Castlight Health, Inc.
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Welcome to the First Quarter 2015 Castlight Health’s Earnings Conference Call. During the call all participants will be in a listen-only mode. After the presentation we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section of Castlight Health’s website following this call. I will now turn the call over to Charles Butler, Vice President of Investor Relations. Thank you. Mr. Butler, you may now begin.

[Charles Butler:]

Good afternoon and welcome to Castlight’s conference call to discuss our financial results for the first quarter ended March 31, 2015. With me on today’s call are Giovanni Colella, our Co-Founder and CEO, John Doyle, our CFO and Nita Sommers our Chief Strategy Officer. Following our prepared remarks we will take questions. Our press release was issued after close of market today and is posted on our website where this call is being 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 30 days. During the course of this call we will make forward-looking statements regarding our trends, our strategies and anticipated performance of our business including our guidance for the second quarter and full-year 2015. These statements reflect management’s current views and expectations and are subject to various risks, uncertainties and assumptions. 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. Forward-looking statements made during the call are being made as of today. If this call is replayed or viewed after today, the information presented during the call 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. On the call we will also discuss certain non-GAAP metrics such as non-GAAP gross margins, operating expenses, net loss and net loss per 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 today’s earnings release which is available on our website and as an exhibit to the Form 8-K filed with the Securities and Exchange Commission before this call. With that, let me turn the call over to Gio.

[Giovanni M. Colella:]

Thanks Charles, thanks everyone for joining us for today's to quarterly financial results. I'm really excited to be here. It is our mission to help enterprise and employees leverage technology to take a fundamentally different approach to managing healthcare spend. I'm pleased to share that Castlight made significant progress against our mission and key strategic growth initiatives during the first quarter. As we look forward, we believe that Castlight remains on track to deliver very strong growth in 2015 and we are even more optimistic about our multiyear growth outlook based on the foundation we're putting in place this year. So, in terms of Q1 highlights, we have a solid first quarter financially. Subscription revenue was up 100% year-over-year in the first quarter. We exceeded our revenue guidance for the quarter due to the completion of the largest number of implementations during one quarter in our history. Additionally, we had great success renewing customers that were also due in the first quarter, many of which are among our largest customers. The evolution of our sales force progressed per plan in Q1. Based on this and on our strong pipeline we believe we are well positioned to expand our business in the latter half of the year when the majority of annual [ph] sales typically takes place. So in Q1 we continued to invest substantially in innovation we remain on track to introduce two exciting new offerings later this year. We believe that our track record of innovation is a key reason that customers choose Castlight as their long-term technology partner to help them manage their healthcare benefits investments. We are pleased with the progress we're making at this critical time in Castlight's development. Most importantly, it appears our customers and their employees recognize the value of our offering. In a little more than two years we feel that Castlight platform has been validated by the quality and the caliber of our customers. We are laser focused on execution and our key 2015 priorities include the following

[Nita Sommers:]

Thanks Gio. Let me provide a little more detail on some of the recent progress and key upcoming efforts on our product value and innovation front. Gio mentioned the success we're seeing with renewals year-to-date. The success of renewals is directly related to the values that our clients are realizing through the use of our broad suite of Enterprise Software Management [indiscernible] Let me share some of that. At the end of 2014 we collected data from a cohort of customers with at least two years of experience with Castlight. We found by year two that on average Castlight user experience is 7% year-over-year reduction of spending as compared to nonusers. Now the customers in this cohort realized a four extra turnout investment for purchasing Castlight. As we continue to optimize our current suite of solutions and introduce new offerings, we expect to be able to continue to demonstrate tangible value. Given the enormity of current healthcare spending by some insurance players, we believe we are only at the beginning of a long-term robust value proposition for Castlight. We noted last quarter that we have two new offerings scheduled for launch later this year that will empower enterprises to drive greater employee engagement and health and to leverage in a way to drive behavior change. You will be getting to hear more about these new offerings as we are hosting three regional customer events in the coming weeks to discuss our product vision. Additionally we look forward to sharing this vision with you at our [indiscernible] Analysts and Investors Summit on June 16 here in San Francisco. In addition to discussing the Castlight products and platforms, we have current customer schedule to speak here directly about the value of Castlight as they face their challenges of managing the corporate healthcare enterprise. Hope you'll be able to join us in San Francisco in June. Taken together we believe the progress we are making delivering value to customers and growing their product portfolio positions Castlight Health for strong growth for many years ahead. I believe we are having a huge opportunity and are making the investments necessary to remain recognized as the leader in the enterprise software management market. With that, let me turn the call over to John to review our financial performance and guidance.

[John C. Doyle:]

Thanks Nita and good afternoon everyone. We had a strong first quarter of 2015 which included total revenue that exceeded our guidance. In addition, we executed well on key objectives to support our long-term growth. These key objectives were also drivers of our Q1 results, so let's get straight to the numbers. Total revenue of $16 million in Q1 2015 was up 90% year-over-year and 10% sequentially. Subscription revenue represented 93% of our total revenue in the first quarter and it increased 100% compared with the year ago quarter. The increase in total revenue in Q1 was driven primarily by incremental revenue from customers launched in Q4 2014 and from new launches in Q1 2015. We completed 22 new customer launches as well as upsell implementations. The efficiency and predictability of customer implementations, particularly of upsell products is a major focus area for us this year. We've made solid gains on this front so far in 2015 including commencing a data infrastructure project with one of the largest pharmacy benefit managers in the United States. We expect this project will enable us to launch customers on Castlight pharmacy in less than four months in many cases, compared with timelines of the year and more prior to the change of the pharmacy product. Based on our progress in Q1 and work plan during the remainder of the year, we expect to drive meaningful improvement in our revenue velocity from upsell products heading into 2016. In addition to strong top line growth in Q1 our gross margin was 58% this quarter compared with 23% in Q1 2014 and 58% last quarter. We are continuing to make targeted investments in data infrastructure related to our plans for improving implementation timelines, particularly with our upsell products and we expect that these incremental costs will lead to flat or nominally lower sequential gross margins for the next several quarters. Our long-term target for gross margins is 70% to 75% and we remain confident in our ability to achieve these targets over time. Total operating expenses were $25.4 million in the first quarter which was 19% higher than the year ago quarter and 7% above fourth quarter 2014 operating expense. Our increasing investments in sales and marketing, product innovations and company infrastructure reflect our confidence in the growth potential of our business. As Gio and Nita discussed our new sales force is well positioned. We are track to deliver new products that build out our value proposition and renewals have been very strong so far this year. From our perspective, the pieces are coming together as planned heading into our core selling season. We expect to drive strong growth in bookings overall in 2015 compared with 2014. Based on this we will continue to invest aggressively to capitalize on our leadership position in the market for enterprise healthcare management solutions. A case in point is sales and marketing expenses which were $14.7 million in Q1 compared with $13 million in Q1 2014 and $14.2 million in Q4 2014. The increase in Q1 resulted primarily from sales hiring and compensation. Rapidly increasing in the size of our sales team was that our newest sales professionals would be ramped in time for Q3 was one of the critical priorities that we achieved in the first quarter. We believe that we are well-positioned from a sales capacity perspective to execute well against the strong pipeline. In addition to the investments in our distribution capabilities we also increased R&D spending in Q1. R&D expense was $6.2 million in the first quarter which was 22% higher than in Q1 2014 and a 17% increase sequentially. These investments have allowed us to build exciting new products that we plan to launch later this year while maintaining a fast pace of innovation on new features and functionality in our existing products. General and administrative expenses were $4.4 million up 39% and 6% relative to Q1 2014 and Q4 2014 respectively. The increases reflect the addition of public company infrastructure and other critical support functions such as an internal talent acquisition team. Our Q1 net loss was $16 million compared to a net loss of $19.3 million in the first quarter of 2014 and $15.2 million in the prior quarter. Our net loss per share in the first quarter was $0.17 on 91.8 million. Weighted average basic and diluted shares outstanding compared to a net loss per share of $0.72 on 27 million weighted average basic and diluted shares outstanding in Q1 2014 and a net loss of $0.17 per share on 90.5 million weighted average shares outstanding in Q1 2014. We ended Q1 with $185.8 million in cash and investments. Cash used in operations was $13.2 million in the first quarter of 2015 compared with $16.1 million in the same quarter last year. Turning now to Q2 and full-year 2015 guidance. For the second quarter we are forecasting total revenue of $17.6 million to $17.9 million representing growth of 67% [ph] and 70% on a year-over-year basis. We expect to generate a non-GAAP operating loss in the range of $16.5 million to $17.5 million and non-GAAP net loss per share of $0.18 to $0.19 based on $94 million weighted average basic and diluted shares outstanding. For the full year 2015 we are maintaining our revenue guidance range of $74 million to $77 million. While we’re very pleased with the progress made during the first quarter against our strategic initiatives, it is important to keep in mind that we do not expect our reported revenue to benefit from these efforts until 2016 [ph]. We’re also maintaining our full year non-GAAP operating loss guidance of $64 million to $67 million targeted non-GAAP net loss per share in the range $0.66 to $0.71 based on $95 million to $97 million weighted average basic and diluted shares outstanding. Overall we are very pleased about our performance in the first quarter of 2015. Our key objectives for the year are on track and our belief is that the business is increasingly well positioned to grow strongly in 2015 and beyond. I want to again thank our employees and customers whose commitments to improving healthcare are the real drivers of our business. With that, Gio, Nita, and I will be happy to take questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Robert Jones from Goldman Sachs.

[Robert C. Jones:]

Thanks for the questions and congratulations on the two big renewals. I guess specifically related to those I was curious if there’s anything you could share as far as how the renewal contract compared to the original contracts for these two clients and maybe anything more specific you can share around what exactly were you able to upsell into those two accounts and anything just on relative pricing contract over contract will be helpful?

[John C. Doyle:]

Yes, thanks Bob. I’m very excited about both renewals as we said in the prepared remarks it was our two top revenue generating customers non-governmental customers and so very significant for the business and in both cases significant expansions of those relationships. In one case not getting into too much detail, because it’s a small number so it’s pretty specific customer information. We sold some of our new products as well as existing upsells. So, you can think about our rewards in pharmacy for example. In terms of how the economics compare, these were significantly larger contracts after the renewal than the original term. So, in both cases very pleased with the outcome.

[Robert C. Jones:]

Great, I guess just a follow-up more broadly on the quarter-to-date, did you give, sorry if I missed it, total number of customers signed in the quarter? And then as we think about retention year-to-date I was wondering if you would be willing to share the dollar retention that you’ve seen so far in 2015?

[John C. Doyle:]

Yes, so signed customers total now is 174. We had 6 net new customers added in the first quarter and Gio mentioned Viacom, McKesson, and state of Mississippi, so very pleased with the customers that we are adding there. From a net dollar retention perspective haven’t updated that specifically, but happy to share that target for the years 100% net dollar retention and particularly with the strong renewals that we’ve talked about to that we’re feeling very confident about that after 2015.

[Robert C. Jones:]

Great then just maybe one last one I’m assuming the this the new client signed in the quarter of 11, 2016 is that a fair assumption?

[John C. Doyle:]

There’s a mix so you end up with customers who will launch sooner than that, but it’s also fair to say that some of them will launch on the 11, 2016 timeline so absolutely a mix.

[Robert C. Jones:]

Okay got it thanks very much for the detail.

[John C. Doyle:]

Thanks Bob. Thanks.

[Operator:]

Our next question comes from the line of Jennifer Lowe from Morgan Stanley.

[Jennifer Lowe:]

Hey, thank you. I would just like to touch on guidance and some of the assumptions there ran up limitation cycles, because it’s encouraging to hear some of the discussions around the process improvements that’s are happening there and some of the changes you’re making to get those implementations moving more rapidly. But if I recall on the Q4 call you’d mentioned the guidance for calendar 2015 assumed that there was wasn’t an improvement in those implementation cycles. So I just wanted to confirm what sort of that, what’s baked into the guide in terms of implementation timelines?

[Giovanni M. Colella:]

Yes, thanks Jen. So first of all very pleased with the growth that we’re seeing and Q1 was a record quarter for implementations, so 34 total implementations, 22 new customers, 12 upsells. The way to connect our conversation on the last call with our outlook now is that we have a significant backlog of upsell implementations that will be working through the process in 2015. Alongside that we are making these investments that we talked about in improvements in data, infrastructure and processes with our data partners and those really will impact implementations of customers that we are signing this year more than they impact the backlog and therefore the impact on revenue velocity is really a 2016 phenomenon.

[Jennifer Lowe:]

And maybe just one more somewhat really hit question, it looks like the professional services component of revenue grew about 14% year-over-year in the quarter, which seemed later than I would have expected given the commentary around the amount of implementation work that is underway right now. So I was just hoping you can provide a little context there around the professional services revenue growth versus what you are seeing practically in terms of new implementation work?

[Giovanni M. Colella:]

Right, so for professional services I think it is important first to level set on how we recognize the revenue there. So, that revenue because we don’t currently have standalone value on professional services is recognized ratably [ph] over the full three-year term of our contracts. So you are essentially spreading revenue related to activity during launch over a very long period of time and so that reduces the variability with quarter-to-quarter implementations. Another thing to point out is that when we renew contracts you are typically not renewing the implementation of professional services piece of those contracts, you are renewing the subscriptions and so what we see for example sequentially from Q4 to Q1 was in Q4 some uplift from some of the terminations that we talked about last quarter where you had an acceleration of unrecognized professional services as well as some contracts reaching the end of their first term and renewals beginning in the first quarter of 15 without that professional services revenue in them. In terms of the expectation going forward, we do expect to resume a modest sequential increases in professional services going forward.

[Jennifer Lowe:]

Okay. Thank you.

[Giovanni M. Colella:]

Thank you.

[Operator:]

Our next question comes from the line of Brad Reback from Stifel.

[Brad R. Reback:]

Hi guysm how are you?

[Giovanni M. Colella:]

Good Brad, how are you?

[Brad R. Reback:]

Good thanks. Just one quick question, can you give us a sense of how much sales capacity is up year-over-year?

[Giovanni M. Colella:]

Yes, so Q1 was big sales hiring year for us as we talked about on the first quarter call. John McCracken started in January, very quick to work scaling up his leadership team and bringing in significant number of new sales folks. Don’t want to get into specifically to the capacity numbers, but we timed that transition specifically to have meaningful additional capacity ramps for our prime selling season in the second half of the year and we absolutely executed against that priority. So we feel very good heading into the second half and we will do so with significantly greater capacity than we have at the same time last year.

[Brad R. Reback:]

And then just one quick accounting question John, when you signed, when you renew a customer and sign an upsell with that customer, does rev rec on the upsell not occur until that products goes live or is a little bit more liberal because of an existing customer?

[John C. Doyle:]

Yes, that is correct, so the rev rec on the expanded suite of products that we’re selling would start when those products are implemented.

[Brad R. Reback:]

Great, thanks very much.

[John C. Doyle:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of Frank Sparacino from First Analysis.

[Frank Sparacino:]

Hi guys, just two questions related to sales following up, I would be curious when you look at sales organization today just in terms of the 10-year sort of churn that you've seen versus a year ago? And then secondly can you remind me when you look at the indirect efforts that you guys have, I don’t know who has been significant in terms of some of the channel partnerships. But where you sort of see the most traction today as it relates to sort of the indirect efforts?

[Giovanni M. Colella:]

Okay, hi this is Gio. Thanks so much for the question. So, let me see I’ll break it down in two parts, then we'll see if we I understand them both pretty well. From the sales team standpoint, again as we pointed out really excited of where we’re now. We hired John McCracken at the end of last year. And we are now at the end of Q1 with our entire sales team built and ready to go. So that is the old sales people that were with us before that were the best performers and we added the new one, so the entire country is covered and they’re up and running and doing very well, which positions us very well for Q3 and Q4 which is our strongest moment. So, that’s in terms of the sales team, very excited, and John also did a lot of work in our infrastructure, our visibility, really excited about that pipeline. So we have great visibility on the pipeline. It’s just a pleasure to be where we are now. Now, in the second part of the question, I'm not so sure I understand it. So what was you…

[Nita Sommers:]

I think Frank, this is Nita, just to clarify your question, are you asking about whether we have distribution partners right now?

[Giovanni M. Colella:]

Is that correct?

[Frank Sparacino:]

That’s correct and just who has been influential and then how do you see that sort of playing out going forward?

[Nita Sommers:]

Yes, so it’s a great question and so I think that first thing to really emphasize the direct sales force nature of what we do. So, we really believe that there’s a lot of value in building direct relationships with our clients. And so, part of our investments that you see in the sales force and the infrastructure is really around building out that national sales force. We certainly have a number of partner organizations that are very important as we do lead generation as we close deals via benefit consultants and other type organizations. So we certainly do spend considerable time with those other types that partner organizations and as we eventually in the future begin to look more down market would certainly look to leverage distribution partners more aggressively.

[Operator:]

[Operator Instructions] And our next question comes from the line of Steven Wardell from Leerink Partners.

[Steven Wardell:]

Hi Steve, here. Apologies if this has been covered already, but when you’re talking with your clients are you seeing them in the first quarter continuing to accelerate healthcare cost shifting onto employees and is that linked with thinking about Castlight and thinking about buying Castlight? So are you seeing kind of acceleration of this trend, are you seeing linkage of this trend to Castlight?

[Giovanni M. Colella:]

Yes thanks Steven, thank you very much. No it was not covered and it allows me to talk quite a bit about what I spend now most of my days in front of customers. So I have great information on that. A couple of things we're seeing and I've been in this business now six years. So I’ve seen the morphing of it. First of all absolutely with no doubt it’s not even a conversation anymore. Are we going to transfer more cost to our employees is just how much and how are we going to do it? Like 60 years ago it was really a question mark. Is it worth it or not? At this point that train has left the station. It’s a conversation then it already starts booking. Our deductibles are this amount and they’re going to go up to this amount, period, end of story. What is really interesting though is we'll we’re having a lot of fun. There is a shift also happening in the audience. So, in my last quarter, I've seen this accelerated and part of it and maybe due to also the fact that we’re getting bigger, so we’re dealing with a lot of big organizations and we’re getting better known. So due to the benefit of doubt over that, but we went from just talking to the benefit leader and now walking into meetings and which I almost always expect to have at least their boss, which is the HR leader and frequently special to our late stages of our deals the CFO involved. So it’s becoming much more of a strategic conversation with them, conversation has moved way beyond transparency with these players. It’s really about the technology, the platform, actually one big, non-customer and a prospect the other in the last meeting we had brought in right away even their Head of IT he was asking very business driven question. So, much broader conversation and with no doubt shift towards high deductible and more out-of-pocket expectations.

[Steven Wardell:]

Okay. Thank you.

[Giovanni M. Colella:]

Thank you.

[Operator:]

At this time we have no additional audio questions. I'll turn the call back over to the presenters.

[Giovanni M. Colella:]

Wow, no more questions.

[John C. Doyle:]

Okay.

[Giovanni M. Colella:]

I should ask my mum to call in. Thank you all for joining us today. We are really pleased and excited about the progress we made to improve the delivery of Canada and the United States. With that in mind, we will welcome you to join us for our [indiscernible] Analysts and Investors Summit on June 16 here in San Francisco. At that summit we plan to discuss our products and the platform and as Nita noted, we will have current customers who will be on hand to speak with you about the value they are getting from Castlight Enterprise Healthcare Management platform and we look forward to seeing you there. Thank you all.

[Operator:]

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