Castlight Health, Inc.
Q1 2016 Earnings Call Transcript

Published: 11 May 2016

[Operator:]

Good afternoon. My name is Loralle and I will be your conference operator today. At this time, I would like to welcome everyone to the Castlight Health First Quarter Conference Call. Thank you. I will now turn the call over to Siobhan Nolan Mangini, Vice President of Finance and Business Operations. Please go ahead.

[Siobhan Nolan Mangini:]

Good afternoon and welcome to Castlight's conference call to discuss our financial results for the first quarter ended March 31, 2016. With me on today's call are Giovanni Colella, our Co-Founder and CEO; and John Doyle, our COO and CFO. Following their prepared remarks, the three of us will take questions along with Nita Sommers, our Chief Strategy Officer. Our press release was issued after close of market today and is posted on our website, where this call has been simultaneously webcast. We are also providing a PowerPoint presentation that accompanies this call. You may access it on our website where it will also be posted after this call for one week. This presentation contains forward-looking statements regarding our trends, our strategies and the anticipated performance of our business, including our guidance for the second quarter and full year of 2016. These statements are made as of today and reflect management's current views and expectations and are subject to various risks, uncertainties and assumptions. If this call is replayed or viewed after today, the information in the presentation may no longer be current or accurate. We disclaim any obligation to update or revise any forward-looking statements. We will provide guidance on today's 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 press release and the Risk Factors included in the company's filings with the Securities and Exchange Commission for a discussion of important factors that may cause actual events or results to differ materially from those contained in our forward-looking statements. This presentation also includes certain non-GAAP metrics, such as non-GAAP gross margin, operating expenses, net loss and net loss per share that we believe aid in the understanding of our financial results. A reconciliation to our comparable GAAP metrics on a historical basis can be found in the earnings release dated May 10, 2016, which is available on our website and as an exhibit to the Form 8-K filed with the SEC just before this call.

[Giovanni M. Colella:]

Thank you, Siobhan, and thank you all for joining us today to review our first quarter 2016 performance. Last quarter, I outlined the reasons that we believe, the long-term opportunity for Castlight is robust. Most fundamentally, the U.S. healthcare system is an unsustainable burden to employers and families, and the situation gets worst every day. We believe, it is inevitable that employers and individuals will change the way they manage their healthcare decision and Castlight is working hard to enable them to do so. Castlight's healthcare benefit platform empowers people to make the best decisions for their health and helps companies optimize their healthcare benefit strategy. We have continued to make progress on this path in 2016, including expanding our channel partnerships and achieving positive results for the first group of customers launched on our Action and Elevate offerings, which are demonstrating the value of the expanded Castlight platform. At the same time, our new bookings and net new local accounts fell short of expectations in the first quarter. The first quarter is typically a slow period for the new sales, given the seasonality of the healthcare benefits buying cycle. But even with the seasonal dynamic we did not achieve our quarterly sales goal. It is important to reiterate that we are seeing strong interest in our platform solutions among current customers and new prospects. Nevertheless, as we move from early adopters to more mainstream buyers, it has been difficult for us to reliably predict sales cycles and timelines have been longer than we anticipated. As a result, while we still expect good top-line growth during 2016, we have tempered our ARR expectation for the full year. We are also aligning our workforce accordingly to enable us to self-fund Castlight's continued growth and innovation and to reach cash flow breakeven by mid-2017. Driving healthy growth is a top priority for everyone at Castlight. We are seeing the mainstream buyers rely heavily on two key inputs before investing in new technology, external third party product validation and demonstrated proof points. As a result, we are investing in building out our channel strategy to ensure that our channel relationship consisting of benefit advisors, health plans and technology vendors are really enabled to continue providing incredible endorsement to key influencers on our behalf. One particularly advanced channel partner for us is Anthem. There we have seen preexisting opportunities begin to accelerate in the pipeline and new qualified needs emerge that had not been on our target list previously. Given the progress with Anthem, we are focused on executing additional relationships with major strategic partners that can complement our existing distribution capabilities. Further, we recently announced a relationship with Benefitfocus to provide year-round benefit management, financial, health and wellness decision support to our mutual customers and we made solid progress in the quarter expanding our relationship with several key regional and national brokers. We are excited about the long-term potential for these relationships to contribute to our growth and further strengthen our overall ecosystem. Additionally, we are laser focused on providing the proof points that the mainstream buyers seek. Castlight has rapidly evolved its product offering, in particular over the past 12 months, with a relentless focus on customer feedback. Our leadership position in the transparency market is giving us unique access to data and insight into consumer behavior in the complex world of healthcare. These insights led us to build Action and Elevate, which directly leveraged the robust data asset that we have built and enhanced over the course of the company history. To be clear, transparency remains a core foundational component to solving the complex health benefits problems facing enterprises today. However, in order to drive broad behavior change among healthcare consumers more proactive approaches are needed as well. This point was driven on in a recent study published in JAMA about the efficacy of a competitor's price transparency tool, where it was shown that transparency without engagement was not effective in driving behavioral change. In contrast, the Castlight platform with Action and Elevate helps drive strong end user engagement by harnessing the power of data such as claims, demographic information and search data to segment and (7

[John C. Doyle:]

Thanks, Gio. Good afternoon, everyone and thank you for joining us on today's call. In the first quarter, revenue was modestly above guidance and our non-GAAP operating loss was smaller than we had forecasted primarily due to effective expense management. I will walk through the details in a moment, but before that I'd like to talk about our sales performance and our plans to adjust Castlight's cost structure to keep the business on track to reach cash flow breakeven next year. At the end Q1 2016, annual recurring revenue totaled $111 million, which was up $1 million from last quarter and 30% year-over-year. New customer adds were in the low-single digits. When combined with customer churn, our net customer account decreased by 2 customers to 189 signed customers as of the end of Q1. Consistent with past periods, the customers we added were significantly larger on average than those we lost and churn was within our expectations. On our year-end call, I said that we were looking to the second half of this year to see renewed momentum driven by sales of new products and our partnership with Anthem. While this is still our expectation based on first quarter sales results, it seems likely to us that growth in ARR in 2016 will be lower than the 41% year-over-year growth we generated in 2015. Based on this updated view on ARR growth, we plan to reduce cost consistent with our longstanding commitment to drive the business to cash flow breakeven next year. Our current view is that we can get there by mid-2017 without compromising core capabilities that we need in place to drive growth and innovation. There is no change in our belief that attaining the ability to finance our growth internally in a timely way is fundamental to driving long-term value for our shareholders and executing our vision. To this end, our plan is to reduce operating expenses in 2017 by approximately 14% compared to our previous annual operating expense target for 2016 driven primarily by a reduction in force effective this quarter. The financial impact of these changes is planned to take full effect by Q1 2017, and the savings to be realized before then are incorporated in the revised non-GAAP operating loss guidance for 2016 that I will provide momentarily. We used benchmarking extensively to guide our thinking about our cost structure, but the dominant consideration for us was ensuring that we continue to put our customers first. This means, increasing our focus on innovation and customer success relative to other areas as we seek to improve efficiency across the business. Now, let's turn to our first quarter non-GAAP financials. Total revenue for the first quarter was $22.7 million, which was an increase of 42% compared to the same period of 2015. Subscription revenue represented 93% of total revenue in Q1. The increase in Q1 revenue was driven primarily by completed implementations, which in the first quarter included 12 new customer launches and the completion of 19 cross-sell product implementations. The 61% year-over-year increase in services revenue was primarily driven by increased launch activity, and also in part due to one-time professional services fees that hit in the first quarter. Gross margin was 63% in the first quarter, a significant increase from 59% in the previous quarter, and 58% in the first quarter of 2015. This increase was attributable to greater efficiencies achieved in launching our customers. Sales and marketing expenses were $14 million in Q1, which was down 5% compared with Q1 2015. Sales and marketing expenses were down 5% sequentially as well, which is consistent with our previous plan to limit operating expense growth to less than 5% in 2016. Looking ahead, we expect that our increased emphasis on working collaboratively with channel partners will allow us to achieve greater efficiencies in sales and marketing without sacrificing growth. R&D expense was $8.7 million in Q1, which was an increase of 39% over the same quarter last year. This increase was driven mainly by new head count in our product and engineering teams added during 2015, which drove the recent launches of two critical new products, Action and Elevate. These products and our specialized R&D capability are essential to our ability to deliver market leading products and value to our customers. G&A expenses of $4.5 million in Q1 increased 2% on a year-over-year basis. G&A expenses were 20% of total revenue in Q1 compared with our long-term target of 8% to 12% of revenue. So we plan to continue driving efficiencies in G&A as we grow. Our Q1 non-GAAP net loss was $12.9 million compared to a net loss of $16 million in the first quarter of 2015 and $14.8 million in the fourth quarter of 2015. We ended Q1 2016 with $120.5 million in cash and marketable securities. The cash used in operations was $14 million in the first quarter compared with $12 million in the previous quarter and $13.2 million in the same period last year. There is no change to our view that we will have a sufficient cash balance on hand to provide for flexibility for future growth initiatives at the time we expect to turn cash flow breakeven in mid-2017. Lastly, I'd like to provide more detail on the financial impact of the settlement we reached in the shareholder litigation as we announced on April 1. We expect to pay $2.7 million related to this settlement in Q2 or Q3 this year as outlined in the 10-Q. We are pleased to be moving this matter to a resolution. And now turning to 2016 guidance. We noted last quarter that we expected to move into production on several large customer deployments during Q3, in particular, which will drive greater revenue growth in the second half of the year than in the first half. We also noted that we expected the second quarter to be the low point with regard to year-over-year growth and that remains the case. For the second quarter 2016, we project the total revenue of $22.8 million to $23.1 million, a non-GAAP operating loss in the range of $12.5 million to $13.5 million and a non-GAAP net loss per share of $0.13 to $0.14 based on $97 million weighted average basic and diluted shares outstanding. For the full-year 2016, we continue to target revenue of $99 million to $102 million. Given our changes to our operating infrastructure, I discussed a moment ago, we now project a non-GAAP operating loss in the range of $40 million to $42 million, which is an improvement from our prior guidance of an operating loss of $47 million to $50 million, which excludes the impact of the restructuring charge taken in Q2. We now expect the non-GAAP net loss per share in the range of $0.41 to $0.43 based on $97 million to $98 million weighted average basic and diluted shares outstanding. This compares to our prior expectation of a non-GAAP net loss per share of $0.47 to $0.51 based on $98 million to $99 million weighted average basic and diluted shares outstanding. We continue to expect cash used in operations to be in the low $40 million for the full-year 2016, including cash outflows associated with both the litigation settlement and the restructuring that we announced today, which in combination totaled approximately $4 million. We expect the seasonality of our business combined with the timing of planned customer deployments, litigation settlement and initiative to lower expenses to lead to a peak in cash burn in the second quarter and meaningful progress towards cash flow breakeven to occur in the second half of the year. Similar to my comments on our P&L guidance, we expect to realize a much greater benefit to our P&L in 2017 versus 2016 as our cost reduction efforts are implemented. Before opening the call to questions, let me remind you of the key priorities we are focused on in 2016. The first is growing our ARR from new customers, regaining momentum here is essential and we believe that new product adoption and channel relationships are the key levers to focus on to drive growth. The second is to continue enhancing our health benefits platform to deliver strong differentiated value to our customers and end users. And finally, we are committed to driving the business to cash flow breakeven, which we expect to achieve in mid-2017. As we discussed today, we are making the plans to ensure we achieve this important goal, while prioritizing innovation and our customers' ongoing success. Ultimately, Castlight helps empower people to make the best choices for their health, and helps companies make the most of their health benefits. We believe through relentless focus on this mission, and driving better execution, we will create enduring value for our customers and users and great success for Castlight. Finally, Gio will offer additional perspective to wrap up our call today but it is important to me personally to acknowledge our dedicated collogues as well. I especially want to thank the friends and co-workers who will be directly impacted by the job eliminations that are happening as part of costs reductions we announced today. We are truly grateful for their many contributions and their commitments to Castlight and our mission. With that, we are happy to take your questions.

[Operator:]

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

[Brian Peterson:]

Hi, guys. Thanks for taking the question. I just wanted to hit on the channel relationships, specifically with Anthem. Did that deliver any new customer logos this quarter? And thinking about the revised ARR outlook, what would you expect in terms of a channel contribution to that number in 2016?

[Nita Sommers:]

Yeah, this is Nita. I'll take that one. So, we continue to be pleased by the start of our Anthem relationship. This quarter similar to last quarter, we definitely saw the impact of that relationship in helping to accelerate deals and move them through the pipeline. I think importantly in this first quarter, we also started to see contribution in terms of new lead generation, which is really a key goal (21

[Brian Peterson:]

Got it. Okay. Thanks, Nita. And, John, just a quick clarification. The subscription deferred revenue actually took a big jump this quarter, and I know that's a little bit of in congruence with what you talked about on the ARR side. So just want to make sure I understand what's going on with the deferred revenue? Thanks.

[John C. Doyle:]

Thanks, Brian. I'm going to have Siobhan answer that one for you.

[Siobhan Nolan Mangini:]

Great. Hi, Brian. So, we tend to have a large number of customers that have annual and advanced billings that occur in the first quarter of the year. And so, the year-over-year growth that you saw was a result of the increase in large customers that we had in the first quarter. Just a reminder, it isn't a great indicator because, we do have a high degree of variance on our billing terms, but it is related to those annual and advanced billings that you see.

[Brian Peterson:]

Got it. Thank you.

[Operator:]

Your next question comes from the line of Adam Borg with Stifel. Your line is open.

[Adam C. Borg:]

Great. Thanks so much for taking my question. I guess, just focusing on ARR, just given the modest start to the year in your commentary, it will be a little bit lower than the 41% seen last year. How should we think about ARR growth more specifically for 2016?

[John C. Doyle:]

Thanks, Adam. This is John. Yeah, we're expecting ARR to be growing this year certainly and more strongly obviously in the Q2 and Q3 than we saw in the first quarter. But I think the slow start in Q1 does make it likely that the growth rate will be lower in 2016 than we saw in 2015. I think, importantly, we have very good visibility to revenue through the balance of this year, and feel very solid about that really with the only significant variables there being, timing of implementation. Beyond that, I think we'll wait to comment on specifics around the forward view on ARR.

[Adam C. Borg:]

Got it. Thanks. And then maybe just one follow-up. R&D, last quarter I believe you commented that R&D is the one operating expense line item expected to grow this year. Just given the head count reductions of 14%, it sounds like a lot of that's not going to be in R&D, but just want to get an update, do you expect that to still grow this year and where the reductions really going to be coming from? Thanks.

[John C. Doyle:]

Yeah, thanks. So I think the first thing to point out is that the goal with this restructuring is to position the business to self-fund innovation and growth. We think that's really, really important. We can do that as we said with a 14% reduction on 2017 operating expenses relative to our plan for 2016. To expand on that just a little bit, and I'll get to your specific question, we expect by Q4 to be at about a $100 million annualized run rate on operating expenses and then heading into 2017 we'll be guiding the business to an OpEx for the year slightly lower than that, but poised of course to invest behind growth as we see momentum restored in the top line. Now in terms of where the changes happen, you're right, sales and marketing is the largest area of spend historically and that is where we will see a greater proportion of the adjustments. In R&D, there we're actually going to see modest growth in spend on a year-over-year basis and then G&A will be somewhere in between those two, with a reduction overall. It's important to note, we think these changes position the business very strongly as we do see growth improving sequentially in Q2. And so we're pleased to be putting the business on a path to cash flow breakeven in that modified growth concept.

[Adam C. Borg:]

Great. Thanks so much.

[Giovanni M. Colella:]

Thanks.

[Operator:]

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

[Robert Patrick Jones:]

Great. Thanks for the questions. I guess just to go back to the top line, I'm just trying to get a better understanding around your comments around the timing of closing that it's taking, the timing it's taking to close deals? It's been a little bit longer than you expected. I guess, qualitatively, kind of what changed their relative to your expectations, what's making this process with the new sales force longer than you had thought? And then any directional comments you could give us around what that means for customer adds this year as you sit here today relative to say last year? I think that would give us a little bit of a better jumping off point into how 2017 could look from a growth perspective?

[John C. Doyle:]

Sure, Bob. And I think with respect to 2017, we want to get a little bit further into the year before we're forecasting too much on 2017 growth, I understand the question. I think as we look at sales cycles, we feel great about having the sales force ramped at this point, and we do think we're doing an increasingly better job communicating the broader value proposition around the health benefits platform into the market. I do think that value proposition is relatively new to the buyer and expanded relative to what we've done before, and there is a certain amount of education we think that has to go on. And then, one of the dynamics as the channels become more prominent in our sales cycles is that from a timing perspective we are more linked to the natural timing of those dialogs. In other words, while we maintain the direct communication with these customers, pushing timing is less straight forward, when you're partnering with a health plan or a consultant or a broker working on their timeline. I think the good news here reflecting on Nita's comments for a moment is that we are seeing contributions to pipeline from the channel partners. We're seeing acceleration of dialogs in flight. And so, what gives us confidence about growth looking meaningfully better in Q2 and Q3 here is based on that progress.

[Robert Patrick Jones:]

No, that's fair. And then, I guess, John, just to go back and dig a little deeper into the decision to undertake more cost cutting. It just seems that given how early the company in its lifecycle, I think there is, on one side obviously the dedication to being cash flow breakeven in 2017 and guys are very much stuck with that and this is, it seems like some difficult decisions in order to stick with that timeline. But I just, I'm wondering, if you guys could maybe walk through just that decision making process a little bit, because I think on one side it does seem like the opportunity in the wide space is still pretty abundant. And yet obviously on the other side, you're making decisions to pull back on spending. So maybe just from a high level, how you guys are balancing those two sides of the equation?

[John C. Doyle:]

That really is the heart of the question and so I appreciate that you asked it and I think speaking to the long-term opportunity, as Gio said in his remarks, costs for employers and employees and their families are unsustainable. Obviously, consumer resume is a powerful trend that we expect to continue. And so we do believe, continue to believe, there's a certain inevitability to the engagement of these employers and managing their healthcare spend very differently than they have in the past. And we think Castlight is uniquely well-positioned to capitalize on those trends. And so the long-term opportunity for the business is one that we remain very, very excited about. And so then getting to your specific question, I think the timing of this decision is a function of the reality that over the last four or five quarters, the penetration of the opportunity has come more slowly than we originally anticipated. And we are very committed to getting the business into a self-funded position against this opportunity and because growth has come on a slower pace than we estimated that requires us to make this kind of an adjustment, which we clearly didn't make lightly. I think some additional context that is worth mentioning is that if you look at the way the organization built up over time coming out of 2014 where we had record bookings, we grew relatively quickly. And then in the middle of 2015, we put the brakes on that head count growth and we've been pretty stable since then. And our baseline plan was really to grow into that head count and avoid the kind of action we took today, which was really absolutely a last resort. And so, as we've grown, we've created opportunities around the business to as we mature and learn the right structure kind of realign against the opportunities going forward. And so in spite of these changes, we do feel like from a sales and marketing perspective and from an innovation perspective, we are very well-positioned to take advantage of that enormous white space opportunity that you referred to.

[Nita Sommers:]

And I would just add that we do think it's going to take time for this to take effect and it's going to take the balance of the year for these changes to really fully take effect. As John mentioned, it will be the first quarter of 2017 when really hit run rate. And so as we have that commitment to be self-sustaining by mid-2017, the time was now for us to make a change and make sure that we could do it with the right level of balance that John was speaking to.

[Robert Patrick Jones:]

I appreciate all the comments. Thank you.

[Giovanni M. Colella:]

Thanks, Bob.

[John C. Doyle:]

Thank you.

[Operator:]

Your next question comes from the line of Stephen Lynch with Wells Fargo. Please go ahead.

[Stephen B. Lynch:]

Hey, thanks for the questions. I was going to ask about client metrics. I believe you said you ended Q1 with 189 signed clients. Can you also provide the count for implemented clients at the end of the quarter?

[Siobhan Nolan Mangini:]

Sure, Stephen. This is Siobhan. We were in the mid-160s in terms of the number of launched customers.

[Stephen B. Lynch:]

Okay. Possibly can you give the – was there a big difference in the net and gross number there or should we just assume they're the same?

[Siobhan Nolan Mangini:]

There wasn't a huge difference. Just to put this into perspective, we were previously in the high 150s in the previous quarter.

[Stephen B. Lynch:]

Okay. And then on the client churn in Q1, I was wondering if you could give some detail on what drove that. I know last quarter you mentioned M&A leadership changes that sort of thing drove Q4 client churn, but were there any particular things that you saw driving at this time around?

[Giovanni M. Colella:]

Yeah. This is Gio. Thank you for the question and very pleased to answer this because I'm spending a lot of time with clients now and have a very good perspective of what's happening out there. Let me put things in perspective for a minute. We did not see more churn than what we expected and most of the churn happened on the lower end on the smaller clients. The ones that probably never did perfectly fit the profile of what the Castlight platform is addressing today. Just spend a few minutes on this. Our platform is becoming more and more sophisticated. And it addresses multiple states within the benefit world. So if you're a small customer with a very little team, probably it's not the right fit for you. And we didn't know what we didn't know two, three years ago, we were at a different stage and we believe that now we understand much better which clients to address. So, in summary, to address your question, there is no specific trend in this, these are smaller logos and probably not the best fit for our current platform.

[John C. Doyle:]

Stephen, this is John. I think to expand a little bit on Gio's comments. Healthcare costs and the sustainability of those costs and a driving engagement with benefits are problems that really every – certainly every large employer in the United States is facing. I think the markets that we target, so above 2,000 employees, almost uniformly are grappling with these challenges. I think what we do see – and again keep in mind, the churn numbers we are talking about are well within our plan and we are not talking about small numbers. But to elaborate on Gio's comments, any enterprise solution that you deliver, whether it's HCM or ERP, is to some extent dependent on the leadership of change management and engagement from the customer side. And while the large majority of our customers I think are prepared to take on those projects and work with us to drive successful outcomes, you do see as you do in any category situations where that doesn't happen and I think those have been the few examples where we've sometimes seen some churn.

[Stephen B. Lynch:]

Okay. That's great. Thanks.

[John C. Doyle:]

Thank you.

[Operator:]

Your next question comes from the line of Zack Sopcak with Morgan Stanley. Your line is open.

[Zack W. Sopcak:]

Hey, good afternoon. Thanks for the question. I wanted to ask question about signed ARR in the first quarter. Can you give any qualitative comments about your expectations from the customers, saw in (36

[John C. Doyle:]

Sorry, Zack, can you repeat just the last piece of that question? I'm not sure I caught it.

[Zack W. Sopcak:]

Oh sure. Just the expectations you had going into the quarter, for how you did relative to your expectations for selling into current customers versus signing new customers, driving that $111 million ARR number?

[John C. Doyle:]

Yeah, got it. So clearly we've been saying that for several quarters, our focus is on driving new logo velocity and that is absolutely remains the focus. And we do see good growth ahead in Q2 and Q3 as we built momentum in the pipeline and a number of these dialogues moving well. No question Q1 even with that quarter being a generally tough one from a seasonal perspective, ARR and new signed customers were behind our plan. I think also worth pointing out, though, that this trend we've seen where the customers were adding are on average significantly larger than those customers we lose. It certainly was evident this quarter where the adds were in the low single-digits and among the churn customers, not a single one of them represented ARR of more than $150,000. And so that's why you see net ARR going up in spite of the decrease in customer count. And so again, looking ahead, we do expect to see significantly better growth in ARR, although for the full year perhaps not at the rate we saw last year.

[Zack W. Sopcak:]

Got it. And can you give any color on the number of solutions you're seeing new customers take up and the number of average solutions for the overall customer base?

[John C. Doyle:]

Do you mean broadly in the healthcare technology space or...?

[Zack W. Sopcak:]

No, the number of Castlight products that your clients are picking up.

[Siobhan Nolan Mangini:]

Yeah. We're seeing steady progress actually, Zack, in terms of the uptake of particularly our newest products, so Dental, Action and Elevate. We are now north of 10% in terms of the attach rate on dental and it's mid to high single-digits now with both Elevate and Action. So we're really seeing a nice uptake. When someone is purchasing Castlight, they're purchasing multiple products.

[Zack W. Sopcak:]

Got you. And just a real quick one. Are the adoption rates on Elevate and Action, are those similar to what you've seen with prior products?

[Siobhan Nolan Mangini:]

Yes. It actually – I would say, considering we just went to market with Action at the end of last year and Elevate as well, there has been very steady uptake from both new and existing customers on both products.

[Zack W. Sopcak:]

Okay. Great. Thank you.

[John C. Doyle:]

Thank you, Zack.

[Operator:]

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

[Frank Sparacino:]

Hi, guys. I wanted to go back to, Gio, your comment just around spending a lot of time with customers, and I'm curious to get your perspective on your reasons why the employers are not moving ahead, I know John, you've talked about change management engagement. But I'm curious, if there are other major concerns, particularly as it relates to the ACA this year that are impacting HR or competing priorities right where perhaps there is a more compelling value proposition but just trying to figure out exactly why someone is not going to move forward?

[Giovanni M. Colella:]

Yeah. No. Thank you, Frank. This is Gio answering your question and coming from weeks of spending time with clients. So, let me first put things in perspective, it's very important that we highlight that the trends that have made us start the company in 2008 are stronger today than what they were then. Actually after a couple of years of plateau we're seeing healthcare cost escalating again and it's a topic of conversation with a lot of employers, if not all employers, every employer. So the macro picture is strongly in favor of a platform like Castlight that helps you manage the cost in the most efficient way. And I don't want to give the impression that we're not getting meetings or interests or that customers are not looking at our solution. We spend a lot of time with customers, there's a lot of interest. The pipeline is robust. What we didn't know and we've learned is that the healthcare ecosystem and the selling of new enterprise products at the benefit leader level is longer than what we expected. It's just a complex sell. It's not in the culture of the benefit person to buy enterprise technology. And so, it takes more education than that we thought a couple of years ago. These are the things we learned over the course of time. With that said, I mean, I really could spend my time speaking to customers, there's a lot of interest and we are seeing all the trends pointing in the right direction, nothing that gets us worried that there's not an interest or a need for a platform like ours.

[Frank Sparacino:]

Great. That's helpful. And maybe, one last thing. Just on the churn, when you look at the customers that exist today, I'm curious how much of that base would you characterize in that small employers segment, less than I guess a $150 million ARR where you feel like churn can still happen.

[Siobhan Nolan Mangini:]

Yeah. I would say that's about a third of our absolute customer account. It's obviously much less in terms of the dollar amount, Frank, of our existing customer base that are these much smaller customers that we had seen a higher degree of churns.

[Frank Sparacino:]

Great. Thank you.

[Giovanni M. Colella:]

Thanks, Frank.

[Operator:]

Your next question comes from the line of Gene Mannheimer with Topeka Capital. Your line is open.

[Gene Mannheimer:]

Thanks. Good afternoon. I just wanted to elaborate a little bit more on the prior question. I mean, we understand the macro trends are in your favor, I think that's clear. But yet something is not clicking. The trepidation on behalf of your customers, is it that the pain is not great enough for them to see the value of your solutions today? I know last year you talked also about a sales force execution issue. Do you feel you have the right sales talent in place today and what does that learning curve look like? When could we expect to see greater throughput there? Thank you.

[Giovanni M. Colella:]

Yeah. Thanks, Gene. This is – you go to the heart of issue here, and we have done a lot of thinking and a lot of learning on this. And let me break down the question in two parts. First is, what are we seeing with the customer, and second, the state of our sales force, and where we are with that. On the customer side, I really can guarantee that we are seeing a lot of the interest and a lot of need and demand for the Castlight platform. If anything it's stronger now with Action and Elevate. The conversation has been Elevate is much more sophisticated. I mean, we are educating the market as we go. But the leading indicators are really pointing in the right direction there. It's a complex sale because of many factors. First of all, it's a technology sell into a benefit leader, who is by definition not the IT person. So it takes longer to educate there. There is many proof points that as we grow as a company we will be able to put in front of the customer in a much more successful way right up front but when you're in the early stages, still educating the market. And last, but not least important, when you go below the big enterprise teams in benefit are quite small. And so, you're dealing with just getting appointments and getting things going with smaller teams and it's longer than what we expected. Last but not least important, as we said, we did not know – we underestimated the importance of the channels and the brokers and the consultants in this and we've built an entire team there now. We've seen progress in that. We're very pleased from Anthem down on how things are going in that direction. So, I would say that no, there's nothing there that surprised us that much. It's just learning how long it takes. On the sales force, it goes back to what I just said, right? We do have a very good strong direct sales force, it's ramped up. We feel comfortable where we are. It's sized at the right size. We underestimated, there's no other way of saying this, the importance of the channels, and that's being addressed. We have a team in place. We're seeing the preliminary results. I don't want to be irrationally exuberant here, but we're seeing everything pointing in the right direction there. We are building the relationship with the consultants, building the relationship with the brokers, and our relationship with Anthem is going in the right direction, and we're very pleased at where it is today.

[Gene Mannheimer:]

Thank you.

[Giovanni M. Colella:]

Thanks, Gene.

[Operator:]

There are no further questions at this time. I'll now turn the call over to Giovanni Colella, Co-Founder, and CEO for closing remarks.

[Giovanni M. Colella:]

Thank you all for joining us today. We do appreciate your questions and your interest in Castlight and look forward to speaking with all of you in the coming days and weeks. We will be presenting at the Goldman Healthcare Conference in Southern California, and the Stifel Tech Conference here in San Francisco, both in early June and hope to see many of you there. Let me finish by saying, we are working tirelessly in the pursuit of our mission to empower people to make the best choices for their health and help companies optimize their health benefits investments. We are committed to striking the necessary balance between our goal to change healthcare and our goal to be self-sustaining and we are proud of the progress we have made, which is purely a function of the terrific people at Castlight. I want to personally thank all of the Castlight employees, including those who will be leading us for the next professional challenge for your vision and dedication to our mission and for the hard work in helping us become the premier health benefit platform we are today. Thank you all, and good evening.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.