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spk00: Good afternoon and welcome to the Cast Light Health third quarter 2020 conference call. If you'd like to ask a question, please press star one on your telephone keypad. To withdraw your question, press the pound key. Leading today's call are Maevo Mara, Chief Executive Officer will offer their prepared remarks and then they will take your questions. The Cast Light press release, webcast link, and other related materials are available on the investor relations section of Cast Light's website. This call contains forward-looking statements regarding trends, strategies, anticipated performance of the Cast Light business, including but not limited to guidance for full year 2020 new sales, our ability to bring new innovation, the opportunities and impact of COVID on our own operations, our ability to sell and our operating results, opportunities and the impact of COVID on our customers' business, and their decisions to buy Sprint Benefits or institute workforce reductions, retention of existing customers, gross margin and operating expense, trends, cash use, future cash position and the changes in the growth strategy on the company's performance. These statements are made as of November 5, 2020 and reflect management's views and expectations at this time and are subject to various risks, uncertainties and assumptions. If any of these risks or uncertainties develop or if any of these assumptions prove incorrect, actual results could differ materially from those expressed or implied by our forward-looking statements. The company disclaims all obligation to update or revise any forward-looking statements. This call contains financial guidance, but the company will not provide any further guidance or updates on performance during the quarter unless in a regulation FD compliant form. Please refer to today's press release and the risks factors included in the company's filings with the Securities and Exchange Commission for discussion of important factors that may cause actual events or results to differ materially from those contained in Cast Light's forward-looking statement. Today's call and presentation includes certain non-GAAP metrics, such as non-GAAP gross margin, operating expenses, operating income loss, and net income loss per share. These non-GAAP financial measures should be considered in addition to, not as a substitute for, and in isolation from, measures prepared in accordance with GAAP. However, Castlight believes that these non-GAAP metrics aid in the understanding of Castlight's financial results. Disclosures regarding non-GAAP metrics and reconciliation to comparable GAAP metrics on a historical basis can be found under the heading Reconciliation of GAAP to Non-GAAP Financial Measures of the Earnings Released that was filed before the call. With that, I'll turn the call over to Maeve O'Meara, CEO of Cast Life Health. Maeve?
spk01: Maeve O'Meara Thank you all for joining us today. We are looking forward to providing you an update on our third quarter. On the call today, I will review our progress on each of our strategic priorities, and then Will will provide a deep dive into our financials for the quarter. I'll start with our health plan growth strategy. As many of you know, I set a goal of signing a new health plan customer in 2020 when we spoke in February. I'm pleased to have met our goal as we signed an agreement with Cigna in the third quarter to support a portion of their Taft-Hartley and federal business segment. Under this agreement, we will provide an initial population of several hundred thousand members access to provider search, quality, and cost. We're pleased that the implementation is on track with an expected testing completion date at the end of November and launch on January 1st, 2021. The initial contract represents approximately $2 million of annualized recurring revenue, or ARR. Our immediate priority is a flawless launch, and we believe we have an opportunity to grow in three ways. One, membership expansion within this segment. Two, product expansion within this segment. And three, growth in additional segments at Cigna. A partnership with a national plan of this size represents clear validation of our solutions and market fit. As it relates to Anthem, we continue to have a strong, mutually beneficial relationship and saw further expansion within their large national employer book of business. In the quarter, Anthem signed more than 15 large employer customers onto Engage, representing more than 100,000 employees. In a few weeks, we will be co-hosting the third annual Engage Summit for 40 plus of the largest and most strategic Engage clients, where we will showcase client case studies, recent product innovation, and outline our future roadmap in partnership with Anthem. Importantly, we have a strong pipeline of health plan prospects. In addition to having met our goal of signing a new health plan customer, we have exceeded our expectations in developing pipelines. We believe that our foundation of two national plan partnerships provides opportunity to grow, validates our strategy, and ultimately will accelerate bringing navigation to people who need our solutions. We look forward to updating you on our progress. Turning to our direct employer business, As we anticipated, third quarter ARR was challenging in terms of churn and slow employer sales due to COVID, as some of our peers have noted. On the positive side, we renewed more than 10 clients, including pulling forward a handful of 2021 renewals into this quarter, and importantly, renewed a large strategic customer representing seven-figure ARR. Looking forward, we've made real traction in customer satisfaction this year. as demonstrated by our customer NPS, which tracks our buyer satisfaction, increasing 24 points from the baseline in January of this year. Delivering product innovation is critical for our business, and this year we have aligned our product innovation with what's most important for employers at this time. I'd like to highlight three product updates from the quarter. First, given the accelerated shift to virtual care, we are creating tighter integrations with care delivery channels. For example, in Q3, we partnered with Amwell, a leading telehealth solution, to enable virtual visits directly within the Castlight app, reducing friction for the user and automating the intake process, leveraging our knowledge of the user's health history and insurance information. We were first movers in enabling virtual care through our platform and curated ecosystem and will continue to invest in streamlining access to these solutions. Second, In light of the dramatic increase in behavioral health challenges facing our customers, we made our behavioral health offering, which first launched in 2016, available at no cost to all of our clients. Behavioral health is one of the most complex areas to navigate, and Caslight has invested in capabilities to specifically address the core barriers of awareness, access, and affordability, leveraging our data to develop personalized user journeys that connect to both the bricks and mortar health system as well as teletherapy and other newer tech-enabled solutions. Third, we added several new partners to our ecosystem, where we are recognized as the broadest and deepest in the market. To support our clients' COVID-19 response, we launched partnerships with Everly Well and Quest Diagnostics for COVID-19 testing and with Vita for behavioral health. Across the broader ecosystem, we added or expanded relationships with Visera, Knox Health, ICO, and Livongo. As with all of our ecosystem partners, clients can purchase these solutions through their Caslight contract and take advantage of turnkey API-driven integrations. In the accelerated shift to virtual care, Caslight's navigation solution is well-positioned given the strength of our ecosystem capabilities. In addition to our continued product innovation, we have the opportunity to execute against two levers to support a return to growth on the employer business. One, demand for navigation, specifically a high-tech plus high-touch solution is growing, but the market is generally unaware of the high-touch side of our offerings, given the challenge of market education during COVID. We are well positioned to capture share in this growing market, but need to invest in educating prospects, channels, and our existing customer base on care guides. Two, we have seen an even greater need to remove friction in the buying process for employers during COVID, and thus we are focused on enabling our customers to purchase through additional channels, including their health plan. Our positive conversations with health plans provide us natural opportunities to develop these mutually beneficial channel partnerships. We are encouraged by what we see in the market with employers engaging in discussions to inform their strategic planning next year, but acknowledge uncertainty due to COVID. We are laser focused on preparation for 2021 and have already hired and onboarded our new sales reps. We are pulling our sales kickoff event into December for the first time, given the importance of training on the full solution, most notably care guides. We have also scheduled business reviews with each of the large consulting houses in Q4 to ensure they understand the duality of our solution, given the criticality of high-tech plus high-touch and navigation RFPs. We are confident these proactive measures will ensure we are well positioned to capitalize on the market opportunity in 2021. Turning to care guides. We are pleased to have delivered on our goal of ensuring that the high touch solution we launched a year ago would be generally available by Q3 of this year. We delivered on that goal on time and below budget and with significant learnings from nearly a year of experience with our early customers. We have optimized both the product and operations to scale, leveraging our data infrastructure to drive greater efficiency and impact. We have built out the capacity of our staff to support a broader array of use cases and implemented a risk score workflow to route more complex cases directly to nurses, regardless of need. This is enabling us to intercept employees who have more complex needs or barriers to care and drive greater impact, both for them and their families. We feel confident that CareGuides enables us to respond to the rapidly accelerating market demand for high tech and high touch offerings and added several incremental customers in the quarter. Our navigation offering is the only solution in the market that approaches the problem with a true technology backbone, which allows us to operate more efficiently than traditional service offerings who are now adding technology. We have clearly seen that there is demand in the market for navigation offerings at a price point below that of our competitors, And our technology and data routes allow us to meet this hole in the market with the same high quality service at a competitive price point. The navigation market is expanding, but the high touch capability has increased in importance in RFPs. Thus, it is critical we ensure our customers, prospects, and consultants are aware of our capabilities. Training, enablement, and marketing care guides are core to the market readiness work I mentioned earlier. I felt confident in our decision to build CareGuides, which was one of the first strategic decisions I made, in addition to our health plan focus, and I'm confident in the product we have built, and now we need to execute against the market opportunity. Turning to our final strategic priority, from a financial perspective, this was another solid quarter. We again achieved positive cash flow and are benefiting from our proactive cost management measures taken earlier in 2020. We beat our expectations again this quarter, and we are confident in raising our full year guidance. Will will cover the financials in more detail, but overall, I'm pleased with our performance in the quarter and the work of the team. Before I close out my remarks, I want to comment on our continued commitment to support our customers and our country through the ongoing COVID-19 pandemic. Working well, our end-to-end solution to help employers and academic institutions manage safe workforce reentry and campus reopening is garnering great feedback from our customers. Given the delayed return to workplace, working well will only nominally contribute to 2020 revenue, but we are pleased to build new relationships and support existing customers as evidenced by a recent quote from our customer council. I have never in my 25 years of human resources worked with a vendor that could put a product out there and make it work so quickly. We are also working to leverage the power of our COVID-19 Test Site Finder, the most comprehensive COVID testing database available, powering Google and multiple state health departments. We continue to support increased access to testing, with one recent example being our integration with Amazon Alexa. The Test Site Finder is free, but has supported demand generation and reinforced our position as the most comprehensive navigation solution available. We are proud to continue to make progress against our strategic priorities, and more importantly for the future, the team that we've built this year. Over the last couple of quarters, we have brought on some great leaders. Last month, we announced the addition of Vijay Anand, Executive Vice President of Engineering, Richa Gupta, Chief People Officer, and Angel Rosa, Senior Vice President of Customer Experience, who collectively bring more than 60 years of experience across enterprise technology, consumer technology, and digital health. Additionally, at the end of the summer, we brought on Brian Marcotte, former president and CEO, Business Group on Health, as a strategic advisor. Brian is one of the most innovative business leaders in the industry, and his expertise has already proven to be invaluable. I feel incredibly lucky to be leading such a powerful, experienced, mission-oriented team. I want to thank the entire Cast Light team for staying focused through this pandemic and bringing the same level of energy and commitment to the important work that we are so privileged to do. I'll now turn the call over to Will to review the financials.
spk02: Will? Thanks, Maeve. I'm pleased with the progress we made this quarter on many of our strategic initiatives, and I look forward to expanding on our third quarter financial results. I'll start my review with annualized recurring revenue, or ARR, which was 131.4 million at the end of this quarter, down approximately 7.8 million sequentially. As Maeve mentioned, we anticipated risk of employer churn in Q3, and churn was the principal driver of the sequential decline. Looking at the quarter, we saw slow employer sales, which did not offset churn, though our ARR did benefit from our momentum in the health plan business. To add a bit of color, Unique to this year, given the financial challenges related to COVID, we saw several clients up for renewal that intended to renew experience financial difficulties. In certain circumstances, we chose to responsibly reduce ARR in exchange for long-term client commitments and the opportunity to position our CareGuides product in the coming year. Revenue was $35.1 million in the third quarter, a decline of 1% year-over-year. Revenue in the quarter benefited from membership levels that continued to exceed our conservative forecasts around potential COVID-related layoffs or user count decreases for our employer clients. Subscription revenue accounted for 97% of total revenue as expected, and professional services revenue of $1 million was in line with our expectations. Turning to our non-GAAP financials in the third quarter, gross margin of 69% continued to benefit from the cost management actions we implemented earlier this year and compares to 62% a year ago. Our subscription gross margin of 79% was in line with the expectations we shared earlier in the year. Non-GAAP operating expenses of $20.5 million were down about 8% sequentially and down 25% compared to a year ago. Non-GAAP operating expenses declined as a percentage of revenue from 77% in Q3 of 2019 to 58% this quarter. The year-over-year improvement reflects our 2020 priority around financial sustainability, specifically as we realized savings following our platform migrations that completed on January 1st of this year, as well as the impact of our proactive cost management measures implemented in mid-Q2 of this year. Based on these factors, third quarter non-GAAP operating income was $3.7 million compared to a loss of $5.4 million in Q3 of 2019. This is the second straight quarter of positive non-GAAP operating income and represented another record profitability level for the company, albeit off a small base. I'm pleased to share that our cash provided by operations was positive for the second straight quarter at $2.7 million. In May, we shared our goal of approaching cash flow breakeven in the second half of the year. As a result of our proactive cost structure actions, strong revenue relative to our post-COVID forecasts and the benefit of several COVID-related cash deferral programs, we were pleased to achieve a second cash flow positive quarter and now anticipate that we will generate a positive cash flow for the second half of 2020. We ended the third quarter with approximately $47 million in cash. At this time, we are updating our outlook for 2020 and expect revenue in the range of 140 million to 143 million, non-GAAP operating profit between zero million and three million, and non-GAAP earnings per share between 0 cents and 2 cents, based on 151 million shares. We now expect our full-year gross margins to be in the mid-60% range, even as our Q4 gross margins are typically lower, given a ramp-up to support 1-1 customer activity. We now expect cash used from operations to be in the range of 7 million to 10 million for 2020, expect to achieve cash flow break-even for the second half of 2020, and expect to end 2020 with more than $45 million in cash. As Maeve mentioned, we are pleased to share our financial results, continue to deliver meaningful traction against our health plan and care guide strategies, and have identified the key steps we believe will support employer sales in 2021. Our team at Cast Light embodies our values of one team on a mission, making things happen. I'm grateful to each and every Cast Lighter for showing up during this pandemic on behalf of our customers, our users, and all of our stakeholders. At this time, we'd be pleased to take questions.
spk00: If you'd like to ask a question at this time, please press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. We'll pause for a moment to compile the Q&A roster. First question comes from Jeff Garrow with William Blair.
spk03: Yeah, good afternoon, everyone, and thanks for taking the questions. I want to ask about the ARR results in the quarter and the renewal momentum. You mentioned there were some tradeoffs as you worked through renewals and brought them forward successfully. How much of those clients that you were able to add care guides to and renew early, how much were on transparency-only solutions? And given the actions you've taken, what does the renewal calendar look like for the fourth quarter?
spk01: Sure. Hey, Jeff. Great to hear from you. So a lot of pieces in there, so I'll try to break it apart. So as it relates to Q3 ARR, kind of as you mentioned, we knew it would be a difficult year on employer sales, saw some of those deals move out, and then Chiron was relatively in line with the conservative expectations that we had set, and then, of course, have been pleased by the health plan momentum. In terms of just a little bit of color on churn, because I think it's important to spend some time there, as we had kind of foreshadowed and discussed last quarter, the economic downturn did indeed create financial pressure, which contributed to churn, both through terminations and pricing concessions. That said, I think it is important to pause because churn has been really different this year. When we've lost customers in the past, it was due to operational issues or insufficient value. That didn't contribute to any of our churn in 2020. Really, you know, the secondary impact of COVID was creating a more difficult environment to reset certain relationships. where there was a dated understanding of what we do, whether that be a totally new buyer or really understanding the product portfolio, including care guides. So kind of as you mentioned, we do feel good about our comprehensive solution, including care guides. That certainly has been a valuable addition. both in the renewals as well as specifically with the customers that we've added. So, you know, just wanted to provide that additional color on churn. And, Will, you can speak directly to the question that you asked regarding transparency versus platform.
spk02: Yeah, absolutely. So, Jeff, I'll hit two points quickly. You know, the majority of our renewals were at the end of their contract term, and so the majority did come from point solution. But at this point, we also are renewing some of the full platform customers, customers that are on complete. Many of them had bought Jeff and Castlight separately in the past. Second piece, just to quickly hit, because you asked about what's left in the year. When we spoke after Q2, we had the majority of our renewals remaining. At this point, we have about 25%, a little bit less than 25% of the renewals remaining on an ARR basis. So we've taken care of most of them, do have a set remaining in Q4, and then are also focused, as I mentioned, on pulling forward the 2021 renewals into Q4.
spk03: Got it. That's very helpful. So I'll ask a little bit more about care guides. You know, as it's been presented, think of it as a add-on as part of the conversation for net new sales to deliver a more comprehensive offering. Can you just remind us about where expectations should be in terms of, you know, potential lift to contracts by adding CareGuys for existing customers, or maybe more broadly, just how to think of the ROI as you're, you know, weaving CareGuys into these renewal conversations?
spk01: Sure, absolutely. So, you know, taking a step back, I would say that we feel really good about the strategic decision to invest in care guides. Having a high-tech plus high-touch solution is becoming increasingly important in navigation. And, you know, what we've all, I think, observed is that this is a market that is having rapid acceleration. So we're really pleased to have met our goal of delivering care guides as GA and Q3. In terms of your question on expectations, so as I mentioned, growing market, and one of the things that we're really excited about is that our technology foundation allows us to access the full market in ways that others can't because of our ability to provide scalable, high-quality service. So we certainly kind of acknowledge that we're in year one of selling care guides, so we have work to do on enablement and market awareness, but we do view it to be a critical factor in allowing us to win and grow in the navigation market in 2021.
spk03: Got it. That helps as well. And last one from you, squeeze one in on the health plan pipeline. More positive comments on the health plan pipeline. And do those comments reflect deals progressing through the pipeline, or is it more that there's more deals entering the top of the funnel? And yeah, I'll leave it there.
spk01: Yeah, no. Thanks, Jeff. We are really excited, as you can imagine, to have executed against the goal that we set at the beginning of the year. which was to sign one new health plan customer. And of course, we are thrilled to have that be a national plan because of the expansion opportunities that that represents, as well as, of course, the broader validation of having two national plans. In terms of pipeline, really healthy. And as you mentioned, certainly we actually do have quite a few opportunities entering the top of the funnel, but we have several mid to late stage opportunities. Some of those do have mid-2021 implementation timelines. And, you know, as I mentioned, I think that the movement that we're starting to see in that pipeline is picking up, particularly, I think, due to the validation. And so our pipeline has exceeded our expectations, and we're hopeful that this gives us an opportunity to exceed the goal that we set this year.
spk03: Great. Thanks for taking the questions. I'll jump back into Q. Thanks, Jeff.
spk00: Once again, to ask a question, please press star 1 on your telephone keypad. And we do not have any telephone questions at this time. I will turn the call over to the presenters.
spk01: Thank you for joining us on today's call. We look forward to seeing many of you virtually next week at the Credit Suisse Healthcare Conference on November 11th. Thank you for joining us today.
spk00: This concludes today's conference call. You may now disconnect.
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