Tivity Health, Inc.
Q4 2017 Earnings Call Transcript

Published: 23 Feb 2018

[Operator:]

Good afternoon and welcome to the Tivity Health Fourth Quarter Conference Call. Today's call is being recorded and will be available for replay beginning today and through March 1st by dialing 719-457-0820. The replay passcode is 9891381. 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 the measures to the most directly comparable financial measure calculated according to the G8 -- according to the 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 expected quarterly and annual operating financial performance of 2018 and beyond. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements without limiting the foregoing the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors among others set forth in Tivity's filings with the Securities and Exchange Commission and in today's news release, and consequently, actual operations and results may differ materially from results discussed in forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events, or otherwise. And now I'll turn the call over to company's Chief Executive Officer Mr. Donato Tramuto. Please go ahead sir.

[Donato Tramuto:]

Thank you, operator and good afternoon everyone. Thank you for being with us today for Tivity Health's fourth quarter and full year 2017 conference call. I am here today with Adam Holland Tivity Health's Chief Financial Officer and also our Chief Growth Officer, Steve Janicak. I also want to just note that Adam has also just recently assumed additional responsibilities for the partnership [Indiscernible] location and we congratulate him as you know that Adam has done really a great job over the last few months. So, congratulations on this new responsibility. Before I begin and as some of you know, our Vice President of Investor Relations Chip Wochomurka is not able to join us today. Chip underwent a surgery earlier this week. He and his family are in our thoughts and prayers and we wish him a speedy recovery. For those of us who know Chip, I can probably assure you he's in his hospital bed listening to this call. So, Chip I hope we've learned from you and you'll be proud of all of us here today. As an overview of our discussion this afternoon, Adam will lead us off with a detailed review of our fourth quarter and full year financial results and will then review our initial financial guidance for 2018. I'll conclude our prepared remarks this afternoon with an overview of some highlights from the year, an update on our ABCD strategy, and a look at some activities help 2018 priorities. Thereafter, we will open the call for your questions. So, without further ado, I will turn this over to you, Adam.

[Adam Holland:]

Thank you, Donato and good afternoon everyone. I'd like to start by recapping some of the key financial metrics for the fourth quarter. Revenues for the fourth quarter were $139.4 million compared to $124.9 million for the fourth quarter of 2016. Income from continuing operations was $8.6 million for the quarter compared to $12.1 million in the fourth quarter of last year and earnings per diluted share from continuing operations was $0.20 compared with $0.30 in the fourth quarter last year. Please note that in the fourth quarter of 2017, adjusted earnings per diluted share from continuing operations was $0.41 compared to $0.35 last year. Q4 2017 adjusted earnings excludes the fourth quarter restructuring costs of approximately $0.04 per diluted share and also excludes approximately $0.17 per share of incremental tax expense due to the effect of the Tax Cuts and Jobs Act. Our continuing operations generated adjusted EBITDA of $29.8 million for the quarter, providing an adjusted EBITDA margin of 21.4%. Adjusted EBITDA for the quarter excludes approximately $2.6 million of restructuring charges, which were not factored into our prior guidance. As mentioned in the release, during the quarter, we initiated and completed a restructuring plan aimed at streamlining certain operations support functions. We did not expect further material charges under this plan and we anticipate annualized savings of approximately $4 million from this initiative beginning in 2018. We will be reinvesting this into the business. SilverSneakers revenue was not affected by hurricanes to the full degree we anticipated. We have previously estimated that Q4 revenue impact of approximately $1 million, but now estimate the impact to be closer to $650,000. Overall, our mix of SilverSneakers' visits was similar to what we saw in Q3 with more members visiting from plan to pay as a per visit fee, while our total visits fell from 22.9 million visits in Q3 to 22.7 million visits in Q4. This decrease was primarily driven by normal seasonality as we tend to see less participation by members in the fourth quarter every year. For the entire year, we saw higher SilverSneakers visits at approximately 92.8 million compared to 84.6 million last year. Moving on to Prime, our Prime business channel was able to generate strong revenue growth, driven by member pay portion of our Prime program, which grew by approximately 9,000 net new subscribers in Q4. From a seasonality perspective, this net new growth represents a strong increase compared to the 6,000 net new subscribers we saw in Q4 of 2016. Most of the Q4 2017 increase came late in the quarter, driven by a targeted marketing campaign launched in December. At the end of 2017, we had approximately 260,000 subscribers in Prime compared to approximately 200,000 last year equating to a year-over-year revenue growth rate of approximately 22%. As typical in the fourth quarter, cost of services as a percentage of revenues increased as compared to Q3, primarily due to an increase in our average cost per visit within our SilverSneakers' network. Also we pulled forward some of our new member mailing marketing materials from Q1 of 2018 to Q4 of 2017 as part of our member engagement strategy, which increased cost of services as a percentage of revenues compared to last year. SG&A increased as a percentage of revenues from Q3 to Q4. There were a number of individually immaterial items that when combined amounted to just under $2 million of additional cost in the fourth quarter. As mentioned earlier, in addition to the fourth quarter restructuring costs, we also excluded incremental tax expense in our EPS adjustments related to the Tax Cuts and Jobs Act. In the fourth quarter, we incurred a non-cash charge of approximately $7.4 million or $0.17 per share. The charges relates to both the remeasurement of our deferred tax assets to the lower tax rate plus the requirement under the new tax law that we recalculate the impact of a repatriated foreign earnings that we had already accounted for earlier in 2017. Excluding these items, our effective tax rate for the fourth quarter would have approximated 29.7%, which reflects a positive benefit of the tax treatment from the exercising of options and divesting of restricted shares. We are optimistic about the impact of tax reform and anticipate an effective tax rate of approximately 27% for 2018. A final point on taxes, we estimate to have approximately $120 million of federal NOLs and credit available for utilization in 2018. I will also point out that the diluted share count for the fourth quarter was approximately 43.4 million shares combined at 39.8 million shares in the fourth quarter of 2016. Moving on to cash flow and debt repayment, free cash flow for the fourth quarter was strong as expected and totaled $29.7 million for the quarter and $99.4 million for the year. We took advantage of the strength of the free cash flow to pay off our term loan A, which was entered into in April 2017 for $70 million. We believe we are in a strong financial position ending the year with approximately $146 million of outstanding debt and $28 million of cash on hand. Our ratio of total debt to 12-month trailing EBITDA as calculated under our credit agreement is less than one times at the end of 2017 compared to almost two times at the end of 2016. In summarizing 2017, we exceeded our original objective that we outlined for financial performance at the start of the year. We ended the year with revenues of $556.9 million with SilverSneakers making up approximately 82% of our total revenues, Prime approximately 15%, and WholeHealth Living approximately 3%. We have adjusted EBITDA of $128.6 million with diluted EPS of $1.44 and adjusted diluted EPS of $1.68. Turning now to our outlook for 2018. Our revenue guidance for 2018 is in a range of $607 million to $625 million. We are optimistic about our topline growth potential in 2018 for both SilverSneakers and Prime based on our experience in 2017. While the year-over-year growth in SilverSneakers' revenue is expected to be healthy, our Prime business is anticipated to grow at a faster rate than in 2017 and is expected to make up a higher percentage of our total revenue than it did in 2017 by the end of the year. Here are some more details around SilverSneakers' assumptions for 2018. At the end of 2017, there were approximately 14.9 million eligible lives including both Medicare Advantage and Medicare Supplement. At the beginning of 2018, we have approximately 15.6 million lives made up of 11.9 million in Medicare Advantage and 3.7 million in Medicare Supplement. We estimate that by year end, MA lives could grow by 200,000 and Medicare Supplement by 100,000. Depending on the mix of visits from our hybrid plans and PMPM plans, our guidance suggests approximately 100 million visits at the midpoint of our 2018 guidance range compared to the 92.8 million visits we saw in 2017. Finally before I move on to Prime, I want to call out some additional color regarding SilverSneakers. One of the key factors of how we gain more eligible lives in 2018 was our winning of additional market share from existing clients. Many of these new lives are transitioning from our competitors and we are mindful in our assumptions as to how quickly these newly eligible members activate their SilverSneakers benefit in 2018. Therefore we expect a ramp-up effect in activations and visits from these new members as we progress through the year. Also in the same vein, we have successfully grown the total percentage of eligible lives that are managed under our hybrid revenue model, which is now approximately 64% of total lives in 2018, which certainly brings revenue opportunity, but also an opportunity we must execute against with more member participation to realize our guidance at the upper end and it's certainly influenced by this opportunity. Moving onto Prime, as I mentioned earlier, we saw great success in our Prime program during 2017 and we ended the year with approximately 260,000 paid subscribers. Several targeted promotions contributed to this growth last year and we anticipate a higher rate of growth as we move into 2018. Three factors will contribute to growing Prime during 2018. First, we had a mix of new promotions that should drive net new pay Prime subscribers from our current group of eligible members. Second, we increased pricing in some of our markets at the start of 2018, which should also benefit the growth. Lastly, we have an opportunity to sell Prime to new plan later in this year which could benefit revenue inside of 2018. We expect Prime to continue to be one of our most important growth levers during the year. Moving onto EBITDA, we have established our EBITDA guidance for 2018 in the range of $139 million to $144 million. The net savings from our modest fourth quarter restructuring will provide us flexibility to reinvest in our digital marketing and our media programs as well as our integrated member experience and data management, all of which, we view as fostering growth opportunities for 2018 and beyond. Moving onto other items and diluted EPS. We expect that our depreciation and our amortization expense for 2018 will be approximately $4 million and that our interest expense will be approximately $8 million, roughly $6 million of that is non-cash interest. In addition based on our current analysis of the impact of tax reform, we expect our effective tax rate for 2018 to be approximately 27%. This does not include any anticipated benefits from share based compensation and with these figures in mind, we have established our guidance range for earnings per diluted share in a range of $2.12 to $2.20. When comparing this range to the actual results we just reported for 2017 of a $1.68 adjusted EPS, you should consider the differential in the tax rate as well as the diluted share count, which in 2017 was approximately 42.5 million shares. For 2018, we expect full year average diluted shares outstanding to be approximately 43.5 million to 44 million shares. Finally, we expect our strong generation of net income coupled with utilizing the remaining tax shield of our NOLs will lead to free cash flow in excess of $100 billion next year in 2018. This expectation is also guided by our expected capital investment spending of approximately $10 million for the full year and paying only approximately $5 million in federal and state tax cash taxes for the full year. One final item to give you is a sense of our expectations on the shape of the year as we progress through 2018. We expect revenue will be affected by normal seasonal fluctuations and SilverSneakers' participation and we also anticipate the year-over-year revenue growth rate will be stronger in the back half of 2018 as participation rates expand through our engagement programs with SilverSneakers and Prime expands through new subscriber initiatives. EBITDA is expected to be lower in the first quarter and relatively ratable for the last three quarters of the year. With that, I'd like to turn the call back to Donato for some additional remarks.

[Donato Tramuto:]

Thank you, Adam. The strong 2017 results just reviewed by Adam were a direct result of the first execution from our Tivity colleagues. I want to take a moment to express my gratitude to all of them. When you work hard and you produce good results, a sincere thank you should never be overlooked. It's their dedication, their passion, and their commitment to providing an unmatched experience and superior level of service to our clients, participating locations, and most importantly, our members that made Tivity Health and the SilverSneakers brand what it is today. And this momentum continues to enrich our reputation in the market. Thank you, colleagues. Last year we celebrated the 25th anniversary of SilverSneakers and over that time, nearly 600 million unique member visits have been recorded, 5 million call center conversations tally nearly 2 million registered SilverSneakers.com members and over 1 million newsletter subscribers, all of which have generated a significant amount of data. We have consistently maintained a net promoter score of 81 and just once again, confirmed for the third consecutive year a net promoter score of 81. The key to our success as well as the confidence in our brand is related to our proven methodology and know-how around how to get seniors physically and socially active by connecting them to the SilverSneakers community. This is what keeps our members delighted and what motivates them to come back for more. It is not only what members want, it's what our clients expect and what our over 16,000 partner locations have come to recognize about what is unique about our program. Rarely do you see such a strong alignment of incentives across all stakeholders. Our strong fourth quarter results topped off a very solid 2017, during which the strength of our business allowed us to raise our financial outlook over the course of the year, ending 2017 with double-digit revenue growth and a strong balance sheet. We are focused on maintaining an efficient balance sheet that allocates capital to drive high shareholder returns. For now, we will continue to focus on paying down our debt and we'll continue to evaluate other options for capital allocations in 2018 such as share repurchases, investments in the enrollment and engagement strategy, and potential tuck-in acquisitions that will advance our ABCD strategy. In the fourth quarter, all three of our businesses exceeded our revenue expectations. These results would not have been possible had we not made great strides on our ABCD strategy over the course of the year. As you recall, the A part of our strategy is to not only just add more eligible members, which we have, it is also to turn more of these members into enrollees and into active engaged members. Uncovering this opportunity in the summer of 2016, has undoubtedly helped us to define this as one of our key growth engines for the company and we intend not to take our eye off the ball and moving more members from our core eligible base to signing up for the SilverSneakers program. A program, if I may remind you, that they received for free by the respective Medicare -- Medicare Advantage plan. In 2017, Medicare Advantage enrollment grew almost 8%, reaching 20.1 million people or about one-third of the senior population. Over the same period, Tivity outpaced the overall market. We continue to grow market share, however, we have more work to do to bring to life the base of those members we have by moving them into enrolled and becoming active and engaged participants. Currently, less than 22% of the 2017 14.9 million eligibles signed up for the SilverSneakers program even though they get it for free. What we have now learned and a real opportunity for us is that many of them who have not signed up simply do not know that they are entitled to the program. Hence I am now convinced that the remaining eligibles, almost 80%, who have not enrolled also have a desire to love life longer by getting physically and socially active and connected. In 2017, our Chief Growth Officer, Steve Janicak reengaged clients in a spirit of collaboration and shared mission, capping off a record year in contract renewals. However, our work doesn't end simply with the signing of a contract. We are in continual dialogue with the senior leadership of our plan partners to ensure the SilverSneakers brand delivers on their goals to attract, retain, and ultimately get seniors engaged both physically and socially. Aging touches every market and plans know that SilverSneakers gives them a unique foothold with the Medicare Advantage population. Turning to the B in our strategy, we saw great headway in understanding how to engage members, lessons that are now embedded into our 2018 business plan. We ended the year with a 3.4 million eligibles who enrolled in SilverSneakers, an increase of almost 300,000 new enrollees from year end 2016. In summary, there remains a tremendous growth opportunity within our eligible members by further penetrating this base. Without question what I have learned is that those who know about SilverSneakers, loved up the program, but not enough people and not enough members know about it. For example, and just recently, I learned that a good friend of mine had the SilverSneakers benefit for many years, but didn't realize it until I had met with him just a few weeks ago. After my response, -- my answer after my response, he ended up checking his eligibility and what he learned was he was a member and he signed up for the program the next day by checking his eligibility. What we found is the individual is somebody all of you know, his name Senator Bill Frist and he now has become a avid supporter and advocate for SilverSneakers. He could not be more elated with the program. Today happens to be his birthday and we wish him many, many more years of vitality and good health. Last month at the JP Morgan Conference someone asked me, who are your two biggest customers? They were somewhat surprised by my response. My answer. Our two biggest customers are the growing demographics. The over 10,000 Americans who turned 65 years old every single day, many of whom will select a Medicare Advantage Plan. And the other large customer base is the 12-plus million SilverSneakers members who are currently eligible for our benefit, but have yet to activate the program. This leads me to the multichannel awareness strategy we launched last year. We ended 2017 with nearly 6 million unique visitors on SilverSneakers.com. This is nearly a 200% increase over 2016. Additionally, we have over 1.6 million email addresses allowing us now to keep connected and directly communicate with them under the SilverSneakers' brand. The increase in member eligibility and participating location checks have exceeded our wildest expectations. Our Facebook page now has nearly 0.5 million likes, a roughly 500% increase year-over-year. Additionally, our call center colleagues answered over 1 million inbound calls throughout the year allowing us to speak with current and potential members about the multiple benefits SilverSneakers can bring to their lives. Finally, we are quickly securing our place as the preeminent leader in digital fitness content for seniors. This original content includes exercise, health, nutrition, community, and living well, not to mention targeted exercise videos that can be done at home for those members who simply can't make it to the gym. As shared at the beginning of my comments, our 25 years plus experience with the aging population unparalleled in this industry has built an unmatched level of credibility and trust with members that is second to none. Our members placed their faith and confidence in the SilverSneakers brand, the Tivity Health colleagues, their instructors, partner locations, and their new found SilverSneakers friends to connect them to physical fitness as well as social interaction programs that improve their overall health and well-being. Research studies have proven that brands who educate and engage, win. And brands that do it in a digital way, win even more. In 2017, we committed to and we succeeded in raising our brand awareness with award-winning content through SilverSneakers.com which serves as an indispensable catalyst in driving members to all of our channels and we will continue with that digital investment in the year ahead. As for the C in our ABCD strategy, we continue to collaborate with aligned partners to introduce new products and services that have the capacity to increase enrollment and member engagement. During late 2017, we launched initiatives that have the potential to enhance both our Silver Sneakers and Prime offerings by combining fitness with rest and recovery provided through our third business channel O Health Living. Admittedly speaking, we are still early in terms of the stages of this program and partnership and we'll have more to say as the year unfolds, but we believe combining our new digital assets with physical fitness and rest and recovery, will create opportunities to further differentiate our overly strong brand to new levels. And finally, the D part of our strategy. During the last year, we featured -- we furthered our efforts to deepen relationships with our participating locations. The owners and the staff at these locations serve as a single greatest conduit to our engagement strategy. The key to every strong relationship as you know is effective communication and to first seek to understand, then to be understood. In this spirit and in 2017, we formed multiple location advisory boards geared towards constructive dialogue involving senior management of several community health and fitness locations in Tivity Health. As my favorite Philosopher Yogi Berra once said, you can observe a lot by just watching. To that end and through the advisory boards and site visits we have made personally, we have learned that what unites us is far greater than what divides us. And there is a fundamental commitment to launching programs that will engage our members to love life longer through the SilverSneakers' program. As you've heard me say almost in every single earnings call, our members are the lifeblood of our company. Providing them with physical activity and a sense of social well-being is critical and maintaining a high quality of life. I continue to honor my personal commitment to meeting as many members and attending as many classes as I can when I am traveling. So, allow me this opportunity to share with you a few member testimonials. This particular one is a letter from a member by the name of Grace. Grace is someone you may have heard me mention before because she has become a good friend of mine during my tenure as CEO. She is 93 years young and lives in Arizona. Grace found out that her Medicare Advantage Plan was unfortunately dropping the SilverSneakers benefit for 2018. In her January letter to me, she writes, "Dear Donato, I almost do not know how to start to thank you for all the blessings SilverSneakers has sent my way. I want you to know that I and my many friends are back to being with our "SilverSneakers". We have joined another plan that is offering it." Just this past week, I was in Ohio and met with Leroy, a 68-year-old retired electrician who joined SilverSneakers when he turned 65. At that time, he was overweight and taking high blood pressure medication. Today, he has lost 50 pounds and no longer takes medications. He is very grateful that his plan continues to offer the SilverSneakers program and he was quick to remind me for free. But we have learned in the past year, especially during open enrollment is the following. The brand SilverSneakers matters. The longevity of the brand has and continues to provide us with terabytes of data a unique perspective and understanding of our membership base armed with this wealth of knowledge we have improved and strive to perfect our programs. Our focus on continual development and our flawless execution of our program has created a brand that is both respected and embraced by the 65-plus population. Our strong Net Promoter Score cannot be overlooked. It rivals, if not exceeds, other notable brands such as Apple, Costco, Amazon, and Starbucks. We also believe that the SilverSneakers brand is incredibly powerful within the context of Medicare Advantage plans. We've heard from numerous members just like Grace and Leroy that access to Silver Sneakers is a significant deciding factor when selecting their Medicare Advantage plan. It's this name brand recognition that has led to an increase in our market share of Medicare Advantage enrollees entering into 2018 as well as the extension of our partnership with Humana through 2022 as announced last month. They value what we bring to their plan and the benefits we bring to their members. And conversely, we value their commitment to their senior members and offering them a trusted program that improves their members' physical and social well-being. While SilverSneakers is at the core of Tivity Health and it accounts for the majority of our revenue, I would be remiss if I didn't touch on the success we're seeing in our Prime business. As Adam highlighted, Prime tallied a 22% growth last year ending the year with over 260,000 paid subscribers. These members have access to a network of more than 10,000 locations. However, the Prime business mirrors the same opportunity highlighted with SilverSneakers, mainly only a fraction of the total eligibles have activated their membership, an opportunity for 2018. In closing, allow me to be clearly focused on describing the key priorities for 2018. First, a very fierce focus around increasing both customer and market share. Second, we will increase our investments in our digital strategy. The successful 2017 awareness campaign serves as an indispensable proxy to the next phase of this campaign, namely, increased engagement. Third, we intend to identify and align with other companies whose products and/or services will support and enhance the ABCD strategy. Fourth, the 2017 successful pilots will be incorporated into our 2018 business plan. Fifth, we will focus on further expanding relationship with members, our partner locations, and our instructors to better understand what future products and service offerings are going to be needed to successfully enroll and engage members. Sixth, we intend to leverage our strong Net Promoter Score of 81 and the highway of our member base deploying capital in a way that is accretive both to our financials and to our strategy. Seventh, and relating to Prime, we are committed to establishing new partnerships this year that will leverage the value proposition in this fast growing business by utilizing the lessons learned in 2017 that will help to expand this growth. And we will continue to invest in our key assets, our people. They have become the [hallmark] behind our fierce execution and result-driven culture. And finally, we will continue to deliver what others seek to do. I look forward to continuing to update you on our progress throughout the year, and especially, at our second Analyst and Investor Day, which will be hosted on April 6th in New York City. We'll plan to provide you with a deeper dive into our digital strategy and our members engagement efforts. I think it will be a very informative day and I hope to see many of you there. Thank you for your continued 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] And your first question will come from Ryan Daniels with William Blair.

[Ryan Daniels:]

Good evening guys. Thanks for taking the questions. And let me start also with well wishes for Chip. Chip, I hope you're doing great and you're able to listen to this. Let me start just with a quick one on the income statement on a forward-year outlook. Typically, gross margins in Q1 will drop about 200, 250 basis points sequentially given some of your marketing initiatives, but you mentioned you pulled some of those forward to drive stronger open enrollment. So, what should we anticipate from the gross margin front still a similar trend or maybe a little bit less pressure than we would normally see?

[Adam Holland:]

There'll be -- it'll be mostly similar Ryan. We had we had planned a pool more into the fourth quarter of 2017 and we did. And there was a cost impact that I mentioned in my prepared remarks that I think overall what you'll see is a similar margin profile from Q1 to Q2 next year for 2018.

[Ryan Daniels:]

Okay, that's helpful. And the restructuring initiative somewhat novel. I know you've been through a few of those the past few years to right-size the organization. Can you offer a little bit more color on what that was? And then I think you mentioned $4 million in savings, but all of that, if I'm correct, is going to be reinvested in growth, is that really just on the marketing front? Thanks.

[Adam Holland:]

Yes, it's not all specific to the marketing front. It was executed and completed inside at the fourth quarter. It was all headcount related. That was all payroll costs. And as I said, it's going to have a $4 million impact spread evenly over the year.

[Ryan Daniels:]

Okay. And then if we think about the supplemental lives 3.7 million, I think, is the number you gave, seeing good growth there. Is that a different product that's needed for that market or is there really an opportunity to expand that as you go forward?

[Donato Tramuto:]

Yes. Ryan, how are you doing? It's a great question. And yes, yes. And we are going through a deep assessment of what that might look. As the good part about MedSup is that you can bring those members in in the current year. So, that is definitely one of our imperatives and as I defined it in the eight or nine that I've given you, it's embedded in those new products and services.

[Ryan Daniels:]

Okay and then last one and I'll hop off. Just thinking about some of the marketing initiatives you referenced, I believe, over 1 million calls inbound to your call center and I'm curious if you've actually looked to leverage that to reach out more actively? I know you've talked about trying to research reasons to keep this up, using fitness facilities like transportation. But do you have the opportunity to leverage at call center on an outbound basis as well? And if so how are you doing that? Thanks.

[Donato Tramuto:]

Yes, I have a suspicion you might have been at our Board meeting, you just didn't tell us. One of the unique things I did at the last Board meeting is I wanted every Board member to sit in on a call center call. Because what you just said is exactly where we're going to head. It has been more transactional and when you listen to those calls without getting into kind of the idiosyncrasies, there is a quintessential opportunity to use that as one of our leveraging points to drive more engagement. So, you're right on and I think you'll hear more about this when we get to the Investor Day in terms of how that's going to happen.

[Ryan Daniels:]

Okay. Thanks again for all the color and again best wishes to Chip. He's in our thoughts.

[Operator:]

From Piper Jaffray, we'll hear from Sean Wieland.

[Sean Wieland:]

Hey thanks and Chip also my best wishes for a speedy recovery. I hope you're on your feet soon. My question is around customer acquisition costs. The expectation that the investments in the digital marketing initiatives not only drive eligible lives and utilization, but also have an impact on new customer acquisition cost. So, can you talk about how that trended in 2017? And what your expectations are going forward into 2018?

[Donato Tramuto:]

Yes. How are you doing Sean? Happy New Year. So, let me kind of break that apart because I think there's two segments to that. One is the ability to move more of the eligibles into the enrollee bucket. And as you heard in my prepared remarks, over 300,000 new enrollees moved over and that was a very impressive movement. What we haven't yet connected, which is what we've been certainly managing with all of you is that now it's the engagement, right. We just don't want people to enroll. We have to get them now engage and that's going to be the effort of this year. The validation last year was to really see whether or not the brand had any strong value to get folks to move into the program based on digital awareness. And I have to tell you that just through the facts and the metrics we gave you; that was a home run. So, let me put it into context. If you look at the amount of members right now that we have enrolled, which is about 3.4 million, that is about 21.6% of all who are eligible. Let's say now with this new awareness that we're able to get just 50 basis point additional enrollees; that would be about 80,000. And now we work through the call center and all the SilverSneakers.com and all the other digital engagements that we have and the same metrics apply that out of those new 80,000 new enrollees, there are about 25%, 30% that will be your frequent users and the rest will be sporadic. You're talking about a significant revenue uptake that far exceeds what we're spending on the digital side. And by the way that still means that there's 12.1 million remaining that have not signed up or who have signed up, have not engaged. And so you can start to see why this is in my mind. And when I answered the question about the two largest customers we have right now, this is an enormous opportunity for the company and so that's what we'll be measuring, baby steps this year and I think once we start connecting, if you will, the call center opportunity with the ability to get the physical locations and the instructors to be part of all this, and we should start to see what I would call a decent momentum.

[Sean Wieland:]

So, I appreciate all those comments. Thank you. Maybe just put a finer point on it, just to try to draw out the trend lines. Is the cost of that incremental enrollee. Is it more expensive or less expensive with the new marketing programs?

[Adam Holland:]

The costs, without giving the exact number of the cost acquisition, is coming down Sean, as we're getting smarter with where we're allocating the spend. And we've got our own internal ROI metrics and we're measuring that against the lifetime value of a SilverSneakers' member that's acquired. So, the trend line is looking good.

[Donato Tramuto:]

And the quality of the member. It's -- the quality of member is much better in terms of their commitment to staying with the program.

[Sean Wieland:]

Donato, you love all your members equally.

[Donato Tramuto:]

I just wish I had more time, Sean, to meet all of them.

[Sean Wieland:]

So, one more quick one. Why is this -- you're going to be more backend loaded than in prior years?

[Adam Holland:]

Yes, I think a lot of it is -- Prime is I think of a bigger piece of the business and some of our marketing events are going to be staggered out through the spring and the summer. So, that's a piece of it. Also we did have extraordinary amount of client market expansion with existing clients last year and so we've got an opportunity now. Some of these clients came from a PMP plan. So, we've got to get them activated. Some came from plans that used in a competitor -- competing products. So, there's a natural evolution, if you will, to get these folks aware of the program, get them activated, and then when you kick-in the digital engagement strategies, Donato just talk about, if you calendarize it, that's going to look like a much more back half weighted progression.

[Sean Wieland:]

That's helpful. Thank you.

[Operator:]

From SunTrust, we'll hear from David Macdonald.

[David MacDonald:]

Good afternoon and like to add my well wishes also. Guys, got a couple of quick questions for you. First of all, you've talked a lot about the various different initiatives that you've kind of put in place this year, whether it's social engagement, dietary, financially, and sending some of the folks at the gym. Can you guys give us a sense of one of the initiatives that you've put in place are ones that you think you'll incrementally put your shoulder behind in 2018 and what kind of the key areas for us to focus on?

[Donato Tramuto:]

Absolutely. And you know what, sometimes it's the low-hanging fruit that makes the most sense. One, very quickly, is that we're finding co-marketing programs with the locations. I have always been quick, David, to say that we have 450-plus colleagues, but we also have nearly 16,000 locations out there that are not on our payroll, however, the incentives are aligned. So, we have done the experiment with several co-marketing programs that have worked very well. But another one I want to talk to you about is that we just recently announced with the Fitbit, an opportunity to -- as you know one of our goals is to make sure that all the eligible members can benefit from being part of SilverSneakers and so we should be capturing, if you will, what's happening beyond the gym. And conversely, Fitbit has a very significant desire to get closer to this population. So, we just announced that we're embedding that into this year. Still more data to come, I think, when we get to the April conference, we'll have more data for you. But those are two without revealing all of them. Those are a few that we are absolutely -- and the others in Ryan brought it up, is the call center. We believe that the call center -- you really -- and I'm more than happy and anytime if you want to sit in and listen to one of the calls, it's -- you had to really hear it and understand it. For many of the seniors, it's kind of a very interesting antidote is that that call to the call center becomes in many respects their only call for the day. And so, yes, we want to listen, but there's things we can say, listen encourage your friend to go with you. By the way, any other friends that are part of your health plan. So, we feel that that is a huge opportunity in terms of how we can drive and scale engagement in the future.

[David MacDonald:]

Okay, just a couple of follow-ups on SilverSneakers. I know you gave this number, but I didn't catch it. Can you give us the percentage that are now hybrid exiting 2017 as opposed to where that was in 2016?

[Adam Holland:]

Yes, I don't have the 2016 numbers handy. The 2018 plan number is 64%. David, let me get back to you on the 2016 number.

[David MacDonald:]

Okay. Two other quick SilverSneakers questions. One, can you guys just give us a sense in terms of movement of members within plans. Did you guys see kind of what you expected in terms of member movement in the case of plans that for whatever reason might not carry SilverSneakers anymore? Was that kind of in line with where you thought it was? Was it a little bit better? And is it also safe to assume that a lot of the folks that move were frequent users of the service?

[Donato Tramuto:]

Yes. Let me answer -- a lot of questions at once. So, let me dissect it. First of all, we were very pleased and very satisfied and I think that there are independent reports out there that I'm always amazed how you guys get close to our data. So, well done, you did your homework. So, quick answer, we were very satisfied and I think I mentioned that in my opening remarks. And also equally satisfied that the participating ones moved over. And so we have an opportunity to be perfectly upfront with you in terms of also reaching those who may not have been active participants with the call center and with the engagement strategy to get them active. So, I have to tell you we were pleased. I'll leave it at that.

[David MacDonald:]

And then last question guys. Can you talk a little bit just on Prime, you did mention as one of the growth drivers increasing pricing in some markets. Is that just because you were a bull market in those markets or is that also a little bit of a piece to give you a little bit of a glimpse into the price elasticity of these customers and how price-sensitive they are or not?

[Adam Holland:]

I think the answer is a little bit of both. We did not do it at all market. We did it strategically with a certain plant in certain markets. I think we'll learn as we go. Where we are now is certainly still highly competitive. And I think the uptake rate is still going to be attractive.

[Donato Tramuto:]

Yes, let me just add one other thing. We talked about you know SilverSneakers and the pilots will be conducted there and one of you had asked, maybe it was you David. I want to just reinforce that we learned a lot last year with Prime. I think part of the success that we've had in the program was really getting deep into understanding what would work this year. And so I think the success we've had there, those success factors are embedded. We do believe that the slight price increase by one of the most significant partners that we have had a great relationship with that, they felt comfortable with it. The same partner as you know, there were 12 steps to register. So, it's not just pricing. We also got rid of the 12 steps that you had to go through to register. Now, it's down to five. So, this is a growing opportunity for us and I think that you're going to start to see more emphasis on that in this given year.

[David MacDonald:]

Okay. Thanks very much.

[Operator:]

Next we'll hear from Dave Styblo with Jefferies.

[Dave Styblo:]

Hi there, good afternoon. Thanks for the questions and, I of course, echo my thoughts to Chip through his recovery right now. I wanted to start out at kind of a high level revenue. When I take a look at the CMS files and identify the nine states where United is bringing SilverSneakers in-house. We come up with something around 940,000 effected individual lives. And so when you triangulate some math on that, you can you can get to 2018 revenue headwind worth anywhere between three and five points of growth. So, first, I just want to confirm if that's a reasonable revenue headwind that's in the 2018 numbers? And second, if that is in the ballpark, then I guess it suggests organic growth excluding the United headwind is more like 14% to 16%. So, just want to triangulate and see if that's the right way to be thinking about underlying trends in the business?

[Adam Holland:]

Yes, I don't know, Dave, if you can look at it exactly like that because there's so many other moving parts that take place when you're building the total revenue profile for SilverSneakers because I can also put it a hypothetical that if we had won back certain markets here or what if we won back fewer markets from another client. So, I can't answer that question, but because there's too many other moving pieces in there to be that granular.

[Donato Tramuto:]

Yes. And first of all, we go through this every year and I'm not sure your numbers are actually correct in terms of the raw number you gave in terms of the total lives. So, I probably should just say that what, Adam was saying is that we won markets back from our competitors in other areas. And so when it all gets thrown into the mix and this happens every year by the way, I think perhaps maybe more attention is on this because it's United. Every year we go through this. Plans decide that they're not going to offer it in certain markets or they decide that they might offer two programs. We go through this every year and that's how we get to the final revenue number and the guidance that you have received here today.

[Dave Styblo:]

Okay. With respect to the guidance, I know initially when you set the preliminary, you guys were explicit that it didn't include really any impact of some of the pilots. It sounds like that the 2018 numbers may include -- or at least that business plan does, but I'm not sure the business plan is different than guidance. So, can you just help us understand is there is some elements of the pilots that you're running through that maybe you just don't have enough visibility on that you're not including in guidance at this point?

[Donato Tramuto:]

Yes. Listen, pilots as you know there are a few that didn't make it. We cut them off and they're not successful. I did reveal to you that there are several pilots that we learned in SilverSneakers that should be embedded and so it is there. And for us, a pilot, gets converted into an actual program once we know it works. And we have a saying that company, be like a carpenter, measure three times and cut once. So, we've measured these programs to make sure that the work. Prime, we shared with you that one of the areas that we've learned last year was we were not doing enough marketing in previous years. And so that's embedded now in terms of how we've reached our guidance. So, yes, there are a few programs and there's more pilots of experiment this year. And if they do begin to realize success, they could very well be in the second half.

[Dave Styblo:]

Okay. And then lastly on the Humana extension you guys tagged on a couple of years there. It seems like you were able to secure that earlier than I would have thought in the process. Can you talk a little bit more about what led to that happening so soon? And is there any sort of change to the economics of that contract?

[Donato Tramuto:]

Yes, it's very interesting. It's almost like when you give numbers, nobody really knows what goes on behind the scenes. This didn't -- it may appear to you that it occurred in January, but I could tell you that that's been long in coming that we have been in dialogue with Humana. Humana does see the power of the brand and there's a great partnership there and so this is not something that just happened in December and then got revealed in January.

[Dave Styblo:]

Anything on the economics?

[Donato Tramuto:]

We don't get into the individual contracts in terms of the economics.

[Dave Styblo:]

All right. Thanks guys.

[Donato Tramuto:]

Thanks Dave.

[Operator:]

From Chardan Capital Markets, Steven Wardell.

[Steven Wardell:]

Hey guys thanks for the questions and my best wishes to Chip.

[Donato Tramuto:]

Thank you.

[Adam Holland:]

Hey thanks.

[Steven Wardell:]

And can you tell us more about the engagement programs that you spoke about on the first part of the call. So, for example, what kinds of engagement programs, what modalities do you think are going to be successful in the next couple of years? You mentioned outbound calls potentially, coastal mailings, other kinds of modalities. And what kind of offers do you find helped to get people engaged and change their behavior? It would be helpful to know what you're finding works for driving engagement.

[Donato Tramuto:]

Yes, and so, again, you're going to hear a lot about this in April, but -- listen, it's a fair question and so let me just kind of share with you. We have been experimenting with incentives. We've been experimenting with the partnership with our locations. We've been experimenting with communication, dialogue, and scaling that from a digital perspective. So, for example, when we know in a call center that Adam had a terrible first experience and quite frankly, didn't like the cleanliness of the gym and he is not going back and feels that the SilverSneakers program that's doing that. All that type of information, we just sat on years and years past. And so having all that we've been able to show the increase, if you will, of those members going back. Now, we have to be scaled and so we've narrowed this down to a few -- it's almost like the Marines, a few good men and woman. And so we have now a few good engagement nuggets that we will be now driving towards a much more digital communication, a much more, what I call, transformative call center, it's been primarily transactional. And the ability to use our location. I cannot underestimate and understate, if you will, the power of our partnership with the location. That's why that strategy is so critical. Quite frankly, I'll be very honest with you, we also learned very painfully through these advisory Boards. How many locations forgot how they were incentivized and that was really a shocker if I can tell you that. And so the ability to say wait a second, you can earn more here and also accomplish your goal to keep this population healthier. Those types of align incentives -- and what they want is a communication back. Tell me about the members that you've identified that can be active in the program and that's where the digital communications strategy that we're investing heavily into this year will play a huge opportunity. By the way, I would love to have all 12 million sign-up. I hope that none of you leave this call thinking that I'm not that naïve, but you're not going to convince me here that out of that 12.2 million that have not enrolled. I gave you the example of Senator Bill Frist. Adam has a story about his mother. I can give you a story about my brother and his wife. Here I am the CEO of SilverSneakers. They have the program and they didn't know it. And so that's what we're finding. There's a lot of folks in that bundle, don't even know they have the program. This past week, Adam and I met with four CEOs from the [Indiscernible] and that was -- the number one call out is how many members are not aware that they have the program. So, this is what that whole digital awareness and digital program is going to do.

[Steven Wardell:]

Great, thank you.

[Operator:]

And we have time for one more question and that will come from Mike Ott with Oppenheimer.

[Mike Ott:]

Hey, thanks for squeezing me in, and again, we want to echo our best wishes to Chip. Just curious here in 1Q, if you're seeing any worse than normal visit impact from the severe flu season and the snow in the southern states we saw last month.

[Donato Tramuto:]

It’s a great question. It's too early. Certainly, that's always as I pointed out to you all, that's always one of the risk, we have snowstorms every day and then it's followed by hurricanes every day and then, of course, the flu season. So, too early to tell.

[Mike Ott:]

All right. Fair enough. Thanks.

[Donato Tramuto:]

Thank you all.

[Operator:]

And ladies and gentlemen that does conclude today's presentation. We do thank everyone for your participation. And you may now disconnect.