Tivity Health, Inc.
Q1 2017 Earnings Call Transcript

Published: 28 Apr 2017

[Operator:]

Please standby, we're ready to begin.

[Chip Wochomurka:]

Good afternoon. This is Chip Wochomurka, Vice President of Investor Relations for Tivity Health, and welcome to our First Quarter Conference Call. Today's call is being recorded and will be available for replay beginning today and through May 4 by dialing 719-457-0820, the replay pass code is 2140921. And the replay may also be accessed for the next 12 months on the company's website. To the extent any non-GAAP financial measures 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 Healthways' expected - Tivity Health's expected quarterly and annual operating and financial performance for 2017 and beyond. For this purpose, any statements made during the 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. We hereby caution 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 any 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 we are going to being by turning the call over to our Chief Executive Officer, Donato Tramuto.

[Donato Tramuto:]

Thank you, Chip, and good afternoon, everyone. Thank you for being with us today for Tivity Health's first quarter 2017 conference call. In addition to Chip, I am here today with Glenn Hargreaves, our Interim Chief Financial Officer. Allow me to give you an overview of our discussion this afternoon. Glenn will lead off and take you through our first quarter results in detail. Next, Chip will review our updated financial guidance for 2017. And then I will conclude our prepared comments with some additional remarks about our areas of focus in 2017 and some early results from some of the initiatives we discussed with you last quarter. Thereafter, we will open the call for your questions. So without further ado, I will ask Glenn to discuss our first quarter performance. Glenn.

[Glenn Hargreaves:]

Thanks and good afternoon. I'd like to start by recapping some of the key financial and operational metrics for the first quarter. Revenues for the first quarter were 141 million compared to 126 million for the first quarter of 2016. Net income from continuing operations was 15.5 million for the quarter compared to 19.2 million in the first quarter last year and earnings per diluted share from continuing operations was $0.38 compared to $0.52 in the first quarter last year. Please note that in the first quarter 2016, earnings per diluted share from continuing operations benefited from the absence of a provision for income taxes. This was a result of the reversal within the quarter of a valuation allowance against differed tax assets that was originally established in 2015. For illustration utilizing a normalized 40% tax rate, the first quarter 2016 would have resulted in net income from continuing operations of 11.5 million and earnings per diluted share of $0.31. Our continuing operations generated adjust EBITDA of 31.8 million for the quarter providing an adjusted EBITDA margin of 22.6%. Adjusted EBITDA for the quarter excluded approximately 2.4 million of restructuring charges and business separation expenses. The strength of our revenue generation this quarter was influenced by two factors. First, SilverSneakers visits were right at 24 million, which met our expectations. But since the mix of the visits was more proportionate than expected to members compliance who pay as per visit fee, this drove a correspondingly increased level of revenue. Second, in our Prime program, we saw an increase in a member pay enrollment of roughly 8,000 new members in March above our projected levels. These two revenue factors also contributed to the strength of our adjusted EBITDA margin this quarter. In addition, two cost factors drove adjusted EBITDA margins above our expectations. First, we experienced lower average cost per visit with the SilverSneakers network. This was partially driven by larger than expected number of visits coming at locations where the visit cost per member per month are capped. And also a function of more visits taking place in lower cost location. The second larger factor was a result of lower than plan technology infrastructure cost for the quarter as we aggressively managed the ramp up of run rate cost while we completed our business separation work. These two cost savings factors more than offset the normal first quarter increase enrollment and marketing expenses and the initial reinvestment of a portion of the cost saving from restructuring efforts into strategic initiatives. We do not expect either the technology cost or the visit cost saving to continue into the second quarter and beyond. The performance underlying the improved generation of adjusted EBITDA led to adjusted earnings per diluted share for the first quarter of $0.42 which exceeded our expectation. In addition to the higher level of EBITDA generation, we also benefited from a tax rate of 37.7% compared to our expected rate of 39%. The tax rate was favorably impacted by new accounting standard related to the tax benefits from share based payment. In short, the tax consequences from the exercise of option and investing our restricted shares and stock are now in the P&L compared to prior rules isolating certain benefits to the balance sheet. Regarding our free cash flow generation for the first quarter, the results reflect seasonality due to the payment of the 2016 colleague bonus and the full year 2016 401(k) Plan matching contributions. Also the timing of payments from due significant long term customers with unexpectedly delayed. These payments have since been received; our free cash flow guidance for the full year remains unchanged. Our restructuring and business separation expenses are accentually complete as we close out the first quarter. The conclusion of the restructure activities means that we are now recognizing quarter by quarter the full value of the annualized savings that we anticipated. As noted in our release today, we completed the refinancing of our senior credit facilities. The new facilities include a 100 million revolving credit facility as 70 million term loan A, and a 150 million delayed draw term loan which provides ability to repay the 150 million cash convertible senior notes due July 1 of 2018. We believe that this facility provides this with efficient access to liquidity. Currently we expect to continue to repay outstanding term loan debt and then reach a point of accumulating cash in the latter part of 2017. With that said in light of our ongoing assessment of strategic growth opportunities, we are well positioned to act on a verity of cash deployment option. Also, non-cash interest for the quarter was 2.4 million. Finally, as detailed in today's release, applicable accounting rules require us to reclassify the senior notes as current rather than long term liabilities at March 31, 2017. I'll now turn to Chip for our outlook for the remainder 2017.

[Chip Wochomurka:]

Thanks Glenn. Having completed the first quarter, we've also done a full view on our outlook for the balance of the year and we have now increased our 2017 financial guidance. Specifically for revenue, we've increased our revenue guidance to a range of 550 million to 558 million from a previous range 540 million to 550 million, which now represents a growth rate of approximately 10% to 11%. As Glenn indicated, we have right at 24 million visits within the SilverSneakers program for the quarter and I'll add that we also now have 14.6 million eligible members. As Glenn also indicated, during the first quarter, we have more visits than anticipated from members who are linked to clients paying us a per visit fee. Going forward for the balance of 2017, we expect the visit proportions to shift back to a more normalized balance with an increased proportion coming from member linked to clients paying us flat PMPM fee. We also expect to see the normal modest quarterly decline in the absolute number of visits that we typically experienced every year afterward peak in the first quarter. Therefore, we anticipate a modest decrease in revenue in the range of $2 million to $3 million as move into the second quarter and a relatively constant quarterly revenue profile thereafter for the balance of the year. With regard to adjusted EBITDA, we have increased our adjusted EBITDA guidance for 2017 to a range of 119 million to 123 million from a previous range of 116 million to 120 million. This increase follows our first quarter performance with adjusted EBITDA at 31.8 million and an adjusted EBITDA margin of 22.6%. Moving through the rest of 2017, we would not expect each quarter to maintain a 22.6% margin. Three facts as we'll modestly reduce the quarterly margin from the peak first quarter results. First, more visits from members who are linked to clients paying under a flat PMPM model as I mentioned in covering a revenue outlook. Second, a more normalize level of IT infrastructure support cost that as Glenn mentioned was low in the first quarter as we finished our business separation initiatives. And third, modestly increase in our reinvestment into strategy initiatives in each of the next three quarters compared to the first quarter level, but our total reinvestment remains at approximately 7 million for the full year. As with our pattern of revenue, moving into the second quarter, we would expect a modest drop in adjusted EBITDA margin compared to the first quarter and a relatively constant quarterly EBITDA margin profile thereafter for the balance of the year. With regard to adjusted diluted EPS, we've increased our guidance for adjusted earnings per diluted share to a range of $1.50 to $1.58 from a range previously of a $1.44 to a $1.52. As with the increase to our adjusted EBITDA guidance, the same factors apply to adjusted earnings per diluted share. The only additional item affecting the level of increased guidance for adjusted earnings per diluted share for the next three quarters compared to the $0.42 that we reported in the first quarter is our anticipated tax rate. As Glenn indicated, we had a tax rate of 37.7% for the first quarter driven by the new accounting standards related to the tax benefits from share based payment. Going forward for the balance of 2017, we're not able to predict a specific pattern of the exercise of options plus we continue to expect a tax rate of 39% in our guidance for adjusted earnings per diluted share. And as with our pattern of revenue and adjusted EBITDA margin as we move into the second quarter, we would expect a modest drop in adjusted earnings per diluted share compared to the first quarter and a relatively constant quarterly EPS profile thereafter for the balance of the year. And finally, let me reiterate Glenn's point that are free cash flow guidance for the full year remains unchanged in a range of $90 million to $95 million. Now let me turn this back over to Donato.

[Donato Tramuto:]

Thank you, Chip. Let me start off by expressing how please I am with the fears execution behind our first quarter performance. I am thankful for the colleagues who have been raised our culture of empowerment and accountability and whose mission driven commitment into both our customers and to our members has allowed us to deliver once again on our quarterly earnings. Second, allow me this opportunity to remind you that because of the dynamics of our membership based contracts and our deep experience with participation, we have high visibility as we enter each calendar year as to the financial outcomes we expect for that given year. Thus we have been and continue to be heavily focused on our ABCD strategy which I shared with you in the past is our focused attempt to increase growth in 2018 and thereafter. As we share with you some of our initial findings from the pilots related to our ABCD strategy, keep in mind that it's much too early for us to fully understand the causes and the implications of early stage results from the small sample sizes. But based on what we've seen and admittedly speaking, we are encouraged by the potential of our ABCD strategy in what is a very large and growth demographic namely nearly a 11,000 individuals turning 65 every single day and nearly 15,000 turning 50 every single day. Make no mistake about it, we intend to continue to be an unmatched leader in this market. The ABC portion of this strategy, I described at last August Investor's Meeting is to add more eligible members in all three networks and build more empowerment, engagement and participation in the eligible population and collaborate with other partners by leveraging our brand to introduce new products and services that will drive participation. One thing we have to learn is that we are a scalable highway of members looking for other products that can influence our engagement. Last quarter, we had a discussion with you about the initiatives and pilots underway and/or planned for 2017 to touch various ideas to achieve these strategic goals. We would expect to rollout some of these initiatives for the 2018 enrollment season. Let me give you an idea of the progress we've seen on some of these pilots. One such initiative was to being more focus marketing efforts in collaboration with our Prime fitness client. We began our approach with a few of these clients in the first quarter. And in March as you heard from Glenn and Chip, we unexpected we added 8.000 new Prime members above our own growth projections. As my favorite philosophy Yogi Berra once said, it's tough to make predictions especially about the future. And that vain and all kidding to the side, let me be clear, it's too early to know if the pilot marketing efforts had anything to do with these new members or if it did have an impact, what does it mean for the future. But what I can share with you, we do know that the 8,000 new members came from the clients we collaborated with. And that these additionally memberships contributed to the growth in revenue above the expectations for the first quarter. We also mentioned last quarter that with SilverSneakers specifically, we wanted to increase the quality and frequency of our online and social media presence to improve new member awareness, enrollment and engagement. One effort that we did undertake was to overhaul and enrich our Facebook community content. As we have learned and as we have validated, Facebook is a preferred social medium for seniors. Hence we began some advertising on Facebook, the initial results have been better than we expected, and not just on Facebook, but also due to the traffic that Facebook has driven to the SilverSneakers website. For example, in the first quarter in 20017 we added a 11 times more Facebook followers compared to the same period last year, even better we nearly doubled the amount of new followers in April compared to the total number of new followers in Q1 2017. Additionally visits to the SilverSneakers website nearly doubled to 1.7 million those visits drove a 155% increase in people performing location look ups, and 109% increase in visitors checking their program eligibility. Obviously and as noted we want to make sure that this activity does correlate in the actual enrollment and actual engagement that will take time to determine and validate. So again we caution you just as we caution ourselves that more analysis is required to understand these results, especially in terms of any correlation between these improvements and increased enrollment and participation, which at this point we would not expect to see as the data is still being analyzed. We plan to shed more light on our progress in the next couple of quarters as we analyze the data, we will share with you those results. We also plan to test new directed content campaigns in the second quarter focused on converting online eligibility checks to enrollment with additional proactive outreach in the third quarter focused on first experience follow up. So you could begin to get a sense of the multiplying opportunities we are studying to influence the member decision to engage and to participate. As I'm sure you noticed, we added the letter D to our strategy, to formalize our intention to leverage the opportunities we see and deepening our relationships with our fitness center partners who make up our national network, as well as their instructors. We've come to understand how critical the first visit is for a member in leading to sustainable participation, hence we are developing ideas we believe can improve the overall experience and increase engagement and to participation among the large numbers of those one and done members and others with low participation rates. Any ideas we have are better with our partners' volume and we want to take advantage of their expertise in improving the member experience as well. So we are making specific efforts to visit the executive teams of our partners and we've created an advisory boards to be staff separately and by not for profit and commercial center partners. We're offering joint marketing programs an unprecedented sharing of insights, research and data from which we can all benefit given the strength of the SilverSneakers brand we are even piloting center base SilverSneakers apparel sales that generate additional revenue for our network. In order to make the first member experience a great experience, we are working to support instructors and other fitness center for personnel who are in contact day to day with members, this support includes enhanced training for instructors and others on how to deliver a consumer experience to the SilverSneakers standard. We are testing whether we can align incentives and reward me awards through among other means different forms of compensation for centers and personnel doing the best job of increasing participation. You may have also seen our recent news release announcing our inaugural Instructor of the Year Awards to honor exemplary fitness instructors. Through these pilots and others that will run throughout 2017 and into next year, we expect to refine the methods and the incentives that we can use to drive increased enrollment from our growing base of eligible members and increased visits from our participating members. We also believe that if I providing a member experience to the SilverSneakers standard we can increase utilization and improve the physical and social fitness of our members, which is also the goal I believe of our health plan clients. In so doing, we expect to strengthen our competitive differentiation and market leadership. This thought provides I believe a great segue to our announcement today of the three year renewable of our contract with United Health extending our 20 year relationship with one of our largest and oldest clients. We believe United Health values our ongoing commitment to reinvest in SilverSneakers and they understand the strength of our brand because of both its importance to their Medicare Advantage membership and the results we produce. This improved depth of understanding led to a renewal that was completed on favorable terms. However, let me also note here for the record that our overall contract renewals are on track with many other clients for 2018 and beyond including if I may add winning back some former clients that have tried other providers. Since our fourth quarter call a little more than eight weeks ago, I have continued my travels to meet our health plan clients, and I plan to continue this practice because of the importance of these relationships and understanding exactly what our clients want and need from our relationship. It has been a pleasure for me to see these industry leaders as they grow in their understanding of the value of SilverSneakers and why we have a net promoter score of 81 and as they advocate for the reinvestment and our ABCD strategy that we have launched and started. For instance, I recently met a CEO of one of our largest health plan clients and before we even addressed any business issues and opportunities, he acknowledged the value in strictness behind the SilverSneakers brand. We clearly understand the value of our brand, because we've seen in person its value to our members. In addition, to my travels to visit our clients I am passionate about continually meeting with our members. I have been reporting to you some of the amazing observations I made, and experiences I've had and seen to help you better understand the strength of our brand, although I must admit unless you see it for yourself or through the eyes of a family member or friend it is very difficult to truly appreciate. On the last call I mentioned that one of our oldest member was 102 years old and that she started SilverSneakers when she was 89,I recently traveled to Long Island to attend her 103rd birthday party, in fact yesterday was her actual birthday, and if I may just add happy birthday ma'am. I was there with the CEO of her Medicare Advantage plan and nearly 75 of her current and former SilverSneakers classmates and instructors were there. Can you imagine what that community means to her and to each of those 75 people especially when you consider the isolation that so often be falls our parents and grandparents as they age. In the same thing, I recently spoke with a 92 year woman who began SilverSneakers when she was 85 at that time she had become immobile to a point where she couldn't tie her own shoes, she was encouraged to participate in SilverSneakers and two very capable instructors tailored activities to her specific needs in the early days, she's still going strong today and is a fully participating member and by the way, she is now able to tie her sneakers before every class. We are making a difference one member at a time. Again think about what those instructors and her classmates mean to her and to each other. SilverSneakers as much about social interaction as it is about physical activity. Our services creates royalty and emotional attachment, because they improve our members physical social and mental health the ladder of which at some point for most people will be one of the most important things in their lives. We do not know of another organization in the country. That offers our comprehensive services to older Americans in the trustful way that is the hallmark of SilverSneakers or that produces the results we achieve or that which approaches the scale that we have. As a result, we believe we have an exceptional long term opportunity to serve this population. In closing, I'd like to once again recognize and thank all of the colleagues at Tivity Health. They have worked through a lot of change over the last 18 months, but there can be no doubt about their intense commitment and dedication or about their fierce execution. We have deliberately created a culture of empowerment and accountability at all levels of our company supported by a performance based reward system. And my colleagues have done nothing but response strongly ever since. I look forward to working with them as we continue to move the needle forward. Thank you very much for your interest in Tivity Health and for being with us today. Operator, we now like to open the call to questions.

[Operator:]

Thank you. [Operator Instructions] We'll take our first question from Ryan Daniels from William Blair.

[Ryan Daniels:]

Yeah. Good afternoon. Congrats on a strong start to the year in the contract renewal. The quick follow-up on that in particular, I know you mentioned that it was on favorable terms for the organization, but I'm curious number one, if there's any change in the model between fixed fee per member per month per visit number one? And then number two, were you able to protect the margin profile for that or given the strength United have seen in there and made plans with your very good growth, was there any dilution to that we need to think about for 2018?

[Donato Tramuto:]

First of all, thank you very much for your question and also for your warm congratulations. As we noted in my script is that we renewed unfavorable terms, we don't get into the specifics. And all I can tell you is I have shared with you over the last few months the relationship with United continues to be very strong and we are very pleased with the terms that we have.

[Ryan Daniels:]

And is it a similar revenue model going forward, I don't know if you want to mention that but there's any big switch between the way that contract is structured?

[Donato Tramuto:]

No, and as I shared you know, it's favorable terms and we just don't get into those specifics.

[Ryan Daniels:]

Okay. I appreciate that. Then if we think about the nuance in the quarter with seeing kind of more visit in markets where you do get a per visit fee and more visits in markets where your cost per cap or lower cost, does that have anything to do with your marketing initiatives i.e. the ability to target those markets with investment that will maximize your revenue and reduce the cost of that revenue or was it really just normal volatility in the business?

[Donato Tramuto:]

Yeah, first of all let me just say to answer the question in two parts, it's still too early and I think that one of the things that we are doing is fleshing out all of these activity base results that are coming in and being able to correlate it to the right outcomes and data. And so some of this is volatility I think that Glenn and Chip alluded to that. But what I think I'm going to be more excited as we get through the next two quarters as to comeback with a greater granularity in clarity as to how that correlation is in fact working. I think the good news is if you're having - it's kind of like what I always say to my staff when you drive by McDonald's and it says 3 billion people visited there, it doesn't tell you how many ate there. So what I want to start to see is how many of this good activity is converting into engagement. And I'm comfortable to say that I think year end we will know that.

[Ryan Daniels:]

Okay, that's helpful. Final question for you just related to that engagement some of the marketing initiatives. I'm curious and you mention this with Prime, so I'll ask it specific SilverSneakers given the scale of that business relative to the revenue stream. Are you seeing a lot of cooperation there as well amongst the health plans to enable you with more data to allow you to do more targeted marketing or is the marketing initiatives that you're putting in place there are really more focused on stuff you can do internally like your website, like social media, like trained fitness members, so how cooperative if you will or the plan in that venture? Thank you.

[Donato Tramuto:]

It's a great question. I think I hachured is in the last few months as I've been on the road, first of all, I don't think I've seen, I've been here now unbelievable as it may sound I'm going to my nineteenth month, but I don't think I've seen a time in this organization where our relationships with our customers are just so remarkably strong. And I want to thank our Chief Growth Officer, Steve Janicak and his team they're working it from a level that really allows me to fill in at the more senior level. But I can tell you this without hesitation that the interest in the ABCD strategy is very, very significant. And so if you look at the macro and the micro, I think that what's changed here is that we are taking a much more aggressive approach on the macro, making sure that we do our own kind of high macro approach on digital strategy. But then we are partnering with our customers, it's interesting tomorrow I'm heading off to meet with one of our top customers next week I'm with another top customer and we're talking about these opportunities of how we can partner together. I think one of the most significant changes is how we've changed the conversation that we are not a product waiting for members, we have this scalable highway of members that can continue to partner with other organizations and also with our own customers to use the brain and to get these members to get more engaged because we know when they're engaged, they're going to have better outcomes with respect to addressing their social isolation, addressing some of their physical challenges. So this has been a partnership that I think I've been just really amazed at how our key customers and partners have stepped up and said we want to partner with you.

[Ryan Daniels:]

Okay. Great, thank you so much.

[Operator:]

We'll hear next from David McDonald from SunTrust.

[David McDonald:]

Hey, good morning and good afternoon, guys. Couple of quick questions, first, just a point of clarification, did you guys say that all 8,000 on the Prime side are exclusively from the folks that you collaborated with?

[Donato Tramuto:]

Yes.

[David McDonald:]

Okay. And then can you give us a sense of just kind of building on that, what percentage of your Prime book have you collaborated within and should we expect further outreach in collaboration throughout '18 with some of the other folks in the Prime book?

[Donato Tramuto:]

Well, we do you know it's a very interesting question. One of the key drivers in terms of Prime is that we do have a significant partnership with one of our customers who before my time has really pushed for a greater collaboration. And we met with them back and just to give you a little bit of history, we met with them back in October the executive team and it was really at that point that we saw a very quintessential opportunity to partner with them even more. And so there is now a activity based marketing co-promotional effort to increase if you will activation. Remember we have the population through this partnership, but the true opportunity is activating them. So I think you're going to see a significant effort in the next months, I don't want to go into because I think we're kind of tipping our head in terms of what we're doing. But I think you're going to start to see one of the cultural monitors in this organization is to have best partnerships in a way that really allows win-win and to make sure that the incentives align with our partners, so that they also benefit from this increased marking activity.

[David McDonald:]

And then guys, one other quick question just in that same vein, is there anyone within the Prime kind of collaboration, are you doing any specific marketing within that to kind of that 50 to 65 sweets spot especially the folks who are going to age into SilverSneakers in the coming years?

[Donato Tramuto:]

Well, it's a great question. One other things I always say is swat, sale that's available today, we have such great opportunity. When you look at the total members in Prime 40 million plus are eligible and the activation is less than 1%. So we have a huge opportunity across all age groups. But where you're heading is exactly where our mission and vision is. We do believe that the 50 plus age group especially in Prime can be a nice conduit to getting them into SilverSneakers when the age in. But right now to be honest with you, when you only have less than a 1% activation on Prime, you have an enormous base of opportunity and that's where I'm focused right now, I'm a firm believer, stay focus as you heard me in my first earnings call focus, focus let's we focus. That 1% unacceptable to me. And imagine if we got into 2% you could double your revenue. So that's really where we're focused right now and that does involve the 18 to 64 year old population.

[David McDonald:]

Okay. And then guys, just last question, I was wondering if you could provide just a little more detail on maybe some of these incentives for either the instructors or the folks who are working at the gym. I would assume that would be something where they participate somehow financially if the loyalty i.e. the amount of visits or the number of swipes starts to move higher, is that kind of generally what you guys are thinking?

[Donato Tramuto:]

Yeah and again I really don't want to get into the specifics because I think it's tipping our competitive hand, but let's just say this you know we intend to ensure that the strategic positioning of what we're talking about that it gets aligned appropriately as you know David, when we had our conversation with you, I believe in New York, you know that the alignment could not be any better, you know is when that card get swiped, our physical locations benefit from it. And so we've got to be able to build a partnership that allows us to be a win-win and those are the activities that we are working on.

[David McDonald:]

Okay, thanks very much. Congratulations.

[Donato Tramuto:]

Thank you very much, David.

[Operator:]

[Operator Instructions] We'll move next with Dave Styblo from Jefferies.

[Dave Styblo:]

Hi there good afternoon, and thanks for the question. I wanted to start out on taking a step back and you guys are running several different pilots, looking at a different growth initiatives, I'm curious that you're going through this what you're learning in terms of what might be the biggest bang for your pocket, I traditionally thought of be more in the SilverSneakers side obviously you're having some success and fine is that ranking one over the other that you can point to especially on these folks who are either one in does or aren't really participating. How would you sort of staggering those? And then as you go forward to perhaps trying to seize this opportunity how do you balance whatever investing that might be required on this against trying to maintain margins, how adamant are you about making sure margins don't segregate over the next year or two versus perhaps thinking about things in the longer term that for shareholders?

[Donato Tramuto:]

Yeah let me - I'll let Glenn and chip to answer the latter part of question, let me answer the first. First of all I've would saying you know make it stupid for people to say no, I think I'm trying the way our potential members have to activate, they've got to go through five or six or seven steps. We learned that in the last number of months as we've gotten deeper. So how do you make that easier and that's what we're trying to do is break the barriers down there. The other is those who know us love us, not enough know about the program, and that's where the marketing comes in, so I think they're we're doing, I think all the efforts that we believe can really move the needle. With respect to the SilverSneakers and I want to be careful you know in terms of not getting too deep in terms of what we're learning, because I think just again tips that had to our competitors. But let me just say this, we know that this is a three act play. We know we have an opportunity for increased awareness, and we have pilots now that are you know directed towards there. We also know that it's just as common sense that we know that if somebody goes to the fitness center for the first time, that they have to have a very delightful experience, so they don't have that delightful experience, then that's going to be you know a very significant loss not only to us, but is going to be a loss to the physical location. Those are the things that we are learning, and there's like four or five key nuggets that we have in fact extracted out that have now aligned our ability to put pilots into place. And so rather than go into the details and more than happy to talk offline you know one on one with you, but I would prefer not to get into the exact information. You want to answer them?

[Glenn Hargreaves:]

This is Glenn and just very briefly that part of the rigor around the pilots measurement methodology to fully that understand and evaluate the ROI out of each initiative. So we by no means would we enter into this with the concept of diluting margins from this activity.

[Chip Wochomurka:]

And this is Chip, and I would add to, you ask the question about rank order, I think the very basis of learning a series of pilot is to try to understand the outcome of those pilots, and then pick from those what you would actually deploy in a more full scale. So it's way too early to rank order or anything until we get deeper into the data analysis. And I have echo Glenn's comment about not wanting any margin degradation, so in terms of not on a quarterly basis, but on a full year basis not looking at any more margin degradation.

[Dave Styblo:]

Sure, I appreciate the answers there. As far as some of the customers that you have bought from the past and you're having an ongoing conversations with what sort of the timeline that that we'd be looking out for you to have an opportunity to convert that business over to you and if that margin up that would move the needle or these sort of a series of smaller customers that were one to art?

[Donato Tramuto:]

Yeah, the first part of your question this is all for 2018 and beyond. And these are more regional players, as you know we have eight of the 10 largest Medicare advantage customers. We are focused, if you look at my scorecard that the board approved, I think we have an opportunity given the position we're in right now, and the focus on investing in the strategy. We have an opportunity to win that the clients that we have lost in the past. And I can tell you, I've involved in a number of those discussions, I have to tell you that when you open the door to meet the seal of a customer base that we lost in the past, they are very happy to see us. They understand when you look at the net promoter score of other branded names out there, I'm not going to announce them on this call here, but they have a net promoter score of 81, I'm telling you that just really floors people, and I can tell you that I remember speaking to one CEO who said that the day he cancel SilverSneakers it was the worst day of his life that he realized that the stickiness of that brand was just that amazing, powerful reaction from the members. So the discussions I think are going very well and we'll give you more as the year progresses.

[Dave Styblo:]

Okay. And then lastly just on capital deployment it sounded like, I've heard you right you guys are going to be pretty aggressive and paying down the rest of the debt up to $150 million loan that's out there, is sounds like that's going to happen this year want to confirm that. And then two at what point are you guys going to communicate a strategy after you've paid down the excess that you wanted in terms of what you might be investing and or possibly returning the shareholders, I know investing has been high in the lift, what sort of forms does that perhaps look like?

[Donato Tramuto:]

Yeah, listen it's a great question, it's funny that the problems I have today are a lot different and the problems I had a year ago. So listen one of the things certainly we are going invest back in the company, you're right to say, we are going to pay debt down, and I do think that listen any good company, I think any good executive team, any good Board, should constantly be observing what the next strategy expansion should be. And I can tell you that we're doing that with the Board I'm very, very pleased with the Board dynamics and interactions we have with the Board. We have a strategy review committee. And I think that that right now, again I don't want to distract this organization, I think one of the challenges we had in the past is that the organization took too much on, and I think right now it's execute on ABCD and keep our eyes wide open. When I talk about this highway there's significant membership stickiness we would be absolutely foolish, if we did not keep our eyes wide open to see what else is out there, but I don't think that should be at this point our key focus. OK thanks again express my quarter thank you very much. Some of that to Mike Petoskey from Farrington research. Guys.

[Dave Styblo:]

Okay, thanks again and congrats on the quarter.

[Donato Tramuto:]

Thank you very much.

[Operator:]

We'll move next to Michael Petusky from Barrington Research.

[Michael Petusky:]

Good evening guys, thanks for taking my question. Few from me, I know you're not wanting people to kind of run beyond, what you actually know here, but I just want to make sure or I guess I want to understand where there's specific target effort at trying to get higher visit count out of those locations, where you get paid for those incremental visits. And I'm not saying you're tying the result to that of where there specific targeted efforts are doing?

[Donato Tramuto:]

Again too early, you know one thing I hope you all know, I'm pretty transparent guy, and but I'm also a pretty cautious guy making sure we have the right data. I think it's still too early and certainly you always want to make sure that you're focused on the precise venues that are going to get you the greatest return, and I can certainly assure you of that, but let's make sure we get all the data in and then I can say to you without hesitation, yes we push that button and this happened and it happened in the right area of it. Is that fair?

[Michael Petusky:]

Yeah, I mean what I'm ramping away from that is did try to move the needle there, the needle would move, but you're not essentially right to pick a victory lap is that a fair reading of what you're saying?

[Donato Tramuto:]

Well you said it better than me. Yeah.

[Michael Petusky:]

That's right.

[Donato Tramuto:]

And I love to take victory, taps on my chest, but I want to make sure I'm taking the right one.

[Michael Petusky:]

Yeah, absolutely. All right. And then just going to I think Chip mentioned that there's now 14.6 million eligible members I was wondering, if you have an - I didn't catch if you mention it an active member that you're?

[Donato Tramuto:]

We don't have an detailed active member figures, you're trying to - I'm assuming for a minute that you're asking, you know the roughly one million active participants number increased those numbers we've categorized in the past are general numbers, and we don't have what I would call an updated specific a number against that profile yet, and it's the same reason why we're not getting into the outcome of the pilots. We've only got two months of actual visit data January and February, and we've got presumptive data for March. We've got a long way to go, so to analyze both the pilots have to give you the specific answer to that specific question.

[Michael Petusky:]

And then I guess, I'm wondering are you willing, obviously you're going you've mentioned you're going back to customers which guys have Don said it was previously but aren't doing that now, are you in discussions with any of the top 10 Medicare Advantage providers that currently don't have?

[Donato Tramuto:]

Yes.

[Michael Petusky:]

Okay. And then the last question, so the gross margin in the first quarter was a little bit below what we've been modeling I'd say as well as G&A expense, would you expect those I guess both of those items to return to the sort of what was to analyze the levels or that's kind of the new go forward level?

[Glenn Hargreaves:]

I think the SG&A should be consistent. Gross margin it's going to come down a little bit, we get it some incremental investments in the pilots, but not significantly.

[Michael Petusky:]

Okay, so even from down from the 2074.

[Donato Tramuto:]

Yeah Mike, if the EBITDA margin as we said, it's going to come down and SG&A is about the same then start to believe it's going to some around the gross margin.

[Michael Petusky:]

Okay, okay, all right. All right guys, thanks, great, great progress. Thanks

[Donato Tramuto:]

Thank you very much.

[Operator:]

A.J. Rice with UBS, your line is open.

[Unidentified Analyst:]

Hi thanks, this is [indiscernible] filling in for A.J. Quickly following up on your point that you are having discussions with health plans, which are not your contract at clients right now, can you talk about what is really holding them back in terms of going ahead with you guys?

[Donato Tramuto:]

Well, listen, I think what has happened here you know and I always kind of give this analogy is when we were one company last year, the focus had been on the other side in terms of the execution, and I think that what everyone's seen now with the new leadership team, with the investment that we are making, it doesn't hurt to have net promoter score of 81 with our focus on the members, and the reality that we are now starting to extract if you will a better understanding and the value proposition that we are able to offer, I think all of that and the fact that you know we hear is that what they're enjoying is at this team is much more of a partnership oriented team. So I think you know that has really helped a lot and has gone a long way, for us to not only get in the doors, just wanting to get into the door, but we're having just remarkable conversations. And we do have a goal this year as an executive team in terms of how many we want to win back and I believe will exceed their goal.

[Chip Wochomurka:]

Well, this is Chip, I'll add to that, I mean the way you ask that question I wonder was that you know what hold everybody back from doing it. And I think Donato made the point that some have already decided to move forward as fro 2018. And the only other factor that I've heard as far as anybody holding back would be a sense of timing as to what their other commitments and obligations are, and I'll just leave it that.

[Unidentified Analyst:]

Okay, thanks. And then my follow-up, just want to go back to your discussion around revenue outperformance in first quarter, and you expect some decline for rest of the year. I understand just give me a color why would you expect number visits decline from first quarter to second quarter. And then have you seen any early indication in terms of the type of visits you're getting you might not expect in second quarter in terms of like okay some visits are not getting repeated or the only one time, so we might be thinking okay these are not coming back this enroll is not coming back something like that, have you seen any early indication, which might give you a pause that this outperformance might not continue in second quarter?

[Donato Tramuto:]

Well I think we did say already two things very specifically. We always see or almost always see a seasonal decline in the absolute number of visits from the first quarter to the second, but very normal type of thing in any sizable population with participation like this in fitness program you're going to see some level of fall. Obviously we're trying with our ABCD strategy, we're trying to diminish that, but you're always going to see some level off fall. And then you've got the other factor of the mix where we think that mix will move a little bit back towards away from visits where we get paid for that incremental visit to do some more visits coming from the flat PMPM model. So at that macro level on those two factors it's natural that you would see revenue a modest decline in revenues. Having said that, I don't think there's anything in the data underlying anything that says there are some specifics around one and done or low participation that's out of the normal range in any way shape reform, I think those two macro factors tell us all.

[Unidentified Analyst:]

Okay and my last just one specific. And do you have the revenue big down across the pre businesses in first quarter?

[Donato Tramuto:]

It will be fundamentally in line with what we've projected on a percentage basis for the full year, which was that 8215 and three in our supplemental materials on the last call, I don't think anything's changed in that dispersion in the first quarter, and we still expect that for the full year.

[Unidentified Analyst:]

Perfect, thanks a lot.

[Donato Tramuto:]

Thank you.

[Operator:]

We'll hear next from Josh Raskin from Barclays.

[Josh Raskin:]

Hi thanks. Appreciate you guys taking the question. Just the follow-up on that last one the, the 82% for the full year sort of - I just want to make sure that SilverSneakers number that implies a 115.5 million in the first quarter, I just want to make sure that's the right number for SilverSneakers first?

[Glenn Hargreaves:]

Yeah, I think - again Josh within rounding that 82, 15 for prime, three for whole health is what we projected for the full year and essentially it was there for the first quarter within the rounding of those percentages, yes.

[Josh Raskin:]

Okay. And then just another clarification on the 14.6 million eligible, how many of those were MA versus med staff?

[Glenn Hargreaves:]

Give me one minute, and I'll get you that specific number, if you go…

[Donato Tramuto:]

I thought it was 10.9 or 11.

[Glenn Hargreaves:]

It's about a 11 - I think 11.1 and 3.5.

[Josh Raskin:]

Okay, perfect. And then just in terms of timing and how we should be thinking about contract updates the Medicare Advantage plans have their bids do June, and I'm assuming this is kind of the height of the let's make sure we have all our benefit design docked in a row. And so any other color you know obviously it's great to get united behind you, any other color on you know big contracts both positively or negatively in terms of that 2018 I guess what I would call the selling season now?

[Donato Tramuto:]

Yeah, what I can say to you, and I hope now that the level of confidence is there, we did say to you last month or it may have been two months ago we had our last earnings call that we were going to get this united wrap up. Let me tell you I am absolutely pleased at the intensity of the renewals and where we are at this point, in fact I would say we were ahead of what I would have had as my milestone, so it's a very solid outlook.

[Josh Raskin:]

Okay, all right, so sounds like thinking well on the renewal side and probably not an effort.

[Donato Tramuto:]

Absolutely

[Josh Raskin:]

Okay, okay.

[Donato Tramuto:]

The renewals and the one back, so I think that the two are have met in my teens kind of not in their head, because I have a high expectation is exceeded by expectations.

[Josh Raskin:]

Okay. And then just last one on the cash flow, I understand there are some are some seasonal weakness and other issues, but the AR it sound alike that was related two large customers, I guess I'm just little curious just to how they paid late and I'm just curious is that at all related to any contract you know negotiations or anything like that or was that just completely anomalous?

[Glenn Hargreaves:]

Josh this is Glenn, it was the use the word fluke maybe not the best choice, but it was an anomaly, we had a large customer who had paid inside of term for the last 12 to 18 months and for whatever reason did not do that in the month of April, they have sent called up the payment and made the payment early again, so we're back on track.

[Donato Tramuto:]

We need it one day more in March that's exactly what it turned down turned out too.

[Josh Raskin:]

Okay, got you, got you. All right, it sounds good. Thank you guys.

[Operator:]

Mohan Naidu from Oppenheimer. Your line is open.

[Mohan Naidu:]

Thank you very much for taking my questions. Congrats on a strong quarter of year. So a couple of quick questions maybe Donato first on the model mix around PMPM versus fee what price decline you go with one model versus other, is there like of sort of factors that drive the health plant clients to pick one?

[Donato Tramuto:]

That's a great question, I think we have to kind to just a little bit of a reflection on the memory lane what moved a number of clients over to the PMPM, after Obamacare I think there was significant pressure from CMS that's gone, what I can tell you I've been in the room of those few who remain in the PMPM and I tell you it's a very interesting observation as we now walk through what we're doing with the ABCD strategy, it is amazing and I'm not trying to be overly optimistic in terms of what I'm observing, but they are now having their own internal debates to say, time out. If in fact this is an organization that's able now to get people engaged and we know that further engagement does a number of things. There is member retention and there is an opportunity to reduce overall medical costs, why are we not there. And so what we need to do which is why I'm excited a lot of us are talking about activity in correlating it to does it really increase engagement, there is a third residual benefit out of this investment and that is might being able to go back to those few that are in the PMPM and show them what's happening here. And so I could tell you without get into the details, one of our renewals it was a very interesting debate. They were going back and forth in terms of whether or not it should remain in the PMPM and go off to the hybrid. And I think what they want to see is that they're from Missouri, they want to see, does this investment really pay off. Can we really move the needle? And I think that that is going to be that can convert those last few into the bucket that we would prefer to have them in.

[Mohan Naidu:]

Okay. Okay. And on the utilization and awareness efforts that you guys are doing, the Facebook effort looks very, very attractive. How do you model that towards these two type of revenue models that you at this point you don't focus on that and you just try to increase awareness in general and both the convince the clients who are and the PMPM model to just convert them, is it via discuss right now?

[Donato Tramuto:]

Well, but there's another step there that is very important. That whole Facebook traffic is to get them into SilverSneakers.com, to allow us to get to know more about the members. And so that allows us then to really use if you will, they opt into SilverSneakers.com that gives us the opportunity then to really be more precise in terms of the interaction and the type of engagement that we are driving. So Facebook is a great conduit, it's kind of the macro, you're not going be able to separate one from the other, but get the awareness out about what SilverSneakers is and then get them into SilverSneakers.com where our ability to engage them and to have a relationship with them becomes much greater. Is that makes sense?

[Mohan Naidu:]

Yeah, yeah, it makes sense. Thank you very much. Maybe one last question on the United contract. The prior contract I thought was much longer, or am I misunderstanding that?

[Donato Tramuto:]

No, no, same at the time.

[Mohan Naidu:]

All right, awesome. Thank you very much for taking my question.

[Donato Tramuto:]

Thank you very much.

[Operator:]

And with no additional callers in the queue, gentlemen, I would like to turn the conference back to Mr. Tramuto for any additional or closing comments.

[Donato Tramuto:]

Thank you very much and I want to thank all of you for joining us today. I've mention to you all this is my 19th month as the CEO and I have to tell you that I'm very, very pleased that the way this organization is operating and the focus to how we are bringing the attention to the ABCD strategy. Have patients with us, I think the next few quarters will tie the activity to what I think we're all looking for and that is what are the results show. Thank you very much. Please don't hesitate to contact Chip, Glenn or myself if you have any further questions. Make it a great evening for yourself.

[Operator:]

That does conclude today's teleconference. We thank you all for your participation.