Castlight Health, Inc. Class B

Good afternoon and welcome to the CAST Light Health fourth quarter 2020 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. Leading today's call are Maeve O'Meara, Chief Executive Officer, and Will Rundurant, Chief Financial Officer. Maeve and Will will offer prepared remarks and then they will take questions. The Cast Light Press Release webcast link and other related materials are available on the Investor Relations section of the Cast Light's website. This call contains four linking statements regarding trends, strategies, and anticipated performance of the Cast Light business including but not limited to guidance for 2021, 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' businesses and their decisions to buy certain 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 February 23, 2021, and reflect management 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 one of the assumptions prove incorrect, Actual results could differ materially from those expressed or implied by our forward-looking statements. The company disclaims any 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 any regulation FD compliant form. Please refer to today's press release. and the risk 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 maturely from those contained in Cast Light's forward-looking statements. Today's call and presentation also 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 or an escalation from, measures prepared in accordance with GAAP. However, Caslike believes these non-GAAP metrics aid in the understanding of Caslike'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 release that was filed before the call. With that, I'll turn the call over to Maiv O'Mara, CEO of Cast Light Health. Maiv?

Thank you all for joining us today. On the call, I'll provide an update on the fourth quarter, a look back at the progress we made over the past 18 months, and then turn towards our goals for 2021. After that, I will hand the call to Will to provide a more detailed review of the financials. For the full year, our total revenue of nearly $147 million exceeded our guidance. Our full year non-GAAP gross margin of 68% was the highest since 2017. And CapSight achieved full year non-GAAP profitability for the first time. While COVID introduced many unforeseen challenges, our experienced management team and Will and I's deep understanding of the business allowed us to make swift, sound decisions that strengthened our financial footing while still enabling us to respond to COVID and the rapid market evolution in a way that has positioned us well to grow ARR in 2021. The team delivered a very strong fourth quarter, and I would like to take a minute to recognize some of those achievements. First, we exceeded our goal of adding one new health plan customer in 2020, signing a second new health plan in December. I am thrilled to announce Blue Cross Blue Shield of Alabama as our newest health plan customer. They purchased our full navigation solution with the first rollout commercial accounts planned for late this year. Their selection of Caslight's navigation solution in a highly competitive process is continued evidence of our strong product market fit with health plans. The relationship builds our strength in the Blues and multiple leaders at Anthem served as customer references in the evaluation process. Blue Cross Blue Shield Alabama is a particularly notable win as Alabama is a respected leader among the Blues as both a larger regional plan, but also an established innovator. Second, we entered a partnership with Boston Children's Hospital to support the national vaccination effort under their existing agreement with the CDC. Specifically, we are enabling providers, pharmacies, and jurisdictions to report vaccine inventory on a daily basis to the CDC. This data set will be made available to the public through Boston Children's Hospital's consumer-facing site, VaccineFinder.org. We were selected to do this work because of the national leadership role we played in COVID testing navigation, and more significantly, our established expertise in health navigation. Will will share the financial details of this agreement, but as an organization, we are honored to support the country in this critical work that so closely aligns with our mission. And finally, our teams executed flawlessly during the heaviest operational time and health benefits. We exceeded our service level for all clients in December and January with overall customer satisfaction scores of 8.1 for our customer service organization. Our care guides also excelled with an average customer satisfaction score of 9.0. We maintained our mobile NPS of 65 plus throughout the full year. We have stronger process, people, and technology to thank for our best operational year in Caslight's history. As we close out 2020 and focus on 2021, I think it's important to take a step back and reflect on the massive organizational transformation that we have driven over the last 18 months. First, we made the strategic decision to enter the health plan market where we saw opportunity to expand our addressable market for navigation. We set a goal of one new health plan customer in 2020. We exceeded that goal in signing both a national plan and a large, well-respected blue plan within the year. We continue to see significant potential in this market and have built a strong pipeline of opportunities for future growth in 2021. We are also fortunate to announce the addition of Scott Sirota as an executive advisor. Scott just recently retired from his role as CEO and president of the Blue Cross Blue Shield Association, which he oversaw for nearly 20 years. During his tenure, Blues membership increased substantially, and the association played a key role in driving deeper collaboration across the 36 Blues plans. Scott is a true expert and respected leader in the space, and the time and energy he provides Caslight are invaluable, but also validation of the opportunity we have in front of us in the health plan market. Second, we made the strategic decision to expand our offering to include a high-touch services offering almost 18 months ago. We built and launched our CareGuide solution to meet the market demand for a high-touch, high-tech navigation offering, leveraging our technology backbone to enable scalable next-generation navigation. We continue to hear from employers and benefit consultants alike that there is a hole in the market and a clear need for a solution that is not services first. Looking back at the first full year live for one of our initial customers, CareGuides drove a 32% increase in engagement compared to our full book of business. And this engagement was seen in all user risk segments. We also saw that higher risk cohorts were 43% more likely to engage in high touch channels versus digital. We were also pleased to see a 24% increase in enrollment in third-party point solutions post the CareGuides encounter, a direct result of our integrated technology that enables guides to seamlessly connect users with these solutions. We are confident that these two key decisions, go-to-market expansion with health plans and the addition of care guides, will enable us to return to growth in 2021. As one additional point of validation, I am excited to share that our newest health plan customer, Blue Cross Blue Shield of Alabama, just signed an expansion with us earlier this month to add care guides as part of the initial launch scope alongside the digital navigation solution I discussed earlier in our Q4 highlights. In addition to establishing clear strategic imperatives, we are proud of the decisions we made during COVID. First, our thoughtful proactive changes to cost structure allowed us to end the year with a 68% non-GAAP gross margin, achieving our first year of non-GAAP profitability and invest cash prudently. Throughout 2020, we demonstrated operational discipline and chose to make high impact investments, such as our health plan team and care guides. COVID also showcased our ability to innovate and execute quickly to support our customers. We established ourselves as clear thought leaders in COVID navigation for employers as the national leader in testing navigation and leveraged our data and analytics expertise to publish key insights in leading academic journals. Most recently, we launched our COVID-19 Vaccine Navigation Solution, which is helping our employers educate, engage, and enable access to vaccines in a personalized, interactive way using the core capabilities of the Castlight platform. Some of our largest customers have deployed this functionality and we'll be speaking about it in a webinar this week. We are confident that the work we did to establish ourselves as the most innovative, nimble player in the navigation space will increase retention and drive pipeline in 2021. Looking back over the past 18 months, we have made an enormous amount of progress, but I am most proud of the leadership team we built, a team for the future. We have hired A-level talent from a mix of tech and healthcare and coupled that new expertise with leaders who have grown up inside the company. We have created a culture of debate and accountability and built a cohesive team despite a pandemic keeping us physically apart. This is a team I am confident can lead Castlight through its next chapter of growth. As we look to 2021, we are confident that we have put in place the right strategy and team and that our focus needs to be on execution. We have three clear priorities. First, we will return to ARR growth in 2021. We expect this growth will be driven by continued traction in the health plan market, as well as a return to growth in our employer business. In the health plan market, we have a strong pipeline and fully expect to build on the momentum we created in 2020. Our health plan customer base now includes Anthem, Cigna, and Blue Cross Blue Shield of Alabama, so we are optimistic that we will have expansion opportunities like our recent Blue Cross Blue Shield Alabama Care Guides win, in addition to new health plan partners. We have built out our health plan sales team and are better positioned to convert on pipeline opportunities as an organization. We continue to see that our full product portfolio is resonating with the greatest demand around digital navigation, but also see acceleration from external factors like the finalized CMS transparency rules. We have been the undisputed leader in transparency for a decade and thus are well positioned to support existing and future customers as they seek to comply with these rules. With employers, in order to drive sales in the growing navigation market, it is critical that we increase awareness of our high-touch capabilities. Our solution has now been live for over a year and is generating great proof points, so we are in a much stronger position to educate the market and take share. Key to increasing market awareness is our consultant and broker strategy. They are particularly aware of the need for an alternative within navigation that isn't just less expensive services. We are negotiating new agreements with the top firms and have kicked off a top 100 local producer strategy to ensure we are getting our full high-tech, high-touch navigation message into the hands of these key influencers who ultimately determine inclusion in RFPs. We also expect to significantly improve performance on renewals. This is a function of both customer health and a significantly smaller renewal cohort than in the past two years. We are moving aggressively to pull renewals forward within the year and are confident in our plan. Second, we will pioneer next-generation navigation. With our high-tech, high-touch approach, we are creating the next generation of navigation. Over the last year, we clearly established the ability of a combination of self-service plus clinical expertise to drive the same or better outcomes as expensive services-first solutions. Adding CareGuides has amplified a strength of CastFlight, which is engaging the middle of the risk spectrum, people with rising risk or chronic conditions. This is a gap we commonly hear from customers and consultants as they have evaluated point solutions and other navigation platforms. We will measure our success through further demonstrated impact on ROI as seen in third-party validated studies and customer case studies. We have a robust roadmap on both the technology and services side, and we will continue to expand our ecosystem as a vector to drive greater impact. As a digital health pioneer that also demonstrated rapid innovation during COVID, our ability to both innovate and execute quickly will matter in a competitive growing market. Third, we will continue to demonstrate operating discipline, investing in growth while maintaining our attractive high-margin business model. As I said in the introduction, I'm proud of our work to deliver Caslight's best financial performance in our 10-plus year history. We operate with attractive gross margins and have proven we can do so profitably. We have built a technology platform that allows us to deliver high-tech, high-touch navigation with strong gross margins. In 2021, we plan to make intentional investments that will deliver a return to growth, but we will apply operational discipline to ensure very low cash burn and sustained growth margins. To close my comments today, I want to thank the Castlight team for everything they accomplished in 2020. We were able to deliver against our goals despite COVID and revealed a fast-twitch innovation muscle that allowed us to deepen our relationships with customers and support our communities and our country. We have done the hard work to set the foundation, which will enable ARR growth in 2021. We are excited to build on the past 18 months of transformation and remain committed to our mission to change healthcare and are grateful to do this important work every day. I'll now turn the call to Will.

Thanks, Maeve. I'll spend a bit of time touching on full-year highlights, review our fourth quarter results in detail, and provide our initial outlook for the year ahead. For the full year 2020, we reported revenue of $146.7 million, an increase of 2%. While 2020 certainly was a challenging environment, specifically for our employer business, our revenue increase demonstrates our resilient revenue model and the team's innovation Maeve mentioned, which led to new engagements and the year-over-year increase in revenue. Non-GAAP gross margins of 68% increased nearly 600 basis points compared to 2019. The improvement was a direct result of our commitment to financial sustainability. As Maeve said, our proactive cost structure decisions in early May allowed us to position the business for a strong year, even in the midst of unprecedented economic times. We are also pleased to report that CassLight achieved our first full year of positive non-GAAP operating income, with 2020 non-GAAP operating income of $6.3 million compared to a loss of $21.7 million in 2019. Finally, as it relates to cash, we delivered positive cash flow from operations for the second half of the year, bringing the full year operating cash flow use to just $5.6 million. Our full year total cash used included one time cash to build our Utah Customer Center of Excellence, which represented more than $3 million of non-operating cash outlay in the first half of 2020. Turning to our fourth quarter results, our annualized recurring revenue, or ARR, at the end of the quarter was 126.7 million, down approximately 4.7 million sequentially. As we discussed in Q3, we saw limited employer sales that did not offset client renewal decisions. Importantly, we continued to pull forward 2021 renewals into 2020, and I will speak further about our renewal book as I address our 21 outlook shortly. Total revenue in the fourth quarter was 37.1 million, an increase of 2% compared to a year ago. Q4 revenue benefited from the recognition of initial revenue against our Boston Children's Hospital CDC agreement, which is reflected in our professional services revenue line. As we referenced in the initial disclosure, the agreement provides for BCH to pay Castlight $8.5 million for work that began in Q4 2020 and is expected to conclude in mid-2021. Subscription revenue of $34.4 million accounted for 93% of total revenue, and services revenue represented the remaining $2.7 million. Subscription revenue in the quarter continued to benefit from membership levels that exceeded our conservative forecasts around potential COVID-related layoffs, employment disruptions, or user count decreases for our employer clients. Turning to non-GAAP measures, our gross margin in the quarter of 68% compared favorably to 58% a year ago. Subscription gross margin of 79% was in line with our expectations. Non-GAAP operating expenses as a percentage of revenue were 61% in the quarter compared to 80% in the fourth quarter of last year. Like previous quarters, 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 2020. as well as the impact of our proactive cost management measures implemented in Q2 of this year. Finally, non-GAAP operating income of $2.7 million represents the third straight quarter of positive non-GAAP operating income. The same can be said for cash flow from operations at $3 million in the fourth quarter. We ended the fourth quarter with $49.2 million of cash on the balance sheet. With that, I'll now provide our 2021 outlook. In 2020, we made significant progress against our goals of financial sustainability and believe that we are now in a position to manage profitability and cash flow against investment opportunities that will drive growth in the business. As we look forward into 2021, we have chosen to make a set of investments we believe will allow us to capture market share, empower the return to ARR growth Maeve mentioned, notably in our sales and marketing organizations, where we are underspending our competitors and comparable firms, and our CareGuides capabilities. As we make these investments, though, we remain committed to financial sustainability and will continue to steward our cash to limit our outlay. As we look forward into 2021, we expect revenue in the range of $130 to $135 million, non-GAAP operating loss between $4 million and $9 million, a non-GAAP loss per share between two cents and six cents per share based on approximately 160 to 161 million shares outstanding, full-year gross margins in the mid to high 60% range, and cash flow from operations to be between $2 million of cash generated and $3 million of cash used. We expect the end of the year with cash and cash equivalents of greater than $45 million. Beginning this year, we will also provide a forward quarterly expectation for revenue. We expect revenue for the first quarter that ends March 31st, 2021 in the range of 32 to 34 million. Finally, as Maeve mentioned, we are committed to ARR growth in 2021. While Maeve described in depth our sales motion and progress in both health plan and employer markets, I also wanted to share a bit of context on our renewal book of business. In 2021, our renewal book is half the size of our 2020 renewal cohort. We are already engaged with each major renewal and believe we can manage our turn to a meaningfully lower ARR reduction and higher net dollar retention in 2020 or 2019. We made significant progress in 2020 while meeting the needs of our customers and users during challenging times, and that couldn't have happened without the hard work, creativity, and commitment from the entire team at Castlight. I echo Maeve's sentiment that we believe we are well-positioned to deliver ARR growth in 2021, and I look forward to updating you on our progress throughout the year. We are confident in our team, the investments we are making to return to growth, and appreciate each of our employees, customers, users, and shareholders as participants in our transformation. At this time, I'd like to open the call to questions. Operator?