Castlight Health, Inc. Class B

Good morning. Leading today's call are Maeve O'Meara, Chief Executive Officer, and Will Bondurant, Chief Financial Officer. Maeve and Will will offer prepared remarks, and then they will take questions. The CastLight press release, webcast link, and other related materials are available on the investor relations section of CastLight's website. This call contains forward-looking statements regarding trends, strategies, and anticipated performance of the Cast Light business. These statements are made as of August 3rd, 2021, reflect management's views and expectations at this time, and are subject to various risks, uncertainties, and assumptions. Please refer to today's press release and the risk factors included in the company's filings with the Securities and Exchange Commission for a discussion of important factors that may cause actual events or results to differ materially from those contained in Castlight's forward-looking statements. Castlight disclaims any obligation to update or revise any forward-looking statements except as required by law. Today's call and presentation also includes certain non-GAAP financial metrics. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP. Disclosures regarding non-GAAP metrics and reconciliation to comparable GAAP metrics on a historical basis can be found under the heading Reconciliation of JAP to Non-JAP Financial Measures of the earnings release that was filed with the SEC before the call. With that, I'll turn the call over to Maeve O'Meara, CEO of Castlight Health. Maeve?

Thank you all for joining us to review our second quarter 2021 results. Today, I'll start by sharing an update on the continued progress in our business, including our view of this year's direct-to-employer and health plan selling season. I'll then comment on some exciting updates to the Cast White team, and finally, I'll share some perspective on our longer-term growth initiatives. I'll start with a brief highlight of some key numbers. We saw a slight uptick sequentially in annualized recurring revenue, or ARR, which continued to move in the right direction for the second quarter in a row and was $128.2 million. Q2 was another very high customer retention quarter with strong sales activity setting us up well for Q3. Our total revenue for the second quarter of $35.6 million landed at the top end of our guidance range. Our non-GAAP gross margin was 69%, and CapSight achieved a fifth straight quarter of non-GAAP profitability and positive cash flow. Turning to the progress in our business, I'll begin with direct-to-employer. This was an incredibly active pipeline generation and RFP season, which benefited from our new CareGuides offering. In total, our RFP volume is up from the pre-COVID levels of 2019, meaningfully higher than 2020, and we entered Q3 with our largest late-stage pipeline in four years. And we see multiple pathways to achieving our targets for the year. By way of example, we were pleased to sign a Caslight Complete deal worth approximately $1 million of ARR in the first two weeks of Q3. Further, in addition to our pipeline activity, we announced a new channel partnership with Business Solver, where we are a preferred navigation vendor, and were selected by a brokerage house in a competitive process to support a portion of their business as the navigation vendor. On the health plan side, our initiatives progressed as planned in the first half of the year. We have developed a strong pipeline with a mix of expansion opportunities and potential new clients. As of today, we have one late-stage opportunity and several promising mid-stage opportunities. Our BCBS Alabama implementations of the digital navigation and care guides offerings are progressing on schedule and we are working closely with Blue Cross Blue Shield of Alabama to meet market demand and to enable their team's efforts. In both the employer and health plan markets, we continue to see potential tailwinds from transparency and coverage regulations as a best-in-class care guidance and healthcare navigation vendor. Importantly, we are starting these conversations with transparency, but they are quickly evolving into broader opportunities. From a retention standpoint, we continue to demonstrate meaningful progress. Q2 represents one of our best quarters in the past five years in terms of churn. I'm confident we are on track to show a meaningful improvement in retention compared to last year, even though we do still have important second half renewals to complete. As evidence of our continued improvement in the health of our book of business, our customer NPS in Q2 rose to 46 from negative territory when I stepped into the CEO role two years ago. I'm very proud of this progress, which I know has taken tremendous work from the entire organization. Importantly, supporting our progress with clients, we were pleased with the results of a third-party actuarial study released in May by Santa Barbara Actuaries, a highly respected firm led by Ian Duncan that is trusted and heavily utilized by the large self-insured employer market. The results demonstrated a 9.1% year-over-year reduction in medical trend among those who use Caslight compared to a matched control group and validate the clear ROI from utilizing Caslight's navigation technology. The study found lower medical spend across members at every clinical risk level. This reinforces a key value proposition we bring to market as the only navigation vendor able to demonstrate impact across a broad portion of a client's population. We have an exciting announcement from a team perspective. In the quarter, we brought on our India-based development team as FTEs. This talented and experienced team, many with tenures of four-plus years, had previously been working with us as part of a third party since 2014 and has been responsible for meaningful innovation in our platform. During the transition, we were able to retain 100 out of 104 members of our team, which is a reflection of engineering and product leadership, our operational muscle in the people and finance functions, and Cat's Light's strong R&D culture. Importantly, bringing our India R&D operations into Cat's Light directly will allow us to scale and grow our team in India. Taking a step back from the quarter, I want to close by speaking to the next episode When I stepped into the role of CEO two years ago, Caslight was viewed as a purely digital navigation company and honestly often known only for its role in creating the category of transparency. On my first earnings call in July 2019, I spoke about the immediate strategic shifts needed, namely expanding the go-to-market through health plans and the addition of high-touch navigation. Following that call, we set up a health plan sales team and announced our CareGuides offering. In July 2019, though, I also shared, and I quote, that the shift to value-based care, the introduction of alternative delivery models, and payer-provider consolidation has created demand for healthcare data infrastructure that provides information on the consumer health and enable steerage to higher quality, lower cost providers. This is the core of what we do. Our architecture is services oriented, so we can expose the technology services that support our current offerings, empower user experiences in new buyer categories, such as retail pharmacies, labs, telehealth providers, and more. Given our progress against the key growth levers, we can now begin utilizing our data and technology capabilities to support the demand for healthcare data infrastructure that provides information on the consumer's health and enables peerage to higher quality, lower cost providers. As we laid out two years ago, we have seen interest in this capability from new buyer categories like telehealth providers offering virtual primary care, on-site, near-site clinics, retail pharmacies, and more. While this commercial development is still early stage, we believe it will meaningfully expand our market opportunity and enable long-term growth. We will keep you updated on our progress. To conclude, I am pleased with the progress we've made in the first half of 2021. We continue to deliver against our financial goals and we're poised to re-accelerate our growth in the second half of the year. As always, I want to thank the team for their commitment to our mission as we serve our customers with the focus that comes from the privilege of purpose. I'll now turn the call to Will for a review of the second quarter financial results and our outlook for the remainder of the year. Will? Thanks, Maeve.

I'll start by reviewing our second quarter results, and then we'll discuss our outlook for the third quarter and full year. Beginning with annualized recurring revenue, or ARR, our ARR of $128.2 million increased slightly sequentially. While we signed some new business in the second quarter, our pipeline is back-cap-laden this year for both the employer and health plan markets, as we have mentioned. We are confident that our team will be able to implement the new business signed in the third quarter and be ready to launch on January 1st. Total revenue in the second quarter of $35.6 million increased 2% sequentially and was essentially flat compared to a year ago. Subscription revenue of $31.1 million represented 87% of our total revenue, and professional services revenue accounted for the remainder. Our PS revenue reflects continued contribution from the Boston Children's Hospital CDC vaccine finder work. Total gross margins of 68.7%, increased 190 basis points sequentially, and 40 basis points compared to a year ago. The increase was driven by top line contribution from the vaccine finder work and continued operational efficiencies. Subscription gross margins remain over 77% for the fifth straight quarter. Operating expense as a percentage of total revenue of 63.5% was relatively flat year over year as we hit the anniversary of our cost management measures implemented last year. And we started to see the return of some expense associated with COVID-19 savings. As Maeve mentioned, in the quarter we established an Indian entity and hired approximately 100 individuals as FTEs who previously worked with Caslight as a third party as part of our development teams. Given this, our total headcount increased to approximately 550 from approximately 450 at the prior quarter. We don't expect material change in our 2021 expense from this transition, but are very excited about welcoming these talented individuals fully into the Catholic family and look forward to continuing R&D scale through our Hyderabad location. Non-GAAP operating income of $1.9 million is our fifth consecutive positive quarter of non-GAAP profit. Similarly, we reported positive cash flow from operations of $4.6 million and drove our cash balance to $60.7 million at the end of the quarter. Turning now to our 2021 outlook, we are reiterating the 2021 outlook provided in Q1, including full-year revenue of $135 to $140 million, non-GAAP operating loss of $4 million to an income of $1 million, non-GAAP loss per share of $0.03 per share to an income of $0.01 per share, based on approximately 160 to 161 million shares outstanding, gross margins in the mid-60s, cash flow from operation between $2 million and $7 million, and cash balance at year-end to be more than $50 million. For the third quarter of 2021, we expect revenue in the range of $33 to $35 million. In conclusion, we are pleased with another quarter of strong financial results and are excited for the strength of our pipeline entering Q3. We look forward to sharing our progress through this quarter as we look ahead towards 2022. With that, we'd be pleased to take questions. Thank you.