Benefitfocus, Inc.

Ladies and gentlemen, a welcome to the BenefitFocus second quarter of 2022 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star and zero. As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Doug Kuckelman, Head of Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, and welcome to Benefitfocus's second quarter 2022 earnings call. Joining me today are Matt Levin, President and Chief Executive Officer, and Alpana Wagner, Chief Financial Officer. Matt and Alpana will offer some prepared remarks, and then we'll open for questions. Before we begin, let me remind you that today's discussion will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those statements, including market developments and opportunities, the execution of our growth strategy, and integration and reliance on key personnel. For more information, please refer to risk factors discussed in our most recently filed Form 10-K. We also refer to certain non-GAAP financial measures. Important disclosures about those measures can be found in today's earnings release. Lastly, we will reference a presentation furnished in an 8K, which you can also find on our investor relations website at investor.benefitfocus.com. With that, I'll turn the call over to Matt.

Thank you, Doug, and good afternoon, everyone. Today, I will provide an update on our commercial achievements cover our progress to date against our strategic plan, and provide further insights on what to expect from our product roadmap during the second half of the year. After that, Alpana will discuss our second quarter results. I want to first recognize and share my deep appreciation for the entire BenefitFocus team for their steadfast focus on executing transformation plans. The tireless efforts put forward by this team have ensured that we remain a safe set of hands for our customers, and for that I am personally grateful. During the second quarter, the team also demonstrated our ability to deliver on our financial commitment, and I am encouraged by the continued signs that our collective work is setting us up to create long-term shareholder value. While our at-bats continued to improve in the second quarter, and we are seeing early indication of win rates improving for the year, we had pushes in timing for some of the larger deals in the pipeline, which are on track to close in the third quarter. That said, the growth in leads and our improving win rates are a testament to the fact that our unwavering focus on service excellence and our go-to-market strategy is working. We had a number of sizable new employer wins that we expect will drive revenue starting in the second half of 2022 and into next year. This includes a large global food packaging manufacturer, a Fortune 500 global electronics manufacturer, and a large regional bank, to name just a few. In addition to our direct sales efforts, the SAP sales channel has continued to be a solid growth driver for our business. We see positive momentum in this channel with both closed deals in the first half of the year and 2X pipeline growth going into the second half of the year. The SAP relationship remains a unique and important revenue-generating partnership for us, and we expect to see continued benefits as we move through the remainder of 2022. We continue to see demand returning in our health plan pipeline for upsells to existing customers as well as new pursuits. As a reminder, there is seasonality in our business, particularly in the sales cycle. The employer sales season normally takes place in the first half of each year, while the health plan, public sector, and sales through our SAP channel occur throughout the entire year. We remain optimistic about our deal pipeline. The current market sentiment is not lost on us. We have seen a lengthening of the sales cycles and a shift in timing for closed sales particularly driven by our mixed shift towards SAP in the public sector, which comprise larger and more complex deals. At this point, our leading sales indicators are positive. We expect to close deals across our various sales channels as we move through the balance of the year, and we continue to anticipate an inflection point in revenue growth towards the end of 2022. During the slide five, I'd like to share an update on delivering against our strategy and commitments. In the second quarter, we continue to demonstrate a high say-do ratio against our three-pillar transformation plan. Proof points this quarter include delivering on our financial commitment, the successful launch of our enhanced COBRA features, further bolstering our administrative services offering, and bringing to market an innovative new data offering called Claims Audit and Recovery Services. As we have talked about in the past, it is important to both me and Alpana as well as the rest of our team, that when we say we are going to do something, we make it happen. As an organization, we maintained our focus on service excellence to further strengthen our core. We put in place what I believe is the best team in the industry, and they are delivering. We are seeing the impacts of this focus and investment in many aspects of our customer service operations, including implementations and case resolution trends. To provide some additional color, case turnaround times are trending down and case counts across our customer base were down approximately 30% year-over-year through the first half of the year. These improvements have set us up well for open enrollment season, which starts in the second half of the year. Service excellence is also critical to brokers and third-party evaluators, key players in our ecosystem, as they need to have confidence in service levels to refer business to us. Last quarter, we announced our inclusion in Aon's Connected Benefits Solutions Panel, a key listing from one of the top brokers in the world. I am pleased to share that last month, we entered into a new strategic partnership with Lockton, another one of the world's largest insurance brokers, furthering our reach across the broker channel. Similar to our relationship with Aon, we expect the Lockton partnership will support and augment our go-to-market sales efforts, especially with larger customers with more lives. This deal of approval, along with referrals from other industry leading brokers and third party valuators, validates our strategy and execution efforts. We anticipate this partnership will help facilitate additional business from both existing and new customers in our employer sector. Importantly, our broker channel sales activity has grown more than 60% year over year, which has resulted in a greater number of conversions from this channel and gives us continued confidence in our expected revenue trajectory. On our progress on our broker channel efforts, I am equally pleased to share that our investments to improve our core product bundles, a key component of our go-to-market strategy, are paying off. Tango Health, our most recent bolt-on acquisition, is already delivering increased value to our customers. During the first half of the year, we successfully bundled Tango's suite of ACA offerings in new customer contracts, and started cross-selling it to our current customer base. Our more robust and comprehensive solutions platform is starting to drive improvement in attach rates. We are just getting started and are confident that Tango's best-in-class ACA compliance offerings will continue to be a key component of our product. Regarding our efforts to grow with intent, we are thoughtfully deploying capital to expand our product offerings, leveraging our data assets, and moving up markets. We recently launched a new product called Claims Audit and Recovery Services, or CARS. With our CARS product, we will be in a position to deliver additional value to our customers for our ability to not only analyze all of their claims data, but to identify errors in the claims and go back to providers to recover the lost money on our client's behalf. For background, approximately 20% of all medical claims contain errors, including data entry errors and miscodings. Each year, billions of dollars worth of bills are paid incorrectly, and while third-party administrators and carriers do their best to catch these errors, many are not identified nor corrected. The new CARS product is designed to address this known issue, and the preliminary feedback from customers has been positive. This is another example of our ability to quickly innovate and gain market traction with product offerings that take advantage of our data assets. Another example of our growth initiatives is the recent release of enhancements to our enrollment experience. These enhancements are designed to make it easier for customers to engage with and select voluntary benefits offerings, starting with the upcoming open enrollment season. We expect this will help drive increased participation rates, which will grow our platform revenues. Finally, regarding our third pillar related to operating efficiencies, We made technology investments that we believe will help us increase customer satisfaction and net promoter source. We expect that these efficiencies across our organizations will lower our cost of revenue and improve our margins later in the year. For example, our work in this area focused on service automation and process improvement in our call center. This effort is designed to facilitate a more seamless open enrollment experience. through further incorporation of AI technologies and advanced interactive voice response technology. These improvements support an enhanced customer service experience, enabling our associates to focus on the in-person customer cases where interactions are most critical. We are also leveraging third-party technology to monitor associate calls and address quality issues in real time, all of which support improvements in customer satisfaction scores. These efforts are designed to improve both the user experience, but also to help drive operational and cost efficiencies. Turning to slide six. As I have said before, we believe we have a compelling value proposition as we grow our presence in the large and growing benefits administration market. We are well underway in delivering on the strategy that we outlined at our May Investor Day. During the second half of 2022, you can expect us to follow through on our commitments to launch our employer, large market offerings, launch Health Insights 2.0, and launch our enhanced billing features. Our seasoned team of industry leaders continue to execute against our transformational growth strategy, and we are seeing the momentum build in the business. Before turning it over to Alpana to walk through the financial results, I'd like to announce our new Chief Technology Officer, Ed Rumses, who will begin working with us on August 8th. Ed and I work together at Hewitt Associates, and in my view, he is amongst the most experienced and credentialed CTOs in the industry. Ed brings more than 30 years of industry experience, having most recently served as the CTO at vSwift. He is a well-respected technology leader in the benefits administration industry, and his work to expand the scope and scale of vSwift's service offerings, as well as his contributions and leadership at DIAA-CREF, Xerox, ACS, Accelerate HRO, and Hewitt Associates make him a valuable addition to our team. As I've said before, one of my earliest priorities was to assemble a first-class team. We believe the tenure and domain experience of our team is unrivaled in the industry. It continues to fuel and support ongoing execution against our strategy, enabling us to reposition benefit-focused and establish our foundation for the future. With that, I'd like to hand it over to Alpana, who will cover our financial performance.

Thanks, Matt. I'll start with the highlights of our second quarter financial results, and then I will cover our guidance for the third quarter and expectations for the remainder of the year. Turning to slide eight to take a closer look at our second quarter revenue. I am pleased to report that we once again delivered results at the high end of our guidance range. Total revenue for the second quarter was 56.6 million compared to 60.9 million for the second quarter last year. The 7% year-over-year decline was in line with our expectations and related primarily to the two previously discussed health plan partial renewals that we covered on last quarter's earnings call. As a reminder, two health plans reduced the scope of their engagement with us in Q4 of 2021. and we expect to continue to see the year-over-year impact in software services revenue as we move through the first three quarters of 2022. Total software services revenue was $48.6 million, down 3% year-over-year, and software services revenues include subscription revenue of $42 million and platform revenue of $6.6 million. Subscription revenue was down as expected, 5% year-over-year, and our contracted annual recurring revenue was $201 million at June 30, 2022, which is down 4% year-over-year, driven by the health plan attrition discussed earlier. Platform revenue was up 12% year-over-year, which is primarily due to timing, as we were relatively flat through the first half of the year. professional services revenue is down 25% or $2.7 million year-over-year, which is primarily due to ongoing customer projects being delivered later in the year, as well as a shift in implementations associated with new customer bookings later in the year. Looking at our margin results on slide 9, gap-first margins were 49% versus 54% in the prior year period. Non-GAAP gross margins were 51% versus 56% in the prior period. Software services GAAP gross margins were 62% in the second quarter versus 64% in the prior period. And software services non-GAAP margins were 64% versus 65% in the prior year. Our margins were impacted by the planned ongoing investments in automation and process improvements which we are putting in place to drive an improved customer experience and generate sustainable efficiencies beginning with the upcoming open enrollment later this year. As a reminder, given the seasonality of our business, our gross margins can fluctuate from one quarter to the next based on our sales and delivery cycles. For the full year, we continue to expect to preserve our gross margins as we realize the contributions from the implementations of new customers later in the year timing of our platform revenue growth in Q4, and realization of efficiencies in open enrollment. Gap net loss available to common shareholders was $13.8 million, and gap net loss per weighted average common share on a basic and diluted basis was $0.40. Compared to gap net loss available to common shareholders of $16.6 million, with GAAP's net loss per weighted average common share on a basic and dilutive basis of $0.50 in Q2 of last year. Adjusted EBITDA was $6.2 million during the second quarter, slightly above the high end of our guidance range. Our adjusted EBITDA margin for the quarter was 11%, primarily driven by the timing of costs, which pushed from the first quarter to the second quarter. Our year-to-date adjusted EBITDA margin is 15%, which is in line with our expectations for the first half of the year. Moving on to our balance sheet and capital allocation on slide 10. We ended the second quarter with approximately $51 million in cash and cash equivalents, a decline of approximately $7 million, inclusive of restricted cash, from the first quarter to the timing of working capital changes. During the quarter, our free cash flow was negative $2.1 million, driven by the timing of customer collections and vendor payments. As a reminder, given the seasonality of our business, the free cash flow generation on a quarterly basis can fluctuate. We continue to expect to deliver our free cash flow guide on a full year basis of 18 to 24 million. I also note that our full 50 million line of credit remains available to us. As we think about future uses of cash, we plan to continue prioritizing our customers' service experience, accelerating our product roadmap, and pursuing select talking acquisitions to accelerate our growth strategy. Shifting to slide 11 to discuss our outlook for Q3. For the third quarter of 2022, we expect revenue between 55 and 57 million with the largest year-over-year decline in subscription revenue, adjusted EBITDA between 4 and 6 million, and non-GAAP net loss available to common stockholders between $6 million, and $4 million, which represents non-GAAP net loss per share of $0.18 and $0.12 based on 34 million basic shares outstanding. As we look ahead, our expectations for the full year 2022, our revenue growth inflection point near the end of the year, and our return to low single-digit growth in 2023 remains unchanged. We are closely watching the macroeconomic trends, in particular the labor market, and the buying behaviors of our customers and prospects. Given our diversified customer base and our long-term contracts, we have not seen a significant impact for business or prospects, and our current expectations and outlook reflect this based on what we know today. In closing, I am pleased we delivered against our financial commitments and with the progress we are making on executing our strategy to drive sustainable growth. I continue to believe in our ability to unlock long-term value for our shareholders. With that, Matt and I are happy to take your questions. Operator?

Thank you. If you would like to register a question, please press the one followed by the four on your telephone. you will hear a three-tone prompt to acknowledge your request. If your questions have been answered and you'd like to withdraw your registration, please press the one followed by the three. One moment, please, for the first question, which comes from the last name of Samuel with J.P. Morgan. Please go ahead.

Hi. Thanks for taking my question. I know you talked a little bit about macro, but was hoping maybe you could just delve a little bit further and talk about what conversations are like right now with your employer's and what their expectations are. You know, are you seeing any hesitancy from them yet?

Hey, Anna, it's nice to hear your voice. Thanks for the question. So, great question, and I suspected we'd get a few macro questions today. So, you know, I know that everyone's sort of looking for the canary in the coal mine right now, just given overall, you know, GDP numbers. corporate confidence, CEO confidence, et cetera. But as you know, labor markets tend to lag with GDP numbers. And I say that having been in the industry and having watched things like BLS and the various reports that the payroll guys put out, and we track all this stuff very carefully along with our own participant base and movements in it. And as we said before, we're really not seeing that canary in the coal mine or that leading indicator around labor market stress. Our observations both in our current book with our current clients and with prospects are that, you know, labor markets still tend to be pretty tight. There's still labor shortages, still war for talent, great resignations still, those narratives are still out there. To answer your question directly, in terms of our discussions with prospects in the selling cycle, You know, we are not hearing any slowdowns in decision making. You know, we made a couple comments around our, you know, sales pursuits and a slight delay in some of them. And those are really just due to contracting issues for normal course, you know, sales processes similar to what we had last year. and the year before. So I'd say overall, we're really not seeing clients talking about macro factors impacting their buying decisions with us. I'd also say, and I say this both based on discussions I'm having with customers and prospects right now, but also just from my own experience having been at this for a while, benefits are really critical both in boom markets because They are particularly, you know, post-COVID because they're an important vehicle to attract and retain associates. Then in downturns, you know, health benefits really matter as well. And they are, you know, a key component in retaining, you know, associates. And, you know, at least for now, and look, I wake up every morning with the same sort of uncertainty that you probably do and just looking at the and other macro factors, but on a day-to-day basis, we're just not seeing it just yet. But, of course, as things change, and if we do see the canary in the coal mine, we'll be very vocal about it and share with what we're seeing.

But right now, it's really business as usual as it relates to the sales season and sales cycles right now.

That's great to hear and really helpful color. I was hoping maybe to follow up on something a little bit different. I was wondering if you could speak a little bit more to the claims audit and recovery services business launch. What made you decide to launch this business, and who are you competing against there?

Yeah, great question. So, you know, I'm really proud of the work that our product team is doing. Tina and her team are proving it. What I mean by that is, We're a technology company, and a hallmark of a technology company is to be able to take things like the data assets that underpin our platform based on the transactions we do every day and find new uses and purposes for that data. So we've launched products last year, taking advantage of our data sets. Last year, we launched a product around RxSaving. And this year, Tina and the team, and the reason I'm really proud of it is from ideation to product, build the in-market. These cycles are getting done within a year. Basically, listening to customers and from our own experience, we know that with every transaction that happens in the healthcare industry, there's upwards of 20% errors. Because we sit on top of the claims information along with the enrollment information, we have a pretty good sense for our customers where there could be incidences of improper billing, fraud, et cetera. And as a result, we mine the data and then go to the client and basically say, look, you know, we feel, you know, we do estimates around potential cost savings based on the data that we see, and then we get into a gain share with them around the recovery. In terms of competition, to answer your question directly, most of our PurePlay Ben admin competitors do not offer these services. Most of these services are offered by standalone claims-oriented technology or HCIP companies, and some of those may partner with a benefits administrator like us. But at least to my knowledge, none of our direct competitors have this capability natively.

Great. Thank you.

Cool. Thank you for your questions.

As a reminder, to register for questions, please press the one followed by the four on your telephone keypad. The next question comes from the last name of Tassan with Piper Sandler. Please go ahead.

Hi. Thank you so much for taking the questions. So I wanted to just kind of follow up on the enhanced employer offering. Can you just describe a little bit what exactly that entails and then just is the intent to launch that offering at some point in the first half of 23 to drive revenue in 24 or should we expect it sooner and then just kind of what are the direct incremental costs that you're factoring into guidance associated with the development launch and marketing of that offering?

Sure, and thanks for the question. I'll offer you sort of the – I'll address the first, answer your question, and I'll let Elkana talk about the second part of your question. So as we talked about, you know, really since I've been here, a goal of mine is that within the first 18 months of being on the job, I wanted to be able to say – and this is when I was talking about the employer business. We also have productivity. initiatives on the health plan side, which are important too, but your question is about employer. What was very important to me was within the first 18 months of being on the job, which takes me through December, the core bundle for employers, I wanted to make sure it was equal to or superior to our core direct competitors. And to do that, I felt very good about where we were in our core enrollment engine. And as we've talked about before, the UI and the UX always gets great reviews. People find it very intuitive. We get lots of positive feedback. The areas that we needed to improve were in administrative services. And we define those as ACA, which we addressed through our Tango acquisition, which we're really pleased with. Over the past few months, we've been coming to market with a revised COBRA solution that is native. And by the end of the year, we plan to round that out with having our billing solutions, our direct and consolidated billing solutions equal to or better than market. So we're roughly two-thirds of the way of fixing our admin services bundles and hope to have all of it completed by the end of the year, which we think will further provide an ability to compete more effectively. In addition to that, and to address your question, We've also made some, you know, we use the word investments, I would say, slight tweaks to our VB offerings. And the point there is in working with our carrier partners, we constantly are trying to evolve how we offer VB to our participants to directly address some of their issues. And as you know, these are products like critical illness, hospital indemnity, etc., And what we're trying to do is make sure that those products feature prominently during the enrollment experience so that those who are most eligible for those products, where relevant, buy them along with their core health and welfare products. So, to sort of round it out, what's really important to me is by the end of this year, enrollment, admin services, VB, as the core bundle for employers, It would be equal to or better than our competitors, and that's really what we were talking about in those comments and our prepared remarks. But I'll let Alpana make a few comments on cost of development distribution.

Yeah, so in terms of the investments, you know, as Matt said, You know, they're organic in terms of what we've been able to bring to market for COBRA and for the voluntary benefits. Obviously, Tango was an acquisition that we did last year, and so that was an inorganic investment from a product standpoint. And what I would say is that, you know, we've mentioned in the past we're making investments within the business that we expect to continue to gain value you know, whether it's in our growth strategy advancement of that strategy and or operational efficiencies as it relates to some of the technology investments that Matt referenced. And so I would say that it's included in our outlook for 2022. And these areas from a product enhancements perspective were contemplated in our strategy that we shared. And so they're on point with what we've been targeting and what our overall outlook is for also for 2023.

Okay. That's really helpful. Thank you. And then maybe just following up on the prior questions with respect to the employer market, I guess, included in 2022 kind of Can you help us understand your expectations for sales of ancillary benefits products? And then just in order to get to that low single digits here over your revenue growth in 23, what is the incremental growth expected on the 22 number, again, for the ancillary benefits sales in 22? Thank you.

Yeah, I'm happy to answer that. You know, as you know, our platform revenue is heavily anchored on open enrollment and the activities that take place with the participants of the lives on our platform and how they re-enroll or enroll in products, like you said, the life and ancillary product base or the product catalog. And so, you know, in terms of what we're seeing right now, it kind of anchors back to what Matt was saying on what we're seeing from a labor markets perspective and The driver for us there is the lives on the platform, and our employer base year over year is growing. You know, our overall end bells are down, and I think we've shared that in the past as a result of the health plan partial terminations. But within that, the employer base is continuing to grow. And so as we see the growth in that base, we would expect that to translate from a voluntary benefits enrollment perspective in the fourth quarter, assuming flat participation year over year. And so that's kind of how we think about it right now in terms of the outlook. And unless we start to see some indicators within the lives on our platform that show a different trend, you know, we're sort of continuing to be confident in our outlook for this year. And then in terms of 2023, we're really not providing any specific guidance at this point. We've shared that our expectations may continue to be low single-digit growth, and that would contemplate what we believe will take place in 2022 and how that translates into 2023 revenue for us.

Okay, got it. That's helpful. So just to verify, we're assuming for 22 it's flat participation relative to historical on a lower total number of lives in the base, flat participation in terms of percent and revenue?

Yeah, so flat participation is correct, higher lives for employer, total lives, which would be inclusive of health plan, are down. But as you know, I think, and we've talked about before, health plan has effectively kind of a de minimis participation at this point in time in the voluntary benefits catalog. Got it. Thanks again.

That's an important distinction, that these products are primarily bought in our employer segments. so the total, you know, call it NBELs, are less relevant for this calculation.

There are no further questions at this time. I'll now turn the call back to you. Please continue with your presentation and or closing remarks.

Thank you, and thank everybody for joining today, and really appreciate the really good questions we got. Before closing out the call, I'm just going to quickly summarize our plans and progress to create value for our shareholders. As we talked about over the past year, we have strategically addressed many of the underlying issues that impacted our past performance, with a priority on improving and delivering consistent service excellence. We are seeing the benefits of our efforts, including increased sales activity with key brokers, indicating our go-to-market strategy is working. and improved customer service metrics year over year as we head into the open enrollment season. We are getting more at-bats with prospects, more referrals, and our reputation in the market is strengthening. While there is still plenty of work to do, we remain confident that we have the right team in place to continue executing on our transformation strategy, and we are pleased with the progress to date. With that, I just want to say thanks again for your time today. Thanks to all our associates for all they do for us every day and for all their hard work. And we look forward to the next quarterly update. Thanks.

That does conclude the conference call for today. We thank you for participation and ask that you please disconnect your lines.