Castlight Health, Inc.
Q4 2016 Earnings Call Transcript

Published: 16 Feb 2017

[Operator:]

Good afternoon. My name is Kelly, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Castlight Fourth Quarter Earnings 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. Thank you. Gary Fuges, Head of Investor Relations, you may begin your conference.

[Gary Fuges:]

Good afternoon and welcome to Castlight's conference call to discuss our financial results for the fourth quarter and full year ended December 31, 2016. Joining me today are Giovanni Colella, Castlight's Co-Founder and Chief Executive Officer; John Doyle, our President and Chief Operating Officer; and Siobhan Nolan Mangini, our CFO. In terms of the structure of today's call, Gio, John, and Siobhan will offer their prepared remarks, and then we will open up the call to take your questions. Our press release was issued after the close of market today and is posted on our website where this call is being simultaneously webcast. We also are providing an accompanying PowerPoint presentation that may be accessed on our website, where it will also be posted after this call and made available for one week. This presentation contains forward-looking statements regarding our trends, strategies, and the anticipated performance of our business, including our guidance for the full year of 2017. We may also discuss matters relating to our pending acquisition of Jiff, Inc., including but not limited to timing of closing, contributions that we expect Jiff's business to make the Castlight's overall performance, the anticipated benefits of the proposed transaction, anticipated future combined operations, products and services, and the excepted pro forma financial results of the combined business. 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. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. 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. More information about our use of non-GAAP metrics and a reconciliation to comparable GAAP metrics on historical basis can be found in the earnings release dated February 15, 2017, which is available on our website and as an exhibit to the Form 8-K filed with the SEC just before this call. With that, I'd like to turn the call over to Gio. Gio?

[Giovanni M. Colella:]

Thank you, Gary, and good afternoon. Thanks to everyone for joining us today to discuss our fourth quarter and full year 2016 financial results. Q4 was a solid finish to an important year for Castlight. We delivered revenue growth at the high end of our guidance and we cut our operating loss by 90% from the year ago quarter. We executed well against the three key priorities we shared at the start of 2016; putting in place the foundation to drive long-term growth, ramping the adoption of our platform offering and continuing to drive the business to cash flow breakeven. In the second half of 2016, we added 29 new logos compared to 10 in the first half of the year. 12 of these new logos closed in Q4, including six new Fortune 500 customers, such as Chevron, Dover Corporation and US Foods. Adjusting for churn, we ended 2016 with 211 signed customers, including more than 60 Fortune 500 companies. With two-thirds of new customers in 2016, purchasing the expanded Castlight platform, our innovative health benefits platform is addressing a clear market need. Our journey from selling decisions support to delivering a comprehensive platform that solves a broad range of health benefit challenges is what the market needs and is critical to our long-term success. I am very encouraged by the great strides we've made in this regard. In addition to improving logo velocity in the second half of 2016, we also made tremendous progress in our Anthem strategic relationship. Beginning in the current quarter, our platform solution is available for sale to Anthem customers at Anthem Engage. Over the course of 2017, we expect to make continued progress with our relationship with SAP following their strategic investment in Castlight last year. This represents an exciting opportunity for us to reach new populations, including in international markets. We're excited about the potential to accelerate adoption of our platform solutions with these relationships in 2017 and beyond. Along with building our foundation for driving long-term growth, we significantly improved the efficiency of our operations. Gross margin was at the high end of our long-term target in the fourth quarter and we reduced the total operating expenses in each quarter of the year. The result in Q4 was another record low for cash burn. Given our progress on key initiatives in 2016, I believe Castlight starts 2017 in a strong position that will improve significantly when we join forces with Jiff. As we announced on January 4, we believe our strategic acquisition of Jiff will create the most comprehensive health benefits platform on the market. Response of the merger from our clients, prospects and partners has been extraordinarily positive. We are confident that our combined business offers the health benefit solutions our customers are looking for and will put us on an accelerated path towards a multiyear goal of $500 million in annual revenue. Yesterday, our S-4 went effective and we now expect the transaction to close at the end of Q1. Thus, this will likely be my final call as Castlight CEO. As I move into my new role as Executive Chairman following the close of this transaction, I want to say that I'm incredibly proud of what we've achieved since I co-founded the company in 2008 in memory of my mother. My personal experience with my mother and her struggle to help her make the best decision for her care convinced me that there was a better way to navigate healthcare that is what we set out to create as Castlight. Our mission is to empower people to make the best decisions for their health and help companies make the most of their health benefits and we have done just that over the past eight years. As proud as I am of what we have accomplished together so far, I am convinced that Castlight's best days lie ahead. With that, I'd like to turn the call over to John.

[John C. Doyle:]

Thank you, Gio. I agree that Castlight's best days are ahead of us. We have the right solutions to address growing market demand for our comprehensive health benefits platform and we expect to see very healthy growth for the business as we put two market leaders together in Castlight and Jiff. The last several years have seen an explosion of new ways for employers to manage health benefits, telemedicine, tech-enabled disease management and concierge offerings are just a few of the areas that have seen a lot of innovation. HR teams are increasingly eager to deliver these best-of-breed solutions to employees, but they often buck at the prospect of maintaining separate relationships with an array of point solution vendors. Not only does it take a lot of extra time, but offering a variety of benefits from different vendors also leads to confusion and low utilization by employees. We believe the answer is a comprehensive health benefits platform, a virtual one-stop shop that leverages big data and a broad ecosystem of partners to provide a consolidated health benefits solution. The same platform that brings best-of-breed telemedicine, disease management and concierge options into a single relationship for employers also gives employees an integrated personalized way to make the most of their health benefits. This means lower costs for employers and healthier, more satisfied employees. This is the vision behind combining Jiff and Castlight. And we are combining forces at an exciting time for our business. During 2016, the first full year of availability for Castlight's platform solution, two out of every three new customers purchased the platform. By the end of year, 23% of all Castlight customers had purchased Action and 44% have purchased three or more products from us. These results reflect a strong start to the evolution of our sales mix beyond transparency. We think our momentum in the market for health benefit platform solutions puts Castlight in a very strong position to leverage our acquisition of Jiff to pull further ahead of our competition. In 2017, we are focused on growth. Three key initiatives are critical this year. First, we are aiming to drive faster adoption of our platform offering by new customers. Next, we're focused on reducing churn and third, we have to do a great job integrating Castlight and Jiff to unlock the strategic value of our combined company for our customers. As Gio shared, we ended 2016 with 211 customers and ARR of $122 million. These numbers compare to 191 customers and $110 million in ARR as of the end of 2015. While we were pleased with our progress on many fronts in 2016, we recognized that we can generate much higher ARR growth considering the size of our market opportunity and the strength of our market position. There are three main reasons we expect to grow ARR faster this year than we did in 2016. First, we launched our full platform for 17 customers in 2016 and the results we've seen have been terrific. These proof points are hugely helpful in sales cycles. Second, we've strengthened key channel relationships. In particular, our relationship with Anthem is providing more robust go-to-market support than ever before and we are pleased by the early momentum we're seeing in the field. Finally, the Castlight field teams are more tenured than ever. Their expertise and growing pipeline should be tailwinds for us this year compared to 2016. As we accelerate new business, a second critical priority is to reduce churn in 2017. It is important to note that the ARR churn that we saw in 2016 mainly arose from two very different sources. Slightly more than half resulted from customer churn, which was generally among smaller, transparency-only customers with ARR well below our portfolio average. While we never want to see a customer terminate, the aggregate impact of these losses was approximately 6% of ARR and solidly within our planning targets for 2016. It's worth noting here that we succeeded in renewing all of the top 10 customers up for renewal last year, as we discussed with you on prior calls. That said, the remainder of the ARR churn in 2016 was driven in part by a weaker than expected pricing dynamic, which primarily impacted transparency-only customers. The result was lower PMPM fees in renewals, which contributed to NDR of 94% coming in below our goal of 100%. Looking ahead, I want to emphasize that the 2017 guidance we provided on our January 4 call and are reiterating today assumes that our NDR remains in the mid 90% range for 2017 and we're expecting to drive strong top line growth. Siobhan will cover guidance in detail, but from a top line perspective, we expect the combined company will generate pro forma non-GAAP revenue growth of 27% to 30% in 2017 and in 2018. Moreover, as we work through the remaining renewals of transparency-only customers, we see a great opportunity to strengthen the business for the long-term. As our customers migrate to our full platform solution, they will be leveraging a more comprehensive powerful solution at fee levels we can build on over time. As a result, we fully expect to increase NDR back to the 100% and beyond level in future periods as churn improves and cross-selling efforts continue to ramp. As Gio said earlier, we expect to close the acquisition of Jiff at the end of Q1. Employees of both companies are excited about what we're calling the road to one, which is our path to bringing our businesses together to create a clear leader in the health benefits platform space. Our integration teams have already made great progress across key work streams like product, sales, channels and marketing so we can hit the ground running once the transaction closes. In the meantime, we are already teaming up to engage key customers and partners, and we look forward to sharing information about joint competitive opportunities on our Q1 call. With that, I'll now turn the call over to Siobhan to review financial results and our 2017 outlook.

[Siobhan Nolan Mangini:]

Thank you, John. I will start today by reviewing Q4 and full year 2016 results and then I will go through our 2017 guidance. After that, we will open the call to questions. Total revenue in the fourth quarter was $29.9 million, with 94% of this amount comprising subscription revenue. As discussed on our Q3 call, approximately $1.7 million of total revenue in Q4 was non-recurring related to the end of customer contracts. Excluding the non-recurring amount, total revenue grew 32% in Q4 2016 compared with the year ago period. Reported revenue is a function of completed implementations and we launched eight new customers and deployed 23 additional cross-sell products in the fourth quarter. In 2016, we made good progress reducing implementation timelines and improving scalability, particularly of our newest products. Going forward, we expect to convert ARR into revenue within four quarters by the end of 2017 as compared to up to five quarters conversions we've seen historically. Non-GAAP gross margin was 74.8% in the fourth quarter, up from 72% in the prior quarter and 59% in the year ago period. Gross margin for the quarter was at the high end of our long-term target range of 70% to 75% due to the impact of the non-recurring revenue noted above. While we expect gross margin to fluctuate on a quarter-to-quarter basis, following the close of the Jiff transaction, gross margins will initially be lower as they are in an earlier stage of ramping customers during their rapid growth phase. We do expect margins to increase with scale over time, just as we've been able to with Castlight's core business and reach the same long-term target range. Total non-GAAP operating expenses were $23.9 million in the fourth quarter, down 13% year-over-year due to continued efficiencies in sales and marketing, and G&A. This was our sixth consecutive decrease in non-GAAP operating expenses and reflects the coordinated efforts across the company to strengthen our financial position. Non-GAAP operating loss was $1.5 million in the fourth quarter, a record low level for the company. We improved this metric by 90% year-over-year. Cash used in operations was $1.7 million in the fourth quarter. On a standalone basis, Castlight is solidly on track to reach cash flow breakeven by the middle of 2017, as previously planned. For the full year 2016, total revenue was $101.7 million, an increase of 35% from 2015. Subscription revenue of $95 million also increased 35% over the same time period. Non-GAAP gross margins was approximately 70% in 2016, up significantly from 59% in 2015. In 2016, we more than halved our non-GAAP operating loss to $31 million versus $65 million in 2015. Cash used in operations was $37 million, a significant improvement from $57 million in 2015. We ended the year with $115 million in cash and marketable securities. With that, I'll turn to our outlook for the full year 2017, which is unchanged from the view we shared when we announced the merger with Jiff on January 4. We continue to expect that Castlight and Jiff will generate non-GAAP pro forma revenue of $138 million to $142 million in 2017, with the contribution of $123 million from core Castlight at the high end of the range. As a reminder, the pro forma range sharing assumes the inclusion of Jiff for the entirety of 2017 and does not take into consideration any deferred revenue write-down associated with purchase accounting for GAAP purposes. In terms of how we expect revenue to flow over the course of the year, we expect the first quarter for Castlight standalone will be down sequentially in the mid single-digit percentage range. The majority of this impact is due to the fact that Q4 2016 included $1.7 million of non-recurring revenue. In addition, the seasonally higher level of churn that occurs at the end of the benefits year itself (17

[Operator:]

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

[Brian Peterson:]

Hi, guys, and thanks for taking the question. So you mentioned that two-thirds of the new customers this year are signed up for the full platform. Could you give us any color on how that mix looks maybe from channel partners versus Castlight direct and maybe how that would be for larger customers versus smaller customers?

[John C. Doyle:]

Sure. Thanks, Brian. So, the mix between direct and channel partners is not all that different. We're seeing similar patterns between the two. Over time, as the Anthem relationship comes online in a bigger way commercially, we do expect to see the platform be the dominant product in that channel and that channel then make up a significant number of our new sales. In terms of customer size, we have seen uptake of the platform more broadly with larger customers and that makes a lot of sense given the flexibility of that platform and our ability to support the kinds of advanced benefit, designs and strategies that those large employers use.

[Brian Peterson:]

Got it. Okay. And I wanted to hit on the pricing transparency customers thing a bit. But I know you mentioned that there was a little pricing with those renewals. Is there any way to size what percent of total revenue or pro forma revenue is from just the core transparency solution at this point?

[Siobhan Nolan Mangini:]

Sure, Brian. This is Siobhan. So, I think there's two pieces that I want to cover in that. I think the first thing is that it's really important to note that the information that we shared today in terms of the pricing dynamic wasn't just for 2016 renewals, but we actually have been very proactively addressing the 2017 book of business early in 2016 as well as other out-of-period adjustments. And so that data was being shared in the 6% number as well as the overall pricing trends that we're seeing. The second part of your question in terms of what is transparency at this point, it's about half of our ARR is transparency at this point in time.

[Brian Peterson:]

Got it. Maybe I'll sneak in one more. Any update on SAP, I know Gio mentioned a few things there, but just trying to understand when we could start to see that really drive a lot of new bookings activity and maybe hit the P&L? Thanks, guys.

[John C. Doyle:]

Yeah. Thanks Brian. So, Gio can comment on the discussions themselves, but in terms of timing, we don't expect the SAP relationship to generate any material bookings in 2017. To the extent it contributes at all, it would be in the latter part of the year, as we've talked about before. The dominant growth driver for the business this year from a channel perspective is absolutely the Anthem relationship. But I'll let Gio comment on the progress and the conversations.

[Giovanni M. Colella:]

Yeah. Thank you, John. The partnership conversation's going very well as expected, if anything better than expected. I don't want to go ahead and get my skies ahead of me and set a date on when we will have this closed. But we gave you some direction in the past earnings call and we're still aiming for obviously in 2017, and let's say within the first two quarters of 2017, we will be able to make some announcement on our progress.

[Brian Peterson:]

Great. Thank you.

[John C. Doyle:]

Thanks.

[Operator:]

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

[Adam C. Borg:]

Great. Thanks for taking the question. I know it's early in 2017 on the new Anthem, I guess, the enhanced relationship, but is there any feedback you could share on how it's going so far?

[John C. Doyle:]

Absolutely, Adam. So, on a couple of levels, first of all, the teams, the Anthem team and the Castlight team on the go-to-market side have been working very closely together, I should include product in that description as well. And the early collaboration has been fantastic. The Anthem business cycle is that proposals will be getting developed and shared with customers, and the first quarter and early part of the second quarter with deals closing later in the second quarter and then the third quarter for January 2018, and the early feedback from customers has just been phenomenal. So our hypothesis about the potential of a comprehensive solution spanning, well-being and decision support and the health benefits platform I think is absolutely resonating in the market. And so we're really excited about the way that relationship is progressing.

[Adam C. Borg:]

Great and just one other question just on churn. I know you talked about it being one of the top three goals for this year already, but maybe a little bit further on what steps do you plan on taking to really reduce that churn going forward? Thanks. That's it for me.

[John C. Doyle:]

Yeah. Yeah, thanks, Adam. And certainly, I want to make sure we're clear here and I think Siobhan gave some nice context for what was driving that churn. We also talked about it in the script. And I understand the question, but I do think there's some misunderstanding about the topic. So first let me say, our top strategic priority in the business is to drive rapid, broad adoption of the platform solution among large employers. We think there are enormous long-term network effects in that strategic position. And we're certainly going to be financially responsible of getting to that point. And I think we showed, frankly, phenomenal progress on cash flows this year and we're going to be super diligent about the way we bring Castlight and Jiff together. But at the end of the day, if one of the prices of channel leverage is that we're more flexible on the prices we're offering in the market and that requires some negative impacts in the short-term on business we're renewing from a time before we were working with channels, we're going to make that trade 10 times out of 10. And so we understand the question, as we look forward in terms of getting our arms around it, Siobhan and her team have done a ton of work and I'll let her share that with you.

[Siobhan Nolan Mangini:]

Sure. So I'd just say, Adam, one of the key things to takeaway is that the first piece that I mentioned, so this is not just 2016 renewals, but we've actually proactively been pulling renewals forward. And the forecast that we're sharing on both over 20% year-over-year growth for Castlight standalone, but the pro forma 27% to 30% growth, incorporate a detailed customer-by-customer forecast. The results are variable by customer, but a very thorough bottoms-up perspective in terms of how this will play out over the next six quarters.

[Adam C. Borg:]

Great. Thanks so much.

[John C. Doyle:]

Thanks, Adam.

[Operator:]

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

[Richard Collamer Close:]

Yeah. Just going back to Anthem and SAP just so I fully understand it. So, SAP, not much contribution in terms of bookings, I guess, here in 2017. You begin to get some contribution of bookings from Anthem in 2017. And as we think about the implementation cycles and stuff like that, are you really saying that the revenue contribution from these channels is really going 2018, 2019? Is that the way to think about it?

[Siobhan Nolan Mangini:]

Generally, Richard, yes. I think we've seen anywhere from 6 to 12 months implementation timelines that we've talked about. I think we've made really strong progress in that conversion over the past year in launching customers on multiple products. When we're talking about bookings contribution from Anthem in 2017, we really are talking about that as an 2018 contributor to revenue. We have a very high degree of revenue visibility when we share on a look forward basis for something like our 2017 revenues.

[Richard Collamer Close:]

And now, if I remember correctly from maybe two conference calls ago, in talking about the Anthem, I thought there was a shorter implementation, if I'm not mistaken, in terms of just because of the data feeds and you've already built the feed. Is that correct?

[Siobhan Nolan Mangini:]

Yeah.

[Richard Collamer Close:]

And what do you think the average implementation time on an Anthem customer would be?

[Siobhan Nolan Mangini:]

So Anthem, we invested heavily in data infrastructure over this past year and so we can launch customers faster and actually cheaper as well as a result because of the fact that we've invested so heavily in that data infrastructure. We have seen customers launch as fast as two months. It depends in terms of the speed, in terms of the speed of what the customer wants to do. So I think there's two things in terms of how the sales cycle play out over the course of the year. Right now, we've just launched Anthem Engage, we're just going to market, we expect to see contributions in the second and third quarters, and then it will be a matter of customers launching them thereafter based off of the benefits cycle.

[John C. Doyle:]

Richard, one of the factors in these deals that's important to remember is that the customers often have a strong preference for a January launch to correlate with their benefits cycle. So in the case of an Anthem Engage sale, there's likely to be some revenue contribution in the latter half of the year, but Siobhan's absolutely right, most of that will begin to flow in, in 2018. And that largely is a function of the customer benefits timeline as opposed to when we could actually launch the product, which would be quite a bit sooner.

[Richard Collamer Close:]

Okay. And just to be clear, on the SAP, so that relationship is signed, sealed and delivered per se. And I guess what's your thought process in terms of – it's been six or seven months now, so just trying to understand that timing a little bit better.

[John C. Doyle:]

Yeah. So...

[Richard Collamer Close:]

I mean, because obviously they made an investment in your company, right? So...

[John C. Doyle:]

Yeah, absolutely. And I think if you think about the staging of the relationship from our perspective, we signed the Anthem channel relationship about six months before the SAP investment. These relationships include typically quite a bit of product lift. And the way we've staged both has been, during 2016, we built a Anthem cost and quality estimator solution for anthem.com, a huge lift for us. And now, we're in the process of building and later we'll be deploying Anthem Engage, another very significant R&D lift for the business. And so, as we think about the way these relationships evolve, the discussions right now with SAP are all about the product that we'll be going to market with together, the specifics around what that product looks like, and then the staging of the work to get that product built and integrated with SuccessFactors' solutions and then sold later in 2017 and then launched at some point in 2018. So I wouldn't draw from the pacing of the discussions anything significant about the substance of that agreement or our commitment to getting it done, it's just more the way...

[Richard Collamer Close:]

Okay.

[John C. Doyle:]

...the business is unfolding organically.

[Richard Collamer Close:]

So things are on track. There's nothing really necessarily to be concerned with or anything along those lines. That sounds good. With respect to – you said something about Action and I wasn't typing fast enough. So could you go back on that front in terms of what the customer count was or the information that you gave on that?

[Siobhan Nolan Mangini:]

Yeah, I think that was – John shared that 23% of our customer base has Action today.

[Richard Collamer Close:]

Okay, great. Thanks. I appreciate the time.

[Siobhan Nolan Mangini:]

Thanks a lot.

[Operator:]

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

[Robert Patrick Jones:]

Thanks for the questions. John, you mentioned that the PMPM was negatively impacted by greater pricing pressure dynamics with the renewals specifically. Could you just elaborate on why that was the case? Was there competitive aspects at play with some particular renewals? And then I guess off of that, what gives you confidence that you can get that pricing going back in the right direction outside of cross-selling opportunities?

[John C. Doyle:]

Yeah, sure. So I think that the comments I was making a few moments ago are germane here, so I'll bring some of that content back. When we made the decision in the late part of 2015 to begin leveraging indirect channels as part of our sales model, one of the things that we did as part of the Anthem relationship and relationships with others was to setup preferred pricing for all of our products. Our assumption at the time was that we would be able to manage, and we have managed, the rollout of those pricing relationships and we would deal with the potential for customers to want to switch from the pricing we agreed to when we sold them direct, which was in many cases higher than the channel pricing. We also decided, though, as 2016 unfolded, and this gets of some of Siobhan's comments, that we were going to be proactive about managing the overall portfolio of customers. And so in some cases, we went out with our channel pricing to customers, whose agreements wouldn't be coming up for renewal until 2017 or even 2018 in a few cases. And in exchange for extending those agreements and in some instances adding additional products, we did take down pricing on the transparency functionality that we sold initially. So I think the way to evaluate the go forward in the business, in terms of our ability to drive higher pricing, is a function and will be a function of our ability to introduce new functionality that leverages that platform footprint initially that will happen through ecosystem partners. And one of the really important parts of the Jiff acquisition is that they have done quite a few reseller agreements in the ecosystem, which allow us to package up those partnered solutions and drive a larger deal sizes. And over time, you'll expect to see more of that in addition to organic product development driving higher pricing from Castlight.

[Robert Patrick Jones:]

Got it. No, that makes sense. And then just on gross margins, very strong performance in the quarter, particularly on the subscription side. Could you maybe just talk about what drove the subscription gross margin improvement? And then, how should we think about this level of gross margin looking forward against the backdrop of trying to win new client partners in 2017?

[Siobhan Nolan Mangini:]

Sure. This is Siobhan. I think we've made fantastic progress in terms of gross margins over the course of 2016 and we've seen this across both the subscription side but also on professional services, as we've gotten more efficient launching customers, and then, as I've mentioned, in particular, with the data intakes and feeds that we have. We did have one-time revenues, which contributed to gross margins being at the high end of the range. So without that, they would have been about 73%. And we really do expect for the standalone business that we're in a good spot in terms of having these gross margins within our long-term range and be very durable. I think it's important as we bring Jiff on there a much earlier stage, investing heavily in their customers, and we'll see a dip, but we expect one of the great things is they have a very similar business model at Castlight. And this is where we can help them as well, make the same progress that we did over the past two years towards the same long-term target of 70% to 75%.

[John C. Doyle:]

And I would add, Bob, it's an important question. The progress we've made on the gross margin front, which required great deal of solid work from the implementation teams and the ops teams has given us more flexibility on the pricing side to do more attractive pricing deals with channel partners and with customers and maintain a very strong gross margin profile. And from our perspective, that's a great lever for us in building this big install base of platform customers, which we believe is the big value creator for the business over time, given the massive network effects and the stickiness of that platform solution. And so I think it shouldn't go without saying that those gross margins and all the progress there have been a critical strategic win for the business in 2016.

[Robert Patrick Jones:]

Got it. That makes sense. Thanks so much for comments.

[John C. Doyle:]

Thanks a lot.

[Operator:]

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

[Frank Sparacino:]

Hi, guys. John, maybe for you, just on the local velocity, I know you don't want to give guidance, but I'm just trying to put it in perspective. 30 new logos in the second half of the year, as we look at 2017, what type of potential growth could we see, maybe sort of where we're at on the Anthem relationship and other channel relationships? Just trying to put that in perspective.

[John C. Doyle:]

Thanks, Frank. It's absolutely the top priority for the business. Rapid adoption of the platform, as I've said multiple times, is really, really important for us. We expect to drive material improvements in logo velocity this year. I think it's early, and just in general, I don't want to be trying to call logo numbers. The variability of sizes of these customers, for example, makes one logo very different from another. And so it's not a great metric from that perspective. But certainly in terms of the lives that we expect to add to the platform over the course of 2017, we expect the material improvement that largely in our mind comes out of Anthem go-to-market relationship, which then gives us confidence in the two year top line growth trajectory that Siobhan and I've been sharing with folks since early January. So thanks for the question. I know it's not a direct answer, but we are excited about faster growth.

[Frank Sparacino:]

Just following up on that, John, I mean, I'm sure you guys have given thought to this, but in terms of actually disclosing the number of lives.

[Siobhan Nolan Mangini:]

So, this Siobhan -

[John C. Doyle:]

Sorry, I thought you were finishing the thought. Let me make a quick comment and then Siobhan can answer.

[Siobhan Nolan Mangini:]

Yeah.

[John C. Doyle:]

Part of the reason raising that here is we actually agree with you. As the business evolves, and we have smaller customers terminating, which is again not something we just want to accept as a long-term condition in the business, but it is a current reality, and then big customers, six Fortune 500 businesses signing in the fourth quarter, the reality is we're driving a good growth in lives on the platform. And so we are thinking about that question. I'll let Siobhan finish.

[Siobhan Nolan Mangini:]

Yeah, I'm just going to follow-up, Frank, is we've been thinking a lot about metrics. We obviously started sharing ARR a little over a year ago to try to provide more visibility into the business and where we're headed. And I think it's another point in time, particularly with the Jiff acquisition for us, to think about how to provide more transparency in understanding of our business. And so it's something you'll hear us talk a bit more about and try to provide you some more visibility going forward.

[John C. Doyle:]

One of things just trying to add a thought here, we're actually seeing Percy economics increasing at a pretty healthy rate, about 20% for 2016, deal sizes are nominally higher. And so I think it tells an important story about the success of the rollout of our platform solution that's getting a little bit obscured by some of the other metrics that we've been sharing. That story being not only is the platform adoption off to a very strong start, but the economics of that business are outstripping the headwinds we've seen on the transparency part of the product offering. So thanks for the question and we appreciate you being on the call.

[Operator:]

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

[Charles Rhyee:]

Yeah. Hey, thanks for talking the questions. Hey, just going to the guidance again, when we think about – and I apologize I missed it, when we think about sort of where the increase in loss, obviously, from the investments that Jiff is making, is it going to be more – should we think a bit more in R&D, sales and marketing? Could you give us maybe a little help in terms of breaking among the different cost lines, where should we kind of accept more of it versus others?

[Siobhan Nolan Mangini:]

Sure. So we'll give more detailed pro forma guidance with Jiff included at the Q1 call. I think to your point, we're very excited by the R&D teams and what they have to offer. And that will be one of the areas of investment as well. They obviously have a sales and marketing team as well.

[Charles Rhyee:]

Okay. So have you guys already – I guess the question is then, in terms of development of – or integrating the Jiff product into what you guys are doing at Castlight, is it your idea to sell two different platforms into the market? And I apologize if you had kind of really gone (43

[John C. Doyle:]

Thanks, Charles. So the current joint opportunities in the market today are opportunities where Castlight is sold and Jiff is sold in their current forms with a plan in the latter part of 2017 to initially integrate the two separate products with things like single sign on, deep linking that allows us to surface content from one product in the other product in ways that I think make the user experience for each of them stronger than they are today even better, and seamless navigation between the application. It will really be 2018 implementations, where the two products come together as one. When I say that I'm not necessarily prejudging whether there would be one application or two applications, I'm more talking about the architecture of the overall product and how we'll be going to market always as a joint offering. A lot of the details, as you can imagine, are things that the product teams are actively working together on now. And so, we'll be able to share more granularity about that over the course of the year.

[Charles Rhyee:]

That's helpful. And then, in terms of the Jiff offering into the market, right now, let's say, for example, with Anthem right, you have this new – you're embedded into the Anthem offering. How quickly can you get the Jiff offering to be included as you go into the Anthem customer base? Or we have to wait for the next selling season or can we get in for the 2018 selling season?

[John C. Doyle:]

Great question. We actually began that work with our Jiff colleagues in the fourth quarter before the deal was even finalized. And the reason we did that is because we were prepared to work as partners if that's how things had come out with Anthem on a combined solution. So when we talk about Anthem Engage, which is what we're going to market with this year with Anthem, there are absolutely elements of the Jiff product capabilities and Castlight product capabilities coming together to deliver that solution. And it's a big part of, I think, Anthem's enthusiasm for what we're able to deliver is that we're now talking about a product that's spanning well-being and decision support and offering key platform capabilities, which goes beyond what either company could do separately. So, I should've said in answer to your other question that we're moving very quickly on putting the two together for that particular channel.

[Charles Rhyee:]

Okay. That's helpful. And then, question for Siobhan, do you have like a deferred revenue number for Jiff that we can maybe approximate sort of an adjustment on...

[Siobhan Nolan Mangini:]

So we have not shared anything to-date. We will upon the transaction close along with the deferred revenue in haircut so that you can do a GAAP to non-GAAP reconciliation.

[Charles Rhyee:]

Okay. And then, maybe the last question real quick. Just following up on the previous question. Is it right to think that you guys are going to consider moving to more like a lives PMPM kind of model, because it seems most of the benefits world is priced and constructed that way? Just curious how Jiff historically looked at it.

[Siobhan Nolan Mangini:]

So I think it's important to note. We do sell in a PMPM model and so does Jiff. I think what we were saying is to provide more transparency into Castlight business, we share ARR at this point, but sharing something like lives will obviously give you a direct insight into the PMPM for Castlight and Castlight for Jiff (48

[Charles Rhyee:]

Great. Okay. Thanks, guys.

[John C. Doyle:]

Thanks, Charles.

[Siobhan Nolan Mangini:]

Thank you.

[Operator:]

Your next question comes from...

[John C. Doyle:]

Sorry. We'll take one more question, please.

[Operator:]

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

[Richard Collamer Close:]

Great. Thanks for the follow up. Just want to understand the churn in pricing aspect again. I think you said something along the lines of you had a 6% impact on ARR based on the churn in pricing. Is that correct? So ARR would have been roughly $129 million. Am I looking at that right?

[Siobhan Nolan Mangini:]

So that what was shared is that the termination churn we saw was 6% of the ARR that we signed at the end of 2015. That was $110 million in ARR and that was about half of the total churn. So you can imagine something around the same number was for pricing.

[Richard Collamer Close:]

Okay, great. Thank you.

[John C. Doyle:]

Thanks, Richard.

[Operator:]

There are no further questions at this time. I would now like to turn the call over to Giovanni Colella, Co-Founder and CEO, to make closing comments.

[Giovanni M. Colella:]

Okay. Well, thank you, guys, very much for joining us today. We look forward to seeing you at the Cowen, Raymond James and the SunTrust Conference in March. This is my last earnings call at Castlight. So I want to particularly thank all our dedicated employees for working tirelessly on our mission. And I want to congratulate my dear friend and partner, John Doyle, for his new role as CEO. With him, we're in great hands. I look forward to the Castlight and Jiff teams joining forces soon and that together we can transform the way employees and their families make their best decision for their health.

[Operator:]

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