Progyny, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Progeny, Inc. Third Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, James Hart. Sir, the floor is yours.

Thank you, Matthew, and good afternoon, everyone. Welcome to our Third Quarter Conference Call. With me today are Pete Ineske, CEO of Progeny, Michael Skirmer, President, 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 our comments and responses to your questions management views as of today only, and we'll include statements related to our financial outlook for both the full quarter and full year 2022 and the assumptions and drivers underlying such guidance, including the impact of our sales season client launches and our expected utilization rates and mix. our anticipated number of clients and covered lives for 2023, the impact of COVID-19, including variants on our business, clients, member activity, and industry operations, the impact of any shortages or disruptions in the pharmacy, medication, and supply chain on our business and our financial condition, our ability to acquire new clients and retain and upsell existing clients, our market opportunity, size, and expectation of long-term growth, our plans for the expansion of our business, including expansion into other markets and of services offered, are business, performance, industry outlook, strategy, future investments, plans, and objectives, which are forward-looking statements under the Federal Securities Law. Actual results may differ materially from those contained in or implied by these forward-looking statements, due to risks and uncertainties associated with our business, as well as other important factors. For a discussion of the material risks, uncertainties, and other important factors that could impact our actual results, please refer to our SEC filings and today's press release, both of which can be found on our Investor Relations website. Any forward-looking statements we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During the call, we will also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted EBITDA margin, gross margin excluding stock-based compensation, and operating expenses excluding stock-based compensation. More information about these non-GAAP financial measures, including reconciliations with the most comparable GAAP measures, are available in the press release, which is available at investors.progeny.com. I would now like to turn the call over to you.

Thanks, Jamie, and thanks, everyone, for joining us today. We're pleased to report that Progeny had a very strong third quarter with record quarterly revenue of $205 million, reflecting 68% growth over the third quarter of 2021. In addition, our adjusted EBITDA more than doubled over the prior year to a record 35 million, yielding an adjusted EBITDA margin of 17%. Positive momentum in revenue was driven primarily by both healthy member activity, which has fully returned to levels that are consistent with what we would expect to see, as well as by a number of new client launches during the third quarter from accounts that were won in the current sales season. Most of these launches were clients who wanted to make the progeny benefit available to their workforce as early as possible, and who chose not to wait until the start of their health plan year on 1-1. There was also a large client who launched during the quarter because their plan year starts in the third quarter. While early launches typically happen in every sales season, those usually are with smaller clients. We've had more non-January 1 starts overall this year, and this has included some larger clients. We view the enthusiasm of these clients in launching our benefit early as validation of both our market leadership as well as the confirmation that the demand for fertility and family building solutions is high, as employers increasingly recognize that their benefits need to be both equitable and competitive, even with the backdrop of some macroeconomic uncertainty. While there are varying predictions as to whether a recession will happen at all or how long it will last, companies are still reliant on the productivity and satisfaction of their labor force, and they're aware of what's actually happening in the market today, where unemployment remains at or near a 50-year low, and labor continues to be extremely tight, and there is a significant surplus of unfilled jobs. The availability of fertility and family-building benefits, as well as the quality of those benefits, is increasingly becoming a significant factor that prospective employees use when deciding whether to join or remain with a company. And while these macro forces are providing a tailwind for fertility as a category, we've seen our market share continue to grow as employers are increasingly choosing progeny as their solution provider, given our track record of success in helping companies more efficiently manage their healthcare spend while simultaneously enhancing the patient experience through our superior clinical outcomes. At this point in the year, our new sales and client renewal season is largely complete. The last year's record-setting sales season, which had been favorably impacted to some extent by carryover demand from COVID-affected sales year in 2020, set a high bar for success in 2022, we continued that momentum and secured a record 105 new client commitments during the selling season, representing an additional 1.2 million covered lives. Quarterly, we expect to enter 2023 positioned for another year of strong growth with 370 clients and approximately 5.4 million covered lives, reflecting double the number of clients and covered lives from the start of 2021. Before I go into greater detail about the selling season, Let me first give a recap of our renewal activities and then briefly discuss employment growth within our existing customer base. For the seventh consecutive year, we expect to retain nearly 100% of our clients. We also continue to see very healthy appetite among existing clients who are looking to expand their project relationship through upsells, including a handful of clients who are adding coverage for the Canadian populations. Altogether, more than a quarter of our clients are increasing their benefit in some way in 2023. We believe our extraordinarily high retention rate is one of the most underappreciated aspects of our business. Our clients include some of the most data-driven and analytical companies in the world. We believe in our sustained success at both renewing those relationships year after year, in addition to expanding with a large portion of the base each year, demonstrates both the high levels of satisfaction we achieve, as well as the strength of our client relationships, which is driven by the value that we continue to create for those clients. By way of illustrating this point, our renewals this year include one of our largest clients who chose to deepen the project relationship through a five-year renewal as opposed to the more usual three-year term in recognition of our track record of delivering substantial value both to the client and its workforce through our superior clinical outcomes and better member experience. Although new sales activity has been the predominant driver to our growth historically, employment growth at existing clients has been a contributor as well. Looking to 2023 as it relates to employment growth within our base, while some of our clients, including some of our largest ones, have made public comments about slowing the pace of hiring or their expectations to keep headcount flat, none of our clients have indicated publicly or in their conversations with us that they're planning for any large-scale reductions to their workforce at this point. Accordingly, we currently anticipate that the employment levels of our existing clients to be relatively consistent versus 2022 with little or no contribution to revenue from organic growth in 2023. Turning now to new sales, we believe the record number of new commitments we've received demonstrates that our opportunities continue to be significant and the market remains substantially under-penetrated. We believe these results also show that Prodigy remains the provider of choice for the largest and most successful companies in the world and that we remain in our strongest and best competitive position given that no other benefit solution has been able to build a fully managed solution that delivers high-quality outcomes. The 105 clients we're adding represent the broadest and most diverse cohort in our history, including aerospace and defense, food and beverage, healthcare, agriculture, telecommunications, energy, cybersecurity, financial services, and more. And as we discussed last quarter, we also want our initial clients in a number of industries that are very large and under-penetrated, including hotels, airlines, labor unions, university systems, and even our first professional sports team. We expect this cohort of newest clients will further enhance the strength and diversity that already exists within our base as our clients in 2023 participate in more than 40 different industries. Consistent with prior seasons, we continue to see a broad range in the size of the newest clients who span from 1,000 lives to well in excess of 100,000 lives. We believe this demonstrates the relevance of fertility as an essential benefit for any type of employer regardless of the industry they're in or the size of their operations. Similar to last year, approximately half of the newest clients had a previous fertility benefit before moving into progeny, and the other half of our newest clients are adding fertility to their health benefits for the first time in 2023. Given that the market overall is evenly divided with roughly half of large employers providing some type of fertility benefit and the other half not providing any coverage at all, we believe our success with both groups this year underscores our growth opportunities with larger employers. As further evidence of the healthy appetite for fertility benefits and its resilience in this macro environment, our newest clients have also continued to select robust levels of coverage for their workforce with most choosing to provide two or three smart cycles, which is consistent with our historical average. We're also pleased to have achieved our strongest ever adoption rate for ProgenyRx this year. Of our newest clients, 97% are taking the pharmacy benefit, driven by the savings we deliver over the traditional PBMs, as well as our superior member experience that, amongst other advantages, eliminates the risk of treatment delays. After the newest cohort launches, we anticipate that 90% of our overall clients will have the integrated solution up from 84% today. Before I turn the call over to Mark, I want to provide a perspective on a recent development that's affecting the supply chain of the commonly prescribed fertility medication. The manufacturer of Menopur, one of the largest drugs in our formulary, has notified us that they have temporarily paused delivery of that medication, thereby creating a shortage in supply, as they wait for the FDA to approve changes that were made in the manufacturing process by one of their suppliers. Ferring's review of their data to date indicates that the safety and efficacy of the product remains unaltered, and Ferring has indicated that they're not aware of any evidence indicating that the changes in the manufacturing process pose any risk to patients. Lastly, Ferring has notified us that they're working with health authorities, including the FDA, to resolve the situation as quickly as possible and will keep us informed. In the meantime, clinicians are able to employ a combination of alternative medications to replicate the effect of Menopur through the administration of these drugs, though the administration of these drugs is more complicated for the patient. It's worth noting that this is the only drug of its kind in the U.S. that's approved for use, and the drug has been used widely and successfully with patients for many years. It's also important to stress that neither Faring nor the FDA recalled any doses of the medication that had already been distributed to the market. Accordingly, in looking at previous situations, that have similarities to this one, we believe it's reasonable for us to anticipate that this situation can be resolved relatively quickly. While we don't anticipate the temporary disruption to have an impact on members' ability to pursue treatment, we do expect a slight financial impact as a result of using the alternate drugs, given the different unit economics for these drugs, which the guidance we're issuing today already contemplates, as Mark will discuss in more detail shortly. With that, let me now turn the call over to Mark discuss the quarter in more detail, and provide our expectations for the balance of the year.