just elaborate a little bit more on what were the factors there? I would imagine it’s a lot of in terms of the integration. And then my second question is, obviously, we are not using a tax rate today but as we start hitting positive earnings, what would you expect the tax rate to be. Thanks.

[John Doyle:]

So Charles thanks, this is John, and I'm going to start on earn out question and then hand it over to Siobhan. So I think first of all, we set deliberately very aggressive earn out targets originally and need to go back to what the strategic objectives were for the acquisition. The goal was to build a bigger faster growing business with the most comprehensive health care navigation platform in the industry. And when you think about what we achieved as a combined business in 2017, whether its growth where the Jiff contribution was more than half of overall bookings during the year or product mix where now we're able to do deliver a much broader set of functionality across wellbeing and care guidance, or it’s this eco system strategy that we’ve been talking about, which really Derek as CEO of Jiff spearheaded in that business before the acquisition, we couldn’t be more pleased about the contributions of the strategic objectives in the business. And then less visible but to me where I sit equally important, it’s just incredible how this team has come together making this acquisition a successful, not just business growth experience but a very successful company, culture, leadership, development experience as well. I couldn’t be and more pleased about that. And so I understand your question relative to the earn-out and wanted to make sure we're clear about how valuable the combination is to our business.

[Charles Rhyee:]

So would you say that at least that Jiff has actually met your financial objectives regardless of the earn-out so you’re hitting your main targets. Is that a fair assessment?

[John Doyle:]

So in earn out, I mean just in earn out it typically shows up in an acquisition when there are different views around price and near term upside in all of the rest, it’s a way to bridge some of those differences. It isn’t necessarily fundamental to the rationale for the acquisition or the expectations of the acquiring organization. And in this case what I'm saying to you is, couldn’t be more pleased across all of the strategic dimensions in the business. And when we reflect even on the financial performance in 2017, particularly around sales growth, the contribution of Jiff both in terms of the team that was executing in the field and in terms of the products that we sold, again more than half of the overall business and as you know much less churn; so on a net basis, hugely important to the momentum that we've been able to talk about today on the call. And so the answer is yes. I'm thrilled with the way things have turned out.

[Siobhan Mangini:]

And just to follow-up on the second piece of the question, I just am really pleased that we're driving to profitability and in a position that we're even talking about taxes right now that we're going to be operating income profitable in the fourth quarter this year, and driving towards that. Cap rate has a significant amount of NOLs. And so in terms of us updating you on the tax rate, we will do that as we get closer to driving to profitability at the end of next year and this year and we're looking into 2019 more broadly.

[Operator:]

[Operator Instructions] This concludes the Q&A session for today's conference. I would now like to turn it back to Mr. John Doyle for closing remarks.

[John Doyle:]

Thanks everybody for joining us on today's call. All of us at Castlight are excited to build on the great progress we made in 2017 as healthcare costs continue to rise and more and larger companies join the effort to solve big problems in the industry. Castlight's in a great position to grow and thrive. We look forward to seeing some of you at the Cowen Healthcare Conference in March. Have a super evening. Thanks, bye-bye.

[Operator:]

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