Tivity Health, Inc.
Q2 2018 Earnings Call Transcript

Published: 5 Aug 2018

[Operator:]

Good afternoon, and welcome to the Tivity Health Second Quarter Conference Call. Today's call is being recorded and will be available for replay beginning today and through August 2 by dialing 719-457-0820. The replay passcode is 2034426. The replay may also be accessed for the next 12 months on the company's website. To the extent, any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in today's news release, which is also posted on the company's website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Tivity Health's expected quarterly and annual operating and financial performance for 2018 and beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Tivity Health's filings with the Securities and Exchange Commission and in today's news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. And now, I'll turn the call over to the company's Chief Executive Officer, Mr. Donato Tramuto. Please go ahead, sir.

[Donato Tramuto:]

Thank you very much, operator, and good afternoon, and happy Thursday to everyone on the call. I'm glad to be with you today for Tivity Health's Second Quarter 2018 Conference Call. I'm also joined here today by Adam Holland, our Chief Financial Officer. I'd like to start off with a high-level review of our performance for the second quarter. I'll then turn it over to Adam, who will provide a detailed review of our second quarter financial results, then I'll conclude today's prepared remarks with a full update of our business development activity and our early view regarding 2019. We'll then open the call for your questions. The strength of the second quarter, which was driven by our SilverSneakers line of business, demonstrates several very important factors

[Adam Holland:]

Thank you, Donato, and good afternoon, everyone. I'd like to start by recapping some of the key financial metrics for the second quarter. Second quarter revenues were $151.9 million compared to $138.9 million for the second quarter of 2017, an increase of 9.3% over last year. Adjusted income from continuing operations was $22.8 million, an increase of 32.3% compared to $17.2 million for the second quarter of 2017. Adjusted income from continuing operations per diluted share of $0.53 increased 29.3% compared to $0.41 for the second quarter of 2017. Adjusted EBITDA was $35.1 million, a margin of 23.1%, compared to $31.7, a 22.8% margin for the second quarter of 2017. SilverSneakers visits came in at approximately $25.7 million compared to $23.1 million for the second quarter of 2017, an increase of 11.3%. As you recall last year in Q2 of '17, we tallied a 9% year-over-year increase in SilverSneakers visits. During Q2 2018, Prime member pay enrollment increased by approximately 7,300 net new subscribers, a 90% increase over Q2 2017 to net new subscribers, and now totals approximately 291,000 subscribers compared to 237,000 subscribers at the end of Q2 2017. This June of 2016, we have increased total net subscriptions by over 60%. Our member pay Prime business, which also experienced the effects of the adverse weather and flu season in the first quarter, got back on track with net new subscriptions that now meet our expectations. Our June test promotion with Fitbit showed early promise, and we look forward to continuing the test and learn various marketing promotions that are designed to raise awareness of our member pay Prime program. While the Q2 Prime subscription activity was successful, the lost subscriptions from the flu and weather trend in the first quarter were not entirely recaptured, which led to some pressure on our Q2 Prime revenue. Our year-over-year improvement in earnings per share includes a favorable comparison of approximately $0.07 per diluted share from the improvement in our tax rate and an offset of approximately $0.01 per diluted share as our share count increased by approximately 1 million shares. Our effective tax rate came in at 25.3%, reflecting the impact of the Tax and Jobs Act as well as the positive benefit of a tax treatment from exercising of options and investing of restricted shares during Q2. We entered 2018 with approximately $120 million of federal NOLs and credits available for utilization, and we expect to pay less than $5 million in federal and state cash taxes during 2018. Moving on to cash flow and debt repayment. Free cash flow, which we define as cash flows from operations less capital expenditures, for the second quarter continued to show strong momentum and totaled $27.2 million compared to $36 million in Q2 last year. Last year second quarter free cash flow benefited from the timing of early payment from a large customer, which was not replicated this year. We ended Q2 2018 with $150 million of outstanding debt and $67 million of cash on hand. Our ratio of total debt to 12-month trailing EBITDA, as calculated under our credit agreement, is less than 1x at the end of Q2 2018. This compares to 1.5x at the end of Q2 2017. Subsequent to quarter end, on July 2, 2018, we repaid the $150 million aggregate principal amount of the cash convertible notes using a combination of available cash and proceeds from borrowings under the delayed term loan facility of $100 million. In addition, on July 2, 2018, we settled the cash conversion derivative of $141.2 million, which was fully funded by payments made by the counterparties for the settlement of the cash convertible notes hedges. Going forward, we expect to maintain a modest cash balance while continuing to utilize our cash flow to reduce leverage. As we assured with you before, we continue to work with our board to evaluate multiple ways in which we can utilize capital and deploy it, thereby increasing the return to our shareholders. Turning now to our outlook for 2018. We are reiterating the annual guidance range of revenues in a range of $607 million to $625 million, EBITDA in a range of $139 million to $144 million, free cash flow in excess of $100 million and earnings per diluted share in a range of $2.12 to $2.20. And with that, I'd like to turn the call back to you, Donato.

[Donato Tramuto:]

Thank you, Adam. And before I begin, I would like to thank all of the Tivity colleagues for their continued efforts around their focus on executing the A-B-C-D strategy. I am very proud of the commitment and energy they bring to their respective roles and responsibilities and while recognizing that our ability to deliver on results is keenly predicated on staying focused on our long-term strategy. As stated earlier, we believe the historical and current investments deployed in the A-B-C-D strategic initiatives are translating into successful results. As mentioned during our Investor Day conference held in June, we're building on a solid foundation we are now focusing on leveraging a scalable model that accelerates value creation for our customers and shareholders. The growth leverage, we believe, serve as an indispensable driver of growth where the whole will have an impact greater than the sum of the individual parts, driving increased enrollment as well as engagement to help us reach our goal of $5 million enrolled SilverSneaker members by the end of 2020. Case in point, and as you heard from Adam's opening comments, we saw an increase in visits in the second quarter. Additionally, and as we examine our increase of new enrollees and targeted markets for both Q1 and Q2 compared to last year, we saw increases in excess of 30%, well above our historical norms, and I believe a sign of the positive impact of our integrated growth lever approach. With that, allow me to provide a progress update on some of our growth levers since last quarter. First, our digital marketing strategy continues to hit new highs. There are 3 metrics that we are keenly focused on. First, new silversneakers.com registrants increased by almost 1 million to 2.1 million. And since January of 2017, second and specific to the metrics that we are measuring, our online SilverSneakers eligibility checks, we have seen an increase over 44% year-over-year. And lastly, fitness center location checks have increased almost 20% over the same time period. We believe these last 2 metrics, eligibility checks and fitness center location checks, are meaningful indicators for our goal to achieve the 5 million enrolled members by the end of 2020. Under the direction of our Chief Brand Officer, there will be more intention on driving traffic to the SilverSneakers website, where we can develop a direct relationship with eligible members. Second, the strategy for our call center, which is now known as our experience center, is shifting from a pure call center to a blended profit center. Our experience center logged a total of 1.3 million interactions, which included over 650,000 outbound calls in the first half of the year. Allow me this opportunity to remind you, these outbound calls are all new activities over last year. During the second quarter, the bulk of these outbound calls focused on new member introductions to SilverSneakers as part of a multi-touch information campaign and one specific program that involves 700,000 eligible members. We doubled the number of new enrollees compared to previous programs that did not have a multifaceted approach. Third, and just this past February, we completed the refocusing of our territory managers and their field teams to work with physicians, community centers, gyms and other places where seniors congregate or engage to increase the awareness of SilverSneakers and to drive enrollment and participation. During the second quarter, this team logged nearly 700 events, giving rise to interactions with an estimated 70,000 seniors, many of whom are eligible for the SilverSneakers benefit. And this third quarter, we plan to integrate this activity with the outbound calls from the experience center, implementing a closed-loop marketing strategy that is deploying multiple initiatives and levers to enroll more eligible members and engagement. Fourth, our new CollegeSave enrollment and engagement initiative has just recently demonstrated promising results. Case in point, we recently had a 35% open rate, resulting in over 1,000 new enrollees in that programs, including many SilverSneaker members who were eligible but not enrolled. Remember, CollegeSave's value proposition for SilverSneakers is to promote both enrollment and engagement, thereby driving revenue. These early results indicate the value around identifying critical nuggets that will tap into our members' interests and behavioral motivations to get them to enroll and to stay with them to ensure they engage. In summary, we are making progress. In just 2 short years, we have added many programs that were historically not a part of the SilverSneakers program. And as a result, new enrollment as a percentage of total membership continues to show year-over-year improvement in both the first and second quarters. With over 12.1 million eligible SilverSneaker members who have never enrolled, the opportunity is knocking at our door. Tivity Health is moving deliberately beyond soft measures that historically included eligibility growth to now looking at more hard measures that tally growth and enrollment as well as engagement. One of our growth levers that was not yet turned on during the second quarter is our new flip50 product. First, allow me to remind you that flip50 is an extension to our existing Prime business, and I'm personally very excited about our new relationship with ARP. Please keep in mind that the success of Prime has been primarily driven by 2 sponsors who make up the bulk of our 41 million eligible lives. Hence, we believe this new sponsorship with AARP will be a key catalyst to the success of flip50. Flip50 allows AARP members to now enjoy a unique combination of exercise with exercise with access to our 10,000 fitness centers in our Prime network as well as nutrition, rest and recovery. We are intentionally launching the product in 7 states and will hopefully expand to additional states as we move through 2019. As with any new product launch, marketing is a vital component to success. With that, I am also pleased to announce today that we are joining forces with long-term partner, Sharecare, led by Jeff Arnold. We believe this combination to market the AARP flip50 product will create heightened awareness and market demand that are designed to drive flip50 subscriptions. Given the early stages of this product, we expect a modest amount of new activations in the back half of 2018 with additional ramping in 2019 and beyond. Sharecare and Tivity will partner on new digital advertising initiatives which will include segments hosted by Dr. Oz. I look forward to reporting on our progress and expect you will see for yourselves the exciting new marketing campaigns related to this product. I now want to give you an update regarding our first blush of 2019's revenue profile as well as an inside view to the revenue mosaic that has been the hallmark to how the forthcoming year revenues are defined. First, let me be crystal clear, the selling season is not yet over. And under the leadership of our Chief Growth Officer, Steve Janicak, the sales team to date has successfully secured approximately 90% -- let me just correct that. We just got news walking into this call. We are at 90% -- 95% of our 2019 contract renewals across all business lines. Second, the sales team has made significant progress in securing SilverSneakers' new business, which includes multiple new Medicare Advantage customers. The 2019 revenue will also benefit from the expansion of existing markets with certain customers which will commence on January 1, 2019. Additionally, there were sale wins in both the Prime business as well as our WholeHealth Living business for 2019. We anticipate continuing to increase enrollment and engagement as well. Continuing with the mosaic, and as anticipated, we did have detailed discussions with UnitedHealthcare during the late Q2 period. And they have informed us of their decision to continue to offer in 2019 SilverSneakers to group Medicare Advantage members in all 50 states and to individual Medicare Advantage members in 28 states. What does this mean? The UnitedHealthcare will take away 11 additional states in 2019 for individual Medicare Advantage lives only. We anticipate these changes will adversely impact 2019 revenue by approximately $19 million to $21 million. This range is based on 2018 enrollment levels in those markets and include some anticipated positive offset related to the natural recapturing of SilverSneakers participants into other Medicare Advantage Plan partners in those states as well as growth in UnitedHealth Group lives with those states for 2019. So what is the estimated net results of the activities associated with our 2018 selling season? We are currently projecting a mid- to high single digit total company revenue growth for 2019, which reflects the revenue mosaic of SilverSneakers wins and losses mentioned, growth in Medicare Advantage enrollment, growth in our Prime and WholeHealth Living business and growth related to our SilverSneakers enrollment and engagement activities. The 2019 preliminary guidance just provided to you also reflects other wins and losses in this current selling season. And as noted earlier, the selling season is not yet over. So some revisions is to be expected. We further expect strong EBITDA and free cash flow as we continue to execute on our business plan. Hence, it is important to note that this is only a very preliminary view, and our financial guidance for 2019 will be communicated in the normal course when we release our results for the fourth quarter in February of 2019. Our view will be informed by the overall growth in the Medicare Advantage market, and specifically, the success of our clients during open enrollment. In closing, let me be crystal clear. We continue to maintain our optimism. We have demonstrated the ability to win new business and increase enrollment and the members we currently have. SilverSneakers serves a rapidly growing demographic. However, and as I stated earlier, the focus of this organization, starting back in August of 2016, is to measure our ongoing and future success by increasing enrollment and engagement. And we believe the single most important growth driver will be our continued investments and our integrated levers strategy. Our Prime business is still under penetrated and should contribute to our growth in 2019, especially given the launch of our new flip50 product. Finally, we may have the early green shoots of an additional lever, our WholeHealth Living network. Through the development of the flip50 product, we learned and we were able to look at WholeHealth Living through a new lens and now plan to invest more into this business in the coming year as we see potential for a new top line growth opportunity to help address the pressing need for paying management solutions. Allow me for a moment to highlight one additional investment we have made into the member engagement strategy. In the second quarter, we established a relationship with one of the nation's largest pharmacy benefit managers, EnvisionRX, offering to SilverSneakers members a discounted pharmacy card on drugs that are traditionally not covered through their health plan. In a recent outreach program, we experienced a 51% open rate and a click-through rate of over 27%. While we are in the early stages of evaluating this new opportunity for the company, the high open and click-through rates speak volumes to the power of our brand as well as the value associated with our high Net Promoter Score of 81, leading us to believe we can offer other products and services that would drive greater enrollment and engagement, making these investments in our integrated offerings beneficial to our customers, our members and our ongoing growth strategy. In summary, our brand equity does have value. This is now my 11th earnings call since becoming CEO, and I believe the execution and delivery of past and current quarter results speaks volumes to the quality of the team and the commitment we have to sustainable, long-term execution. Thank you. And operator, we are now prepared to take questions.

[Operator:]

[Operator Instructions]. And our first question will come from Sean Wieland with Piper Jaffray.

[Sean Wieland:]

But wanted to ask about your -- the sales change that you discussed in the last call like new quota-carrying territory managers and how -- what kind of traction you're seeing off of that new model.

[Donato Tramuto:]

Sure. You know what? I have our Chief Growth Officer here. Steve, why don't you comment?

[Steven Janicak:]

Our focus, really, for territory managers is trying to get out in front as many customers as we can and as many members as we can to drive engagement and enrollment, so we are doing that. It's -- the results of that are preliminary at best, but we're seeing is we're seeing, as Donato mentioned in his script, the increase of new enrollment for this year versus Q1 and 2 versus last year of around 30%. So we're having an impact, and we'll have more as time progresses.

[Donato Tramuto:]

Yes. I think, Sean, the data is, right now, new, but I will say it's very encouraging. And we have to be careful. It's not just the territory managers all by itself. I think that -- if any industry has proven that is the integrated strategy that works is pharma. It's Steve's territory managers that are deployed that then gets connected, if you will, to the call centers, and then it's also registering those folks and making sure does CollegeSave have an advantage. So it's really a triangular approach. However. You can see that in the second quarter, the internal visit expectations we had, it exceeded our internal expectations, which I think speaks to the fact that we're seeing momentum.

[Sean Wieland:]

And what about the incentive program that you were going to launch in June to drive further engagement? What kind of traction have you gotten there? Or how did that launch go?

[Donato Tramuto:]

Well, that's the CollegeSave. And I just mentioned in the script that the campaign, we had almost a 40% open rate, which is really impressive. Any of you that have done this work before, I did it in my previous company, to have a open rate like that is very, very impressive. And 1,000 enrollees, that's the first campaign that we've launched and to have that kind of attraction. And many of those enrollees were not enrolled before into the SilverSneakers program, so that's a very encouraging metric that we're seeing.

[Sean Wieland:]

All right. And I've asked this before on prior calls, but have you thought more about your customer acquisition costs and maybe quantifying that for us?

[Donato Tramuto:]

We have. And with Arra onboard, we are working through that quantification, and I can share with you that. In the next call, you will have the details. You can take me to the bank on that.

[Operator:]

Our next question will come from Ryan Daniels with William Blair.

[Ryan Daniels:]

Thanks for the incremental detail on United. That's very helpful. I'm curious now that know what markets they're going to be bringing in-house early on in the year, to what extent are you able to go to other partners in those markets and try to enhance marketing campaigns to ensure share shift to them to further offset that in-sourcing impact on Tivity?

[Donato Tramuto:]

Yes. Ryan, one of the things I want to be very careful, we have -- we still have a very, very solid relationship with United. And my expectation is that they're going to diversify, and that diversification means that we have an opportunity to preserve a relationship with them. And so I think the news is certainly public, and I think that our other partners will handle that as such. But we are going to continue to work with United and continue to show them value and continue to have them as one of our valued partners, and I think that, that is something I'm absolutely adamant about.

[Ryan Daniels:]

Okay. And then if you go through renewals, obviously it seems like a very successful renewal season year-to-date with 95%. Can you talk a little bit about, number one, if you're seeing any major pricing changes or margin profile changes in the book of business? And number two, any major shifts, whether it's a hybrid model or not?

[Donato Tramuto:]

Yes. Listen, I've been now here, what, almost 3 years, hard to believe. And we continue to see that pressure, but I think the value that we're also seeing is this recognition of the investments that we are making to get more of these members enrolled. Perhaps the greatest challenge we hear right now is that, "Where were you guys a few years ago when we wanted more enrolled members?" I think we're going to continue to certainly face the normal, what I call, ins and outs of pricing. And I think that what we have to do is continue to demonstrate that we can win on getting more enrollees. I apologize now. I forget the second part of your question. Who said the lights are the first to go?

[Adam Holland:]

Shift to hybrid.

[Donato Tramuto:]

Well, as you know, I mean, our strategy with A-B-C-D speaks to volumes to the value around the hybrid model, and I'll have Steve comment in terms of what he's hearing and seeing. That is our preferred route to go. But, Steve, what have you seen in terms of market dynamics?

[Steven Janicak:]

Yes. What we've seen so far for our renewals, we don't have any of customers that are moving from a split or a hybrid model to a fixed PMPM model. And as we are out in the marketplace, we talk about the value of that split model. But at the end of the day, if a customer or as we're in the sales processes and on a PMPM model, we will definitely accommodate for that. But it's not our -- it's not the first thing that we talk about. We really continue to get the value and communicate the value of the hybrid model for both us, the health plan, and of the physical locations.

[Donato Tramuto:]

And I'll just add to that, these levers were created as an integrated approach because of the pressure that I believe our customers rightfully have placed on us. And that is they want to see more members and. They want to see the ability to leverage that brand value. And if you just look at these open rates, when I was running Physicians Interactive, I would have done anything to have these types of open rates. And to see these types of open rates really does speak that the brand does have an enormous amount of equity value, and our plans are recognizing that our incentives have to be aligned.

[Operator:]

Our next question will come from Mohan Naidu with Oppenheimer.

[Mohan Naidu:]

Just will ask a couple of more -- a couple more questions on the UnitedHealth. When you -- based on your conversations, can you talk about what they are thinking about the group market beyond the current contract period? It sounds like they are trying to pull more individual markets into their own Optum Fitness model, but how -- what is their outlook for the group beyond the current contract period?

[Donato Tramuto:]

Yes. I think it would be unfair. What I can give you would be the spirit of the dialogue I've had with them, and I expect this will be diversification. This isn't out of the ordinary. We've had customers that have diversified before. I do think that the value proposition that we are driving, I do believe United respects our brand. I do believe very strongly where the company might have been a few years ago triggered this, but I also believe that I'm taking United commitment to the partnership very seriously. And I think that they know that I am as well. And I think the fact that we're going into a second year and they've maintained the group, I think, is a good indication of where I believe that they will head.

[Mohan Naidu:]

Okay. And I guess on the 5 million enrollment target that you guys have for 2021, can that be achieved without the individual business from United?

[Donato Tramuto:]

Let me say this to you. When I threw that target out, I didn't throw it out in a very haphazard manner. I threw it out recognizing that if you look at the current eligible lives, which are over 15 million, and if that were to stay like that and when you look at half of those lives and the personas that we have developed, half of them fit the personas to want to do something to keep themselves active, that, that 5 million goal is clearly achievable regardless -- and I think that's a mistake, and I saw that when I first came on as CEO. The mistake that I believe we made a few years ago is that we've focused too much on this eligibility race. We have the market share. We have -- I know that the focus is on United, but I want to remind everyone that we have 63 -- 64 other clients that continue to see us as a very great partner. And so the ability to get to 5 million has always been predicated our 15 million eligibles. And I believe as long as we maintain that, that, that goal going into 2021 is doable. That's my expectation and belief.

[Mohan Naidu:]

And maybe one quick one for Adam. Adam, when you look at the mid- to high-single digit growth for 2019, should we think about Prime growing much faster into mid-teens or even higher into 2019, especially now that flip50 is going to come in as well?

[Adam Holland:]

Yes. Mohan, we'll probably get into the breakdown of the different pieces in our February call next year. Donato has said it well in his prepared comments that we think Prime, including flip50, is going to be a contributor to the growth profile of mid- to high single digits.

[Operator:]

[Operator Instructions]. We'll go next to Dave Styblo with Jefferies.

[David Styblo:]

I just want to start out understanding the flip50 initiative now that, that's out in the public with AARP. Can you give us a sense of how are you going to implement and roll that out over the course of the rest of the year? Is that already active and live right now? And can you remind me on the economics, how that works? Is it something that the employee pays a little bit more for to have access to this and then they get some credits for certain programs that they may want to utilize? If you could just give a quick rundown of what that looks like, it would be helpful.

[Adam Holland:]

Yes, sure. So the rollout, we're in the very beginning stages of the rollout now that the deal has been announced. And what we'll be doing is partnering with AARP and Sharecare and a few other third-party marketing firms. And what I would expect to see is, as Donato said in his prepared, a slow ramp-up of modest subscriptions by the end of the year, ramping much more quickly as we get into the first part of 2019. So I think the overall model, the way it works, it's pretty simple. This will be targeted towards AARP-eligible members and will help focus on that 50-plus population, which is a different segment from our existing Prime business. And members who are AARP can sign up directly via the app or the website and enjoy the benefits, and they'll have access to the Prime network, which is around 10,000 locations, the rest and recovery inside the app itself as well as a network of practitioners, right now, which is in 7 states. And as we continue to expand that network under the flip50 umbrella, that's what where we hope to get, close to all 50 by the end of next year.

[David Styblo:]

Okay. That's great. And then coming back to United, the $20 million revenue headwind for next year, so that's about 3% headwind of revenue growth. It sounds like the number of states that are rolling out or in-sourcing is about $11 million, which I think is about the same number they did for the 2018 plan here. So should we think of the headwind that's been in '18 numbers or is that also about 3%?

[Adam Holland:]

Yes. We never really got to that level of specificity with the '18 number. I think there's been some other reports out there that have dialed that in, but we haven't gotten into that individual revenue number for '18.

[David Styblo:]

Okay. Can you talk a little bit about the change in contracts? There are some things that been renewed and so forth, and then you're putting some additional levers on to keep growth going forward into next year through all these levers. Is there any -- is there any material change in the EBITDA margin that we should be contemplating as we think about '19?

[Adam Holland:]

Yes. Well, like Donato said in the prepared remarks, even our EPS is expected to be strong. We'll give more color on the EBITDA profile and EPS with specificity as we get into our February earnings. Really too soon to get into that. This is already, as you know, way early for us to be speaking about revenue for next year. And we'll get into more detail once we get past open enrollment.

[Donato Tramuto:]

And quite frankly also, we want to look at the investments as well. I think that we're starting to see the return on the investments. We're going to be always -- as you've witnessed over the last 2 years, we're going to always be very, very strict in terms of making sure we keep good margins. But at the same time, if we see something that's working here in the next quarter, we may invest more to get more. So I think that Adam is correct is that this is the first time this early we've given you the clumps. I know many of you have wanted to know the United situation and the mosaic, and I think that -- let's let the year now unfold and let more selling occur.

[David Styblo:]

Sure. That's helpful. The last one I had. So it was really nice to see the SilverSneaker business hop back up. I think it was 11%. The call was breaking up a little bit, but I think the business were up 11% year-over-year, if I heard that right.

[Donato Tramuto:]

Correct.

[David Styblo:]

Can you help us understand how much of a revenue headwind there still was from flu and the bad weather that may have persisted in the second quarter results, just because obviously the back half guidance implies a meaningful acceleration of revenue growth. And so some of those things are Prime initiatives and flip50 and so forth. Just trying to get an understanding of what may be the core revenue growth rate would have been in 2Q if we didn't have flu and weather impacting it still.

[Adam Holland:]

Yes. The impact for flu and weather with SilverSneakers was really more isolated inside the first quarter. We saw those visits start to snap back in late March as we reported and continue to come back as we move through June. Prime, which is a different model, as you recall, was short of our expectations in Q1, so we entered Q2 with less subscriptions than we have planned. While our month-to-month subscription rate was where we want it to be, we're happy to see it. It took most of the second quarter to kind of make up for the shortfall we entered into the quarter with. So I think from the flu and weather effect inside Q2 was more Prime-related. Now to speak to the range of the back half, this has always been the case. The back half guidance is informed by upside potential with Prime and flip50. And so I think the 6 months we have ahead of us is -- speaks to the opportunity, and I would point more towards Prime and flip50 for that. That's said, if we continue to see enrollment inside SilverSneakers increased above expectations, I'm not going to say there is not some upside potential there maybe in the fourth quarter for SilverSneakers. So there's a lot of moving parts inside the guidance range, but like I said, we reiterate and feel good that, that range is where we are.

[Donato Tramuto:]

Yes. We're also excited -- quite frankly, we're also excited by the Sharecare opportunity. I think that for the flip50 and that population, we believe that the Dr. Oz connection can have some meaningful activity. So this is how it will how play out.

[Operator:]

[Operator Instructions]. And our next question will come from Mike Petusky with Barrington Research.

[Michael Petusky:]

So first of all, thanks for the detail around United and revenue guidance for next year. I think that was, in my view, extremely helpful. Okay. So first for Adam, just a couple of questions. The tax rate in the back half that's implied by the full year of 27% is about 28.5% for the back half. Could the tax -- effective tax rate actually be that high in the second half?

[Adam Holland:]

We try not to forecast any positive impacts from exercises of options, investing of our issues, Mike. So that's just kind of where -- what our cadence of forecasting has been.

[Michael Petusky:]

Okay. So possibly, it may come in a little bit lower than -- I understand the guidance, but there are probably some upside, meaning it could be a bit less than what you've guided to. Is that fair?

[Adam Holland:]

That's fair.

[Michael Petusky:]

Okay. All right. And then I guess in terms of the balance sheet, and particularly, I'm interested in how the cadence of the interest expense goes through the next couple of quarters. What does the balance sheet look like today in terms of cash and debt today, not at the end of the quarter, but right now?

[Adam Holland:]

Yes. No. Like we said, it's going to be a modest cash balance at the end of Q3 ,Q4 with a diminishing debt balance. I don't want to project an exact amount here. We didn't guide the balance sheet. So thinking if you take forward our free cash flow profile, the debt could be fully retired, say, by the end of -- certainly by the first half of next year. Regarding the interest expense what you'll see is certainly less than what you saw in total in the first 2 quarters, and it will be more of a cash-based expense versus noncash.

[Michael Petusky:]

So I mean, the guidance would seem to imply will be less than $1 million each quarter, right?

[Adam Holland:]

That's a fair range.

[Michael Petusky:]

All right. And then just one more question for Adam and then a quick one for Donato. Adam, I guess on -- the gross margin the last 2 years, '16 and '17, the gross margin in the second half is always sort of stronger than the first half. And the -- I'm assuming that the guidance that you guys have given for the second half would include some pickup in gross margin. I guess, one, is that true? And then secondly, why is that?

[Adam Holland:]

Yes. We don't get into -- I don't want to get into the quarterly guidance here. What we see is, I think, opportunity for leveraging some fixed costs throughout the year, and that's a piece of it. Not all of our costs, inside cost of sales are variable. Some are fixed. And then a higher volume, we can leverage that. There could be some upside potential.

[Michael Petusky:]

Okay. All right. And then last one for Donato real quickly. How big a deal -- obviously, when you hear a partnership with AARP, the power of AARP and sort of the move folks. But I don't know this is really that kind of a range. I mean, I guess when you kind of look at the order of things that you're really excited about, I mean, is this something that you like but is not going to be a massive needle mover? Or do you see this over time, meaning over 3-year, or 4-year, five-year time period, this becomes a really big relationship and a really big deal?

[Donato Tramuto:]

Well, let me answer that in two parts. First of all, we have spent the better part of 14, 15 months on this deal, and so that, in itself, should speak to the significance. Secondly is that we have historical evidence of how these types of sponsorships will work. And the Prime activations, when I first came in here a few years ago, I couldn't believe that we were not capitalizing on this sponsorships. And you now know what's happened. In fact, Adam, I would ask you, what were the activations two years ago on Prime versus today?

[Adam Holland:]

It's up 60% in total.

[Donato Tramuto:]

So 60%. So the sponsorships actually mean something. Like anything else -- Yogi Berra once said, "You don't want to make the wrong mistake." We're going to do this right. I was very careful to choose a partner, and there are several partners, not just Sharecare, we are having a major launch here year. So we are making the investments, which should speak to the fact that this could be a very -- in my mind, it could be a very nice growth lever for this organization. And I also think that the reality of how this product was developed, it was listening to what the consumers wanted. It was wasn't just a fitness benefit but as fitness with nutrition and this relaxation. And so AARP, as you know, I think, has the branded name when it comes to 50 and older. So for all of that, we would not have spent this much time with AARP if we didn't think that this would have kind of value that we are expecting.

[Operator:]

Our next question will come from Steven Wardell with Chardan Capital Markets.

[Steven Wardell:]

So can you give us a little more color into what's going on in the minds of buyers in the spectrum? So plans that are buying your MA, MS products, what are some of the issues going on in their lives? How did that translate into demand for your products? How that's different from last year?

[Donato Tramuto:]

I'll turn that to Steve.

[Steven Janicak:]

Really not a lot of difference from last year. Most of the conversations we're having, what's driving it is most of the MA plans, they're still looking for acquisition. Acquisition and retention are one of the key components. So they see the value of the SilverSneakers brand as being able to do rate -- not only acquisition. But then all of the ancillary benefits that were adding ancillary enhancements were adding to the program. Their product helps with their retention. So that's really it. That's part of it. The other part of it is a lot of them -- and we're hearing this a lot from our current customers as well because they want the participation and they want the engagement. As a result of more people being not only engaged and participating, it reduces their overall medical costs. And now we're also starting to hear a lot of our customers asking for things beyond -- as Donato said, beyond the physical fitness piece of it and more into the social component of it. So they're asking us how can we develop programs and execute on things that help social engagement, just to get people active, not only from a mind -- from a body but from a mind perspective as well.

[Donato Tramuto:]

Let me just add to that, I think one of the things that we've demonstrated now is that the brand -- and this has been -- there's been a little bit of method behind my math over the last few years. Can we generate, if you will, a strong brand value? And the fact that we've done that, I think we have to kind of go back to what I've been saying the last year is that we need to look at SilverSneakers as a highway of members. And what I'm hearing from the plan, the brand is powerful. What else can you do to help us manage other areas in that population? And I think as we get to the deployment of capital over the next year, that's a very heightened awareness for those companies. Where do we deploy our capital to get the greatest value around can we create new revenue sources and at the same time drive enrollment and engagement by whatever we bring in? So I think you need to help us play out. I think the greatest validation that we've had is we have validated that members will do things when SilverSneakers is attached to whatever activity it is that we're driving. I think that concludes -- well, thank you, everyone. Have a great evening and appreciate the time that all of you took to join us today. Make it a great evening.

[Operator:]

Again, that will conclude today's conference. Thank you all for your participation, and you may now disconnect.