This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Good afternoon, everyone, and welcome to the Progeny, Inc. Second Quarter 2024 Earnings Conference 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.
James Hart
Thank you, Matt, and good afternoon, everyone. Welcome to our Second 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 third quarter and full year 2024, and the assumptions and drivers underlying such guidance, the demand for our solutions, our expectations for our selling season for 2025 launches, the timing of client decisions, our expected utilization rates and mix, the expected benefits of our pharmacy program partner agreements, including future conversion of adjusted EBITDA to operating cash flow, 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 in 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.
Pete
Thanks, Jamie, and thanks, everyone, for joining us this afternoon. During the second quarter, we continued to make significant progress in many of the areas that are most impactful to building the long-term value of our business and laying foundation for our future growth in women's health. This includes our early success in the most recent selling season, the enthusiasm we're seeing for our newest services amongst existing clients, the advancement of new channel partner relationships, and the investments we're making to further enhance our already leading solutions in women's health and address even more of our clients' and members' needs. As it relates to our second quarter results, while the rate of utilization ticked up modestly from the first quarter, consistent with our prior assumptions, and our second quarter revenue adjusted EBITDA within our guidance, based on our current visibility to the remainder of the year, we now believe the second half will unfold differently than expected. Accordingly, we are adjusting our revenue guidance lower by approximately 5% at the midpoint, with corresponding reductions to adjusted EBITDA as well. Given the year has continued to unfold differently than we had originally expected, we recognize there's frustration and disappointment, and we share in those sentiments. The transparency we provide to the market as to what we're seeing and how that informs our financial guidance carries the highest level of importance to us. And the planning models we build leverage a vast data set of past activity, capturing appointments, scheduling to care consumption, so that we can provide what we believe to be the best, most predictive view of the future, given the limited amount of actual visibility we have around care consumption at any given time. Unfortunately, given the inherent variability in any business that doesn't have an annuitized revenue stream, let alone one whose revenue is driven by utilization in an area where the timing and pursuit of care is so deeply specific to the individual, we can and are seeing variability more than expected from historical trends. In 2023, we saw this dynamic play out, albeit with a positive effect, where a relatively small portion of the base was engaging more favorably than the historical pattern indicated. And as a result, we were able to raise our guidance multiple times last year. In 2024, we're seeing the opposite effect. I'll take a moment to walk you through what we're seeing. To be clear, member engagement has been healthy in 2024 at levels that are well within our historical norms. And that continues to be the case into Q3. However, where we're seeing a deviation from historical pattern is in the ART cycles for female utilizing member resulting in a negative impact to our previous outlook. We added a table in our press release this quarter to illustrate this dynamic more clearly for you. And the table shows how historically we see an increase in the average number of R-cycles per utilizer over the course of the year, reflecting the progression of our members collectively as they move through their fertility journeys. And while utilization as a percentage is thus far level with Q2, you can see from the table that we would ordinarily expect for average cycles per utilizer to increase to something like 0.56 in Q3 and then tick up a bit higher in Q4 as well. While it has increased over the first half of the year, we're anticipating a lower rate of increase than what we ordinarily would expect or none at all over the second half of the year, and this is driving approximately 7% lower revenue per utilizing member. The obvious question then is why aren't we seeing the customary pattern in 24? There are a number of factors that could be causing this, such as higher clinical success rates, which would result in fewer treatments per utilizer, different treatment paths based on the member's medical need, or different timing of the treatment journey based on the member's preference. The table highlights we aren't seeing or expecting a decrease in cycles per utilizer, and because the rate of utilization is also expected to remain consistent with past patterns, we aren't viewing this as an indicator of a lesser demand audit. But we also can't predict how long this lower average will last. So accordingly, we believe in outlook on the high end, showing we've consistently seen throughout the year, and the low end showing a decline in both utilization rate and R-cycles per female utilizing member. At the midpoint, we estimate the impact of this to be approximately 55 million headwinds to the revenue from our previous guidance. We're also making an adjustment to our forecast to reflect that a small number of clients reported lower covered lives this quarter, either from recent reductions or as employees from previous rounds of reductions may be coming off of their COVID recovery. To be clear, we aren't seeing any large-scale workforce reduction programs reported by any client. However, the collective impact across our full base this quarter was approximately 100,000 covered lives or approximately 10 million of headwinds to the top line. While reductions aren't new, there are always some clients lowering headcount in any given year, We've historically seen growth from other clients act as an offset. Though a meaningful number of clients have increased their headcount this year, it hasn't been enough to fully mitigate the reductions. Mark will walk you through the details of our guidance shortly, but I want to reemphasize that while the factors affecting our outlook today are beyond our ability to influence our control, and we can never have perfect visibility into care consumption within the utilization model, what is within our control is the transparency who provide for the market regarding the drivers of our business. Our hope is that doing so will allow investors to turn their focus back towards those areas that are within our control, where we continue to successfully execute against our strategic priorities and why we believe in the long-term strength and trajectory of the business isn't in any way affected. Those areas include building the long-term value of the business and positioning progeny as both an industry leader and a catalyst in raising the bar in the delivery of solutions for women's health care. So turning now to those areas, beginning with our latest selling season, since that has the greatest impact to our long-term growth, also demonstrating our leading industry position. Our goals are clear each season. First, we want to expand our market share through new client acquisition. Second, we seek not only to maintain our high rate of retention, but also to grow our relationships with existing clients through expansions and upsells. And lastly, we look to develop new partnerships to enhance our market presence and create efficiencies in our sales efforts. At this point in the season, we're pleased with our progress across all these areas. With respect to the first priority, adding new clients, we're now in the heart of the selling season. Employer demand remains strong with a consistent pipeline of opportunities compared to last year's selling season. We're also continuing to add to our new sales pipeline as companies are evaluating their benefit offering throughout the year. As usual, we anticipate that the majority of client decisions will be laid this summer and early fall. As most companies look to finalize their benefits ahead of their open enrollment activities in Q4. I'm pleased to report that at this point in the season, commitments received to date are pacing ahead of where we were at this time last year. And although this is just one indicator of demand, we believe these early commitments demonstrate that the appetite for family building and women's health solutions remain robust. As usual, we'll provide you with a recap of the complete selling season on our next call in November, but at this point in the season, we are pleased with where we are. In any selling season, Our goal is to meet or exceed the number of covered lives from the prior season. And although the majority of commitments for sales seasons are still ahead of us, we believe we're on pace to meet this objective. Consistent with our most recent seasons, our earliest wins for 2025 are coming from a wide range of industries, including financial services, hospitality, media, state and local government, and labor unions, just to name a few. which we continue to believe speaks both to the broad appeal for our solutions as well as our differentiation in the market. Our wins so far this season are broadly diverse in terms of size, ranging from 1,000 wives to in excess of 100,000. We're also continuing to see from our commitments to date a high take rate on ProgenyRx, further validating the significance of our differentiation in terms of cost and member experience with that product. And from my perspective, a very promising development this year is that a meaningful number of wins are also choosing to take one or more of the newest products in our solution, such as menopause, maternity, and postpartum support. Equally encouraging is that we're seeing the same dynamic with existing clients. At this point in the season, accounts representing approximately 1 million of our existing covered lives have chosen to offer one or more of these products to their employees in 2025. And while we've always had multiple pathways to grow with existing clients, our newest products represent an exciting addition to our upsell and expansion activities. And while we don't expect meaningful revenue contribution from these products in 2025, we're encouraged by the interest in adoption rate for employers that we've seen to date. In terms of renewals more broadly, activity thus far has been consistent with our typical rate of near 100 percent retention. We're also not seeing any clients looking to reduce their benefit for next year reflecting the value they're continuing to see as we improve the efficiency of their overall health care spend while also helping their workforce realize their family building goals. And lastly, with respect to our business development priorities, we continue to see significant opportunities for ongoing expansion through the development of additional channel partner relationships. Last quarter, we told you that we were advancing several new partner relationships, and we recently became the preferred partner to Meritane Health, subsidiary of Aetna and the second-largest TPA in the country with 1.5 million members, adding to our existing agreements with CVS Health, Evernorth, and Vistia Health. In addition, we are progressing other channel partner opportunities and hope to be able to provide additional detail on future calls. We believe continuing to add these channel partnerships are an important part of the go-to-market strategy since they act both as validation for our market-leading solution as well as provide an alternative way to reach and contract with new prospects. This quarter, we also enhanced our global offering through the acquisition of April, a Berlin-based fertility benefits platform, expanding the scope of services we can provide to multinational employers and their employee populations in over 100 countries. April has created a platform, customizable by country, to provide members with personalized, culturally sensitive education support care navigation, and we're excited about the opportunities to broaden our support on a global scale. Let me now turn the call over to Mark to review the quarterly results before I come back with some closing remarks. Mark.
Mark
Thank you, Pete, and good afternoon, everyone. I'll begin with the second quarter results and then provide our expectations for the third quarter and the full year. Second quarter revenue grew 9% over the prior year to $304.1 million, making this our first quarter to exceed $300 million in revenue, less than two years since we crossed the 200 million milestone. To put this into perspective, after we launched our solution in 2015, it took us five years to reach our first $100 million quarter, while it's taken us less than two years to meet each of the next 100 million plateaus. This illustrates both the momentum that we see in the market as well as our ability to rapidly scale our operations while increasing margins and profitability at the same time. Revenue growth in the quarter was primarily due to an increase in the number of clients and covered lives as compared to a year ago. As of June 30th, we had 463 clients with at least 1,000 lives, representing an average of 6.4 million covered lives. This compared to 384 clients and an average of 5.3 million covered lives a year ago, reflecting an approximately 20% growth in lives over the prior year. As expected, a handful of clients launched during the second quarter, adding approximately 100,000 new covered lives. However, as Pete mentioned, we also saw a number of our existing clients report lower lives as compared to March 31st, which is likely due to recent turnover or from the lapsing of benefits coverage following prior workforce reductions. This is not at all a new dynamic. With a base as large as ours, in any given quarter, we've always seen a certain number of clients reporting lives. with a number of clients also increasing their lives. This really speaks to the advantage of having a diverse base that touches nearly every corner of the U.S. economy. While we continue to see both pluses and minuses in this quarter, as usual, the net impact was a slight reduction within the existing base, and that moderated our sequential growth in members during the quarter. Following the close of the quarter, several additional clients representing the last handful of clients from the 2023 selling season, launched their progeny benefit, contributing an additional 75,000 lives. Taking into account the launches that took place in July and over these first few days of August, we have nearly 470 clients today representing approximately 6.5 million covered lives. We expect to end the year with between 6.5 and 6.6 million covered lives. Looking at the components of the top line, medical revenue increased 12% over the second quarter last year to $194 million, due again to the growth in our clients and covered lives, while pharmacy revenue increased 4% in the quarter to $110 million. The lower growth in pharmacy is a reflection of the lower art cycles per utilizing member, which Pete described earlier, as well as the benefit in the year-ago period from manufacturer-driven drug price increases, which did not occur over the first half of this year. Turning now to our member engagement metrics, approximately 15,600 art cycles were performed in the second quarter, reflecting a 5% increase versus the second quarter last year. The female utilization rate was 0.47%, a decrease as expected from the record 0.50% that we reported a year ago, and a modest increase sequentially from the 0.46% in the first quarter of this year, reinforcing that the slight variability we saw earlier in the year was not indicative of a new macro trend. Over the back half of the year, we continue to expect that the rate of utilization will be consistent with historical levels, albeit somewhat lower than what we saw in 2023. Turning now to our margins, gross profit increased 13% from the second quarter last year to 68.3 million, yielding a 22.5% gross margin, an increase of 80 basis points as compared to the year-ago period. as we continue to realize efficiencies in our care management resources, even as we deliver cost containment for our clients. Sales and marketing expense was 5.4% of revenue in the second quarter, a slight improvement from the year-ago period, as the investments we've made to expand our go-to-market resources were more than offset by the leverage we continue to gain through client acquisition and retention. G&A costs were 10.3% of revenue this quarter, as compared to 10.8% in the year-ago period. The 50 basis point improvement is primarily due to ongoing efficiencies in our back office operations, reflecting the inherent nature of our expanding margins on G&A as we grow revenue, and lower non-cash stock-based compensation. With the operating efficiencies we've realized, adjusted EBITDA grew 15% this quarter to $54.5 million. Adjusted EBITDA margin of 17.9% this quarter was up 90 basis points from the year-ago period. Net income was 16.5 million in the second quarter, or 17 cents per diluted share. This compared to net income of 15 million, or 15 cents per diluted share in the year-ago period. Adjusted earnings per diluted share earnings excluding the impact of stock-based compensation, taking into account any associated tax impacts, was 43 cents in the current period as compared to 36 cents in the second quarter of the last year. Turning now to our cash flow and balance sheet. Operating cash flow during the quarter was 56.7 million, which compares to 76 million generated in the year-ago period. The decrease is due to the previously disclosed impact of certain favorable working capital items in the prior year period, as well as higher cash taxes in the current quarter. Over the first six months of the year, we've generated $82.4 million in operating cash flow, representing a 79% conversion of our adjusted EBITDA over the same period. As of June 30th, we had total working capital of approximately $357 million, including $262 million in cash, cash equivalents, and marketable securities, and no debt. The decrease in our cash position as compared to March 31st reflects our stock repurchasing activity during the quarter. In 2Q, we repurchased 5.6 million shares for approximately $160 million. Since launching the buyback program in February, we've returned value to our shareholders through the repurchase of 6.8 million shares, completing the previous authorizations and reducing our shares outstanding by 6% since the start of the year. We're pleased to announce today that our board has approved an additional 100 million program, giving us further flexibility to reduce shares outstanding and deploying our cash to what we believe provides a very attractive return. Turning now to our expectations for the third quarter and full year 2024. Taking into account the dynamics Pete described earlier, with a lower average number of art cycles per female utilizer, we expect revenue of 290 to 303 million for the third quarter. For the full year, we now expect revenue of between 1.165 billion to 1.2 billion, reflecting growth of 9% at the midpoint. As you can see in the table at the back of today's press release, our range for the full year assumes that the rate of utilization will be 1.05% at the low end and 1.08% at the high end, consistent with historical levels. We are also assuming art cycles per unique female utilizer of 0.95 at the low end and 0.96 at the high end, as compared to 0.99 in the prior year. Turning to our profitability, we expect adjusted EBITDA of $47.5 to $51 million in the third quarter, and net income of $10.7 to $13.2 million. This equates to 11 cents and 14 cents earnings per diluted share, or 35 cents and 38 cents of adjusted EPS on the basis of approximately 96 million fully diluted shares. For the year, we now expect adjusted EBITDA of 199 to 209 million, along with net income of 55.4 to 62.4 million. This equates to 57 and 64 cents earnings per diluted share or $1.53 and $1.61 of adjusted EPS on the basis of approximately 98 million fully diluted shares. I'll remind you that our net income projections do not contemplate any discrete income tax items, nor does it consider any impacts associated with the share repurchase program we announced today. At the midpoints of this guidance, we are expecting to see the continued expansion of our margins in 2024 with adjusted EBITDA margin on incremental revenue of over 18%. I'll now turn the call back over to Pete.
Pete
Thanks, Mark. Hopefully today's remarks and the upcoming Q&A give you a clear perspective about the strong state of our business overall, even with the change in our forecast driven by the lesser than expected art cycles per female utilizer, but which is not material to the health of the business. If you aren't aware, we're hosting an investor day next week. On Monday, August 12th here in New York City. We put together an exciting agenda featuring a lot of progeny teams that you don't normally get to meet at investor events. Our goal is to give you a look into how we think about capitalizing on our market opportunities and what gets us excited about the future. Several clients are participating and we've created panels from the point of view from both providers and members. If you're interested in joining us, please send a note to James as registration is required and space is limited. With that, we'll open the call for your questions. Operator, can you please provide instructions?
Operator
Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Your first question is coming from Annie Samuel from J.P. Morgan. Your line is live.
Annie Samuel
Hi. Thanks so much for the question, and thanks for the incremental disclosure and the release. Really helpful. I was hoping perhaps you could help us understand what might be driving some of this volatility in mix and utilization. Just wondering, like, has anything changed within the benefit structure or coverage that might be leading to this shift? Have any best practices changed? You know, the fertility clinics that might be leading to better outcomes or perhaps less prevalence rates given the adoption of GLP-1s. Just curious if you have any thoughts on what might be driving that.
Pete
Sure, Annie. Thanks for the question. And the last part of your question, you came in and out, so I didn't catch it, but I got the spirit of the question.
Annie Samuel
Sorry, it was, you know, is there maybe higher success rates, you know, driven by perhaps less prevalence of PCOS from GLP-1s?
Pete
Yeah, so So right now, as I mentioned in my prepared remarks, we don't know exactly what's driving this. It's not a mixed issue. It's a cycles per female utilizer. Not that it's a decline, but it's the rate of growth that you would normally see seasonally as the year progresses is not what it has been traditionally, which is why we broke out not only the sort of full year expectations, but the quarterly trends historically to give you some insight into that. And so as we sit here now, we don't know exactly what may be driving that. We also don't know whether or not it will persist. It's just that we're seeing it right now for Q3 as well as what we saw in Q2, and where our forecast is therefore continuing to project what we're seeing in terms of that lower rate of growth. But we don't know exactly why, and certainly we'll do our best to continue to find out why to the extent that we can. But as we sit here now, we don't exactly know why.
Annie Samuel
Great, thanks. And then I was just wondering if perhaps you could just provide a little bit more color. What are you seeing around lives? How are you thinking about the backdrop just going forward, just kind of given some of the more elevated unemployment and some of the more recent calls for a recession?
Pete
Yeah, I think as Mark talked about in his comments, The net adjustment in lives, I think it just happens to be one quarter of more net down than up, true ups for lack of a better term, that we normally get from our clients every quarter. They're reporting lives to us, and lives go up and down, and they usually net out to either the same or plus or minus for the book of business. It just so happens this quarter that they netted out to a slightly fewer lives. But as we also talked about, we've heard of no actions of any kind from anybody that would be driving this. I think it's just normal activity. And I think the overall continued, albeit most recent report, slower growth in job growth. reported by the government, I think should support any concerns anybody may have that there's further degradation in the base, which we don't believe will happen.
Mark
Thank you. Thank you. Your next question is coming from Michael Cherney from Living Partners. Your line is live.
Michael Cherney
Afternoon. Thanks for taking the question. So we started the year with guidance that was below what you guys had hoped for. This is now the second guy down that we've seen. Pete, I understand that some of this stuff is out of your control, but as you sit here at this point in time, what's your comfort level that the low end calls $1.165 billion of revenue is the last cut that you need to make?
Pete
It's why, Mike, we share... the assumptions that are inherent in that low end. There's hopefully no more surprises this year, and therefore I have a lot of comfort in that number. That said, it's very difficult to predict the unknown or even size the unknown. Unfortunately, this is a year where we've had some surprises that are to the negative two of them, sort of, you know, were short-lived and didn't continue. This third one is right now persisting. So it's the best answer I can give you, you know, without other unknown surprises that I can't predict, I feel really comfortable.
Michael Cherney
And, I mean, I know so much of your model is built on new member ads. It's very early for this, but As we think about heading into the end of the year and obviously seeing a big difference between membership growth and art cycle growth, how should we think about where your normalized revenue growth rates should be? Are we going to be exiting the year at a run rate that is the quote new normal for this business? Where are you seeing the various different moving pieces beyond obviously the additional services which are A nice uptick, but to get back, I don't know if you want to call it growth acceleration, a growth normalization, or whatever the new normal for this business should be. I'm taking away from next week. I apologize, but just trying to get down to the bottom of the growth opportunities.
Pete
No, it's a fair question. The biggest driver in growth is and will continue to be adding logos and lives. I'm happy to have Michael expand on where we're at so far. I talked in my prepared remarks that we're pleased with where we are relative to adding lows and lives versus where we were this time last year. But nonetheless, happy to give more color. Beyond that, barring, again, any surprises or changes relative to volume of utilization, if you will, per unique member, you know, that will still remain the single largest driver of growth for us as it has in the past.
Mark
Thank you. Your next question is coming from Jalindra Singh from Truist Securities.
Jalindra Singh
Your line is live. Thank you, and thanks for taking my question. Actually, I'm going to follow up on the last question from Michael about this long-term growth in the business. I know we have seen three different issues this year in the first seven months, of which two issues, we still don't know why those happened. And I understand the strong demand among employers and employees, but Based on your experience thus far, does that change in terms of how you think about your approach to guidance in future? And also related to that, have you guys thought about any changes you can do in your business model, even in terms of provider contracting or empire contracting, which can result in less variability in your results?
Pete
Regarding the first part, you know, we're certainly going to do a couple things. One is continue to get as much additional information as we can to inform our models and guidance, and also to the extent that we can get more real-time information through our providers and through the data that we get, that'll inform us, that'll be something that we're gonna continue to work to enhance versus our current algorithms and models. And considering the couple surprises we had this year, in the future our ranges will definitely get wider to sort of capture some of that. Regarding changing how we do business, it is a care consumption model. without putting in some sort of minimums by client or anything else like that, it's hard to sort of mitigate the variability in actual consumption. So there isn't thinking around that as we sit here now. That doesn't mean things may not evolve, but as we sit here now, that's not the plan.
Jalindra Singh
Okay. And my follow up on the 2025 selling season commentary. Last year, you guys called out several not now employers. Have you seen them coming back this year? And additionally, are you seeing any change in their behavior or approach either in terms of scope of coverage or benefits with respect to the benefit?
Pete
So relative to coverage, We're not seeing any change. What employers are adopting in terms of the early commitments is consistent with prior year, whether it's number of cycles, whether it's facility preservation in the form of egg freezing, whether it's RX. I made the comment in my prepared remarks that the take rate for RX from new clients is really high, as it has been in the past. all of that is positive. There's also positive results relative to the take rate of some of the newer products that we have out there, so that's also positive. As it relates to the not-nows, the majority of the early commitments are not-nows. And so, yes, they do come back. They come back like they come back every year, and they're the head start, for lack of a better term, for the sales season because they've looked at the benefit in prior years and are making the decision earlier in the year.
Operator
Great.
Jalindra Singh
Thank you.
Operator
Thank you. Your next question is coming from Stephanie Davis from Barclays. Your line is live.
Stephanie Davis
Hey, guys. Thank you for taking my question. I was hoping to follow up on some of the prior questions. Can you just dig in one level deeper as to what data you saw that made you anticipate this lower level of cycles for you during the back half of the year? And given that you do have cohort-level data, what gives you confidence that this isn't a cohort maturation issue?
Pete
So the first part of the question, we look at where we're at this time in the quarter versus where we're at this time in the previous quarter and in the first quarter. And the reduction or the slower rate of growth in cycles per female utilizing member is consistent with what we saw in Q2, which was a slower rate of growth than what we would normally expect off of Q1. As it relates to maturation, I think it's really early, considering this is right now a new trend, to conclude that. And I think we sort of do the math overall in terms of the impact. There's still cycles per utilizer growth. It's just not at the rate that we would expect with this normal seasonality that we see in the business.
Stephanie Davis
Understood there. And then when you think about the bullishness on the selling season today and kind of how it's coming ahead, do you have any thoughts on how government lives could contribute in this upcoming selling season now that you have a hunting license or how that mix of commercial versus government opportunities is shaping up in the pipeline?
Michael
Yeah, so this is Michael. First, as Pete said in the remarks, certainly we still have lots of decisions still to come, but as it relates to both commitments to date as well as what remains in that active pipeline, we certainly feel good about. And then to the partner's question, yes, I mean, what What the partnerships allow us to do is really the value prop stays the same as it relates to the partners and the areas where we consistently differentiate remains the same in those partners. But the partnerships really provide us two things. One is another reference point for our differentiation and our leading solutions. The second part is it provides additional towards bringing employers on. And in particular around the contracting process and the decision to sort of change, our partnerships really help ease that last mile if you want to think about it that way. So our prior partnerships continue to be valuable to us and great levers. And, you know, that's how we look at as we add partnerships going into the future and look for that same sort of impact and effect on new business.
Stephanie Davis
Thank you.
Operator
Thank you. Your next question is coming from Alan Lutz from Bank of America.
Alan Lutz
Your line is live. Good afternoon. Thanks for taking the questions. Pete, last quarter you mentioned the Alabama Supreme Court ruling as a potential driver of utilization. Can you just provide an update on what you saw there in 2Q? Is there anything to call out on a state-by-state basis?
Pete
Thanks. So we surmised last quarter that the short-term dipping utilization was caused by that. If you recall, we also talked about the fact that it returned back to normal levels, and that's consistent with what we reported for the full quarter for Q2 and also what we're seeing right now for Q3. So the good news is that it was a short-term dip and not something that persisted. We're not seeing anything today on a state-by-state basis that is of any meaning to call out.
Alan Lutz
Okay, great. And then I want to follow up on some of the comments around the selling season a little bit stronger than last year. Can you talk about how quickly you think the fertility market is growing in 2024? Do you think it's changed at all relative to 2023? And do you think Progeny is taking share? Thanks.
Pete
So the first thing is I do think we continue to take share. based on the rate of live growth that we have every year versus the growth in the market. And relative to how much the industry is growing in 24, it's hard to say it's anecdotal. Because when I say that, as companies take coverage, whether it's through carriers or through us or any of the other competitors that we have, Coverage is very different with different benefit plans, right? Carriers have generally plans that are dollar maximums, so therefore limited coverage and not comprehensive coverage. And many companies sort of, depending on those dollar maximums or what they offer, don't offer coverage across the board or coverage for a number of cycles to ultimately get pregnant successfully, just based on the math of live birth success rates and the cost of IVF. So coverage comes in two forms. Overall, the thing I always point to is that if you look at the CDC data around ART cycles that are reported every year, and I think the last year that's reported is 21 or 22. Anyone know? 21 is the last year that's reported. The rate of growth over the last 10 years is roughly 10% a year, compounded annual growth rate, juxtaposed against what's happening with live births, which have been on a decline. We sort of look at that data point as what's happening in overall growth in terms of access to coverage.
Mark
Got it. Thank you.
Operator
Thank you. Your next question is coming from Glenn Santangelo from Jefferies. Your line is live.
Glenn Santangelo
Thanks for taking my question. Hey, Pete, I hate to beat the dead horse here, but as you sort of pointed out in some of the other answers, we've had different issues, whether it be the 4Q call, the 1Q call, and now tonight. And so I guess listening to your answers, it kind of sounds like each quarter the issue was a little bit different, but You know, one thing that we get questions about is it seems like the common thread, you know, throughout this year is that all the economic indicators are sort of trending down. And so I guess the question is, why is it unreasonable to think that it's at least not in part to a weakening consumer? I mean, you seem pretty confident that you're not seeing any weakness in demand. And I'm just kind of curious as to what gives you the confidence to sort of say that when it seems like it could be, you know, a logical answer.
Pete
Yeah, look, certainly that could be one answer, right? So I'm not saying that's impossible. Here's what I'm saying. When I say demand is still there, you look at the top of the funnel, i.e. unique utilizers and utilization rate, we're closer to the high end of historical utilization rates as opposed to the lower end. of historical utilization rates. And to me, that's a positive, especially when last year was a record year, if you will, in terms of utilization rate, right? So that's sort of why I make that first comment. Other than that, right now what we're seeing, we talk about the other issues. The other issues were mixed, which was first half of Q1 that resolved itself. We called that out for one reason, to talk about, you know, why the utilization rate versus the revenue that came with it in Q1, you know, why that was lower, and that's why we called it out. The second issue around the utilization rate in dip was temporary, and as I answered on the previous question, was already resolved, and so far, as we continue into Q3, doesn't appear to be a persistent issue. It appeared to be a short-term issue. This one is new, and it is a, as a percent, small drop in cycles per utilizer, but the utilizers are still utilizing. It just happens to be impacting the future outlook, and because we're not seeing that correct itself yet, if it does correct itself, we're guiding to it, and that's why we're explaining it. So I could understand the perspective that that could be, you know, all of it could be looked at collectively as a softening a little bit around consumer demand. But I look at the top of the funnel and how many people are utilizing the benefit and is that changing as a starting point and indication of demand. And then on top of it, you know, the sales season and the demand from clients, the overall active pipeline, et cetera, and all those comments that I made, It tells me that there's demand from employees to their benefit offices, and that's why that demand continues.
Glenn Santangelo
Okay. Maybe if I could just ask a quick follow-up to maybe tighten up our model. I thought, you know, Mark, when we started the year at 5.4 million members, you know, we added 1.3. I thought we were supposed to finish the year at around 6.7, and now it sounds like we're going to finish the year 6.5. to 6.6. Did we lose, you know, is there a difference of 150,000 members that seem to have fallen off somewhere, or am I misremembering that? I'm just kind of wondering if you can sort of walk us through what the expectation was versus what it is now.
Mark
Yeah, so you're right in that we were saying we were going to be approaching 6.7 million. We talked about it even in our prepared comments today that We did have an unexpected net reduction in members this quarter. We put that at about 100,000. I think that's part of what you're seeing right there. Again, the clients that we expected to launch and we announced that we're going to launch have all launched actually now that we're into the early part of August. So that isn't the factor. And to the extent that there is any type of organic growth across the balance of the year is sort of the difference between maybe it's 6-5 or rounding up to 6-6 or 6-6 neighborhood. But it's really just what we've seen in this last quarter that's impacted that number you're looking at.
Mark
Perfect. Thanks for the call, guys. Thank you. Your next question is coming from Sarah James from Cantor Fitzgerald.
Operator
Your line is live.
Pete
Thank you. I wanted to ask about quarterly progression and then if I could afterwards come back on for a clarification of something in the release. But when I look at your unique female utilizer guidance chart here, so you've got flat from 2Q to 3Q. I was wondering if you could help us understand some of the moving pieces in that assumption because you've got you know, a full quarter of the in-account shrinkage now, but you also have a bunch of new accounts starting in 3Q, which is great, but usually comes with some utilization headwind, and then there's a different number of weekdays, which I'm not sure is material or not for your business model. So could you help us think through the scale of those moving pieces as you come to your guidance?
Pete
Sure. Do you want to do it, Mark?
Mark
Yeah, I'll do it, and then, Pete, if you have a follow-up. So I think the important thing maybe is just to understand what the charts are. The lower chart, which is the one I think you're referencing, is showing the quarterly progressions of art cycles per unique female utilizer. So this is the component of what our utilizers are doing, how many art cycles will they complete in any one quarter. And if you look at 22 and 23, you see them progress from 0.50, 0.51 into the second quarter, a higher level at 0.55, and then continue to progress through the balance of the year. And the dynamic there is people who begin with utilizers that aren't actually seeking art in the... Sorry. May I have your attention, please? May I have your attention? Apologize. We have a fire alarm going off. Apologies. Apologies.
Pete
No worries. Yeah.
Mark
I think he should be done in a second. So you're seeing a higher mix of initial consults in the first quarter of the year, which then progresses as the year goes on. What we've seen this year, and this is what we're highlighting is, and you can see also the art cycles per female utilizer actually just sort of increase a bit year after year. What we saw in Q2 is it's still an increase from 0.53 to 0.54, but a much lower increase than you can obviously see and perceive in prior years. And further, the reason that we're estimating a 0.54 here for the third quarter is because it's effectively what we're seeing at similar rates. So we've thought it was most prudent, again, and it's always been our guidance philosophy to show and to base our estimates on what we're seeing. And you can see, so from the low end of the guidance range, we have that stepping down a bit in Q4 to reflect the fact that perhaps there may be other unforeseen factors that may continue to bring that down as the year goes on. And the high end of the range where we do allow for it to increase a little bit, but of course, as you can see, versus 22 and 23, not as much as you would typically expect. So hopefully that's helpful.
Pete
Sure. And then just to clarify, there's a pretty good size recast in that chart versus how you report the art cycles per unique female utilizer higher up. And I just wanted to clarify that's only the 300,000 member account. There's no other difference because the seasonality is quite different. One historically goes up in 4Q and the other seems to come down. So I wanted to make sure I understood that.
Mark
So, yeah, in the upper chart, the numbers that we've excluded from average members, and really it's only for 2024, remember, that is associated with, and that's a full year average now, and that's only the members associated with the federal plan, which has a different rate of utilization based on how they chose to, I think we've talked about this, how they've chosen to design their benefit. The rate, the average members is a little bit lower than the 6.5 to 6.6, because it does factor in the full year averages, including Q1 and Q2, which didn't have those earlier launches.
Pete
Got it. Is that what drove the recast for 23, or is that something different?
Mark
I don't think we're recasting 23. Okay. Oh, no, I think if you look, the art cycles per unique female utilizer, if you look in the upper chart, 22 is 0.96. That's the far right row on the lower chart, same 0.96. And then 2023 is a 0.99 for the full year, same as on the chart below, 0.99.
Pete
Full year versus quarterly on the bottom chart, and the full year is all the way to the right.
Pete
Got it. Yeah, maybe we can follow up a little bit more often because I'm still getting some quarterly differences, but we can handle that later. Thank you.
Operator
Okay. Thank you. Your next question is coming from Richard Close from Canaccord Genuity. Your line is live.
Richard Close
Yeah, thanks for the questions. Maybe just to expand on Sarah's line of questioning here. Just looking at the bottom chart, and if you go back in time, I know you're only showing us 22 and 23 and so far in 24, but if you go back to earlier years, have you guys ever experienced anything like this where you've seen decreases in any quarters? I guess that's the first question.
Pete
Yeah, if you look back, Depending on the year you look at, if you look at 2020, it was the first year of a COVID year. 2021 was a year that had a lot of variability because it was sort of the first, still in COVID, but sort of coming out of it during the year. The last two full years were more indicative of pre-IPO activity versus sort of those two COVID years in terms of the seasonality and sequential improvements.
Richard Close
Okay. And then, you know, I know you don't have reasons, you know, to explain the variance here, the, you know, decline, but, you know, is there... If you can expand upon what you said earlier in terms of trying to find out, I mean, just what's the process in terms of, you know, trying to figure out what the change is? It seems like you'd really want to know that.
Pete
It's a combination of, you know, creating tools that could aggregate data what are conversations with 30,000 people utilizing the benefit in a quarter and start to understand whether or not that will tell you anything. It's a combination of analyzing the significant different volume of journeys and whether or not that will tell you anything, a combination of do you see anything in any different area in the country, or whether or not you see anything at any clinics, and see if that'll tell you anything. It's also a combination of as the outcomes come in, which we don't have today, for these cycles in Q2, and that'll tell you anything. So it's sort of all of the above, but we'll take time, because in real time, you don't know what's happening.
Mark
Okay, thank you.
Operator
Thank you. Your next question is coming from Scott Schoenhaus from KeyBank. Your line is live.
Scott Schoenhaus
Hi, team. Thanks for taking my question. My first question is on if we look at, you know, fertility benefit services, average revenue per ART cycle, it really accelerated and spiked to levels we haven't seen in a few years. Can you give us some color on what's driving that?
Mark
Sorry, the average per ART? Yeah, I think what you're seeing there is if you have a, again, for the number of people that are utilizing the service versus the number that are completing art cycles, it's a greater proportion. There is revenue associated with that. So you're seeing a higher proportion of revenue for non-art revenue to the cycles themselves, and that's going to push your average up. Got it.
Scott Schoenhaus
So it is a factor of this art cycle per utilizer. Got it. My follow up question is on this revenue mix. You know, if we look at, you know, this state by state revenue mix declines, is there any states or regions that are, you know, a clear glaring signal or discrepancies between what, you know, you did a year ago and or if we can even drill it down more simply, like the pharmacy benefit services revenue. Are the declines in that part of the business, can you see big discrepancies state by state versus a year ago? Thank you.
Pete
Yes. As I mentioned before, I think somebody else asked the same question. There isn't a state by state significant variance right now that we can see and call out. And Mark had talked about in his prepared remarks earlier, what drove the difference in growth rate in pharmacy revenue versus medical revenue. And it's really tied to the revenue per cycle that didn't grow as much sequentially as Q1 and Q2 as it had in the past, and prior year did. And so you're going to comp off of a year that had more growth, and then on top of it, manufacturer rate increases were in last year's were done by Q2 of last year, weren't by Q2, by the end of Q2 of this year. So there's a combination that would impact it. But no, there isn't anything to call out state by state right now.
Operator
Thank you. Your next question is coming from David Larson from VTIG. Your line is live.
David Larson
Hi. Can you maybe talk a little bit about your conversations with benefits consultants? Like we've had some discussions with a handful of them over the past, two years, and they highlighted to us that DEI, diversity, equity, inclusion, was an important consideration when companies and plans would sign up for these benefits, and that was a driver of growth. We're now heading into an election cycle. You know, it's possible, obviously, that perhaps, you know, a more conservative leading, you know, administration will take power. I mean, has that entered into the conversations at all or not? And it gets back to sort of this red-blue discussion. Thanks.
Pete
Well, regarding the last piece, even if the more conservative party takes power, the former President Trump, the Republican nominee, has already said he supports fertility and IVF. And on both sides of the aisle, there's been enough statements out there, there's support for IVF. So I don't think that will... create an issue for the industry. Regarding conversations with the benefit consultants, I think the trend is positive relative to what's happening at benefit consultants. Over the last couple of years, they've effectively all created a center of excellence around family building benefits that wasn't in place before. That's an indication of the overall demand and how often the conversations are happening with existing clients or prospective clients of theirs, and for them to be equipped to be an advisor to these clients, we see that as a positive. Michael, I don't know if you want to add anything.
Michael
Yeah, no, and then, you know, just also just from a sort of what's happening and how that plays itself out, again, I'd point back to, you know, Pete's comments in the prepared remarks in, you know, we're not seeing, we're not, you know, we're The active pipeline is comparable to last year. To date, again, the closes are good. Obviously, lots more to go, but you would start to see those things play out. And again, we're not seeing those things.
David Larson
Okay. And then just one quick follow-up. The revenue per art cycle increased a good amount sequentially. Is the mix back to where you thought it would be, meaning the revenue coming in per cycle for each service is now high again, and it's simply the overall utilization and membership that's lower than sort of what was expected? Thank you.
Pete
The revenue per cycle and the increase in Q2 is a function of the fact that utilizers who utilize services that are in R-cycles are using other stuff, that drives the math that makes it seem higher. So if there's fewer cycles, but other services and other utilization is done, but they're not art cycles, that'll drive the overall math because we're not really breaking out the two separately. That's what's driving that. Mix is normal, if you will, for lack of a better term. There isn't a significant mix change. We had that mix anomaly in the first six weeks of the year. And other than that, it's been relatively consistent with what we would expect at different times of the year. So that is normal. But I just want to make sure you don't take away from that comment that the jump up is only around that. It's also around this other item, which is revenue per R cycle. I'm sorry, utilization by female utilizers of the number of R cycles per unique utilizer is down. Therefore, other services, because they are utilizing the benefit, they're utilizing it, goes into the same math of a lower volume of R-cycles, if that makes sense.
Mark
Yep, thanks very much. Thank you. There are no further questions in the queue.
James Hart
Okay, thanks everybody for joining us this afternoon. As always, please feel free to reach out to me if you have any questions or follow-ups. Happy to assist in any way that we can. And again, if you're interested in coming to the Investor Day next week, send me an email and I will confirm your registration.
Operator
Thank you. This concludes today's conference call. You may disconnect your phone at this time and have a wonderful day. Thank you for your participation.
Disclaimer