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spk04: Good afternoon and welcome to Cast Light Health third quarter 2021 conference call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one in your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to Sophia Golden. Please go ahead.
spk06: Leading today's call are Maeve Amera, Chief Executive Officer, and Will Bondurant, Chief Financial Officer. Maeve and Will will offer prepared remarks, and then they will take questions. The Catholic Press release, webcast link, and other related materials are available on the investor relations section of Catholic's website. This call contains forward-looking statements regarding trends, strategies, and anticipated performance of the Catholic business. These statements are made as of November 2nd, 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 CASI's forward-looking statements. TaxLight 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 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 GAAP and Non-GAAP Financial Measures of the Earnings Release that was filed with the SEC before the call and in this quarter's presentation slides available on the Investor Relations section of Cathlight's website. With that, I'll turn the call over to Maeve O'Meara, CEO of Cathlight Health. Maeve?
spk05: Thank you all for joining us to review our third quarter 2021 results. Today, I'll start by sharing an update on the continued progress in our business, including our meaningful traction in direct to employer sales and strong pipeline of health plan opportunities, and then provide further perspective on the longer term growth initiatives I discussed in August. I'll start with a brief review of the key metrics. We delivered another quarterly increase in annualized recurring revenue, or ARR, to 130.2 million, up 2 million sequentially from Q2. The increase was driven primarily by our strong execution on direct-to-employer sales netted against the churn we forecast and realized in the quarter. Direct-to-employer quarterly bookings were the highest in over three years. I'll speak more about our sales pipeline and forward view for employers and health funds in a moment. Our total revenue for the third quarter of $34.8 million was at the top end of our guidance range and was ahead of our expectations. Our non-GAAP gross margin was, again, 69%, and Castlight achieved a sixth straight quarter of non-GAAP profitability and positive cash flow, ending the quarter with $66 million in cash and no outstanding debt. I will begin with employer sales. As I mentioned in my opening comments, our Q3 bookings were the highest we have achieved since Q4 of 2017. The bookings build on the active pipeline generation and RFP season I mentioned in our Q2 earnings call, as well as improved sales execution. We are very pleased to welcome our new customers, such as Elbit Systems of North America and Baptist Health, among others, to the Cat's Light family. Nearly three-quarters of our Q3 bookings were from new customers, including multiple competitive navigation RFPs, where our combination of high-tech and high-touch were a critical factor in winning the business. Importantly, approximately two-thirds of our new customers added our care guides offering, validating our decision to add expert human support and solidifying our navigation market position. We also saw benefits from prior relationships, such as a large university that was forced to terminate its contract last year due to COVID-19 cost reductions, even while seeing meaningful value with Caslight, who re-signed in the quarter and also will now expand from care guidance to Caslight Complete as of January 1st, 2022. Similarly, one of our new wins followed the acquisition of an existing well-being customer. The acquiring organization and its brokers learned about Caslight through the acquisition process and ultimately decided to expand the relationship to include Caslight Complete as well as care guides across the full organization. We believe that Caslight's market-leading technology and combination of high-tech and high-touch solutions are squarely meeting the needs of the navigation market. In addition, we are also one of the few, if not the only, providers of comprehensive transparency and coverage solutions. This is becoming a priority not only for health plans, but also large self-insured employers with a compliance focus and or government contracts. And the strength of our experience and transparency drove one of our most meaningful customer wins in the quarter. We have a robust employer pipeline entering the last months of the year, and we look forward to updating you on our progress. From a customer retention perspective, I shared last quarter that we were on track to deliver a meaningful improvement in retention compared to last year. I shared that churn was weighted to the second half of the year, given the majority of renewals occurring in that time period. As expected, we did experience ARR reductions from a small number of clients that we had identified as being at risk of attrition. While churn picked up sequentially as we forecasted, we are pleased that churn was less than half the level that we experienced in Q3 of 2020. The attrition in the quarter was more than offset by our new bookings, and we are pleased that our team is executing against meaningfully lower churn in 2021 versus prior years. Turning to our health plan business, I am pleased to share that a health plan pipeline has increased since we last spoke. We experienced no losses during the quarter, and all the pipeline opportunities I mentioned in August remain active, although certain decisions that we'd hoped would occur in the late Q3 timeframe have pushed to the fourth quarter. Right now, we have a half-dozen meaningful health plan opportunities in mid-stage or late stage, and we remain optimistic in our position across the full set. The opportunities encompass full digital navigation, navigation plus care guides, as well as transparency only. While we will continue to refine and improve how we forecast the timing of our large health plan prospect decision-making, we are excited to have such a robust health sales pipeline for this quarter and looking into 2022. The traction we are seeing in the market is evidence that health plans view us as critical, trusted partners in delivering value to their customers. I'll conclude my remarks today with additional commentary on the longer-term growth strategy I discussed on our last call. As I mentioned last quarter, we believe our data and technology capabilities can support the demand for healthcare data infrastructure that provides information on the consumer's health and enables peerage to higher-quality, lower-cost providers, both bricks and mortar and virtual. As we laid out two years ago, we have seen demand for this capability from new buyer categories, like telehealth providers offering virtual primary care, advanced primary care providers, retail pharmacies, and more. We are pleased to be engaged in a rigorous evaluation process from one of the leaders in those categories to bolster their offering, and we have several additional conversations underway. While I want to be clear that any contribution to 2022 revenue will be nominal from these relationships, we believe there is meaningful TAM and revenue potential as we expand our intelligence as a service capabilities. Finally, we believe our discussions to date demonstrate the power, scale, and uniqueness of our core data and technology, as well as experience driving healthcare outcomes. To close, I'm happy to report our meaningful progress in 2021, and I am excited for the fourth quarter of the year. Our team is executing on our core goal of delivering ARR growth. We see our next generation navigation solution resonating in the marketplace, and we continue to demonstrate operating discipline as we grow the business. We are in a large and growing market, and the momentum across the business is real and exciting. I want to thank the entire CastBite team for their excellent work, not only this quarter, but across all of 2021. It's gratifying to see your work producing outcomes for our customers, users, and shareholders. With that, I will now turn the call over to Will for a review of third quarter financials and our outlook for the remainder of the year.
spk03: Will? Thanks, Maeve. I'll start by reviewing our third quarter results, and then I'll discuss our outlook for the fourth quarter and the full year. Beginning with annualized recurring revenue, or ARR, our ARR of $130.2 million increased sequentially for the third quarter in a row. The increase was driven by the employer market, including meaningful new client additions, as well as upsells to current clients. As we have mentioned previously, our 2021 renewals were weighted towards the second half of the year, And as Maeve shared, we had strong renewal activity in the quarter. The largest customer that terminated, with an ARR of more than 2 million, was signed in December 2019, but never launched because of COVID-19's impact on their implementation. This is the only customer whose implementation was delayed or impacted by COVID-19. Total revenue in the third quarter of $34.8 million decreased 2% sequentially and decreased 1% compared to a year ago, and was at the upper end of our previously shared outlook for the quarter. Subscription revenue of $31.6 million represented 91% of our total revenue, and professional services revenue accounted for the remainder. Our professional services revenue again principally reflected our Boston Children's Hospital CDC vaccines.gov support, and the expected sequential decline was in line with the expectations we laid out earlier in the year and our work to support BCH and the CDC. Turning to non-GAAP measures, gross margins of 69% were essentially flat sequentially and compared to a year ago. Subscription gross margins were over 77% for the sixth straight quarter. We remain pleased with our industry-leading attractive gross margin profile, which helps demonstrate the scale of our technology and competitive advantage that our R&D investments have generated. Non-GAAP operating expense as a percentage of total revenue of 62% was down 1% sequentially and up 4% year over year as we continued to see increased business expenses from the COVID-impacted 2020 baseline. Our non-GAAP operating income of $2.5 million delivered our sixth consecutive positive quarter of non-GAAP profit. Similarly, we reported positive cash flow from operations of $5.8 million, and our cash balance was $65.8 million at the end of the quarter. In the quarter, we made the final payments on our term loan, and the company now has no outstanding debt as of 9-30. After several years of an intentional focus on operating with fiscal discipline, we feel well-positioned to invest in the areas of our business that are driving growth as we planned for 2022. Turning now to our outlook. We are updating the 2021 full-year outlook we originally provided in our Q1 call and now expect revenue of $135 to $140 million, a non-GAAP operating loss of $4 million to an operating income of $1 million, non-GAAP loss per share of $0.03 per share to an income of $0.01 per share, now based on approximately 160 million shares outstanding, gross margins in the mid to high 60s, compared to our previous expectation of mid-60s, cash flow from operations between $10 and $15 million of cash generated, compared to our previous expectation of between $2 and $7 million of cash generated from operations, and a cash balance at year end of around $60 million, compared to our previous expectation of at least $50 million. For the fourth quarter, we expect revenue in the range of $33 million to $35 million. As you can hear in today's call, we are pleased at how well Caslight solutions are resonating with large employers, health plans, and potential future customers of our data and technology. Our strength in transparency means we are one of the only firms that can support employers in compliance with coming regulation. Our successful launch of care guides positions us to meet the customer demand for navigation, and we are now focused on finishing strong in 2021, the one-one launch period, and planning for 2022. As always, I'd like to thank the Caslight team, and specifically Sophia Golden, who read today's Safe Harbor and was the winner of the Making Things Happen Culture Award in Q3 as a key member of the team delivering our vaccine navigation solutions. With that, we'd be pleased to take questions. Operator?
spk04: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question will come from the line of Richard Close from Canaccord. Please proceed with your question.
spk00: great thanks uh maven will first congratulations on the success and building momentum hey will i was wondering if uh you could just go over on the guidance um you know you look year to date you've generated about i guess what 5.6 million in non-gap operating income through september um But you've kept the guidance, the annual guide at a $4 million loss to positive one. So that implies a pretty big range for the fourth quarter. Can you just talk a little bit about that?
spk03: Absolutely, Richard, and thanks for the question. So you're right to mention that we've done a really nice job on delivering operating profit, non-GAAP operating profit for the first three quarters of the year. As we look at the fourth quarter, there's a couple of dynamics in play. The first is that we do see expenses tick up in advance of the 1-1 launch season. That's especially true when we have meaningful new business activity. And obviously, you heard Maeve talk about that on the employer side. We're also launching Blue Cross Blue Shield of Alabama in this quarter for 1-1. And then we're hiring in advance of some investments in the growth areas for 2022. And so there is an investment set planned for the fourth quarter, along with that essentially seasonal expense load. Between both those pieces, we chose to maintain that operating income guidance at the range of kind of a loss of four to income of one.
spk00: Okay. That's helpful. Thanks. Maybe on the health plans, you know, I think it was my understanding that late stage means That cast light's been selected, but a contract hasn't necessarily been finalized. Correct me if I'm wrong there, but how are you thinking about these deals that are in the pipeline? Is there anything specific that may be hanging them up in terms of crossing the finish line or –
spk05: Yeah, no, thanks for the question, Richard. And you are remembering correctly in terms of how we characterize the pipeline. And so, you know, what I'd say is that we were really excited to see the pipeline grow and continue to expand. And certainly we had hoped that some of those decisions or, excuse me, some of those opportunities would actually close in Q3. We do expect both decisions and contracting in Q4 and are also, frankly, focused on improving our forecasting ability. But on the whole, I think the key takeaway should be that we feel really good about the health plan pipeline and our position in the market and are excited to pursue the opportunities that I mentioned in the prepared remarks.
spk00: Okay. I guess just to follow up on that. So let's say you bring, you know, one or two, whatever the number is across the finish line, just remind us like, you know, in terms of what the timeline would be for, you know, you get selected, you win the business, sign the contract. And then, you know, maybe when it goes into ARR and then begins to convert to revenue.
spk05: Sure, absolutely. I can just comment first, and Will can add anything I've missed. But I think an important point with health plans is that we have seen implementations can happen very quickly, as you saw with Cigna. That was a four-month implementation. And then you can also, with other health plans, expect a 12-month implementation, often coinciding with a 1-1 or 7-1 launch. Will, do you want to speak to the recognition of revenue?
spk03: Absolutely, Richard. So to Maeve's point, if you think about essentially when we are awarded the business, we enter a contracting phase. That typically is anywhere from six to 12 weeks as we work through the contracts. At the point the contract is signed, we would essentially put the guaranteed subscription revenue into ARR. So we would disclose that as part of, for example, our 1231 ARR if we sign a health plan this quarter. And then the revenue contribution would come when that customer launches. Of the, call it half dozen or so opportunities Maeve mentioned, small number would launch in the middle part of 2022. Most of them would be oriented towards the fourth quarter of 2022 from a revenue contribution perspective, but you would know the ARR in advance.
spk00: Okay. That's great. I'll jump back in the queue, give some others a chance.
spk04: Once again, as a reminder to ask a question, that is star one. Your next question will come from the line of Charles Rye from Cowan. Please proceed with your question.
spk02: Yeah, thanks for taking the question. A question on the guidance here. I appreciate, Will, the comments about the costs here expected in the fourth quarter. I think last quarter, though, you guys talked about an expected step up in sales and marketing. You know, as, you know, salespeople kind of start to assume travel costs Obviously, we didn't really see that here in the quarter. You know, is that something we should expect a bigger step up in the fourth quarter when you're looking at EBIT assumptions for the full year or particularly fourth quarter? It's really more an impact maybe to gross margins.
spk03: No, it's a good question, Charles. And I have to say, this is a place where COVID duped me. We expected to be doing more travel in the third quarter and more kind of field sales and marketing expense than we did. Partly, I think, because the Delta variant. In the fourth quarter, we do expect to see that tick up. We've been at in-person conferences this month, or I should say in October last month already, part of the fourth quarter. And so do expect to see SG&A tick up in the fourth quarter. even though, to your point, the gross margin, specifically the cost of PS, the cost of delivering the implementations line, is where we'd also see kind of a step up quarter over quarter.
spk02: Okay, that's helpful. And then, you know, Maeve, obviously a lot of success here, you know, year to date, and it's nice to hear about the increase in the pipeline with health plans. You know, maybe what has changed, or maybe not changed perhaps, but, you know, what do you think has been the key here, you know, to this kind of acceleration in interest from health plans? Is it that the market has changed dramatically given perhaps COVID, or is it that they view Caslight as a more robust offering now with the addition of care guides? Maybe some thoughts there.
spk05: Sure. No, thanks Charles. I appreciate the question. You know, speaking specifically about health plans, As you know, we really set this as a focus area starting in really when I stepped into the CEO role in late 2019. So I think part of what you're seeing is actually just the results of spending the 18 plus months actually going out, meeting health plans and really working that pipeline. I think that the product market fit has been strong really from the start. But I think we're now starting to really see that come through in the opportunity set. So part of that, I think, is just time. And then the second piece that I think is benefiting us is that very often what health plans are looking for is to support their customers. And the increase in customer interest in navigation solutions has you know shown up as health plans wanting to provide those solutions to their customers so that's been the kind of second tailwind uh which is you know manifesting itself in a large robust health plan pipeline okay that's helpful and and and then maybe following back up to richard's question it's you know
spk02: At this point, do you still feel confident in closing something by the end of the second of the health plan here by the end of the year, your end? Or is this something that you think at this point probably more likely maybe slips into early next year?
spk05: Well, you know, what we do expect is that decisions will occur in Q4, and certainly we are hard at work in cases where decisions have been made. So, you know, on the whole, you know, what I feel good about is the pipeline and our position, and so certainly are hoping to have, you know, positive news to report the next time we talk.
spk02: Okay, that's great. And maybe just one more follow-up, Will. When we think about the fourth quarter in terms of the EBIT guidance implied for the fourth quarter here, Would you say more of it is coming in sort of a decrease in gross margin sequentially or an uptick in sales and marketing? Because I'm assuming maybe R&D and G&A are relatively flat.
spk03: Yeah, Charles, I think the way to think of it is we do have a step up in the cost of delivering essentially the product in the fourth quarter. implementation cycle and then what we call our pyro or our rollover cycle when our teams are essentially reconfiguring and resetting up customers for the following year. So you will see a step down in that gross profit or gross margin quarter over quarter. That will drive, you know, I would call most of the kind of the delta between Q3 and Q4. And then, like I said as well, you are going to see a step up, actually, in each of the OPEX lines, sales and marketing, R&D, and G&A. In sales and marketing and R&D, it's partly as we are investing ahead of the opportunities Maeve talked about from a growth perspective, you know, health plan and that data and technology opportunity.
spk02: Great. Appreciate it. Thanks, guys.
spk04: Thanks. We do have a follow-up question in queue from the line of Richard Close from Canaccord. Please proceed.
spk00: Yeah, thanks. I appreciate the comments on the churn compared to last year and whatnot, the progress that's been made there. Can you just provide us an update in terms of where you are on the renewals for this year? I know it was second half weighted, but did most of that occur in the third quarter, or how much is remaining in 4Q?
spk05: Sure. No, thanks, Richard. And I'll just start out by saying that I'm really proud of the fact that churn in 2021 will be meaningfully better than what we saw in both 2020 and 2019. So as you're pointing out, we shared last quarter that we do have renewals slated towards the second half of the year. And so at this point, we have about a handful plus to execute in Q4. We have line of sight to the majority of those renewals, and we do expect the majority of them to be customers in 2022. That said, of course, we do expect some ARR degradation and we are forecasting churn. But on the whole, we feel like we've really turned a corner in terms of the health of our book of business, which is just a credit to the entire organization.
spk00: Okay. And then with respect to the current selling season, was most of that, most of You know, stuff for January 1st starts, you know, you've had to already book, or is there an opportunity? Is the selling season continuing here in fourth quarter where it could be a contributor to 2022?
spk05: Yeah, thanks, Richard. You know, just to spend a moment on employer sales, you know, as we shared back in Q2, the team did a great job building pipeline in the first half of the year. They were able to do that because of the strong product market fit. of high-tech, high-touch navigation. And then this past quarter, what you saw was the sales team doing a great job executing against that pipeline, which is a credit both to the sales team and the strong leadership in that organization. To your point about the cycle of one-one, So certainly, Q3 was a big quarter for us from an employer sales perspective, but we do have a healthy pipeline entering Q4. We typically do see a set of employers who certainly launch off 1.1, so we'll continue to be focused on those opportunities over the next two months.
spk00: Okay. My final question is on transparency. You guys called this out a couple times. You mentioned government regulations. I think one of the health plan is a transparency opportunity. Can you just go over, you know, obviously this is core to, you know, Cast Light, the genesis of the company. Can you just go over the dynamics of the current environment as it relates to transparency?
spk05: Sure. Well, as you mentioned, Richard, the company has been a pioneer in the healthcare transparency space. We've been actively tracking both hospital and health plan related transparency regulations. We are very well aligned with the transparency rule and well positioned to support both our existing customers and future customers as they are focused on compliance with what is a very complex set of rules. In terms of what we're learning as time goes by, which you probably heard in my remarks, we had initially seen the interest and focus on compliance coming from health plans. It's been a big opportunity for us to have those conversations and expand those conversations. But more recently, over the last quarter, we did see more interest from employers, particularly those who have large, meaningful government contracts. We also see it from employers who are SLEIS, so have multiple carriers, so are looking to ensure that they're compliant across a multitude of plans. But, Richard, I mean, the kind of high level here is that people are taking these regulations seriously. And, you know, we believe that CatLight is certainly one of the only solutions that's really able to ensure compliance with those regulations.
spk00: Okay. Thank you.
spk04: Your next question comes from the line of Andrew Weinberger, who is a private investor. Please proceed with your question.
spk01: Yeah. Hi. Just to follow up on the last question with regard to transparency, when you look at sort of your RFPs, which started as transparency, What percentage of those have sort of grown from transparency only to, you know, maybe a cast light complete or even sort of an addition of care guides on top of that? I guess what I'm trying to understand, as transparency regulations become more in focus, how much more RFP activity is Do you expect Castlight to be invited to, and are you sort of stuck just selling transparency or is there an opportunity once you're in front of customers to sort of showcase all of the solutions that Castlight has?
spk03: Absolutely. I'll take that one. As you think about the transparency and coverage kind of regulations, they lead to very specific conversations at the beginning. As an example, one of the new customers we added in Q3 was a customer that issued an RFP actually at the very end of Q2, and we signed and contracted them in a period of really a matter of weeks, about eight weeks, because they were specifically focused on transparency and coverage. In that conversation, though, we expanded the dialogue from pure compliance to the value that a comprehensive navigation solution delivers, both in terms of healthcare and then broadly in benefits. That was one of our differentiators in addition to being able to deliver transparency in that comprehensive way Maeve mentioned. And it was a really clear proof point of essentially the question you're asking. The broader RFP question, though, the majority of the RFP activity we are receiving is still for our full digital navigation solution or navigation plus care guides. Really around two-thirds of our RFP activity is that, and you saw that actually in the business we closed. About two-thirds of the net new logos we signed had care guides attached to them and were really navigation customers. Thanks for the question.
spk04: Again, that is star 1 for any questions. At this time, there are no further questions in queue.
spk05: Thank you for joining us today. We look forward to speaking with many of you at the 30th Annual Credit Suisse Healthcare Conference next week.
spk04: This concludes the Cast Light Health third quarter 2021 conference call. Thank you for participating. You may now.
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