Tivity Health, Inc.
Q3 2017 Earnings Call Transcript

Published: 27 Oct 2017

[Chip Wochomurka:]

Good afternoon. This is Chip Wochomurka, Vice President of Investor Relations for Tivity Health, and welcome to our Third Quarter Conference Call. Today’s call is being recorded and will be available for replay beginning today and through November 2nd by dialing 719-457-0820, and the replay pass code is 6062340. 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’ll 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 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 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’m going to turn the call over to our Chief Executive Officer, Mr. Donato Tramuto.

[Donato Tramuto:]

Thanks, Chip. Good afternoon, everyone. Thank you for being with us today for Tivity Health’s third quarter 2017 conference call. In addition to Chip, I’m here today with Adam Holand, Tivity Health’s Chief Financial Officer. As an overview of our discussion this afternoon, Adam will lead off and take you through our third quarter results in detail, next Chip will review our financial guidance for 2017 and add some initial comments on 2018. I’ll then conclude our prepared comments with some additional remarks about our areas of focus and the remainder of 2017 and into next year with some further insight into the early results from our various initiatives to increase member engagement, enrolment, and participation. Thereafter, we’ll open the call for your questions. So without further ado, I’ll ask Adam to discuss our third quarter performance. Adam?

[Adam Holland:]

Thank you, Donato. Good afternoon, everyone. I’d like to start by recapping some of the key financial and operational metrics for the third quarter. Revenues for the third quarter were $137.7 million compared to $125 million for the third quarter of 2016. Net income from continuing operations was $19.9 million for the quarter compared to $4.8 million in the third quarter last year and earnings per diluted share from continuing operations was $0.46, compared with $0.12 in the third quarter last year. Please note that, in the third quarter of 2016, adjusted earnings per diluted share from continuing operations were $0.31, when excluding business separation costs and restructuring costs, as well as income tax expense related to the first-half of 2016 and income attributable to the reversal of a deferred tax asset valuation allowance. Our continuing operations generated EBITDA of $35.3 million for the quarter, providing an EBITDA margin of 25.7%. Revenue generation this quarter was influenced by three factors. First, as mentioned in our release, SilverSneakers visits were negatively impacted by the hurricanes in Florida and Texas with the most dominant impact felt in the Florida market. We estimate that the visits were reduced by approximately 500,000, which translated to loss revenue of approximately $1.7 million. Second, we also maintained roughly the same proportionate mix of SilverSneakers visits experienced in the first two quarters of this year for members linked to clients who pay us a per visit fee, when we had expected a return to a more normalized mix of visits for the third quarter. The benefit of this mix helped to partially mitigate the level of revenue drop from the hurricane. Finally, the overall drop SilverSneakers revenue was somewhat offset by an increase in our member pay prime program as the member pay enrollment increased by approximately 12,000 net new members during the quarter. The increase in net new Prime members came late in the quarter, driven by a targeted marketing campaign launched in September. Moving on to EBITDA, four factors contributed to the strength of our EBITDA margin this quarter. The first item worth just under $1 million, stems from a favorable settlement of, at least, related contingency. The second item is related – is simply timing-related and approximately a $1.3 million sequential quarter decline in the spending on our member awareness and engagement projects. The spending on these projects was more pronounced in the first-half of the year. The third factor regarding EBITDA margins is that, we continue to experience lower average cost per visits within the network. This was largely driven by the mix of visits for the quarter on average taking place in lower-cost locations, as well as the number of average visits per member increasing, which reduces the average cost per visit. The final factor is that the growth in the member pay Prime Fitness activations was largely in September and the visit costs were proportionately lower during this initial month of enrollment. The visit cost profile should mature for these new members during the fourth quarter. The performance underlying the improved generation of EBITDA led to earnings per diluted share for the third quarter of $0.46. In addition to the higher level of EBITDA generation, we also benefited from a tax rate of 34.3% compared to the second quarter rate of 35.7% and our expected rate of 39%. The tax rate continues to be favorably impacted by new accounting standards related to the tax benefits from share-based payments. In short, the tax consequences from the exercises of options and divesting our restricted shares and stock are recognized immediately within the P&L compared to the prior rules isolating certain items to the balance sheet. Moving on to cash flow and debt repayment. Free cash flow for the third quarter was strong, as expected, and totaled $31.8 million. We took advantage of the strength of the free cash flow to continue to pay down our term loan A by $35 million, which leaves the loan balance of $5 million at the end of Q3. We ended the quarter with almost $5 million of cash on hand, and we expect to repay the outstanding term loan A debt and to accumulate cash as we move through the fourth quarter of 2017. Our work on evaluating strategic growth opportunities continues and likely will extend into the first part of 2018, at which point, we will be well-positioned to consider a variety of cash deployment options. I’ll now turn it over to Chip for our outlook for the remainder of 2017. Chip?

[Chip Wochomurka:]

Our outlook for the remainder of 2017, Adam, we’ve completed the third quarter and we’ve also done a full review of the balance of the year. Specifically with regard to revenue, our guidance is now in a range of $555 million to $557 million, which represents a full-year growth rate of approximately 11%. As Adam indicated, we had an impact of approximately 500,000 reduced visits from the three hurricanes during the quarter. This left us with a total of 22.8 million visits within the SilverSneakers program for the quarter, driven by what is now up to 14.8 million eligible members, compared to the 13.5 million eligible members we had at the end of 2016. The 22.8 million visits represented a sequential quarterly decline of 200,000 visits. At this point, we anticipate an additional impact in the fourth quarter of approximately 300,000 visits, or approximately $1 million of revenue from the October carryover of the hurricane in Florida. However, the growth in net new members in our prime program should allow us to see a modest total revenue growth in the fourth quarter compared to the third quarter. Moving on to adjusted EBITDA, our guidance for 2017 has been increased to a range of $126 million to $128 million. Of course, the results in the third quarter have influenced this upward adjustment. But moving through the fourth quarter, we would not expect to maintain quite this higher level of EBITDA margin. Five factors are expected to reduce the quarterly gross margin compared to the third quarter results. First, as discussed last quarter and in our earnings release today, we expect a modest uptick in our IT infrastructure support cost. Second, as we move into the fourth quarter, we will see a peak in our annual SilverSneakers enrollment expenses that are likely to be close to $2 million. We’re incurring most of these expenses earlier than in recent years as part of our initiative to drive greater awareness in earlier enrollment and participation immediately following the start of a new benefit year on January 1. Third, as Adam mentioned, we benefited in the third quarter from a favorable settlement of a lease-related contingency, and this will not be repeated in the fourth quarter. Fourth, as we move into the holiday seasons, we typically expect the average number of visits per SilverSneakers member to decrease a bit, which typically causes the average cost per visit to increase. And fifth, finally, as Adam mentioned, the visit cost profile for the new Prime Fitness members who largely joined in September is expected to mature in the fourth quarter and lead to a normalized margin profile. In addition to the discussion on gross margin, we expect to see an increase in spending with an SG&A in the fourth quarter a little more than $2 million, driven largely by specific media and marketing initiatives uniquely tied to the Medicare open enrollment period, as well as the short-term consulting project. Moving on to adjusted diluted earnings per share, our guidance for adjusted earnings per diluted share has been increased to a range of $1.58 to $1.61. This increase is driven by the increased guidance for adjusted EBITDA. But there are two items that are – affect the slope of our guidance for adjusted earnings per diluted share for the next quarter, compared to the $0.46 we reported in the third quarter. The first is our anticipated tax rate. As Adam indicated, we had a tax rate of 34.3% for the third quarter, driven by the new accounting standards related to tax benefits from share-based payment. For the fourth quarter of 2017, we’re not able to predict a specific pattern on the exercise of options nor are we able to predict the stock price at the time grants of restricted shares are scheduled to vest. Thus, we continue to expect a tax rate of 39% in our guidance for adjusted earnings per diluted share. The second item is our diluted share count itself. Given the significant rise in the stock price, the diluted share count for the third quarter rose to 43.5 million shares. Using the recent trading range of our stock at approximately $41 per share, we would expect that the average diluted share count would rise to approximately 43.9 million shares for the fourth quarter, and that the average for the full-year of 2017 will be approximately 42.7 million shares. Finally, let me reiterate Adam’s point, that our free cash flow generation for the third quarter was strong and then our guidance for the full-year is now approximately $95 million. Now let me just move on to a few brief comments into our current view for 2018, particularly with the backdrop of our guidance for 2017, it illustrates a revenue growth rate of approximately a 11% and an EBITDA margin above 22.5%. The data we receive in January from our client health plan partners on enrollment is key to our detailed full financial guidance that we normally issue in February. However, given the overall growth in Medicare Advantage enrollment year-to-date, the strength of our contract renewals in 2017, as well as winning back a few customers, we can make this comment at this time. For 2018, we expect that our revenue growth rate and margin profile will approximate what we expect to achieve in 2017, and this growth rate and margin profile are above the current consensus estimates. Anything above those levels will be dependent upon the maturing of the enrollment details in January that we will discuss with you in February. And with all that said, let me turn this back to Donato.

[Donato Tramuto:]

Thank you, Chip. And before I jump into the highlights of the third quarter, allow me this opportunity to recognize my colleagues across the company for their outstanding performance and for embracing the culture of empowerment, accountability and a collective obsession around customer satisfaction and member engagement. I’m honored and humbled to be leading an organization where these key attributes have found fertile ground and serves as the key drivers to our success as a company. Together, we have come a very long way from my first earnings call exactly two years ago today. As you’ve heard from Adam, Tivity Health tallied another very good quarter, both from a financial perspective as well as with our initiatives to enhance our future growth to increase enrollment and participation. Our earnings results for the quarter were better than we expected. And if not for the impact of the three hurricanes, we would have outperformed consensus estimates for revenue, EBITDA and earnings per diluted share. Nonetheless, our strong revenue performance for the quarter is reflective of both the power of the SilverSneakers brand and the growing awareness of our Prime Fitness program. The significant EBITDA margin impact of both lower costs related to visit mix and the settlement of a lease-related contingency have increased our expectations of finishing 2017 on a strong note. Our financial performance this quarter, again, validates the strength of the forward visibility to our annual financial performance and provides additional support to our decision to raise our financial guidance. This guidance at the midpoint now implies a 11% revenue growth from 2016 and an increase in our adjusted EBITDA margin to more than 22.5%. As detailed last quarter, specific to our ongoing optimization of the Tivity organization, there are some very important key tenants that form the foundation of the culture we launched two years ago, which include a commitment to building the best team of outstanding leaders, always being physically prudent with our investments with a focus on achieving an appropriate return on those investments, proactively becoming the best partners to our health plan clients, the participating locations in our fitness center networks, and of course, with every member in our programs to create the most positive impact possible on their lives, and demonstrating our commitment to making this positive impact on lives by being a responsible corporate citizen and leading in both thought and action in areas so closely aligned to our core business. Activating on this commitment, the three hurricanes in late August and September provided an immediate need for responsible corporate citizens to act. Many of our members and our fitness center partners were directly affected by Harvey in Houston, by Irma in Florida, and by Maria in Puerto Rico. Among the ways we have responded to their needs is by joining with the global not-for-profit organization healthy villages to establish a relief fund to support bringing services and programs to older adults affected by the storm. We are working closely with organizations that support adults 65 and older who have been affected by the storms. By identifying gaps in services to this population, we can move quickly to get those services to those most in need. Our culture of empowerment and accountability combined with our visibility to our regular financial progression through the year have enabled us to focus heavily on our ABCD strategy during 2017, which is designed, if I may remind you, to help increase our future growth rate in the future years. As a reminder, to those who are new to Tivity Health, our ABCD strategy aims to add more eligible members in all three networks; B, billed more engagement, enrollment and participation in the eligible population by increasing the awareness of our brand; C, collaborate with other partners by leveraging our brand to introduce new products and services that will drive participation; and D, deepen our relationships with our fitness center partners who make up our national network and their instructors. We have been developing and testing innovative projects designed to increase awareness and thereby build enrollment and participation among the company’s almost 15 million eligible SilverSneakers members and over 40 million eligible Prime members, a large proportion of whom through the eligible for our programs are not enrolled and are not participating. In summary, we continue to tally significant success around increasing awareness of our services and our target populations through social media and our results have improved further since the last quarter earnings call. For example, in the last four weeks alone, we have had more than 17 million SilverSneakers impressions on Facebook. This represents of views by more than 3.3 million unique individuals. Compare this to the figures we shared with you last quarter for four weeks in June, that’s 3.5 million more impressions and 400,000 more individuals. For 2017 through mid-October, our silversneakers.com website had almost 5 million users who made more than 9.6 million visits. That’s up from 1.9 million users and 3.8 million visits for the same time period last year, and up more than 70% on both metrics from the first-half of 2017. Eligibility checks on the SilverSneakers website increased by more than 50% year-to-date. Searches for fitness facility locations continue to increase quarter-to-quarter. The cumulative effects is a year-to-date increase of more than 400%. We added almost 550,000 opt-in e-mail context to our proprietary website year-to-date to a total of approximately 1.5 million, that’s 1 million new members since the start of this year. As we mentioned last quarter, we began to focus now on our test market awareness campaigns and participation data with the goal of finding and understanding the linkages between increased member digital media awareness and engagement and greater program enrollment and participation. Once again, please keep in mind, we don’t expect to have sufficient maturity of the data and subsequent analysis to share with you specific to definitive participation statistics resulting form these efforts most likely until the second or third quarter of 2018. Moving to the D element of our ABCD strategy. We’re making excellent progress on deepening our relationships with our fitness center partners. During the third quarter, we launched two separate Advisory Boards for our for profit and our not-for-profit partners. And already we’re either implementing or considering a range of ideas for improving member engagement and participation that these Advisory Boards have generated. We’re also continuing to enhance our instructor training programs. We have launched some media campaigns in a series of test markets to determine their impact in the open enrollment period, as well as partnering with many participating locations on visual tools, promoting brand and program awareness. We are getting a great response from our fitness center partners who like our members understand the brand value as evidenced by our high net promoter score. And so I’m very excited about our progress on these initiatives and very confident that we are on the right track. This year, 2017, marks the 25th anniversary of the launch of SilverSneakers. 25 years of unique knowledge collection, relationship building, product development and enhancement, all of which have created an indispensable understanding of how to enroll and engage members. As my favorite philosopher, Yogi Berra, once said, you can observe a lot by watching. I continue to fulfill my personal commitment to attend SilverSneakers classes across the country. Where time and again, I hear from members who understand that our focus on social interactions is so important and such a differentiating aspect of SilverSneakers. I also hear firsthand about how SilverSneakers is changing lives. For instance and just recently, a member shared with me that she was diagnosed with high blood pressure and placed on medication seven years ago. Two years after joining SilverSneakers, the medication was reduced by half and ended completely the following year, thanks to the member of losing weight, staying active and having a social interaction with SilverSneakers members. Another member joined SilverSneakers 10 years ago, when knee problems developed. One of six children, all the members siblings had undergone knee replacement surgery. Today, this specific member is active, having had no surgery and with no knee pain and credits SilverSneakers and is one of our key ambassadors now by getting her family, her neighbors and her friends to join the program. A third member lost 70 pounds after joining SilverSneakers seven years ago and is still going strong today. She says, it wouldn’t have been possible, I would not be alive today without the support of the instructors and friends she has met since joining SilverSneakers. There are scores of these kinds of experiences and stories that have been communicated to us either verbally or in print, which have become the key incident to why we continue to enjoy such a high Net Promoter Score. By working to improve our members experiences, we believe we have much potential to improve our Net Promoter Score going forward. And this, I can assure you, has become one of our key operating imperatives in this organization. What I have also learned is that thanks for 25 years of dedication from our SilverSneakers instructors and colleagues. The SilverSneakers program has generated a social help dynamic that has unquestionably served, both the health plans and our members in a very positive way. In closing, let me now give you my perspective on our focus and opportunities for 2018. Now that Chip has provided an initial profile for our growth and margins. First, our markets are very attractive with Medicare Advantage continuing to expand with some industry estimates for growth of as much as 8% for 2018. Second, we already know that our awareness projects in digital strategy are a unique conduit for enrollment and eligibility checks. Third, our high Net Promoter Score strongly difference – differentiates the SilverSneakers brand. I’ve indicated that we are focused on improving, both the strength of our brand and continuing to advance our NPS. Fourth, we also believe that there’s an opportunity in helping prospective health plan customers understand how they can leverage our investments in our NPS and digital strategy to possibly influence their own star ratings. Fifth, we expect 2018 to benefit from improved performance across our functional areas. For example, we achieved a contract renewal rate of over 99% for 2018. This hasn’t happened since 2011 in the company. We produced a few new contracts that increased client penetration and had some former clients return home and come back to us. Lastly, we saw solid growth in our Prime business. 2017 year-to-date showed promising results in some of the co-marketing initiatives that we have launched. We expect to build on that success in 2018 with some broader newly designed marketing initiatives with a key partner that covers more than 27 million eligible lives. We’re also approaching the end of 2017 with lots of exciting initiatives, lots of momentum and lots of opportunity. We look forward to talking with you for our fourth quarter call in February to update you on our plans for 2018 and to provide a more detailed and refined financial outlook for the year based on final enrollment data being available to us for SilverSneakers in January. Thank you again for your interest in Tivity Health and for being with us today. Operator, we’d now like to open the calls to questions.

[Operator:]

Thank you. [Operator Instructions] We’ll go to our first question from Ryan Daniels with William Blair.

[Ryan Daniels:]

Hey, guys, thanks a lot for taking the questions. Donato, let me start with one for you. There was discussion of increasing spending in the fourth quarter more than the organization typically does in order to market to the Medicare Advantage population. I’m curious if you could just provide a little bit more color on that? Is that really pulling forward some of the marketing spend we might typically see in Q1? And number two, what gives you the confidence that the early marketing, while people are enrolling, or during that kind busy period will yield the same result as marketing to them once they’re already in the Medicare Advantage program for the new year?

[Donato Tramuto:]

I’m going to save my voice, Ryan, and have Chip take that, if you don’t mind.

[Chip Wochomurka:]

Yes, Ryan, thanks for the question. Well, first of all, there’s two pieces of the answer – there’s two pieces of an answer here. One, with regard to the enrollment spending we do on cards and program information, that’s up in the cost of goods sold line. That is a bit of a pull forward. We three, four years ago, we used to do that. We got away from doing it and did it more so on January. We’re pulling it forward. But back again this year, we think it will have and we’ve seen in the past, too. But we think it will have much more impact by getting people who are changing plans or people who are new enrollees for the first time their information in December. So that they’re ready to hit the ground running in January. So we are pulling that a little bit forward. With regard to what we talked about in the SG&A line, that is something new that we’re focused on this year some of our pilot work with regard to media types of spend and advertising that’s tied to that open enrollment period to try to get more awareness and more people into those campaigns into the program. The majority of that, I would say, is in a variety of test markets. There’s a bit of that spend. That’s at a national level, the majority is in a variety of test markets.

[Donato Tramuto:]

And the only thing I would add, I’ll use my voice for at least a minute is, Ryan, I think that one of the things, I kind of equate this. I spent seven years studying to be a Roman Catholic recently, we always said to ourself. You can get the member into the church, you can kind of recruit them to be a loyalist to their faith. And I think this is the same thing. You just can’t try on the digital strategy, it’s been a very successful year in terms of how we built up the Facebook. Now you’ve got to really pull them through. And we are beginning to see, I just received a letter today and there’s not a day that doesn’t go by that we don’t get some e-mail, some written print, or some inquiry about how they can enroll. And what we have to do is be smart enough to make sure that we can respond to that. And as they come from silversneakers.com, they are members of silversneakers.com. They now become, if you will, that active participant for us to recruit. So we can’t just stop with the digital program.

[Ryan Daniels:]

Sure. And then you mentioned initial thoughts on MA enrollment for 2018, you’re calling for upwards of 8% growth. Is that what you’re predicating your 11% growth on, so using a baseline assumption of 80 plus your marketing initiatives giving in new contract wins giving you up to a 11%?

[Chip Wochomurka:]

Yes, Adam – or Ryan, this is Chip. It is – we’re in a range of, I call it, 7.5%-day [ph] as a baseline. What we don’t know in the wildcard, of course, is as we get statistics in January, where the real enrolment falls out both within plans, as well as within geographies. But that 7.5%-day range is a place that we’re feeling comfortable with using as a baseline, and of course, then you’ve got to bake in the growth in Prime.

[Ryan Daniels:]

Yes.

[Chip Wochomurka:]

And you’ve got to bake in other factor.

[Donato Tramuto:]

And I think it’s – as you and I have always talked about this, I think, what’s been unique about our business model is that, there are multiple growth levers. The fact that you have 11,000 individuals aging in, that does feed into that 8% growth that I mentioned before. But the fact is, you can’t discredit that we are now heightened the awareness of the SilverSneakers brand. And by the way, thanks to the colleagues, and I hope that they are listening to this call, because we could not possibly have had the success on the digital awareness program, had it not been for 25 years of our colleagues focused on being great instructors and urging, if you will, the kind of relationship that they have with our members. Even our own consultants had built up this digital campaign, they’re shocked. They’re really blown out of the water of the extraordinary success of this happen here. So you add that into the equation. We can’t disclaim what’s happening with Prime. I think, Prime has been a great example of the – adding a little bit of investment dollars to marketing has helped to increase, if you will, the activations there.

[Ryan Daniels:]

Okay, great. And two more very quick ones. You mentioned a one-time consulting project in the quarter, anymore color there?

[Adam Holland:]

This is Adam. Yes, that just related to some work we’re doing surrounding our Net Promoter Score, it’s that one-time event and we’ll have more to say about it in February.

[Ryan Daniels:]

Okay. And then, Adam, another one for you. Just curious the debt levels continue to go down with the strong cash flow, but the interest expense is trending up a little bit. Can you just remind me why that nuance is occurring?

[Adam Holland:]

Yes, it is a nuance. It’s a timing element. And the fact that we’re paying down the debt level earlier. We had a little bit acceleration of the deferred loan amortization costs in Q3, we’ll probably see that and not go back down in Q4 and normalize that the $14 million, $15 million range for the year or something like $15 million range for the year. Remember, only about a fourth of that is cash interest.

[Ryan Daniels:]

Right. Okay, perfect. Congrats on the strong quarter again and the good outlook. Thanks.

[Donato Tramuto:]

Thank you, Ryan.

[Operator:]

We’ll now hear from David MacDonald with SunTrust.

[David MacDonald:]

Good afternoon, guys. The questions, first, just on the 2018 guidance, I think, I just want to make sure I heard this right. When you guys are talking about that kind of a 11 percentage growth in the margins in line, that does not include any potential impact that you guys would see from the pilot projects, is that correct?

[Donato Tramuto:]

In terms of the engagement, David?

[David MacDonald:]

Yes, yes.

[Donato Tramuto:]

Yes, the engagement, it’s still too early to kind of see that pull through. And so, we want to be a little bit cautious not to get ahead of ourselves. But I can say, the awareness has been very successful. So let’s make sure that we can give you, if you will, in that second-half next year a tie in to how the awareness really did lead to engagement uptick.

[David MacDonald:]

Okay. And then can you spend a minute just talking about Prime. I mean, how many have seen now a couple of times this year a pretty nice uptick tied to an awareness, our marketing project with some of your Prime clients? How many of your Prime clients have you not marketed to? And if not, why not? So, could we see additional marketing projects with incremental Prime clients on a go-forward basis?

[Donato Tramuto:]

Well, it’s a very good question. One of the most significant partnerships we have represents $27 million.

[David MacDonald:]

Yes.

[Donato Tramuto:]

And this is a pilot as well. We want to make sure. And good news is that, we’ve had now two marketing campaigns, one in February and one in September. So again, we don’t want to get ahead of ourselves. We want to make sure we get more data. I mean, 27 million out of the 41 million, that’s a great place to start. But your questions are very good one, because there’s – there are other opportunities with the other partners that we are now exploring and now that we’ve learned and we have lessons gained. We’ll apply those lessons obviously in those partnerships as well.

[David MacDonald:]

Okay. A couple of other questions, guys. Just on visit mix, we’re not talking about a couple of quarters in a row here. Is there any chance, this is kind of a new normal. I guess just a little more detail on why you would expect a visit mix to kind of revert back to what you’ve seen, or why it would continue along the path for the current scene?

[Adam Holland:]

This is Adam. Yes, that’s a good question. I think, the answer is twofold. One, we want one more under our belt before I think we’re going to call it a trend. That get – the fourth quarter does have some seasonality aspects to it, that’s unique from the first quarters of the year. You have Thanksgiving holidays, the Christmas holiday, and the members pattern of visits changes a little bit. But you’re spot on it. I think, we see that again in the fourth quarter. We’re going to take it that differently when we talk in the spring.

[David MacDonald:]

Okay. And then, guys, just last question. Look, we’re constantly seeing and reading about health issues in seniors who have a lack of social interaction. Is there anything you guys are talking about with your planned sponsors and your clients in terms of maybe something outside of SilverSneakers, or other events that are more social interaction targeted as opposed to just kind of a gym membership type of event?

[Chip Wochomurka:]

Let me give you – my quick answer is, yes, One of the things that we find very unique, and I think the awareness and the MPS score validates. So it is that we have a highway of members. And the highway members gives us, if you will, an incredible trusting relationship. And so we are working with the Board. We are strategically assessing what else could we bring. I think, we have to kind of turn this around not look at us just as a product company. We are a highway of members, and the fact that, we could bring a million new members into silversneakers.com, we think we can look at areas like nutrition. I keep on laughing. You may laugh at this, but a dating service. We’ve had SilverSneakers marriages. And so we’re going to think big, start small, execute quickly and make sure that aligns with our financial mandate. But yes, I think now we’ve come to the realization that we have stability in the company, that the awareness campaign is working, that I think our customers want us to bring, if you will, because of that NPS high score and because of the trusting relationship we have with those members, they want us to come to the table with other ideas.

[David MacDonald:]

Okay. Thanks very much, guys. Congratulations.

[Donato Tramuto:]

Thank you very much.

[Operator:]

Thank you. Our next question will come from Nina Deka with Piper Jaffray.

[Nina Deka:]

Hi, congrats on outlook, the accomplishments.

[Donato Tramuto:]

Thank you very much.

[Nina Deka:]

Can you provide some examples on some of your win back stories, maybe some metrics that you use in your value proposition to win these accounts back?

[Donato Tramuto:]

Yes, a great question. I can give you kind of a generic. I think, what our clients are or those who have come back is that, the investment that we are making in the company now has been really an enormous. It’s been enormously well received. I think, you can’t disclaim, this is our third year in a row that we’ve had a high Net Promoter Score. We are now making enormous investments in terms of the awareness and the engagement. And quite frankly, I think, that the customers have seen a change in the culture, that’s why I spent sometime today. I think, it was necessary. It’s interesting sometimes. We look at results from numbers. But there’s no spreadsheet to kind of really define how the culture has changed, how the culture is one of empowerment, the culture is one of a listening to our clients. And so we had a goal to win a few back. And I’m pleased to say that, we exceeded that goal. And I think that we can continue to make a very strong stand in the marketplace by keeping this culture sound and in place.

[Nina Deka:]

Great. And just in terms of the financial model, could you maybe provide some updates on your long-term debt to EBITDA strategy, and also your effective tax rate?

[Adam Holland:]

Yes, sure. So let me start with EBITDA. So, yes, at the end of this year, what will essentially be left with is the $150 million in convertible bonds, which are due next summer. And we do have the facility in place to retire that debt. We also had a free cash flow available to start paying that debt down. And that’s something we’re going to talk in more detail about when we had a February call. And in regards to the tax rate, we are becoming a cash tax payer next year. And we’re completely aware of that and we’re working with our team to look at other tax mitigation strategies to make sure we’re as efficient as we can be. And we’ll have again more to say on that next year.

[Nina Deka:]

Okay. Thanks

[Operator:]

Thank you. And we’ll hear from Mohan Naidu with Oppenheimer.

[Donato Tramuto:]

Sounds very good.

[Mohan Naidu:]

Thanks for taking my questions. So, Donato, I want to little bit – dig a deeper or dig it a little bit deeper and awareness and engagement campaigns that you are doing, which are obviously seeing a lot of traction. Can you help us understand how awareness converts into engagement and engagement converts to revenues, because you have mix of contracts where you’re having some visit-based revenuers versus some fixed PMPM contracts, right, how do they balance all, if you continue to drive more engagement than visits?

[Donato Tramuto:]

Sure, and I’m going to give you, I work best by giving you real examples. But let me tell you what’s going to happen here is that, the ability now to have this information coming forward through the call center and through our digital relationship, i.e., silversneakers.com gives us the information to instantly, for example. Let’s say, I’m registered in silversneakers.com, and we’re following that individual, and we’re also following that person in the call center. We learned that that individual had a first really poor experience at a location. How we get that data to the location, so developing the relationship with the physical locations is equally as important as our having, if you will, this information about the member connecting that in a – an able technology manner, we’ll be able to get that information out immediately. That location will then have an opportunity to know, gosh, Donato went for the first time and really didn’t have a good experience. How do I retrain my instructors. Let me give you a great case example. On my birthday this past year, I get a letter from this mercedes-benz.com that I’m involved in. And they informed me that over the last 10 years, I had purchased a car at the 3.4-year time period. I didn’t even know that happened. What happened is that they engaged me and by the time they engaged me, I end up buying a new car. And that’s what we anticipate will happen here and how we can technology enable that is where we will begin to invest next year. But getting the data, understanding that the awareness campaign is bringing more members into silversneakers.com, we have a unique opportunity to scale this in a way that gets the information out quickly to our 13, actually it’s 14,000 locations now.

[Mohan Naidu:]

Got it. And in your current contracts, can you give us a sense of what’s the mix between the visit-based revenue contracts versus the fixed PMPM contract?

[Chip Wochomurka:]

Yes, Mohan, this is Chip. The membership profile breaks out in a way, it’s very close to one-third, two-thirds, it could be 63%, 64% and then they offset on the other side the 60% – the higher percentages what we call the hybrid model and then the lower percentage would be tied to a fixed or flat PMPM.

[Mohan Naidu:]

Got it. Okay. I’ll leave it there. Thank you very much.

[Operator:]

Thank you. Well now hear from Dave Styblo with Jefferies.

[Dave Styblo:]

Hi, there. Thanks for the question, guys, and congrats on the quarter as well.

[Donato Tramuto:]

Thank you, Dave.

[Dave Styblo:]

I wanted to help – if you guys could try to help me connect the dots a little bit more on all the activity that you’re seeing on awareness, whether it’s silversneakers.com, Facebook and so forth, and I know that’s been a funnel for you to have that information and hopefully drive better engagement. I guess, can you give us the sense of, I think, you said there’s 5 million users on SilverSneakers. How many of those are current SilverSneakers eligible folks versus those that are not? And I guess as you’ve gotten all this traditional traffic in there, I suppose I would have thought okay. Should we see maybe the participation level, the number of visits trend up a little bit. And it seems at this point you guys might be trending a little bit below the 94.5 million guidance. So part of that, of course, is the hurricanes. But can you help me reconcile this data point as to why you feel like the engagement is going to increase just, because it doesn’t seem like we’re quite seeing it yet?

[Donato Tramuto:]

No, we can caution you that having done this before this is not my first rodeo with respect to doing digital campaigns. The company that I found is, Physicians Interactive, was a very digital focused company. You’re not going to see that right away. Remember, we have been bringing this just like my analogy with the church, we’ve been bringing everybody now in. And so it’s going to take time now to gather the data, to create, if you will, a digital online communication with them, understand their profile, a call center which historically was much more of a inbound has now transformed to a outbound. So all of that will lead, I’m confident into our seen improvement. But not that I wasn’t expecting that right now. What I can say to you, I wasn’t expecting to have as many members join silversneakers.com and getting to your earlier question, we’ll get back to you on that. I don’t know, I honestly don’t know how many are SilverSneaker members in silversneakers.com. We don’t, by the way, we don’t want them just to be silversneakers.com – SilverSneaker members. What we also want to do start anticipating that those who are 62, 63 and they’re aging in look at the unique opportunity we have as they’re aging in, we educate them about SilverSneakers. In fact, we have hundreds of thousands that have ended up on a list of they’re ineligible right now. But could be eligible over the next 24 months and we’re going to maintain that list and begin to educate them of the value of SilverSneakers. So you have a push pull strategy here. One is to ensure that those who are active members that we have a relationship with them that helps and understand their profile just like me with the car dealership. And the other is, we begin to educate them about what that program means, so that they choose, if you will, plans that are offering SilverSneakers, because they see the program is being very valuable.

[Dave Styblo:]

That’s helpful. Thanks, Donato. And then I think one aspect investors don’t hopefully appreciate is the Prime opportunity and there certainly have more traction again. I’m wondering what the marketing strategy or co-branding strategy is with – is now with the Blue Cross Blue Shield Association. I know you guys made some fixes there to streamline the process, streamline the steps of finding out. And my understanding was that, you were going to be able to have a – have more opportunities or better opportunity at least to engage with those folks to let them know they have that potential benefit. Can you let me know what that looks like as you head into next year. What are the improvements in terms of being able to market target those of?

[Donato Tramuto:]

Well, one of the most significant improvement has been, I think, I did relate this last time is that, there was a 12-step process to register. And we have worked with this key partner to bring that down to five steps, that’s going to go a long way. And a lot of potential members and members who did activate complained about the length of the steps. The other is that, we have come up with programs without getting into the specific marketing collateral and what we did, that proved. That when we did implement that program, that there were more activations. And in the contract that we signed, the renewal of the contract that we signed with the specific partner, it does define that early next year, we will begin to take what we’ve learned here and come up with even newer ideas for more marketing programs next year. Remember, they have 27 million members. And if you look at our total activations, our total activations is like 5 basis point of one point. So there’s a huge opportunity here to put a little bit of investment dollars and they have committed to that. And so, we are very optimistic by how that can grow. I do admit what you just said is, I think, Prime is one of our most significant growth engines, it just doesn’t get discussion highlighted enough.

[Dave Styblo:]

Okay, thanks. And then lastly, just to make sure I understood the comments about 2018, especially on the margin side. I think, you said something along the lines of being better than the consensus margin, which as – if we’re all looking at the same thing or not was 22.2%. I wasn’t sure about the comment what you thought the margins would be at that level or better, or are you trying to indicate that the EBITDA of $135 million from consensus had upside. Can you just clarify what you’re trying to say there?

[Donato Tramuto:]

Yes, Dave, I’m happy, too. I said that, if you take a look at our current now revised guidance for both revenue at the – majority of the midpoint and the EBITDA, the margin percentage that’s generated from that midpoint that we would expect to approximate both of those two statistics. And both of those two statistics are higher than the current consensus estimates.

[Dave Styblo:]

Okay, got it. Thanks.

[Donato Tramuto:]

Thank you, Dave.

[Operator:]

We’ll continue on to Steven Wardell with Chardan Capital Markets.

[Donato Tramuto:]

Hello, Steve.

[Steven Wardell:]

Hey, thank you, and congrats on the quarter.

[Donato Tramuto:]

Thank you very much.

[Steven Wardell:]

So I’m wondering you talked about an incentive compensation program at fitness locations. Can you tell us any how that’s proceeding? And are there any insights that you’ve learned from that?

[Donato Tramuto:]

Well, the one and so I can give you is that, we have implemented a few still too early. What I can share with you is that, one of the areas that we are very optimistic on, we talk about co-marketing on the Prime side. But we have done co-marketing with a number of our physical locations and we have been very impressed, they have as well. As you know, through these Advisory Boards, they’re able to see and understand what other locations are doing now. And so we do know that one of the things that we think has been extremely left unattended in years past was partying with these locations, they’re as motivated as we are to get more members to join. And so I can say to you that the co-marketing efforts again without getting into the details, the co-marketing efforts have been – there’s two or three that we’ve been piloting with. And now once a pilot succeeds, we want to come back and see how you scale it. And so that’s what we’re doing right now is defining how we scale that.

[Steven Wardell:]

Great. Thank you.

[Operator:]

Thank you. And we’ll hear from David MacDonald with SunTrust.

[David MacDonald:]

Hey, guys, just one quick follow-up question. When you look at the renewals that you did this year and the new contracts that you won, does the mix in terms of hybrid versus flat PMPM look the better – look better the same relative to the legacy kind of two-thirds, one-third?

[Chip Wochomurka:]

Yes, Dave, this is Chip. I think from a statistical perspective, I’ll answer with what we can see today, because of course, the final answer to that question is going to be dependent on the enrollment data in January and what comes in what way. Right now, it would suggest to us that, we will see an increase in mix of the hybrid model and a decrease in mix of the fixed PMPM model.

[David MacDonald:]

And could you guys give us any sense in terms of magnitude just for this year? Was it kind of 80-20, or 90-10, or is that a level of detail you just don’t want to get into?

[Chip Wochomurka:]

Well, no, I think, I just, if I’m answering – if I’m understanding your question here, you’re asking about the current mix in 2017?

[David MacDonald:]

Yes.

[Chip Wochomurka:]

Yes, I just answer – I did just answer that on an earlier question, but I’ll reiterate it. The mix today is about 64%, 65% hybrid, and the resulting offset, what would that be, 35%, 36% fixed PMPM. We expect that hybrid percentage of that 64%, 65% to increase in 2018.

[David MacDonald:]

Okay. I guess, I asked it wrong, Chip. When you look at just the 2018 contracts kind of, if you put those in a vacuum, are those kind of – I mean, obviously, if it’s skewing, if the hybrid as a total is going to skew higher, is that a 70% number this year, in 2018, 80%, any sense around that, or again is that kind of get into the weeds a little more than you want them?

[Chip Wochomurka:]

I think that’s getting into the weeks a little more, because that would isolate things that are new for 2018…

[David MacDonald:]

Okay.

[Chip Wochomurka:]

…versus, we’ve got a of where things are offered and how they’ve come – all come together. So that’s a longer answer and would be quite analytical.

[David MacDonald:]

Okay, sounds good. Thanks very much.

[Donato Tramuto:]

Thank you, David.

[Operator:]

Thank you. And I would now like to turn the conference over to Mr. Tramuto.

[Donato Tramuto:]

Thank you very much. And again, I just want to acknowledge all the colleagues who have done a remarkably great job in the last year. And thank you all again for attending this call, and please don’t hesitate to contact Chip, Adam, or me if you have any further questions. So make it a great evening for your – yourself.

[Operator:]

Thank you. Ladies and gentlemen, once again, that does conclude today’s conference. Thank you all again for your participation. You may now disconnect.