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Operator
Thank you for holding. We look forward to talking with you soon. Please hold the line, and we'll be right back with you.
Katherine
Good afternoon, ladies and gentlemen, and welcome to the progeny third quarter 2021 earnings call. At this time, all participants are in a listen-only mode, and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, James Hart. Sir, the floor is yours.
James Hart
Thank you, Catherine, and good afternoon, everyone. Welcome to our third quarter conference call. With me today are David Schlanger, CEO of Progeny, Pete Ineske, President and COO, and Mark Livingston, CFO. We will begin with some prepared remarks before we open the call for your questions. Before we begin, I'd like to remind you that today's call contains forward-looking statements, including but not limited to, statements about our financial outlook for both the fourth quarter and full year of 2021, including our expected utilization rates and mix, the impact of COVID-19, including variance on our business, clients, member activity, and industry operations, our ability to acquire new clients and retain existing clients, our plans for and the timing of leadership and board changes, our market opportunity, size, and expectation of long-term growth, Our corporate governance plans, business performance, industry outlook, strategy, future investments, plans and objectives, and other non-historical statements as further described in our press release that was issued this afternoon. These forward-looking statements are subject to certain risks, uncertainties, and assumptions, including those related to progeny's growth, market opportunities, and general economic and business conditions. We debate these statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of these and other risks that could cause actual results to differ materially from these forward-looking statements are discussed in our periodic and current reports filed with the SEC, including in the section entitled Risk Factors in our most recent 10Q. During the call, we will also refer to non-GAAP financial measures, such as adjusted EBITDA and adjusted EBITDA margin. Reconciliations with most comparable GAAP measures are also available in the press release, which is available at investors.progeny.com. I would now like to turn the call over to David.
Catherine
Thank you, Jamie, and thank you, everyone, for joining us today. We are pleased to report a solid third quarter with strong 24 percent revenue growth and 220 basis point gross margin expansion. These results reflect a continued improvement in utilization from the low point we saw during the early part of the quarter that has continued into Q4. And Pete will provide additional color and utilization shortly. In a few minutes, Mark will walk you through the quarterly results in more detail, but I want to take a moment to talk about a few of the highlights. As you all know, by this point of the year, we've largely completed our annual sales and client renewal season, and I'm happy to report that we'll be entering 2022 positioned for another year of strong growth. For the fifth year in a row, we've achieved close to a 100% client retention rate. We also had strong upsell success within our existing customer base, where a third of our clients increase their benefit in some form or another for next year. From a new sales perspective, and Pete will provide more detail shortly, 2021 has been the most successful selling season in our history, producing a record number of new clients and members such that we expect to enter 2022 with 265 clients under contract, representing an estimated 4 million covered lives, which is nearly a 50% increase in members from the beginning of 2021. We believe this strong momentum in building our client base demonstrates that our market opportunities continue to be significant, that we are in our strongest ever competitive position, and that Progeny has become the provider of choice and industry leading fertility and family building solution for the largest and most successful companies in the world. Beyond the pure numbers of accounts that we've won and retained over the years, we believe the caliber of our clients also attest to our ongoing ability earn the trust of the most discerning and prominent companies, companies who are increasingly turning to progeny to manage an area of their employee benefit plans that uniquely addresses their commitment to diversity, equity, and inclusion. While we've been successful at adding leading brands as clients, we remain at a very early stage of penetrating our market opportunities, particularly among the largest companies in the U.S. Before I turn the call over to Pete, the press release we issued today also announced some transitions in the leadership team at Progeny. I wanted to provide you with my perspective on what these changes mean. Summarize what was announced. As of January 1st, I will become the executive chairman of Progeny. Dr. Beth Seidenberg, our present board chair, will transition to the role of lead independent director. Pete will move into the role of CEO and join the board. and Michael Stermer, who has been our Chief Growth and Strategy Officer and was formerly SVP of Health Services at Livongo, as well as Cigna's Chief Operating Officer for the New York-New Jersey Health Plan, will become Progeny's President, responsible for all sales, marketing, client services, strategy, and new product development. Let me first say congratulations to Pete and Michael on their well-deserved new positions. I believe these changes represent a very natural progression in roles and responsibilities for Pete, Michael, and me. And it also reflects many of the ways that we've already begun to collaborate and work together as the leaders of Progeny. For anyone on the call who wasn't previously aware, Pete and I have worked together closely for 25 years and across multiple companies. When we joined Progeny five years ago, the company had just a handful of clients and was in the earliest stages of defining its solution. Beyond defining that solution and developing its positioning and value proposition, there was a clear and urgent need to develop a culture of progeny and to create the processes, discipline, and infrastructure that would turn what was an interesting idea to both a viable, scalable business as well as a thriving enterprise with employees committed to our vision, mission, and values. But even in those very early days, we saw the incredible opportunity in front of us to disrupt the traditional approach to managing a fertility benefit. We could see how we would be able to provide employers with a more efficient use of their healthcare dollars in a high-cost, episodic disease category where outcomes vary significantly and where patients needed more support in order to successfully navigate what is often a complex and difficult journey. Through our consistently superior clinical outcomes and world-class service and support over the past five years, we have built a business that is producing significant and recurring value for all three central constituents in the healthcare ecosystem, the employer sponsoring the health plans, the patients undergoing the treatments, and the providers who want to help people build their families. Because of how unusual and competitively differentiated a healthcare business that delivers measurable and sustainable value to all of those audiences is, the initial five clients and 110,000 covered lives that we had when Pete and I joined Progeny will have increased by more than 50 times and 35 times respectively as we begin 2022. I obviously couldn't be prouder of what we've accomplished over these past five years, given the many thousands of members who have achieved their family-building dreams because of our help. In transitioning to executive chairman, with Pete taking over responsibility for the day-to-day management of the business, I can dedicate my focus to those areas where I can make the greatest impact to Progeny's ongoing growth and expansion. By continuing to be a sound, beyond continuing to be a sounding board for and partner to Pete, my efforts will be directed on overall corporate strategy and corporate development, including new markets, products, and businesses, as we seek to extend Progeny's position as the brand of choice in fertility and family building benefits. This change will also give me the opportunity to spend more time with my family than I've previously been able to do, in addition to having the flexibility to pursue certain other personal interests. I also believe this is an opportune time to implement this transition given that we are now concluding the most successful selling season in our history and Pete, Michael and I have the necessary time to ensure there will be a seamless continuity in the day-to-day management of the business. I look forward to continuing to work closely with Pete, Michael and the rest of the progeny team as we chart the course for our continued strong growth and I couldn't be more excited for what's to come. Now let me turn the call over to Pete to discuss the success of the recent selling season in more detail.
Jamie
Thanks, David. Let me begin by saying that I'm enormously grateful for the close collaborative partnership that David and I have. As we each transition into new roles in 2022, I know that we'll continue to work together in much the same way that we have throughout the past five years of rapid growth at Progeny. I also want to congratulate Michael on his expanded role. Michael just led our sales team through its most successful selling season in Progeny's history. While Michael's substantial experience in leading operations, sales, and strategy functions throughout his career, I believe he's ideally suited to take on this larger role as Prodigy's president. I still believe that we're in the very earliest stages of addressing our significant market opportunities, and I look forward to working with both David and Michael as we capitalize on those opportunities to continue to grow the business. Given that our ability to win new clients and retain our existing clients are the single largest contributors to our future growth, I'll begin today with a recap of our most recent selling season, which is now largely complete. When the year began, we told you about the earlier than normal commitments that we were seeing, particularly from those not-now accounts, that we had been unable to make change to their benefits a year ago due to their need to focus on mitigating the effects of the pandemic to their workforce. While these early commitments provided us with a healthy start to the year, we obviously wanted to sustain that early momentum throughout the remainder of the season. We were pleased to report that we succeeded having received commitments from more than 85 new clients in total who represent an estimated 1.2 million new covered lives. This represents the most new business that we have won in any single selling season. To put this in context, in this sales year, we added more clients and nearly as many covered lives as what we had in aggregate when we went public just two years ago. Our newest clients continue to represent a broad cross-section of over 20 different industries, including financial services, consumer packaged goods, energy, professional services, healthcare, media, food and beverage, hospitality, and manufacturing. We believe this further enhances the strength and diversity that already exists within our client base. Although the average size of new clients last year was a bit smaller than our historical average, the average for this year's cohort is 14,000 covered lives, which is consistent with our results from the 2019 selling season. And while the average this year is 14,000, we continue to see a broad range in size, spanning from companies with 1,000 covered lives up to those with more than 100,000. We believe this further emphasizes the universal need for fertility as a benefit for any type of employer, regardless of either industry that they're in or the size of their operations. Newest clients this year also continue to select robust coverage levels for their employees, significant majority selected either two or three smart cycles, which is consistent with our historical averages. And while there were a number of similarities between this season and prior ones, there were some favorable differences as well. We drove to the strongest adoption rate for ProgenyRx, with 92% of our newest clients taking the pharmacy benefit. In addition, we also saw a higher percentage of new clients who were adding fertility coverage for the first time. This year, 48% of our new clients didn't have an existing fertility benefit, which compares to our historical average of approximately one-third and last year's rate of 40%. We believe this ongoing shift underscores the macro trend that's been revealed in previous industry research, where the adoption of fertility benefits among large U.S. employers is expected to increase significantly over the next few years. While winning new business is obviously critical, another contributor to our strong growth has been our success with client retention and upsells. We believe that retaining customers year after year and expanding the relationship with them over time best demonstrates the sustained value we are providing to our clients, and our results in both areas this year were very strong. Consistent with prior years, we achieved a near 100% client retention rate this year, and as strong as this result is, we're equally pleased to see that a number of our clients also chose to increase their benefit with us. With respect to expansions and upsells, we have multiple pathways to grow our relationship with clients. We can upsell additional services, such as progeny Rx for facility preservation. This year, for example, we continue to see meaningful uplift in the penetration of Rx within the existing base. Second, we can sell an expansion, making progeny available to more lives at the client, such as those populations who weren't previously covered by the benefit, or to any employees that may have been acquired through M&A by these clients. Third, the clients can add additional smart cycles And this year, we saw a small but growing number of clients move to an unlimited Smart Cycle benefit. We saw strong results across all three pathways this year, which we believe speaks to the strength of the offering as well as the satisfaction of our clients. Before I turn the call over to Mark, I want to discuss our utilization this quarter. As discussed in our previous call back in August, as the third quarter began, we observed a small decline in appointment volumes as compared to what we normally would have expected. which we attributed to a small percentage of members whose activity was inconsistent with historical patterns. As of the time of the August call, we had already begun to see an improvement in utilization off this low point, and we're pleased to see that the improvement utilization continued over the course of the quarter, although at a rate that was somewhat slower than what was needed to reach the higher end of our top line guidance range. Although the past activity of our members has proven to be a reliable indicator of what we should expect in the present, The utilization that we actually see each quarter ultimately reflects patients making decisions based on factors that are unique to them at that point in time. Over the past 18 months, those decisions have been made against the backdrop of an ongoing global pandemic. Despite what has been a small impact to our utilization expectations overall, we're pleased that our service has continued to prove its resiliency and that those impacts have been small relative to what others have been experiencing in healthcare from a utilization perspective. As we begin the fourth quarter, utilization has continued to improve versus our exit rate in Q3, giving us further confidence that the phenomenon observed this past summer was temporary. With that, let me now turn the call over to Mark to discuss the quarter in more detail.
David
Thank you, Pete, and good afternoon, everyone. I'll begin with our results for the third quarter and then provide our expectations for the remainder of the year. Revenue grew 24% over the third quarter last year to $122 million. point three million driven primarily by the increasing clients and covered lives over the year ago period looking at the components of the top line medical revenue grew seventeen percent to eighty five point three million while pharmacy revenue increased forty three percent to thirty seven million we had a hundred eighty eight clients as of September thirtieth representing an average of two point nine million covered lives during the quarter this compared to a hundred and thirty five clients and an average of 2.2 million covered lives in the third quarter last year, which reflects a 29% growth in lives over the past year. As has been the case in the past, a handful of the more than 85 new clients Pete mentioned a moment ago have chosen to launch their benefit ahead of the typical January 1st start date and are reflected in our 188 clients as of September 30th. I'll remind you that these types of off-cycle launches tend to happen with smaller companies who have greater flexibility in rolling out a new benefit to their workforce on dates that don't coincide with the start of their plan years. Turning now to our utilization metrics, there were 6,892 art cycles performed during the third quarter, which is approximately 27% higher than the year-ago period. For the reasons we discussed on last quarter's call, this reflects a slight decrease from the record number of art cycles that were performed in the second quarter, though, as Pete mentioned a few moments ago, We continue to see appointment volumes improve over the course of the quarter. Female utilization this quarter, which as a reminder is the component of utilization that corresponds most closely to our financial results, was 0.46% as compared to 0.44% a year ago. While the utilization rate is comparable with what we achieved in the second quarter, it's important to note that treatment mix is always a contributing factor to revenue. Utilization associated with consultations and diagnostic testing and procedures contribute a lower revenue value as compared with more advanced procedures such as fertility preservation and IVF. Our utilization in the third quarter included a lower than usual proportion of fertility preservation and IVF treatments, reflecting the small subset of members who didn't pursue those treatments during the third quarter. Turning now to our margins and operating expenses, Gross profit increased 37% from the third quarter last year to 28.5 million, reflecting a 23.3% gross margin, or an increase of 220 basis points from the year-ago period. The increase is primarily due to the favorable impact of the efficiencies that we continue to realize across our care management service teams, as well as the impacts of the regular contract renewals with our providers and the pharmacy program partner agreements that were executed earlier this year. I'll remind you that our third quarter margins are typically higher than what we see in the fourth quarter because towards the end of the year, we're onboarding the new headcount that we need in order to successfully manage the significant step up in our member base as our newest clients go live with their programs on January 1st. Sales and marketing expense was 3.6% of revenue in the third quarter, which was comparable to the year-ago period and reflects our continued efficiencies in these functions even as we pursued a larger number of client prospects. G&A costs were 12.3% of revenue this quarter, reflecting a slight improvement from the year-ago period, again, as we continue to realize efficiencies across our administrative functions while we grow the business. Given the efficiency in our cost structure as our revenues have grown, adjusted EBITDA increased 64% in the quarter, from 10 million a year ago to 16.5 million this quarter. Our adjusted EBITDA margin of 13.5% this quarter reflected an increase of 330 basis points from the year-ago period, and adjusted EBITDA margin on incremental revenue in the quarter was 27.5%. Net income was $16.8 million in the third quarter, or 17 cents per share. This compared to net income of $4.8 million, or 5 cents per share, in the year-ago period. The higher income in EPS as compared to a year ago reflects the margin improvements I just described, as well as a tax benefit of approximately 9 cents per share, primarily relating to the ongoing favorable impact of deductions associated with equity compensation activity. Turning now to our cash flow and balance sheet, operating cash generated during the quarter was $24.2 million. This compares to cash provided of $15.3 million in the year-ago period. As expected, our cash flow this quarter reflects a normalization in working capital, which stemmed from the change in the timing of payments we receive under the pharmacy partner arrangements we signed earlier this year. Cash flow also reflects ordinary timing items in both periods. As of September 30th, we had total working capital of approximately $150 million, reflecting $114 million in cash, cash equivalents, and marketable securities, and we had no debt. Turning now to our expectations for the fourth quarter and full year 2021. Pete describes, although utilization has continued to improve since its earlier lows, the rate of improvement has been slightly less than what was implied in the top end of our original guidance range. We are projecting fourth quarter revenue of between $133.9 million to $140.9 million representing growth of between 34% and 41% over the prior year period. This reflects the continued improvement in utilization that we are seeing now. On a sequential basis, this guidance represents between 10 to 15% growth versus Q3. For adjusted EBITDA in the fourth quarter, we expect between $16.8 million to $18.3 million, along with net income of between $800,000 to $3.4 million, are between one cent and three cent earnings per share on the basis of approximately 102 million fully diluted shares. And for the full year, we now expect revenue of 507 million to 514 million, reflecting growth of between 47% and 49% over the prior year period. On that basis, we now expect adjusted EBITDA of between 69 million to 70.5 million, and net income of between 51.5 million to 54.1 million, or between 51 cents and 54 cents earnings per share, based on approximately 101 million fully diluted shares. As a reminder, our net income ranges for both the quarter and the year do not reflect estimates for discrete income taxes, including the income tax impact related to equity compensation activity. At the midpoints of this guidance, we expect to see the continued expansion of our margins in 2021, with adjusted EBITDA margin on incremental revenue of 22.6%. We believe that margin on incremental revenue is useful as a forward indicator for where the business is capable of moving, and it highlights our expanding rate of margin capture on new revenue. Let me now turn the call back over to Pete for some closing remarks. Thanks, Mark.
Jamie
Before we open up the call for your questions, I wanted to provide our thoughts on the remainder of this year and how that positions us for 2022. With the guidance we've issued today, we're expecting our fourth quarter will be our largest ever in terms of revenue, underscoring our strong belief that all the macro factors that have been driving our growth remain fully intact and that utilization continues to return to more normal levels. As we begin to look into 2022, despite our successful selling season, there will always be some accounts who determined it wasn't the right time for them to take the benefit, and this selling season was no exception. This sets us up with a larger pipeline than what we had at this time last year, which positions us well to start next year's selling season with momentum. We continue to believe that we are at a very early stage of penetrating our core market. Once our newest clients go live, we will still have just a low digit percentage of the 8,000 employers in our target market. We're also continuing to explore the possibility of broadening our portfolio of services or adding new markets where we believe it makes sense for us to expand. We expect that the significant majority of the new clients will go live with their benefits on January 1, 2022, and for the remainder to launch during the second quarter of 2022. At that point, we expect to have 265 clients representing an estimated 4 million covered lives. Typically, the utilization that we see in the initial period following a new client's launch provides us with insight as to what that client's utilization could look like for the full year. As a result, we expect to be in a position to provide you with a revenue range for 2022 as well as profitability guidance when we report our year-end results. With the visibility we have into 2022 around new sales, client retention, and upsells, we remain comfortable that revenue will grow by approximately 50% in 2022. With that, we'd like to open up the call for your questions.
Katherine
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone now. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold a moment while we poll for questions. Your first question is coming from Ann Samuel with JP Morgan. You're live.
Ann Samuel
Hi, guys. Thank you for taking the question.
Katherine
Hi, Annie. Hi, Annie.
Ann Samuel
I was wondering if you maybe could give us a little bit of color on within the 50% revenue guidance for next year, what kind of utilization are you embedding within that and could you achieve that even if you don't see any sequential improvement versus where you are now in utilization?
Jamie
Relative to current utilization levels, it's assuming that continues. Other than that, We estimate what we expect based on our new client ads, but until those utilization levels actually occur early in the year, I can't really comment on that until it happens. Even though we use our best estimates based on our experience of clients by industry, I think we're in the best position to give you any more clarity around that when the year starts, when we give the full year guidance, when we report our year-end results.
Ann Samuel
Okay, and then you said that a third of your clients increased the benefits, and I was wondering if maybe you could talk a little bit about same-star growth and how much of that 50% growth next year is coming from same-star growth.
Jamie
The third of the clients that added some form of expanded benefit aren't all equal, right? So some of them add Project NRX, which is the biggest upsell opportunity for us. Some of them add Fertility Preservation. Some of them add simply surrogacy reimbursement or smaller sort of forms of expanded benefit that we don't sort of talk about in detail because they're nominal in terms of their impact. I think that the point we're trying to make about the third is simply how many of our clients continue to look at the benefit and improve it as an indication of satisfaction. The majority of the approximate 50% in terms of our view for next year right now, comes from the new lives added. The small portion, but not insignificant, comes from the upsells. Again, until we provide guidance at year end, any more clarity around that, I think, is probably premature.
Ann Samuel
Okay, great. Thanks, guys.
Katherine
Your next question is coming from Michael Cherney with Bank of America. Your line is live.
Michael Cherney
Good afternoon. Thanks for taking the question. First, just one quick technical question and then one more on the business. First, just for the fourth quarter net income, maybe it's just my math, but I'm having a lot of trouble footing your EBITDA guidance or net income guidance. Is there something funky going on in between those lines that we should be considering and does that have any impact on cash flow?
Jamie
Mark will take a look at that and get back to you if there's something there. Mike, and if there is, we'll publish something on the website.
Michael Cherney
I understand. And then just turning back to Andy's question relative to utilization, I guess you said that it's continuing to improve. I know that this was obviously a common theme from last quarter. Relative to what you would have expected it to be or maybe where the guidance was before, what percent is it at right now And are there any subsets either from what you're hearing from your customers, what you're hearing from your providers within your network, as to for the ones that are getting back towards normal or already at 100% of normal, what caused them to come all the way back? And is it also part of the factor that the ones that are coming back first are the ones that are the negative mix shift for you from a revenue perspective? I know there's a lot of questions, but I have a lot of themes I want to make sure I hit on.
Jamie
Yeah, the easiest way to think about the current utilization levels versus what we were seeing in the middle of the summer is there's two components to utilization, which I think you just touched on. One is rate of utilization overall, and second is the mix of what's being utilized. What's coming back, what continues to come back is the rate of utilization. What's coming back a little stronger is the mix. relative to full cycles being utilized more as a proportion of total medical services. It's consistent, I think, with our belief of what was going on early in the summer relative to just the utilization drop off that was temporary from what we expected, which is people just made decisions to pause pursuing treatment and as they're starting to pursue treatment again, as you might imagine, they're gonna start with initial consults first and then go on to treatment. So that's sort of the high level explanation as to you know, how the utilization is returning.
Michael Cherney
Got it. That's good for me. Thanks.
Katherine
Your next question is coming from Stephanie Davis with SVB Lyric. Your line is live.
Operator
Thank you for taking my questions, guys, and congratulations to the whole team for the transition role. Pete, now that you've been announced as the incoming CEO for about 30 minutes, I was hoping you could kick us off with your initial goals for the new seat or maybe your top three priorities as this field of femtech kind of rapidly expands.
Jamie
I think we alluded to some of them at a high level. They're a combination of expanding our addressable markets in certain ways both with product and with markets themselves. They're also looking at new development opportunities, as David alluded to, that he'll also be focused on as well as Michael. And so at a high level, it's just creating structure and resources around exploring newer opportunities beyond the current opportunity, which as we talked about, we still believe we're in the early, really first inning of.
Operator
So pulling on that thread a little bit more then, when you did have clients that maybe opted in for a different competitor or who said no, were there certain features they were seeking out that you would want to add to your solution, maybe more than just pure play fertility?
Jamie
Yeah, the not nows are all materially just timing based on their own priorities of when they want to add the benefit. They were not not-nows because we lost them to competitors, or they were not not-nows because our offing is somehow deficient. That said, we believe there's still things we can do to improve it, which when we're ready to talk about, we will. But right now, our not-nows were like they are in prior years, last year and prior years, even pre-COVID, where they're simply just other priorities and when they're ready, and so it's normal activity in terms of not-nows.
Operator
And one quick thought, if I can sneak it in, just on the not-nows front, did we see a pretty complete conversion of this group from last year, or is there going to be a longer tail of conversions to come over the coming year, so we just need some sustained heightened activity?
Jamie
We saw, like we did in prior years, both the number of accounts and covered lives coming from not-nows grew very nicely this year, has grown each year for us, and our expectation is that there's no reason why that shouldn't continue.
Operator
Awesome. Thank you so much, and congrats again on the seat.
Jamie
Thank you so much.
Katherine
Your next question is coming from Ralph Giacobi with Citi. Your line is live.
Ralph Giacobi
Great. Thanks. Good afternoon. I guess last quarter you also talked about 50% revenue growth for 22. At the time, off midpoint of guidance, it was about $780 million. Is the 50% still holding for 22 off the lower revenue base, so around 765, or is it still applied to the prior baseline?
Jamie
Yeah, I think the 50%, as we talked about it last quarter, was an approximate. It's still an approximate for the reasons that I said. You know, until and when we see the actual utilization from new clients, we're really not in a position to give any more precision. You know, the delta, whether you do it off of the midpoint, you know, at Q3 or the current guidance, is really not that significant relative to the overall growth. And if I were in a position or we were in a position as a company to provide more specific guidance now, we would. We're just not. And so, really, that's why we continue to say, you know, approximately 50%. I think that's more instructive versus trying to be more precise at this point.
Ralph Giacobi
Okay. Fair enough. And then I just wanted to reconcile some of the commentary because you talked about close to 100% retention. But just in looking at the numbers, you're adding 85 clients in 2022. You also said you're going to have 265 clients by 2Q22. So the math there would just imply that eight or so are rolling off. Is that the right math we should be doing, or do you expect mid-year ads so it's not as sort of direct?
Jamie
No. I think you might have missed one of the comments. A few small clients like in past years where we sold them during the year have already gone live and so part of the 85 overall are a handful of small clients that have already gone live and are in our numbers as of September 30th. But if you notice, the overall lives didn't go up that much because, again, these are small clients, so not a big impact at all relative to revenue contribution or anything this year, you know, relative to the overall base. Got it.
Ralph Giacobi
Okay.
Jamie
Thank you.
Katherine
Your next question is coming from Sarah James with Barclays. Your line is live.
Sarah James
Hi, guys. This is Steve Braun on for Sarah. Um, so, um, if we could just, um, unpack the, uh, new client ads. Uh, so historically you have, um, you've had a Jan one start for new clients and you flagged more QQ starts this quarter. Um, is that related to more of the return to office and COVID, or should we think about that as the size and type of the employer you're targeting? And, um, how should we think about like, that shifting the seasonality of new client ads, could that be shifting it away from the historic, like, Jan 1 starts into more of, like, QQ?
Jamie
The majority of dollars and lives are going live in Q1, mostly in January 1st. There's a handful of clients that are going live in Q2, mostly because that's when their plan year starts. So they are in industries that don't have a calendar year plan year. So there's no sort of shift, if you will, of any kind relative to when clients go live. They still materially are going live consistent with their plan year. The clients I talked about, the few handful of small clients that already went live this year, they're the indicators of those that have gone live off of their normal plan year and just a little earlier. But there isn't a delay of any kind in terms of new client commitments and when they're going live.
Sarah James
All right, thank you.
Katherine
Your next question is coming from Iris Long with Bernberg. Your line is live.
Iris Long
Hi, thanks for taking my question. First, I wanted to go back to Pete's comment. I think you mentioned that utilization was lower for IVF and fertility preservation in Q3. Can you talk about that dynamic a little bit? are you seeing or do you expect the same trend to continue in Q4 and then maybe next year?
Jamie
Yes. What I mentioned was the proportion of full IVF cycles versus overall medical treatments was a little lower than normal. That is already based on what we're seeing in October, scheduled for October and November, is already returning back to normal levels. And it's really the proportion that we saw that was lower over the summer is consistent with what we believe was going on overall, which is just a slight pause in pursuing treatment due to the fact that the pandemic is, you know, has been around for, you know, back then, 15 months or so. And, you know, people were just looking to basically maybe get out of the house, maybe go on vacation, whatever. It was, you know, consistent with comments we were hearing from our providers in terms of what they were also seeing in their business.
Iris Long
Okay, got it. So it sounds like it's just Q3 then.
Jamie
Yeah, the slightly lower proportion was Q3. It's already returning in what we're seeing already for Q4. It's part of why our expectation around Q4 guidance has baked into it.
Iris Long
Okay, perfect. And then my next question is on the new customers. I'm wondering if you can talk about the characteristics and maybe the client profile for your new 85 clients that you're adding. So are these clients that you're adding, are they smaller than your existing clients, or maybe are they a similar size? And I'm wondering if you can talk about the dynamics that you're seeing. Are these clients mostly from certain industries, or in general, do you see higher demand for certain industries?
Jamie
Yeah, so a couple of things there. One, related to client size, the average size of new clients that we added in this year's selling season for next year are higher than last year, but similar to what they've been in previous years. Last year, with COVID, with the pandemic as a backdrop, it impacted larger clients coming on board in a more significant way in last year's selling season. This year is, if you will, back to normal from an average client size perspective. Related to industries, they were across 20 industries, most of which are industries that we already had clients in. There was no disproportionate size in any industry. From an account perspective, they were across the board. and very positive as we continue to penetrate these industries. It becomes a network effect where more and more other companies in those industries who want to remain competitive and attract and retain employees in the future become easier and easier to sell into.
Iris Long
Got it. Thanks.
Katherine
This concludes the Q&A portion for today's call. I'd now like to turn the floor back to James for closing remarks.
James Hart
Thank you, Katherine. Thank you, everyone, for joining us today. Just to follow up on the question Mike Cherney asked, there is a table at the back of the press release that does a reconciliation to the guidance. Mike hadn't yet seen that table, so that addresses his question. So if there are any other questions, please never hesitate to reach out to me. And otherwise, we look forward to speaking to you in February. Enjoy the rest of the year.
Katherine
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
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