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Operator
Good day, ladies and gentlemen, and welcome to the Progeny, Inc. First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode, and the floor will be open for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, James Hart. The floor is yours.
James Hart
Thank you, John, and good afternoon, everyone. Welcome to our First Quarter Conference Call. With me today are Pete Inefsky, CEO of Progeny, Michael Stermer, 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 today reflect management's views as of today only and will include statements related to our financial outlook for both the second quarter and full year 2023 and the assumptions and drivers underlying such guidance, the demand for our solutions, our expectations for our selling season for 2024 launches, anticipated employment levels of our clients and the industries that we serve, the timing of our client decisions, our expected utilization rates and mix, the potential benefits of our solution, our ability to acquire new clients and retain and upsell existing clients, our market opportunity, and our business strategy, plans, goals, and expectations concerning our market position, future operations, and other financial and operating information, 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, assumptions, 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 that 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 and adjusted EBITDA margin on incremental revenue. 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 Pete.
John
Thanks, Jamie. Thanks, everyone, for joining us today. We're pleased to report that we've had a very solid start to the year, as well as another strong quarter. we achieved record quarterly revenue with growth of 50% over the first quarter of 2022. This growth was driven once again by the healthy demand that we continue to see for fertility and family building care as our members look to start or expand their families, as well as an increase in our clients and covered lives following a record sales season in 2022. During the quarter, we also increased our margins as compared to the first quarter a year ago, as our continued focus on operational excellence produced not only our highest ever quarterly gross profit and adjusted EBITDA, we also achieved our best first quarter cash flow as well. We also successfully onboarded a record number of new clients during the quarter, further demonstrating that even as we rapidly expand our member base, we're able to effectively scale the business while continuing to provide industry-leading service levels. Simply said, we believe our year has begun with clear and positive momentum across all the key areas that we look to in measuring our success, including sales momentum early in the 2023 selling season. And we're particularly pleased to be executing against our strategic priorities at this time, as we believe awareness of both the challenges of infertility and the need for equitable, high-quality coverage has never been more top of mind. In fact, the most recent data released just last month from the World Health Organization revealed that the prevalence of infertility is continuing to increase, now affecting one out of every six people of reproductive age globally. To put that in perspective, less than four years ago, when we became a public company, the prevalence of infertility was reported as one in eight. We believe this increase over such a short period of time only underscores the powerful trends driving the growing need for fertility services. And while there are many factors driving this increasing prevalence, the growing number of people who are choosing to defer family building until later in life when natural conception becomes biologically more challenging is one of the most significant ones. Despite the long recognition of infertility as a disease, by all the relevant public health authorities, it continues to be covered differently or not covered at all as compared to the other conditions recognized by those same authorities such as diabetes, asthma, cancer, and others. And once again, employers are leading the way by adding this important coverage to their employees. This clear need coupled with advances in both technology as well as the models of care delivery for infertility have progressed to effectively meet the market's need for proven viable solutions. And despite that, the majority of those in need continue to face insufficient coverage. We continue to partner with an increasing number of employers across the country to make infertility treatment available to those that need it, working closely with clients, consultants, and industry groups to make coverage for infertility an essential benefit. While we know how impactful comprehensive care is to the individual who needs it, it's equally true that society as a whole benefits as the challenges of global population decline become better understood and appreciated. While national birth rates are declining in the U.S., that's entirely driven by women under 34, birth rates for women over 35 are increasing more than 2% a year compounded supported by the greater access to care and advances in assisted reproduction. The Prodigy solution has been making a profound impact as the prevalence of infertility has grown. In just the past four years, we've helped improve access via a nearly five-fold increase in our client base. And while a lot of healthcare companies have aspired to deliver value-based care, we're actually fulfilling its promise for our clients each and every day. And we're doing this through a combination of superior clinical outcomes, which produce an average of 25% to 30% savings, including controlling for unit cost inflation, where companies have grown accustomed to annual increases, but not with progeny. Over the past two years, we've more than doubled client and member base and are providing the clinics in our network with significantly more patient volume. And by leveraging this growing scale, we've been able to negotiate more favorable rates passing along to our clients a shared percentage of unit price savings for 2023. But beyond this greater economic value, our impact is felt in other ways by employers who, in choosing us as the fertility solution, are ensuring that their workforce is getting access to the most supportive and comprehensive care available. The impact is also felt by employees as well who are able to build their families through our solution that has shown through our comprehensive reporting to be the most effective at supporting successful family building through infertility care with an increase in faster, healthier pregnancies and healthier babies. And it's because of this growing need and our proven impact that we continue to believe that our 5.4 million covered lives today represent a mere fraction of our true market opportunity. Although this 2023 selling season is just getting underway, We're very pleased with the level of activity we've seen thus far, which continues to confirm that there is still a significant unmet need in the market, as well as a growing recognition of the importance of coverage across industries, geographies, and company sizes. And that's because even though companies are being more cost-conscious during this macroeconomic time, adding family building remains a priority. The activity we're seeing across all of our sales channels is favorable when compared to the level of activity we saw at this time last year, which became a record sales season for us. We're also actively engaging with not-now prospects from prior selling seasons. As usual, these represent the majority of the early commitments we've received for 2024 thus far and are just one indicator of the positive demand we're seeing in the market. Although it's early in the season, these wins are from well-known brands in such diverse areas as travel and hospitality, manufacturing, consumer packaged goods, and a large university school system. We're also seeing further success in early wins with Taft-Hartley labor populations, which when added to our original addressable market of large self-insured employers, expands our overall TAM to approximately 100 million lives, the majority of which continue to be uncovered and underserved. Last year was our first year in market, where we directly targeted and invested in our solution for these labor populations. And we're pleased to see our momentum there is continuing. And in a further demonstration of what we call our flywheel effect, where after winning our initial client in an industry, when we see others in that same industry look to maintain health benefit parity by adding the benefit, we had early wins from another hospitality client, as well as one of the largest children's hospital systems in the country, which continues our strong track record of recent success with that particular subsector of healthcare. On our last call with you, we discussed how Children's Hospital Association has selected Progeny to be the preferred solution to the more than 220 member hospitals in its coalition, representing two plus million covered lives collectively. While CHA affiliated hospitals can choose whether or not to consider us, CHA's approval of us along with all the work they did to vet our solution and processes, carries significant weight. Last quarter, we told you CHA wasn't the only relationship we were pursuing, and we recently announced that Progeny has been chosen to be the preferred fertility and family building solution for the family path suite of services within Evernorth. Evernorth, which includes companies such as ESI, Accredo, and others, was formed to help accelerate the delivery of innovative and flexible solutions across various aspects of healthcare, including fertility. And under this focus, Family Path was created to be the fertility solution within that portfolio of high-performing growth services. This partnership is particularly important because of the depth of experience Evernorth has in the fertility space through both Family Path and Freedom Fertility, and their focus in this space has allowed Evernorth to become familiar with progeny's differentiation and understand firsthand the impact we can have on their employer population. Accordingly, we couldn't be more pleased that Evernorth made the decision to enhance its Family Path suite of services by including Progeny as the preferred facility and family building provider within their solution. Similar to our other non-traditional channel partners, most notably our partnership with CVS Point Solutions, their decision to work with Progeny came out of a comprehensive review of Progeny's clinical approach, outcomes, plan design, security, privacy standards, and brand. And while this relationship has the benefit of expanding our go-to-market activities, it also streamlines the contracting and onboarding process for our mutual clients, including those who are looking to add a fertility benefit for the first time. Taken together, we believe these positive indicators, which include the size and health of our current active pipeline the active engagement and forward progress with the not nows, and the number and diversity of the early commitments further demonstrates both the strong demand in the market as well as our leading position as a provider of choice for fertility and family building solutions. In every sales year, we aim to grow the absolute number of new clients and covered lives as compared to the prior year, and this year is no different. Although it remains very early, given the strength we are seeing in the sales season thus far, we believe we're on track to meet that objective. To conclude, we're very pleased with our results this quarter, which we believe demonstrate that we have continued to execute against all of our strategic initiatives. And the early momentum we're seeing in our sales season supports our belief that progeny is in its strongest ever competitive position, that our market opportunity remains largely unpenetrated, and that all of the macro factors that have contributed to our growth remain intact.
Jamie
Let me now turn the call over to Mark to walk you through the quarter. Mark. Thank you, Pete, and good afternoon, everyone.
Mark
I'll begin by taking you through the first quarter results and then provide our expectations for both the second quarter and the full year. First quarter revenue was $258.4 million, reflecting growth of 50%. The growth versus the prior year period was primarily due to an increase in the number of clients and covered lives as compared to a year ago, which was amplified by the number of non-calendar year starts throughout 2022. We had 379 clients with at least 1,000 lives in the first quarter, representing an average of 5.3 million covered lives. That client count includes a handful of relatively small accounts that were won toward the end of the 2022 selling season. This compared to 264 clients and an average of 3.9 million covered lives a year ago, reflecting 36% growth in lives over the prior year. Taking into account the clients who launched after March 31st, today we have over 380 live clients who represent 5.4 million covered lives. We've all seen the headlines where some high-profile companies have publicly discussed the targeted layoffs they've undertaken to varying degrees, and some, though not all, of those companies are our clients. While we did see an impact from those reductions from some of our clients during the quarter, this was fully offset by other clients who have continued to expand their workforce through additional hiring, which was consistent with what we had expected. This dynamic mirrored the recent jobs reports from the Labor Department, including the one issued just last week, which have continued to show meaningful hiring within certain industries that are very well represented in our client base. including healthcare, hospitality, and professional services, to name just a few, and that the overall rate of unemployment continues to be at or near record lows. Nevertheless, as it relates to membership growth within our base, a key element of organic growth, we continue to anticipate that overall, our existing clients will hold relatively flat at 5.4 million lives over the balance of the year, with any additions from existing clients netting against any reductions in 2023. Turning now to the components of the top line, medical revenue increased 42% over the first quarter last year to $157.1 million, which again was due to the growth in clients and covered lives, while pharmacy revenue over the same period increased 65% to $101.2 million. The growth in pharmacy revenue is primarily driven by an increase in the number of clients who have the integrated solution. A year ago, 83% of our clients had Progeny Rx, whereas today, 90% of them do. Our higher penetration for Rx reflects not only the 97% take rate we saw among clients added in the most recent selling season, but also our continued success with upselling among existing clients given both the superior member experience from our pharmacy program as well as the meaningful savings ProgenyRx provides to both clients and members. Turning now to our utilization metrics. Approximately 13,200 ART cycles were performed during the quarter, our highest ever quarterly total, reflecting a 48% increase in cycles as compared to the first quarter of last year. The female utilization rate in the quarter which is what principally drives our financial results, was .48% as compared to .45% a year ago. I'll remind you that utilization can vary from period to period due to a number of factors, such as the timing of when new clients go live, the time of the year, and the demographic mix of the newest clients. This quarter's rate was in line with our historical ranges. Turning now to our margins and operating expenses, Gross profit increased 78% from the first quarter last year to $58.6 million, yielding a 22.7% gross margin. The 360 basis point increase in margin from the year ago period primarily reflects the efficiencies that we continue to realize in the delivery of our care management services, as well as the impact of our renewal providers and pharmacy program partners at more favorable terms. In addition, as we discussed at the time, First quarter gross margin a year ago was impacted by the onboarding of care management resources in advance of the fairly significant client launches that we knew were coming in Q2 and Q3 last year. In 2023, the significant majority of our newest clients all went live by Q1, so that same dynamic didn't apply to our margins this year. Sales and marketing expense of 5.5% of revenue in the first quarter. was 5.5% of revenue in the first quarter, a slight improvement from the 5.8% in the year-ago period, as continued increased investments in our go-to-market resources were offset by the leverage we continue to benefit from as the majority of expenses in sales and marketing relate to new client acquisitions. G&A was 11.4% of revenue this quarter as compared to 13.4% in the first quarter a year ago. The 200 basis point improvement is primarily due to efficiencies in our back office operations, reflecting the inherent nature of our expanding margins on G&A as we grow revenue, which more than offset higher non-cash stock-based compensation expense. With our strong top-line performance, as well as the operating efficiencies we've realized throughout the business, adjusted EBITDA grew 87% this quarter to $46.4 million, yielding a margin of 17.9%. This compared to 14.4% in the year-ago period. Net income was $17.7 million in the quarter, or 18 cents per share. This compared to net income of $5 million, or 5 cents earnings per share in the year-ago period. The increase was due to our higher operating income, which more than offset an increase in non-cash stock-based compensation expense, as well as a lower benefit for income taxes. Turning now to cash flow in our balance sheet. For the first quarter, net cash generated by operating activities was $21 million, which compares to an operating cash use of $11.3 million in the year-ago period. The more than $32 million improvement from the prior year was due primarily to our higher profitability, operating efficiencies that were implemented throughout the back half of 22 that continue to bear fruit, as well as normal timing items that can impact any given quarter. As of March 31st, we had total working capital of approximately $320 million, reflecting $208 million of cash, cash equivalents, and marketable securities, and no debt. Turning now to our expectations moving forward. Given our strong start to the year and the continuation of the strong utilization we currently see as the second quarter begins, we are pleased to be in a position to raise our guidance for 2023. For the full year, we are raising the range and now expect revenue to be between 1.04 billion to 1.065 billion, reflecting growth of between 32% and 35%, or 34% growth at the midpoint. We are also raising our guidance on profitability. We now expect adjusted EBITDA of between 176.5 million to 184 million, And for net income, we now expect between 43.6 million to 49 million, or between 42 and 48 cents earnings per share, on the basis of approximately 103 million fully diluted shares. I'll remind you that our net income projections do not contemplate any discrete income tax items, including the income tax benefit related to equity compensation activity. To the extent the related activity occurs, we will continue to benefit from those discrete tax items throughout 2023. At the midpoints of this guidance, we are expected to see the continued expansion of our margins in 2023 with adjusted EBITDA margin on incremental revenue of over 20%. For the second quarter of 2023, we are projecting revenue of between $260 million to $265 million, reflecting growth of between 33% and 36%. For adjusted EBITDA, we expect between $44 million to $45.5 million, along with net income of between $9.3 million to $10.4 million, or between 9 and 10 cents earnings per share on the basis of approximately 102 million fully diluted shares. With that, we'd like to open the call up for your questions. Operator, can you please provide the instructions?
Operator
Absolutely. Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you keep your hands set. If listening on speakerphone to provide optimum sound quality, please hold while we poll for questions. First question is from Anne Samuel with JP Morgan. Please proceed.
Anne Samuel
Hi, guys. Congrats on the terrific results tonight. I was hoping maybe we could just speak a little bit more about the Evernorth partnership, you know, what the genesis was behind that, why they chose to partner with you. Because I remember maybe it was a few years ago, they were looking to enhance their benefits. So just, you know, kind of curious how this came about and, you know, if there may be more opportunities like this out there.
Evernorth
Hi, this is Michael. It's been a growing relationship, um, over the years. Um, and, you know, as we continue to get more, um, familiar with each other, um, you know, the relationship really, uh, and partnership really grew out of that. Um, we're really excited about it and, um, um, think that we have, uh, a lot of, uh, potential ahead, um, where we do, we are continuing to look for, uh, relationships, um, like that and partnerships that, uh, align with our, our values and mission and, um, and can help bring productivity benefits to the market and to employers that need them.
Anne Samuel
That's helpful, Collar, and great to hear. Maybe just one more. You had really, really strong incremental margins in the quarter, and you spoke briefly about operating efficiencies, but I was hoping maybe you could just explain a little bit more about those, and does this structurally enhance your longer-term margin capture opportunity?
John
Sure. I'll start, and then I'll let Michael – not Michael, I'll let Mark – add some color. One of the things that's unique about this quarter versus a year ago quarter and really last year where we had a significant amount of larger clients adding the benefit based on their timeline, their fiscal years, et cetera, was a lot of the investment that we had to make to support those clients that weren't yet live in Q1 we're in the first quarter and therefore margins drag a little bit, right? We're seeing the opposite now happen, which is to the extent that we have our overall, our clients primarily live that we expect to be live for this year, or at least that we have visibility into, the margin is starting out really strong and And overall, for the full year based on our full year guidance, we do expect to see, you know, a better drop through rate. Even despite all of the additional incremental investment that we're making in the business and continue to make in the business. we expect to see that overall margin drop through. So when we talk about the margin expansion and the leverage in the business, it's really not only about Q1, but also about our expectations for the full year and being able to take advantage of leverage that we have throughout the business, despite all the additional incremental investments that we're going to be making.
Mark
Yeah, I think the only thing that I'd add to that is, again, specific operating efficiencies we're always looking for ways to improve how we deliver service and care. We've talked about using AI even in our service functions to improve the level of quality of the calls that we're doing. So there's a number of initiatives that we're constantly working on, and those do bear fruit in terms of improved margins. And I think the only thing else I'd point out is, again, with the clients that we're launching throughout last year, It's a little bit harder to see, but our sales and marketing efforts are not linear throughout the year. The selling season does amp up through Q2 and Q3, and some of our costs reflect that. So there's some minor tweaks here and there as the year goes on around adjusted EBITDA. But overall, again, as you look to the full year, still a strong year that we're expecting based on the guidance we provided tonight.
Anne Samuel
That's really helpful, Collar. Thanks so much, and congrats again on the great results.
Collar
Thanks, Andy.
Operator
The next question is from Scott Schoenhaus with KeyBank. Scott, your line is live.
Scott Schoenhaus
Hi, team. Yeah, congrats on these great results and strong start to the year. So I guess my first question is on utilization. Two parts here. You know, you onboarded a lot of new clients, so theoretically your utilization should be a little bit tempered, but we saw, you know, really strong start to the year. What drove this? And then should we still expect, you know, a stair-step function and utilization throughout the year? Thanks.
John
Yeah. As it relates to the impact of new clients, remember, even though we added a record number of clients, the percent of overall new lives to the total, you know, gets diluted, right, as you continue to grow as a company. Now that impact is more tempered, in fact, versus new and although you know the implication of what you're asking is although utilization from the new clients generally starts out slower and ramps up overall that impact on a blended basis isn't going to be as big as it relates to the strong utilization in q1 it was really across the board relative to you know the different industries that our client base is in so we didn't there wasn't anything noticeable in any geographic area or in any other, you know, or any other pattern to call out that we saw, really just overall stronger utilization for the benefit. It is going to vary a little bit. It's still within the, you know, tight range of what we normally see on a quarterly basis for utilization in a given quarter. But yeah, it was a little bit stronger than what even we expected when we put our guidance out at the beginning of the year. What we're currently seeing is continued strong demand, which is why we were confident in raising our full year guidance off of what we're seeing even now for Q2 and current utilization patterns continue to remain strong. We can never predict exactly sort of what quarterly utilization is going to be because there is timing items. And remember, we calculate utilization on one unique patient utilizing the benefit, female utilizing the benefit at any point throughout the quarter. And the amount of utilization varies per member based on their individual needs. So it's not a perfect measure. It's just a good KPI in terms of understanding the health of the business.
Scott Schoenhaus
That's really helpful. Thanks so much, Peter. And then I guess my, my followup question is on the pharmacy benefit. Clearly you saw a lot of nice revenue growth this quarter. Can you kind of walk us through what's embedded in guidance for that segment of the revenue stream for the rest of the year?
John
Yeah, the, the, um, the guidance contemplates obviously the, the, the take rate that we already have in the install base that's alive today. And relative to what we're expecting in terms of what we see from a utilization perspective, what we're expecting throughout the year, we then plan for the pharmacy piece of it relative to what we expect on the medical side and the overall utilization with the benefit. That's all the call I can give you. We don't guide and sort of quantify medical and pharmacy separately. We guide on a combined basis. because it doesn't always perfectly work out in one line or the other, but overall, it's driven off of what we expect on the medical side from a utilization perspective, and therefore, that drives corresponding pharma utilization.
spk20
Perfect. Thank you so much.
Operator
The next question is from Sarah James with Cancer Fitzgerald. Please proceed.
Sarah James
Hi. Thank you. I was hoping you could give us a little bit more color about the Evernorth arrangement and how the sales process integrates. So should we think about this as a push or a pull? So can their sales team be pushing or selling progeny benefits, or is it more a pull where if one of their clients is looking for fertility, they let them know that progeny is integrated?
John
Yeah, thanks for your question, Sarah, and welcome back, by the way. Nice to have you back. I'm going to let Michael answer that question.
Evernorth
Yeah. Hi, Sarah. So, it can be both. And, you know, our experience has been with other partners like our CVS Point Solution partner is that it is a blend of both. And as the relationship matures, you get a little bit more mix of both a push from clients from the Evernorth side and making them aware of the family path benefits with progeny as the preferred provider, as well as obviously our sales team out in the market and pursuing leads and active opportunities and sort of pulling that in through and pulling Evernorth back through from an ease of contracting perspective and an additional value perspective. So we would expect to see both. We'll see sort of the pace that that materializes as all of these channel partnerships materialize at different paces, but that would be our expectations.
Sarah James
Great. And one more, if I could, just the comments you made were really helpful thinking about seasonality and, you know, the timing of account starts that you experienced last year versus this year. Is there a way to break that out into the year-over-year margin differential? Like how much was just from a different timing of account starts and the startup costs related to that versus what was more efficiency or fundamentals?
John
It's probably not a perfect way, but I would maybe suggest that you look at the rate of addition sequentially by quarter to give you some indication of how much extra contribution those later starts would give you in margin impact. It's probably the easiest way I would do it. The only reason that it's not easy and perfect to do is because, remember, in every year there's incremental investment that we're constantly – spending on hiring throughout the year in anticipation of what we expect for the following year, et cetera, and adding new capabilities, et cetera. So all of that is blended into what you're going to see relative to the contribution drop through from those new client starts. But that's probably the best way I would suggest that you do that.
Mark
Yeah, I just would add, I think the clearest example of that would be the sequential growth from Q1 to Q2 last year. Again, we had built our company around, you know, effectively what was going to be going live substantially in Q2. And so you see that improvement, you know, sequentially quarter over quarter, particularly in the gross margin line.
spk11
Yeah, that was probably the most pronounced quarter last year.
Mark
Yeah, there's other, as Pete said, there's a number of factors as you get into Q2 to Q3, et cetera. But that's probably the clearest example you can look to.
Pete
Great. Thank you, guys.
Operator
The next question comes from Jalandhra Singh with Truist Securities. Please proceed.
Jalandhra Singh
Hi, this is Eduardo Ranon for Jalandhra. Thanks for taking the question. You guys announced your partnership with Parsley Health to introduce Progeny Plus, a physician-led primary care service for the entire women's health spectrum. Can you share more details on the arrangement, such as who's providing what service, and the revenue model. I mean, based on current pilots and what you're hearing from existing clients, what proportion of clients do you think would adopt Progeny Plus?
John
I'll start and then I'll let Michael add the color. You know, relative to what portion of clients are going to add it, it's extremely early to give you any indication of what that might look like. You know, as the year progresses, no different than our commentary around new sales, you know, we're happy to add some color in terms of what we're seeing in that space. I don't know. Do you want to take the first part?
Evernorth
Yeah, no, I mean, I think to Pete's point, you know, we recognize that there is certainly a broader need, and that need requires... you know, delivery of care in a different way and a physician-led way. And, you know, that's really what we saw in the parsley partnership. You know, we're really looking at this as, you know, as a pilot and we'll see how and the speed of which that it emerges and learnings that we have along the way. But, you know, fundamentally, it aligns with our belief around the combination of benefit coverage coupled with a physician-led model. And that's sort of what we're seeing from the broader women's health space and where some of these partnerships are coming from.
Jalandhra Singh
That's helpful. I guess maybe if I could sneak in another one. I believe April to June is your core selling season, you know, now that we're in May. I guess can you comment a little bit more in detail on the progress you're seeing so far and just how that compares to last year's selling season at this point?
John
Let me just add one comment to the way you asked the question. April to June is a very important part of the selling season, but by no means the most important part. This is the time, the beginning of the year, through June, July, et cetera, and even throughout until September and October, we're still adding pipeline and some of that converts. All of it's really important. And obviously, you know, closing sales, you know, which happens middle of August through beginning of October is the most critical time for us from a sales perspective. I wouldn't discount any of that. That said, I think the commentary that we gave, we tried to give as much color as we can. The most important color I would urge you to pay attention to is When we talk about where we're at in terms of pipeline and sales activity, early sales commitments, etc., we talk about all of that relative to where we were a year ago this time. It's really important for the reasons that I just said a little while ago that we're constantly adding pipeline and converting pipeline throughout the sales year. And so it's always important to understand, you know, given where you're at in the sales year, especially the way the cycle of benefit decisions are made, it's always important to understand, you know, point in time compared to point in time a year ago where you're at. And so all of our comments relative to, you know, having positive sales momentum and continued demand for the benefit all lie in that data.
spk17
That's helpful. Thank you.
Operator
Okay, up next we have Michael Cherney with Bank of America. Michael, please proceed.
Michael Cherney
Hi, this is Charlotte. I'm from Mike. Thanks for taking my question and congrats on the great quarter. This one's just another one around the 2024 selling season updates. I was just wondering if you could talk about if you're seeing any changes in the types of customers that are interested in the benefit. And then also you mentioned the not now early commitments. Could you talk about how your not now book is looking versus previous pipelines? Thank you.
John
Sure. I'll take the second part first. Our not nows this year, similar to this time last year, similar to the year before that this time, are greater than they were in any other year in terms of overall opportunities and active pipeline that we're working. Early commitments, as I mentioned in my prepared comments, are really positive relative to those not nows. And so we're real pleased with where things are going relative to not nows so far this year. What was the first part of the question? I'm sorry, what was the first part of your question again?
spk03
Yeah, that was just around how it relates to any changes in the type of customers. Oh, is there any changes?
John
Yes. So, I'll let Michael answer that.
Evernorth
So, outside of we, as we said in the prepared comments, sort of seeing that flywheel effect and, you know, a following, sort of speak, of new industries that we opened last year. We are continuing to see a very diverse set of clients across industries, which is similar to what we saw last year. And again, as we said in the prepared comments, continued momentum in some of those industries that we really started last year, whether that's Taft-Hartley labor segment, in the children's hospital, and more broadly, healthcare segment. or the hospitality area. So continue to see good diversity there, but I wouldn't say really any material changes from last year. That momentum started last year, I'd say.
spk04
Okay, great. Thank you, and congrats again on the quarter.
spk09
Thank you so much.
Operator
Once again, if you have a question or a comment, please press star one on your touchtone phone. The next question is coming from Stephanie Davies with SVB Securities. Please proceed.
Mark
Hi, guys. This is Annika Zempi, Officer Stephanie. Congrats on the quarter, and thank you for taking my questions. So first, I was hoping we could go back to the industries that you're still seeing some strong demand in, since we do keep seeing layoff headlines from the tech and professional services side of the world. Just hoping you could talk about what gives you confidence in the sustainability of demand in industries like hospitality in the context of a recession.
John
Sure. I think the first easy thing that gives us confidence is the early commitments that we've gotten in these industries. So I mentioned hospitality in particular, where last year we won our first large hospitality client. We won another large one this year. Second is, although there are... Although there are headlines around layoffs, and they've been going on really for the last year, 12 months, 14 months, where collectively maybe there's 150,000, not all our clients, but maybe 150,000 announced layoffs, there are more targeted reductions. And certainly we're not seeing them in any meaningful way, referring back to Mark's comments on what we're seeing in terms of overall covered lives. Although we see small reductions in certain areas, they're being more than offset by the organic growth in lives in the existing base. And so there is continued employment and a tight labor market in all those that you mentioned, but in our industries overall. And more importantly, we're continuing to see the demand through the different sales channels that we refer to, whether it's the traditional benefit consultants who are telling us that family building and fertility benefits continue to remain in the ad column, if you will, as employers are deciding what to do with their overall benefit packages, or the individual clients across industries that we're talking to There's no concentration in one industry. It's across industries. Last year, we expanded to 40 industries, and we continue to see the flywheel effect across those industries in the early activity, whether it's early sales commitments or new pipeline additions or existing not-now pipeline that continues to engage in the sales process. All of that is what gives us confidence in the upcoming sales year.
Mark
That's super helpful. Thank you. And then if I could just ask a quick follow-up. Do you think you can talk more about how you're thinking about your partnership dynamic with payers longer term and how you've been able to leverage the family path relationship to go to other large payers outside of Cigna?
Evernorth
So we continue to evaluate all relevant areas of partnerships. First off, and we'll continue to sort of explore that and be opportunistic around where there's alignment. On the Evernorth and Family Path side, that is on the Evernorth side of the equation. And so, again, that's unique to a health plan. I wouldn't call Family Path aligned to the health plan. But to your question, health plans remain, you know, an interesting area, and as the benefits continue to expand and demand continues to expand, it's an area that we'll stay open to and explore opportunities within.
Evernorth
Okay. The next question comes from Michael Weisberg with Crestwood Capital.
Operator
Please proceed.
spk06
Yes, congratulations. A couple of comments on your announced partnerships. With children's hospitals, could you give us a sense of the average one of those? You said there were 220. What's the average covered lives in a typical hospital?
John
Well, if you do the math, I'm a little over 2 million covered lives across all of them. You can sort of come up with an average, but they vary greatly in terms of size. So I don't have the exact number in front of me in terms of how much over 2 million, but you could do the math roughly. Roughly 10,000 lives, I would say, something like that on average.
spk06
Okay, and you signed one just at the time you made the announcement with the parent organization, but you've had success. Have you had success before. Could you give us a sense of how many of those hospitals are actually clients or about to become clients?
John
Well, the about to become, I'm not going to comment on, but I think we have at least five, if not seven of them signed up already. Some of which are already live, most of which are already live, some of which are new commitments that are happening in real time that we're commenting on as we talk about the overall sales season, but very early in terms of overall opportunity relative to that relationship.
Evernorth
Okay, that concludes today's conference.
Operator
There are no further questions in queue. Do you have any closing comments you'd like to finish with?
John
No, we're good. We are real pleased with the year so far in terms of how it started and look forward to reporting on future calls, the continued progress, you know, considering how well positioned we feel.
Operator
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.
spk09
Take care.
Operator
Good day, ladies and gentlemen, and welcome to the Progeny, Inc. First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode, and the floor will be open for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, James Hart. The floor is yours.
James Hart
Thank you, John, and good afternoon, everyone. Welcome to our first quarter conference call. With me today are Pete Inefsky, CEO of Progeny, Michael Stermer, 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 today reflect management's views as of today only and will include statements related to our financial outlook for both the second quarter and full year 2023 and the assumptions and drivers underlying such guidance, the demand for our solutions, our expectations for our selling season for 2024 launches, anticipated employment levels of our clients in the industries that we serve, the timing of our client decisions, our expected utilization rates and mix, the potential benefits of our solution, our ability to acquire new clients and retain and upsell existing clients, our market opportunity, and our business strategy, plans, goals, and expectations concerning our market position, future operations, and other financial and operating information. 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, assumptions, 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 that 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 and adjusted EBITDA margin on incremental revenue. 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 Pete.
John
Thanks Jamie. Thanks everyone for joining us today. We're pleased to report that we've had a very solid start to the year as well as another strong quarter. We achieved record quarterly revenue with growth of 50% over the first quarter of 2022. This growth was driven once again by the healthy demand that we continue to see for fertility and family building care as our members look to start or expand their families as well as an increase in our clients and covered lives following a record sales season in 2022. During the quarter, we also increased our margins as compared to the first quarter a year ago, as our continued focus on operational excellence produced not only our highest ever quarterly gross profit and adjusted EBITDA, we also achieved our best first quarter cash flow as well. We also successfully onboarded a record number of new clients during the quarter. further demonstrating that, even as we rapidly expand our member base, we're able to effectively scale the business while continuing to provide industry-leading service levels. Simply said, we believe our year has begun with clear and positive momentum across all the key areas that we look to in measuring our success, including sales momentum early in the 2023 selling season. And we're particularly pleased to be executing against our strategic priorities at this time, as we believe awareness of both the challenges of infertility and the need for equitable, high-quality coverage has never been more top of mind. In fact, the most recent data released just last month from the World Health Organization revealed that the prevalence of infertility is continuing to increase, now affecting one out of every six people of reproductive age globally. To put that in perspective, less than four years ago when we became a public company, the prevalence of infertility was reported as one in eight. We believe this increase over such a short period of time only underscores the powerful trends driving the growing need for fertility services. And while there are many factors driving this increasing prevalence, the growing number of people who are choosing to defer family building until later in life when natural conception becomes biologically more challenging is one of the most significant ones. Despite the long recognition of infertility as a disease by all the relevant public health authorities, it continues to be covered differently or not covered at all as compared to the other conditions recognized by those same authorities, such as diabetes, asthma, cancer, and others. And once again, employers are leading the way by adding this important coverage to their employees. This clear need, coupled with advances in both technology as well as the models of care delivery for infertility, have progressed to effectively meet the market's need for proven viable solutions. And despite that, the majority of those in need continue to face insufficient coverage. We continue to partner with an increasing number of employers across the country to make infertility treatment available to those that need it, working closely with clients, consultants, and industry groups to make coverage for infertility an essential benefit. While we know how impactful comprehensive care is to the individual who needs it, it's equally true that society as a whole benefits as the challenges of global population decline become better understood and appreciated. While national birth rates are declining in the U.S., That's entirely driven by women under 34. Birth rates for women over 35 are increasing, more than 2% a year compounded, supported by the greater access to care and advances in assisted reproduction. The Prodigy solution has been making a profound impact as the prevalence of infertility has grown. In just the past four years, we've helped improve access via a nearly five-fold increase in our client base. And while a lot of healthcare companies have aspired to deliver value-based care, we're actually fulfilling its promise for our clients each and every day. And we're doing this through a combination of superior clinical outcomes, which produce an average of 25 to 30% savings, including controlling for unit cost inflation, where companies have grown accustomed to annual increases, but not with progeny. Over the past two years, we've more than doubled client and member base and are providing the clinics in our network with significantly more patient volume. And by leveraging this growing scale, we've been able to negotiate more favorable rates, passing along to our clients a shared percentage of unit price savings for 2023. But beyond this greater economic value, our impact is felt in other ways by employers who, in choosing us as the fertility solution, are ensuring that their workforce is getting access to the most supportive and comprehensive care available. The impact is also felt by employees as well who are able to build their families through our solution that has shown through our comprehensive reporting to be the most effective at supporting successful family building through infertility care with an increase in faster, healthier pregnancies and healthier babies. And it's because of this growing need and our proven impact that we continue to believe that our 5.4 million covered lives today represent a mere fraction of our true market opportunity. Although this 2023 selling season is just getting underway, we're very pleased with the level of activity we've seen thus far, which continues to confirm that there is still a significant unmet need in the market, as well as a growing recognition of the importance of coverage across industries, geographies, and company sizes. And that's because even though companies are being more cost-conscious during this macroeconomic time, adding family building remains a priority. The activity we're seeing across all of our sales channels is favorable when compared to the level of activity we saw at this time last year, which became a record sales season for us. We're also actively engaging with not-now prospects from prior selling seasons. As usual, these represent the majority of the early commitments we've received for 2024 thus far and are just one indicator of the positive demand we're seeing in the market. Although it's early in the season, these wins are from well-known brands in such diverse areas as travel and hospitality, manufacturing, consumer packaged goods, and a large university school system. We're also seeing further success in early wins with Taft-Hartley labor populations, which when added to our original addressable market of large self-insured employers, expands our overall TAM to approximately 100 million lives, the majority of which continue to be uncovered and underserved. Last year was our first year in market, where we directly targeted and invested in our solution for these labor populations, and we're pleased to see our momentum there is continuing. And in a further demonstration of what we call our flywheel effect, where after winning our initial client in an industry, When we see others in that same industry look to maintain health benefit parity by adding the benefit, we had early wins from another hospitality client, as well as one of the largest children's hospital systems in the country, which continues our strong track record of recent success with that particular subsector of healthcare. On our last call with you, we discussed how Children's Hospital Association has selected Progeny to be the preferred solution to the more than 220 member hospitals in its coalition, representing two-plus million covered lives collectively. While CHA-affiliated hospitals can choose whether or not to consider us, CHA's approval of us, along with all the work they did to vet our solution and processes, carries significant weight. Last quarter, we told you CHA wasn't the only relationship we were pursuing, and we recently announced that Prodigy has been chosen to be the preferred facility and family building solution for the Family Path suite of services within Evernorth. Evernorth, which includes companies such as ESI, Accredo, and others, was formed to help accelerate the delivery of innovative and flexible solutions across various aspects of healthcare, including fertility. And under this focus, Family Path was created to be the fertility solution within that portfolio of high-performing growth services. This partnership is particularly important because of the depth of experience Evernorth has in the fertility space through both Family Path and Freedom Fertility, and their focus in this space has allowed Evernorth to become familiar with progeny's differentiation and understand firsthand the impact we can have on their employer population. Accordingly, we couldn't be more pleased that Evernorth made the decision to enhance its Family Path suite of services by including Progeny as the preferred facility and family building provider within their solution. Similar to our other non-traditional channel partners, most notably our partnership with CVS Point Solutions, their decision to work with Progeny came out of a comprehensive review of Progeny's clinical approach, outcomes, plan design, security, privacy standards, and brand. And while this relationship has the benefit of expanding our go-to-market activities, It also streamlines the contracting and onboarding process for our mutual clients, including those who are looking to add a fertility benefit for the first time. Taken together, we believe these positive indicators, which include the size and health of our current active pipeline, the active engagement and forward progress with the not-nows, and the number and diversity of the early commitments, further demonstrates both the strong demand in the market as well as our leading position as the provider of choice for fertility and family building solutions. In every sales year, we aim to grow the absolute number of new clients and covered lives as compared to the prior year, and this year is no different. Although it remains very early, given the strength we are seeing in the sales season thus far, we believe we're on track to meet that objective. To conclude, we're very pleased with our results this quarter, which we believe demonstrate that we have continued to execute against all of our strategic initiatives. And the early momentum we're seeing in our sales season supports our belief that progeny is in its strongest ever competitive position, that our market opportunity remains largely unpenetrated, and that all of the macro factors that have contributed to our growth remain intact.
Jamie
Let me now turn the call over to Mark to walk you through the quarter. Mark. Thank you, Pete, and good afternoon, everyone.
Mark
I'll begin by taking you through the first quarter results and then provide our expectations for both the second quarter and the full year. First quarter revenue was $258.4 million, reflecting growth of 50%. The growth versus the prior year period was primarily due to an increase in the number of clients and covered lives as compared to a year ago, which was amplified by the number of non-calendar year starts throughout 2022. We had 379 clients with at least 1,000 lives in the first quarter, representing an average of 5.3 million covered lives. That client count includes a handful of relatively smaller clients that were won toward the end of the 2022 selling season. This compared to 264 clients and an average of 3.9 million covered lives a year ago, reflecting 36% growth in lives over the prior year. Taking into account the clients who launched after March 31st, today we have over 380 live clients who represent 5.4 million covered lives. We've all seen the headlines where some high-profile companies have publicly discussed the targeted layoffs they've undertaken to varying degrees. And some, though not all, of those companies are our clients. While we did see an impact from those reductions from some of our clients during the quarter, This was fully offset by other clients who have continued to expand their workforce through additional hiring, which was consistent with what we had expected. This dynamic mirrored the recent jobs reports from the Labor Department, including the one issued just last week, which have continued to show meaningful hiring within certain industries that are very well represented in our client base, including healthcare, hospitality, and professional services, to name just a few, and that the overall rate of unemployment continues to be at or near record lows. Nevertheless, as it relates to membership growth within our base, a key element of organic growth, we continue to anticipate that overall, our existing clients will hold relatively flat at 5.4 million lives over the balance of the year, with any additions from existing clients netting against any reductions in 2023. Turning now to the components of the top line, medical revenue increased 42% over the first quarter last year to $157.1 million, which again was due to the growth in clients and covered lives, while pharmacy revenue over the same period increased 65% to $101.2 million. The growth in pharmacy revenue was primarily driven by an increase in the number of clients who have the integrated solutions. A year ago, 83% of our clients had progeny Rx, whereas today, 90% of them do. Our higher penetration for Rx reflects not only the 97% take rate we saw among clients added in the most recent selling season, but also our continued success with upselling among existing clients, given both the superior member experience from our pharmacy program, as well as the meaningful savings progeny Rx provides, to both clients and members. Turning now to our utilization metrics, approximately 13,200 art cycles were performed during the quarter, our highest ever quarterly total, reflecting a 48% increase in cycles as compared to the first quarter of last year. The female utilization rate in the quarter, which is what principally drives our financial results, was 0.48% as compared to 0.45% a year ago. I'll remind you that utilization can vary from period to period due to a number of factors, such as the timing of when new clients go live, the time of the year, and the demographic mix of the newest clients. This quarter's rate was in line with our historical ranges. Turning now to our margins and operating expenses. Gross profit increased 78% from the first quarter last year to $58.6 million, yielding a 22.7% gross margin. The 360 basis point increase in margin from the year-ago period primarily reflects the efficiencies that we continue to realize in the delivery of our care management services, as well as the impact of our renewal providers and pharmacy program partners at more favorable terms. In addition, as we discussed at the time, first quarter gross margin a year ago was impacted by the onboarding of care management resources in advance of the fairly significant client launches that we knew were coming in Q2 and Q3 last year. In 2023, the significant majority of our newest clients all went live by Q1, so that same dynamic didn't apply to our margins this year. Sales and marketing expense of 5.5% of revenue in the first quarter, was 5.5% of revenue in the first quarter, a slight improvement from the 5.8% in the year-ago period, as continued increased investments in our go-to-market resources were offset by the leverage we continue to benefit from as the majority of expenses in sales and marketing relate to new client acquisitions. G&A was 11.4% of revenue this quarter as compared to 13.4% in the first quarter a year ago. The 200 basis point improvement is primarily due to efficiencies in our back office operations reflecting the inherent nature of our expanding margins on G&A as we grow revenue, which more than offset higher non-cash stock-based compensation expense. With our strong top-line performance, as well as the operating efficiencies we've realized throughout the business, adjusted EBITDA grew 87% this quarter to $46.4 million, yielding a margin of 17.9%. This compared to 14.4% in the year-ago period. Net income was $17.7 million in the quarter, or $0.18 per share. This compared to net income of $5 million, or $0.05 earnings per share in the year-ago period. The increase was due to our higher operating income, which more than offset an increase in non-cash stock-based compensation expense, as well as a lower benefit for income taxes. Turning now to cash flow in our balance sheet. For the first quarter, net cash generated by operating activities was 21 million, which compares to an operating cash use of 11.3 million in the year-ago period. The more than $32 million improvement from the prior year was due primarily to our higher profitability, operating efficiencies that were implemented throughout the back half of 22 that continue to bear fruit, as well as normal timing items that can impact any given quarter. As of March 31st, we had total working capital of approximately $320 million, reflecting $208 million of cash, cash equivalents, and marketable securities, and no debt. Turning now to our expectations moving forward. Given our strong start to the year and the continuation of the strong utilization we currently see as the second quarter begins, we are pleased to be in a position to raise our guidance for 2023. For the full year, we are raising the range and now expect revenue to be between 1.04 billion to 1.065 billion, reflecting growth of between 32% and 35%, or 34% growth at the midpoint. We are also raising our guidance on profitability. We now expect adjusted EBITDA of between 176.5 million to 184 million, and for net income, we now expect between 43.6 million to $49 million, or between 42 and 48 cents earnings per share, on the basis of approximately 103 million fully diluted shares. I'll remind you that our net income projections do not contemplate any discrete income tax items, including the income tax benefit related to equity compensation activity. To the extent the related activity occurs, we will continue to benefit from those discrete tax items throughout 2023. At the midpoints of this guidance, we are expected to to see the continued expansion of our margins in 2023 with adjusted EBITDA margin on incremental revenue of over 20%. For the second quarter of 2023, we are projecting revenue of between $260 million to $265 million, reflecting growth of between 33% and 36%. For adjusted EBITDA, we expect between $44 million to $45.5 million along with net income of between 9.3 million to 10.4 million, or between 9 and 10 cents earnings per share on the basis of approximately 102 million fully diluted shares. With that, we'd like to open the call up for your questions. Operator, can you please provide the instructions?
Operator
Absolutely. Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you keep your hands set. If listening on speakerphone to provide optimum sound quality, please hold while we poll for questions. First question is from Anne Samuel with JP Morgan. Please proceed.
Anne Samuel
Hi, guys. Congrats on the terrific results tonight. I was hoping maybe we could just speak a little bit more about the Evernote partnership, you know, what the genesis was behind that, why they chose to partner with you. Because I remember maybe it was a few years ago, they were looking to enhance their benefits. So just, you know, kind of curious how this came about and, you know, if there may be more opportunities like this out there.
Evernorth
Hi, this is Michael. It's been a growing relationship, um, over the years. Um, and, you know, as we continue to get more, um, familiar with each other, um, you know, the relationship really, uh, and partnership really grew out of that. Um, we're really excited about it and, um, um, think that we have, uh, a lot of, uh, potential ahead. Um, where we do, we are continuing to look for, uh, relationships, um, like that and partnerships that, uh, align with our, our values and mission and, um, and can help bring productivity benefits to the market and to employers that need them.
Anne Samuel
That's helpful, Culler, and great to hear. Maybe just one more. You had really, really strong incremental margins in the quarter, and you spoke briefly about operating efficiencies, but I was hoping maybe you could just explain a little bit more about those, and does this structurally enhance your longer-term margin capture opportunity?
John
Sure. I'll start, and then I'll let Michael – not Michael, I'll let Mark – at some color. One of the things that's unique about this quarter versus a year ago quarter and really last year where we had a significant amount of larger clients adding the benefit based on their timeline, their fiscal years, et cetera, was a lot of the investment that we had to make to support those clients that weren't yet live in Q1 we're in the first quarter and therefore margins drag a little bit, right? We're seeing the opposite now happen, which is to the extent that we have our overall, our clients primarily live that we expect to be live for this year, or at least that we have visibility into, the margin is starting out really strong and And overall, for the full year based on our full year guidance, we do expect to see, you know, a better drop through rate. Even despite all of the additional incremental investment that we're making in the business and continue to make in the business. we expect to see that overall margin drop through. So when we talk about the margin expansion and the leverage in the business, it's really not only about Q1, but also about our expectations for the full year and being able to take advantage of leverage that we have throughout the business, despite all the additional incremental investments that we're going to be making.
Mark
Yeah, I think the only thing that I'd add to that is, again, specific operating efficiencies You know, we're always looking for ways to improve, you know, how we deliver service and care. You know, we've talked about using AI even in our service functions to improve the level of quality of the calls that we're doing. So there's a number of initiatives that we're constantly working on, and those do bear fruit in terms of improved margins. And I think the only thing else I'd point out is, you know, again, with the clients that we're launching throughout last year, It's a little bit harder to see, but our sales and marketing efforts are not linear throughout the year. The selling season does amp up through Q2 and Q3, and some of our costs reflect that. So there's some minor tweaks here and there as the year goes on around adjusted EBITDA. But overall, again, as you look to the full year, still a strong year that we're expecting based on the guidance we provided tonight.
Anne Samuel
That's really helpful, Collar. Thanks so much, and congrats again on the great results.
Collar
Thanks, Andy.
Operator
The next question is from Scott Schoenhaus with KeyBank. Scott, your line is live.
Scott Schoenhaus
Hi, team. Yeah, congrats on these great results and strong start to the year. So I guess my first question is on utilization. Two parts here. You know, you onboarded a lot of new clients, so theoretically your utilization should be a little bit tempered, but we saw, you know, really strong start to the year. What drove this and then should we still expect, you know, a stairstep function and utilization throughout the year? Thanks.
John
Yeah. As it relates to the impact of new clients, remember, even though we added a record number of clients, the percent of overall new lives to the total, you know, gets diluted, right, as you continue to grow as a company. now that that impact is more tempered, in fact, versus new. And although, you know, the implication of what you're asking is although utilization from the new clients generally starts out slower and ramps up, overall that impact on a blended basis isn't going to be as big. As it relates to the strong utilization in Q1, it was really across the board relative to, you know, the different industries that our client base is in. So there wasn't anything noticeable in any geographic area or in any other, you know, or any other pattern to call out that we saw. Really just overall stronger utilization for the benefit. It is going to vary a little bit. It's still within the, you know, tight range of what we normally see on a quarterly basis for utilization in a given quarter. But yeah, it was a little bit stronger than what even we expected when we put our guidance out at the beginning of the year. What we're currently seeing is continued strong demand, which is why we were confident in raising our full-year guidance off of what we're seeing even now for Q2, and current utilization patterns continue to remain strong. We can never predict exactly sort of what quarterly utilization is going to be because there is timing items, and remember, we calculate utilization on one unique patient per you know utilizing the benefit female utilize utilizing the benefit at any point throughout the quarter and and the amount of utilization varies per member based on their individual needs so so it's not a perfect measure it's just a good KPI you know in terms of understanding the health of the business that's really helpful thanks so much Peter and then I guess my my follow-up question is on the pharmacy benefit clearly you saw a lot of nice revenue growth this quarter
Scott Schoenhaus
Can you kind of walk us through what's embedded in guidance for that segment of the revenue stream for the rest of the year?
John
Yeah, the guidance contemplates obviously the take rate that we already have in the install base that's alive today. And relative to what we're expecting in terms of what we see, you know, from a utilization perspective, what we're expecting throughout the year is We then plan for the pharmacy piece of it relative to what we expect on the medical side and the overall utilization with the benefit. That's all the call I can give you. We don't guide and quantify medical and pharmacy separately. We guide on a combined basis. because it doesn't always perfectly work out in one line or the other, but overall, it's driven off of what we expect on the medical side from a utilization perspective, and therefore, that drives corresponding pharma utilization.
spk20
Perfect. Thank you so much.
Operator
The next question is from Sarah James with Cancer Fitzgerald. Please proceed.
Sarah James
Hi. Thank you. I was hoping you could give us a little bit more color about the Evernorth arrangement and how the sales process integrates. So should we think about this as a push or a pull? So can their sales team be pushing or selling progeny benefits, or is it more a pull where if one of their clients is looking for fertility, they let them know that progeny is integrated?
John
Yeah, thanks for your question, Sarah, and welcome back, by the way. Nice to have you back. I'm going to let Michael answer that question.
Evernorth
Yeah. Hi, Sarah. So, it can be both. And, you know, our experience has been with other partners like our CVS Point Solution partner is that it is a blend of both. And as the relationship matures, you get a little bit more mix of both a push from a clients from the Evernorth side and making them aware of the Family Path benefits with Progeny as the preferred provider, as well as obviously our sales team out in the market and pursuing leads and active opportunities and sort of pulling that in through and pulling Evernorth back through from an ease of contracting perspective and an additional value perspective. So we would expect to see both. We'll see sort of the pace that that materializes as all of these, you know, channel partnerships materialize at different paces, but that would be our expectations.
Sarah James
Right. And one more, if I could, just the comments you made were really helpful thinking about seasonality and, you know, the timing of account starts that you experienced last year versus this year. Is there a way to break that out into the year-over-year margin differential? Like how much was just from a different timing of account starts and the startup costs related to that versus what was more efficiency or fundamentals?
John
It's probably not a perfect way, but I would maybe suggest that you look at the rate of addition sequentially by quarter to give you some indication of how much extra contribution those later starts would give you in margin impact. It's probably the easiest way I would do it. The only reason that it's not easy and perfect to do is because, remember, in every year there's incremental investment that we're constantly – spending on hiring throughout the year in anticipation of what we expect for the following year, et cetera, and adding new capabilities, et cetera. So all of that is blended into what you're going to see relative to the contribution drop through from those new client starts. But that's probably the best way I would suggest that you do that.
Mark
Yeah, I just would add, I think the clearest example of that would be the sequential growth from Q1 to Q2 last year. Again, we had built our company around, you know, effectively what was going to be going live substantially in Q2. And so you see that improvement, you know, sequentially quarter over quarter, particularly in the gross margin line.
spk11
Yeah, that was probably the most pronounced quarter last year.
Mark
Yeah, there's other, as Pete said, there's a number of factors as you get into Q2 to Q3, et cetera. But that's probably the clearest example you can look to.
Pete
Great. Thank you, guys.
Operator
The next question comes from Jalandhra Singh with Truist Securities. Please proceed.
Jalandhra Singh
Hi, this is Eduardo Ranon for Jalandhra. Thanks for taking the question. You guys announced your partnership with Parsley Health to introduce Progeny Plus, a physician-led primary care service for the entire women's health spectrum. Can you share more details on the arrangement, such as who's providing what service, and the revenue model. Based on current pilots and what you're hearing from existing clients, what proportion of clients do you think would adopt Progeny Plus?
John
I'll start, and then I'll let Michael add the color. Relative to what portion of clients are going to add it, it's extremely early to give you any indication of what that might look like. You know, as the year progresses, no different than our commentary around new sales, you know, we're happy to add some color in terms of what we're seeing in that space. I don't know. Do you want to take the first part?
Evernorth
Yeah, no, I mean, I think to Pete's point, you know, we recognize that there is certainly a broader need, and that need requires... you know, delivery of care in a different way and a physician-led way. And, you know, that's really what we saw in the parsley partnership. You know, we're really looking at this as, you know, as a pilot and we'll see how and the speed of which that it emerges and learnings that we have along the way. But, you know, fundamentally, it aligns with our belief around the combination of benefit coverage coupled with a physician-led model. And that's sort of what we're seeing from the broader women's health space and where some of these partnerships are coming from.
Jalandhra Singh
That's helpful. I guess maybe if I could sneak in another one. I believe April to June is your core selling season, you know, now that we're in May. I guess can you comment a little bit more in detail on the progress you're seeing so far and just how that compares to last year's selling season at this point?
John
Let me just add one comment to the way you asked the question. April to June is a very important part of the selling season, but by no means the most important part. This is the time, the beginning of the year, through June, July, et cetera, and even throughout until September and October, we're still adding pipeline and some of that converts. All of it's really important. And obviously, you know, closing sales, you know, which happens middle of August through beginning of October is the most critical time for us from a sales perspective. I wouldn't discount any of that. That said, I think the commentary that we gave, we tried to give as much color as we can. The most important color I would urge you to pay attention to is When we talk about where we're at in terms of pipeline and sales activity, early sales commitments, et cetera, we talk about all of that relative to where we were a year ago this time. It's really important for the reasons that I just said a little while ago that we're constantly adding pipeline and converting pipeline throughout the sales year. And so it's always important to understand, you know, given where you're at in the sales year, especially the way the cycle of benefit decisions are made, it's always important to understand, you know, point in time compared to point in time a year ago where you're at. And so all of our comments relative to, you know, having positive sales momentum and continued demand for the benefit all lie in that data.
spk17
That's helpful. Thank you.
Operator
Okay. Up next, we have Michael Cherney with Bank of America. Michael, please proceed.
Michael Cherney
Hi, this is Charlotte. I'm from Mike. Thanks for taking my question and congrats on the great quarter. This one's just another one around the 2024 selling season updates. I was just wondering if you could talk about if you're seeing any changes in the types of customers that are interested in the benefit. And then also you mentioned the not now early commitments. Could you talk about how your not now book is looking versus previous pipelines? Thank you.
John
Sure. I'll take the second part first. Our not nows this year, similar to this time last year, similar to the year before that this time, are greater than they were in any other year in terms of overall opportunities and active pipeline that we're working. Early commitments, as I mentioned in my prepared comments, are really positive relative to those not nows. And so we're real pleased with where things are going relative to not nows so far this year. What was the first part of the question? I'm sorry, what was the first part of your question again?
spk03
Yeah, that was just around how it relates to any changes in the types of customers. Oh, is there any changes?
John
Yeah. So, I'll let Michael answer that.
Evernorth
So, outside of we, as we said in the prepared comments, sort of seeing that flywheel effect and, you know, a following, sort of speak, of new industries that we opened last year. We are continuing to see a very diverse set of clients across industries, which is similar to what we saw last year. And again, as we said in the prepared comments, continued momentum in some of those industries that we really started last year, whether that's Taft-Hartley labor segment, in the children's hospital, and more broadly, healthcare segment. or the hospitality area. So continue to see good diversity there, but I wouldn't say really any material changes from last year. That momentum started last year, I'd say.
spk04
Okay, great. Thank you, and congrats again on the quarter.
spk09
Thank you so much.
Operator
Once again, if you have a question or a comment, please press star one on your touchtone phone. The next question is coming from Stephanie Davies with SVB Securities. Please proceed.
Mark
Hi, guys. This is Annika's MP on for Stephanie. Congrats on the quarter, and thank you for taking my questions. So first, I was hoping we could go back to the industry that you're still seeing some strong demand in, since we do keep seeing layoff headlines from the tech and professional services side of the world. Just hoping you could talk about what gives you confidence in the sustainability of demand in industries like hospitality in the context of the recession.
John
Sure. I think the first easy thing that gives us confidence is the early commitments that we've gotten in these industries. So I mentioned hospitality in particular, where last year we won our first large hospitality client. We won another large one this year. Second is, although there are... Although there are headlines around layoffs, and they've been going on really for the last year, 12 months, 14 months, where collectively maybe there's 150,000, not all our clients, but maybe 150,000 announced layoffs, there are more targeted reductions. And certainly we're not seeing them in any meaningful way, referring back to Mark's comments on what we're seeing in terms of overall covered lives. Although we see small reductions in certain areas, they're being more than offset by the organic growth in lives in the existing base. And so there is continued employment and a tight labor market in all those that you mentioned, but in our industries overall. And more importantly, we're continuing to see the demand through the different sales channels that we refer to, whether it's the traditional benefit consultants who are telling us that family building and fertility benefits continue to remain in the ad column, if you will, as employers are deciding what to do with their overall benefit packages, or the individual clients across industries that we're talking to There's no concentration in one industry. It's across industries. Last year, we expanded to 40 industries, and we continue to see the flywheel effect across those industries in the early activity, whether it's early sales commitments or new pipeline additions or existing not-now pipeline that continues to engage in the sales process. All of that is what gives us confidence in the upcoming sales year.
Mark
Thank you. And then if I could ask a quick follow-up. Can you talk more about how you're thinking about your partnership dynamic with payers longer term and how you've been able to leverage the family path relationship to go to other large payers outside of Cigna?
Evernorth
So, we continue to evaluate all relevant areas of partnerships. First off, and we'll continue to sort of explore that and be opportunistic around where there's alignment. On the Evernorth and Family Path side, that is on the Evernorth side of the equation. And so, again, that's unique to a health plan. I wouldn't call Family Path aligned to the health plan. But to your question, health plans remain an interesting area, and as the benefits continue to expand and demand continues to expand, it's an area that we'll stay open to and explore opportunities with them.
Evernorth
Okay, the next question comes from Michael Weisberg with Crestwood Capital.
Operator
Please proceed.
spk06
Yes, congratulations. A couple of comments on your announced partnerships. With children's hospitals, could you give us a sense of the average one of those? You said there were 220. What's the average covered lives in a typical hospital?
John
Well, if you do the math, I'm a little over 2 million covered lives across all of them. You can sort of come up with an average, but they vary greatly in terms of size. So I don't have the exact number in front of me in terms of how much over 2 million, but you can do the math roughly. Roughly 10,000 lives, I would say, something like that on average.
spk06
Okay, and you signed one just at the time you made the announcement with the parent organization, but you've had success. Have you had success before. Could you give us a sense of how many of those hospitals are actually clients or about to become clients?
John
Well, the about to become, I'm not going to comment, Don, but I think we have At least five, if not seven, of them signed up already, some of which are already live, most of which are already live, some of which are new commitments that are happening in real time that we're commenting on as we talk about the overall sales season, but very early in terms of overall opportunity relative to that relationship.
Evernorth
Okay, that concludes today's conference.
Operator
There are no further questions in queue. Do you have any closing comments you'd like to finish with?
John
No, we're good. We are real pleased with the year so far in terms of how it started and look forward to reporting on future calls, the continued progress, you know, considering how well positioned we feel.
Operator
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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