Benefitfocus Inc (BNFT) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Benefitfocus first-quarter 2014 earnings call.

(Operator Instructions)

Thank you. I would now like to turn the call over to Milt Alpern, Chief Financial Officer. You may begin.

Thank you. Good afternoon, everyone, and welcome to Benefitfocus' first-quarter 2014 earnings call. We will be discussing the operating results announced in our press release issued after the close of market today. I'm Milt Alpern, CFO of Benefitfocus, and with me on the call today is Shawn Jenkins, our President and Chief Executive Officer.

As a reminder, today's discussion will include forward-looking statements such as second-quarter and full-year 2014 guidance and other predictions, expectations, and information that might be considered forward-looking under federal securities laws. These statements reflect our views as of today only and should not be considered as representing our views as of any subsequent date.

These statements are subject to a variety of risks and uncertainties, including the fluctuation of our financial results, general economic risk, early stage of our markets, management of growth, and a changing regulatory environment that could cause actual results to differ materially from expectations. For further discussion of material risks and other important factors that could affect our actual results, please refer to our annual report on Form 10-K which is on file with the SEC and our other SEC filings.

During the course of today's call we will also refer to certain non-GAAP financial measures. You'll find important disclosures about those measures in our press release. With that, let me turn the call over to Shawn, and I'll come back at the end of the call to provide details regarding our first-quarter results as well as our updated guidance for the second quarter and full-year 2014.

Super. Thanks, Milt, and thanks to all of you for joining us today. Benefitfocus carries a significant business momentum into 2014 with strong first-quarter results that exceeded the high end of our guidance range for both a revenue and profitability perspective. Total revenue for the quarter was $30.7 million, an increase of 29% year-over-year and was driven by core revenue growth of over 54%.

In the quarter we saw strong deal activity in both segments of our businesses and continued momentum around the private exchange opportunity. In both business segments, employers and carriers are demonstrating higher levels of interest in cloud-based benefits management solutions. The urgency is driven by three primary factors. First, a generational shift to cloud-based technologies which is really a multi-industry trend and it's clearly providing a lift to our business.

Second, we are seeing increased employer interest in migrating to a defined contribution model. They are seeking greater cost certainty which defined contribution models provide.

And, third, the Affordable Care Act regulatory mandates are causing many customers to fundamentally rethink their approach to employee benefits. Carriers are seeking direct-to-consumer solutions as the individual market is expected to grow significantly in the next five to seven years. Benefitfocus Marketplaces offer insurance carries a private exchange solution that integrates with the public exchange while also incorporating voluntary benefits. This integration creates a better direct sales channel for our customers.

Our solution lets insurance carriers give consumers the ability to determine subsidy eligibility, compare plan options, estimate costs, and apply subsidies to qualified health plans from a single work [flow]. These tools paired together offer our customers a marketplace plus administration solution with easy-to-use tools for employers, employees, brokers, and carriers, encompasses administrative support for the first sale, meaning new, renewal, and [off] cycle sales of group products as well as employee shopping enrollment management for new hires, life events, and open enrollments.

In the carrier business, we continue to see strong momentum and we're thrilled to announce the signing of United Healthcare, a national insurance carrier with over 30 million covered lives. United will be rolling out the Benefitfocus enrollment platform nationally across its mid and large group market segments. This is a terrific customer win for us and it further validates Benefitfocus as a cloud-based platform of choice for the insurance carrier industry. We now have seven of the ten largest insurance carriers as customers and we see a substantial opportunity to expand our footprint within each of them.

Interest in private exchanges is particularly strong amongst Blue Cross Blue Shield plans across the country as well. We are also thrilled to announced the signing of CareFirst, the Blue Cross Blue Shield in Maryland and Washington, DC as a new private exchange customer. We are seeing continued momentum from a number of our private exchange customers such as Aetna, Blue Cross Blue Shield of Florida, and Mercer as they successfully roll out their marketplaces on the Benefitfocus platform.

In our large employer segment, the development of Marketplaces and overall dynamics of our post retail ACA world has sparked a growing need for whole workforce solutions. Addressing this complexity and providing customers with a new way forward will be key focus this week at our annual One Place user conference, the premier event in the benefits management industry. We will be hosting hundreds of current perspective customers and partners for three days of product announcements, training seminars, and best practices presentations.

At One Place, we will be introducing the new edition of HR InTouch Marketplace which is specifically designed for the new phenomenon which we refer to as everyone is eligible. HR InTouch Marketplace, the Whole Workforce edition, allows employers to provide the decision support tools and enrollment capabilities of our platform for full-time employees and for employees enrolling in subsidized qualified health plans through public exchanges.

The new edition will also feature a recommendation engine and guided shopping experience to help employees navigate the increasingly complex enrollment process. In addition, the HR InTouch Marketplace Whole Workforce edition will now enable retirees to shop for individual Medicare plans, including helping them find the best-matched plan by filtering eligible plans by physician and pharmaceutical information.

In our employer business, we had another strong sales quarter that included 25 new large employer customers. These include Caltech, Jet Propulsion Labs, Boston Scientific, AmeriGas, Southeastern Freight Lines, Janus Capital Group, Stage Stores, Limited Stores, and UniFirst. Employers are in the process of designing their 2014 open enrollment strategies which is leading to strong customer interest at this time.

As an example, AmeriGas, the nation's largest retail propane maker, chose the HR InTouch platform to support their benefits administration, enrollment, and employee communications. AmeriGas has a widely dispersed workforce of approximately 9,000 employees located in 1200 locations across 50 states.

With HR InTouch Marketplace, these employees will be able to shop and enroll for their benefits from any web-based device and will be able to utilize more than 300 informative videos in our planned shopping app to understand and compare their plan options to make the right benefits choice for their specific circumstance. An exciting part of this win is that AmeriGas is also deploying our Benefit Informatics, data analytics and reporting solution. We believe Benefit Informatics is a clear differentiator in the marketplace.

Another strong win in the quarter was Southeastern Freight Lines, one of the largest trucking carriers in the country with nearly 7500 employees, half of whom are drivers. Southeastern is looking for a next-generation solution to help them migrate from their existing passive paper-based enrollment process to an active online process that could reach their highly mobile workforce. They were also looking for a solution to help them deal with the complexity of complying with the Affordable Care Act, including required employee communication.

On our last call we shared the three areas we would be making incremental investments in 2014. These are sales and marketing, a new third-party implementation program, and the private exchange marketplaces that we have just outlined. These are areas that will enable Benefitfocus to fully capitalize on the multi-billion dollar market opportunity we are targeting. I'm pleased to say that we have made significant progress on each front in recent months and are well-positioned to start realizing these benefits of these investments later this year and beyond.

First, in the sales organization we had a very strong hiring quarter and in the process of onboarding a number of highly qualified and experienced sales professionals. We are on track to meet our hiring objectives for the year and believe this greater market coverage will enable us to more effectively target the 18,000 large-employer prospects that we have identified.

We also enhanced our sales leadership team at the hire of Rebecca Brinson to lead our channel sales group, and to scale our sales operations. Rebecca brings tremendous sales leadership experience from her previous roles at both ADP and Xerox.

We've also made great strides in building out the Benefitfocus implementation program. This program will offer collaborative and consultative approach for clients implementing our software through system integrators. Accenture, Deloitte, Rock, HRchitect, and Assan have joined the implementation program and will begin their training in 2014.

Benefitfocus selected Accenture, one of the world's leading organizations providing management consulting, technology, and outsourcing services as a preferred integrator of its private exchange marketplace solution. In this role, Accenture will serve carriers, benefit consultants, and employers in configuring and deploying the marketplace platform. Benefitfocus selected Deloitte as the preferred integrator for employer implementations. As part of this role, Deloitte will assist Benefitfocus with the development of a certification program for employer implementations.

Interest and willingness to commit material retail resources for this program has far exceeded our initial expectations and is a powerful validation of potential opportunities in this market. 2014 is all about getting charter members signed, which we've done, get them certified on the platform and trained. Training will include shadowing of current customer implementations that are underway with the Benefitfocus implementation team. This is an important element of our long-term growth strategy and we'll begin to see the positive impact from this program later this year and into 2015.

To summarize, the first quarter represented a strong start to 2014 for Benefitfocus. We are benefiting from strong momentum in both our carrier and employer businesses, we have established a clear leadership position in the cloud-based benefits management market. We are seeing positive results from investments we are making to capitalize on this momentum. We believe these actions will help position the Company to derive additional revenue growth over time. With that, I'm going to turn it over to Milt. Milt.

Thanks, Shawn. We are pleased to have delivered a strong first quarter with results that were of better expectations from both the revenue and profitability perspective. I will begin by reviewing the details of our financial performance and then I'll finish with our updated guidance for the full-year 2014 as well as the second quarter.

Total revenue for the first quarter was $30.7 million, an increase of 29% compared to the first quarter of 2013, and above the high end of our guidance range of $29.6 million to $30.1 million. Breaking this down further, software subscription revenue was $28.5 million, representing 93% of total revenue and growing 28% year-over-year, while professional services revenue was $2.2 million, representing the remaining 7% of total revenue and up 38% year-over-year.

Looking at revenue by segment, employer revenue for the quarter was $13.3 million, up 54% compared to the year-ago period, while carrier revenue was $17.4 million, up 14% in the year-ago period. Our employer business represented 43% of total revenue in the first quarter compared to 36% in the year-ago period. Our revenue mix will continue to shift towards the employer business as we believe the employer market is highly underpenetrated and we are confident in our ability to continue driving growth in that segment for the foreseeable future.

Let me now review the supplemental metrics we report on a quarterly basis. Our sales team performed well in Q1 as we ended the quarter with 418 large-employer customers, an increase of 114 compared to 304 in the first-quarter 2013, and up from 393 at the end of the last quarter. We also ended the quarter with 43 carrier customers, up from 36 in the first quarter of 2013 and up from 40 from the end of last quarter.

As Shawn mentioned, the addition of United Healthcare is an exciting customer win that we believe will be a positive growth driver for this business in the future, and we will continue to sign new carrier customers going forward, but with seven of the ten insurance carriers already under contract, we expect a significant amount of our near-term carrier revenue growth will come from equal penetration of our installed customer base. In addition, we continue to see significant interest in our marketplace solutions from many of our carrier customers. Our software revenue retention rate was once again greater than 95% in the first quarter, which we believe is evidence of a significant value our platform generates to our customers.

Moving down to P&L. I'll start by discussing gross profit on an adjusted basis which excludes stock-based compensation, depreciation, and amortization of acquired intangibles, and amortization of capitalized software. Adjusted gross profit in the first quarter was $13.7 million, resulting in an adjusted gross margin of 44%. This is down from the 55% adjusted gross margin in the year-ago period due to a number of significant professional services engagements we are undertaking for some of our customers.

As a reminder, we recognize expenses for professional services on an upfront basis but defer the revenue until our customer is live. Services revenues has been amortized over a 10-year customer relationship period. The short-term negative impact on gross margin reflects the significant demand we are seeing from our carrier customers and for our marketplace solutions which typically has significant upfront implementation and professional services components. Over time these engagements should drive incremental subscription revenues as our customers sign up live to these new channels.

Additionally, we expect our professional services margin should scale on the future as we begin to recognize the revenue from our services engagements and the associated expense lines down. In addition, we expect the creation of a third-party implementation ecosystem would be a driver of future gross margin expansion. The near-term negative gross margin impact will eventually subside and will lead to significant long-term benefits and we are confident in the scalability of our business model and our ability to reach our long-term gross margin target.

Turning to operating expenses, on a non-GAAP basis, excluding stock-based compensation and amortization of acquired intangibles, sales and marketing expenses were $10.8 million, an increase of 19% compared to the first quarter of 2013. R&D expenses were $8.6 million, an increase of 93% compared to the year-ago period, and G&A expenses were $3.4 million, up 24% compared to the year-ago period.

The increase in sales and marketing and R&D expenses during the first quarter was largely due to the increased investments we have begun making in our sales capacity as well as ramping of a private exchange marketplace offering and third-party implementation partnership programs while the increase in our G&A expense reflects increased public company costs.

Adjusted EBITDA was a negative $8.8 million or negative 29% of revenue. This is better than our guidance of an adjusted EBITDA loss of $10.5 million to $11 million and compares to negative $2.9 million in the first quarter of 2013.

As we mentioned on our last call, the reduction in the adjusted EBITDA margin reflects a focused strategy of increasing investments in sales and products so that we may capitalize on our leadership position and its multi-billion dollar opportunity and increase our shareholder value over the long term. With that said, as the growth of our employer business moderates and our business achieves greater scale over time, we continue to believe that we can achieve our adjusted EBITDA target of 20%.

Non-GAAP net loss per share was $0.46, based on 24.5 million of weighted average shares outstanding, better than our guidance at a loss of $0.53 to $0.55 per share and compares to a per share loss of $0.23 on 21.3 million weighted average shares outstanding in the year-ago period. We have made an adjustment to our non-GAAP net income adjustment to reflect an interest accrual on build to [seek lease] arrangements.

As we discussed on our last call, we have changed our accounting for the leases associated with our current and future headquarters facilities from an operating lease to a financing obligation. The adjustment made is for interest expense on the financing obligation related to the accounting for two headquarter's buildings. Looking quickly at our GAAP results, gross profit was $11.5 million, operating loss was $11.8 million, and our net loss per share was $0.51.

Turning to the balance sheet, we ended the quarter with cash, cash equivalents, and marketable securities of $75 million. This is a decrease from $78.8 million at the end of the fourth quarter. I'd now like to finish with our guidance for the second quarter and full-year 2014.

For the full year, we expect revenues of $130.6 million to $134.6 million which equates to year-over-year growth of 25% to 28%. We are targeting an adjusted EBITDA loss of $49 million to$ 53 million and a net loss per share of $2.37 to $2.53 based on 24.9 million weighted average shares outstanding.

Turning to the second quarter, we're targeting revenue of between $31 million to $31.5 million which represents year-over-year growth of 27% to 29%. From a profitability perspective, we expect an adjusted EBITDA loss of $15 million to $15.5 million and a non-GAAP net loss per share of $0.70 to $0.72 based on 25.1 million weighted average shares outstanding.

In summary, we are very pleased with our first-quarter performance in both the financial and operational perspective. We continue to see strong demand for our platform which validates the value we are able to deliver to our customers, and we believe that the investments we are making in our people and products will allow us to capitalize on this multi-billion dollar market opportunity. With that, we're now ready to take your questions. Operator, please begin the Q&A.

(Operator Instructions)

First question, Greg Dunham, Goldman Sachs.

Thanks for taking my question. First off, and I apologize I might have missed this because I was jumping on some other calls. The United Healthcare win, that is a clear kind of standout kind of piece of news from the press release. Did you provide any context in terms of what specifically they're using you guys for, what kind of scale should we expect and maybe when this would impact kind of the cost of revenue line as well as the overall revenue line?

Sure. Thanks, Greg. So, the United win is a significant win for us at Benefitfocus. We're very excited to welcome United as a great new customer. They selected Benefitfocus for our E-enrollment platform for both their mid and large employer market segment.

It also includes, and we did talk about this a little bit on the call, our benefit informatic service, so we'll be serving up the benefit informatics data service to power the enrollment experience so that individual members can see their historical information with United and make informed decisions as they select their health plan. It's a very exciting combination of those two technologies.

As far as the roll out, it's obviously a big customer, big win for us. As you know, our business, Greg, it takes a little while to bring the large carriers live to market. We expect to be live with United towards the end of this year in 2014. Of course we are doing the implementation services, the project management work, and the integration as we speak now and for roll out in the fourth quarter.

Okay, great. And maybe one for Milt. I look at the cash flow over the trailing 12 months. It's basically break even on an operating basis and then I look at the adjusted EBITDA line and it is negative $25 million. Obviously there is a big shift due to the accounting. Is this the kind of delta that we should expect going forward or would you expect this big disconnect between kind of operating cash flow and adjusted EBITDA to normalize soon?

I think in the short term, Greg, I think you'll still see the delta, keeping in mind that EBITDA really does not reflect what cash flow is for us based on the fact that we have the professional services project underway that you know we collect the cash up front for these things and then recognize the revenue over a much longer customer relationship period. So I would assume to continue to expect to see the disconnect between EBITDA and cash flow going forward.

Great. Thanks, guys.

Next question, Nandan Amladi, Deutsche Bank.

Things for taking my question. Shawn, a question for you. It's kind of a big picture one. You were recently certified as a web-based entity. How does that change the nature of your place in the ecosystem both in terms of partnerships and competition?

Yes, great question and very insightful. So, what we see happening at Benefitfocus in the industry is this idea of we refer to as benefits for the whole workforce where everyone is eligible. As a matter of fact, it happens to be a big theme of our One Place conference that we're hosting here with all of the great customers and partners in the ecosystem in Charleston this week where we have a series of major new product announcements taking place.

So, one of the main themes is this idea that with the Affordable Care Act implementation really is a sense that everyone is now eligible, it's just a matter of what. So, traditionally employers have full-time employees covered by their health plans and other benefits and then they might have part-time employees which historically they would refer to as ineligible.

But now that part-time employee might actually be eligible for a government subsidized plan or qualified health plan and we believe through the use of the Benefitfocus technology and our marketplace capability, we can actually greet those part-time employees inside of Benefitfocus' HR InTouch marketplace capability. And when they come in we can inform them that they perhaps might not be eligible for their company plan, but we can provide them information about government-subsidized plans, perhaps take them to one of the private exchanges that we're operating for one of our insurance carriers or one of the multi carrier exchanges we have.

The reason we went to the effort to become a web-based entity and go through that certification process is we feel like it is kind of a future capability whereby we're looking to either directly or through partnerships serve up individual policies and subsidy information for these formally ineligible employees. So you can think of it as really kind of a capability that we acquired and will be using in I would say various formats depending on the marketplace and the context of our customers.

Thank you, and a quick follow-up if I might. Your launching a system integrator certification program.

Yes.

How should we think about your targets? How big will it be say by the end of this fiscal year? What are the milestones we should look for?

Yes, great question. The interest that we had as we formulated the curriculum, the training and the certification has really been outstanding as we think of at Benefitfocus we have one platform that serves two markets, our insurance carrier market and our large employer market. We are very excited to have system integrators join the implementation program for both of those markets and so we have selected Accenture is a lead integration program on our shores carrier program. They will be helping our customers -- they will be sending their consultants through the training and certification so that Accenture will be able to work with our customers on configuring and integrating our private exchange technology for them.

And then on the employer side we're super excited to actually have four system integrators led by Deloitte. Deloitte is helping us commercialize the certification and training for the employer implementation process that we go through at Benefitfocus, and then we have Assan, HRrchitect, and Rock, three great SAS cloud-based system integrators and project management firms. And so I think as you talk about the milestones toward the end of the year, the big milestone is equipping lead partners in both of our businesses, our plan is to fully develop the curriculum training and certification over the next several months.

Each of these firms will be putting some of their consultants through the certification training process over the summer, and our target would be that really by the end of the year the you begin to see certified consultants come through the other side of the training certification. There will also be a bit of shadowing that is taking place with some of our existing customers that are in flight, and so really this is kind of teeing us up for the tail end of this year but really more of a 2015 type of full array of system integrator certified consultants.

Thank you.

Next question, Richard Davis, Canaccord Genuity.

Great. Two kind of just numbers question. So, on my math on a GAAP basis, and I know you don't break out exactly but just roughly it would be helpful to explain to investors, with the way you recognize revenues on ProServe because you recognize expenses up front and the revenues over 10 years or so, is it fair to say that that side of the business, if it were kind of standalone, is probably losing, I don't know, $10 million to $15 million on a GAAP basis? Now, the cash flow is a lot less, and then I had a quick followup.

Well, that would depend, Richard. I think that certainly as you point out the fact that there's a big difference in the way that we recognize revenue and the way the cash flow is, you see that all the expenses recognized up front and then the revenue recognized over a 10-year customer relationship period, so clearly the way it's recognized there is a significant loss right now.

I think if you were to recognize the revenue over the course of the implementation period let's say if you were able to determine standalone value for this you'd be able to do that, you would be certainly much closer to profitability or certainly much less of a loss being recognized if we were able to recognize it over that implementation period. Right now we aren't kind of giving any kind of alternative profitability metrics on a GAAP basis or otherwise to indicate what the profitability numbers would look like if we had a different way of recognizing those types of [errors].

Got it. And then just kind of math wise as well, we have you kind of bottoming at about $20 million of gross cash in say Q4 of 2015. Does that seem roughly correct? I know you're not doing that is for 2015, but at some point -- Greg said you had on the past basis, but it feels like you're going to be slightly negative on a free cash flow basis this year.

Yes, I think that is low. I think if we look at the -- as we've already pointed out when Greg asked the question was the big difference between what we generate in cash flow versus what the EBITDA numbers show. I think your number of $20 million bottoming sometime in 2015 is probably low. I would say for 2014 we're probably talking about a burn somewhere in the neighborhood of $20 million to $25 million, but I don't see it in 2015 getting down to levels that you're talking about.

Got it. No, that's very helpful. Thank you so much.

Next question, Terry Tillman, Raymond James.

Good afternoon, guys. I was dropped off three times, so my question may have been asked three times, but can I try them anyways?

Sure go ahead.

Shawn, in terms of the employer business, it was good to see the number of logos added. Can you mind us again how the seasonality works as we progress through the year? I thought maybe 2Q and 3Q are the high watermarks typically in the terms of new business signings. Just maybe give me kind of a recap on that. And then, secondly, anything you can say about the quality of the bookings, was there anything different or a change in trend around the size of the deals in that employer business?

Sure, great. Thanks, Terry. Yes, the seasonality of our business, the benefits industry in general, the context of which the Benefitfocus platform is used to help employers manage all their benefits, most employers, particularly large employers, have a January 1 effective date for their benefits, so they roll out the menu of new options to their workforce in the fall, generally in October/ November timeframe for what is commonly referred to as open enrollment season. And so our employers, the good thing about that is in a SAS-based business it provides a really kind of a knowable schedule when the software needs to go live and it helps the project management teams build their schedules and so forth.

We back up from an open enrollment target window in the October/November timeframe to an implementation average of four to five months in our large employer market, depending on the size of the employer and whatnot, and so we really see a lot of signings in the second and the third period where employers are deciding to modernize the benefits for the following year, so in this case they would be looking at their 2015 benefits cycle.

Getting a new cloud-based platform and the benefit focus platform and the communication strategy, so that is generally why we see you correct Q2 and Q3 the bigger new employer signing quarters and around the qualitative we announced some great logos. I don't know if you caught it on the call but Caltech is a super company, Boston Scientific, AmeriGas, Southwestern Freight Lines, Janice and some others Stage Stores, Limited Stores, and UniFirst, those are all big companies and I would say that I think over the last several years we've seen the average employer size drifting up a little bit and this quarter would be consistent with that. I don't know that it's materially up in anything kind of out of what we've been seeing.

We just continue to see great logos, great customer wins, great momentum in the employer business, so we're real happy with the quarter on the sales front. And we also mentioned, too, that we're increasing our spend in sales and marketing and we're real happy with the sales and marketing professionals that we're onboarding right now. And we did mention a new Vice President of Sales and Marketing on our channel sales, Rebecca Birnson, who has experience from both ADP and Xerox and that's a great part of our investment strategy for the year is to increase that employer sales team.

Got it. And I guess, Shawn, in terms of the last quarter we did get a lot of questions because I think the loss was a little higher and part of it was obviously the R&D investment private exchanges, and further ramp in sales and marketing, but on sales productivity are you seeing anything, and I don't know if you can quantify it where it stands, but time to productivity or time to quota achievement, is there any improvement you're seeing because either maybe it's becoming a little more mainstream adoption or people are more comfortable with ACA or maybe the carriers are helping create a network effect. Are you seeing any change in how quickly some of these reps are ramping?

Yes, I think the good news from my standpoint, Terry, is that it's consistent with what our plan and what our model has kind of predicted over the last couple years.

So as we have thought about the employer business and increased our investment in sales and marketing, our ability to find the professional, onboard them, get them trained and ramped up has been, I don't want to say has been no surprises because we certainly learned a lot as we scaled our business in taking it public and whatnot, but the good news is we're very happy with the way we see the predictability I guess of that capability that we've ramped and, if anything, certainly the more insurance carriers we have, the more logos we have, the more private exchanges that we're bringing to market on the Benefitfocus platform. Our name is out in the industry better.

I think the initial public offering help with that a bit, too, so people are more familiar with Benefitfocus. A call like this is great because people are learning about the Benefitfocus platform and the Company. I do not know that there's been a radical change in the time to ramp. Maybe one last piece, Terry, is as we talk with other software as service platform businesses, we see similar patterns on you find the person, you bring them on and train them and they go out and sell and then you implement. So, I think the good news is it is kind of a knowable thing that we're working on tweaking and dialing in as we keep going.

Okay. Thanks for your help on that. Milt, just a numbers question. Anything you can say though about the gross margin because it is volatile and the irony is I guess when you're seeing the carrier demand or the services worked, it can even near term hurt gross margin, but is there anything we can hang our hat on next year?

Should we see the gross margin improve next year on a year-over-year basis? And then I guess what would be more of a lever for improvement? Is it just the cumulative effect of you're starting to recognize revenue or potentially the third party SI's? Which one of those two could be more bang for the buck on the gross margin? Thanks.

Thanks, Terry. In an answer to your first part of the question, what was driving kind of the margins most recently. Obviously we talked about last quarter and again this quarter that we are making significant investments in a number of areas, market places in the product around marketplace offerings.

Certainly sales and marketing ramping our sales capacity, adding more people and adding more infrastructure around the sales and marketing organization and, lastly, as we point out the third-party implementation program which we now have gotten off to a great start with the signing of the five implementation partners this quarter. I think in the shorter term, the remainder of 2014 I think as a result of these investments and gearing those things up we will continue to see some margin pressure. We will continue to spend in those areas because obviously spending in those areas we believe gives us the best opportunity to grow our top line because we see a value proposition at this point.

And then as we kind of look out, when do we begin to recognize some improvement. I think the things that you mentioned clearly are going to continue to that, the partnership program that we've implemented and once we begin to get these partners up to speed so that they are delivering on our behalf or delivering directly themselves to our end-user customers the implementation services that we are providing today, I think that will certainly begin to show margin improvement as that might in a change of accounting could result from developing a standalone value for those services.

Also, I think the investments that we're making not only on the marketplace side but on the growth in our sales organization, our sales and marketing organization will continue to scale and generate revenues and thereby more margin improvement as we look into 2015.

Next question, Sean Wieland, Piper Jaffray.

Thank you. I want to go back to the United deal. Does it cover all the lines in the mid and large employer segment, both the risk-based and fee-based businesses? What are they doing for E-enrollment now?

Great question, Sean. As you can imagine, United is a very large organization and they have a lot of lines of business, a lot of market segments that they are in and a lot of capability actually they built up over the years with different products and so forth.

So commenting specifically about how they'll use the benefit focus enrollment in certain areas I prefer to leave it -- messaging to the market which ones are getting it, I would just say that we're comfortable saying that they will be using the Benefitfocus E-enrollment for both their mid and large employer market segments and there is nothing to preclude them to use it for either fully insured or self-funded business, so they'll have the ability to do both and of course they have a go-to market strategy in their messaging which is important. We always like to sort of respect the customers as they bring it to market.

Okay. Can you help us out thinking about the size of the deal?

Well, typically -- Sean, this is Milt. We don't give an estimate of what that size of the deal might be. Shawn kind of just put in context what it's covering, okay, what areas of United it's covering. As we've obviously just signed a deal as we move through implementation it's probably going to take us through into Q4 2014. As we move forward, we will be able to get a little bit more better idea of what the size of the deal might be and what the implications are, kind of revenue we might see. Maybe very, very late 2014 but into 2015, but right now it's a little bit early to begin to speculate on how quickly this deal's going to ramp.

Okay, so maybe a broader question then from your perspective. Shawn, when you think about the evolution of this business and there's been milestones over the course of time since you've founded the company, where does this contract stack up relative to the big milestones? Is this a big milestone for the company to get a contract this big?

Sure. As one of the founders, Sean, it's been such an incredible journey to watch Benefitfocus grow and add customers and it may sound a little simplistic, but every customer that we win makes me excited, I get passionate about learning about their business and clearly it's undeniable the size of United Healthcare, the scale of their organization, the time and the market with all the change and for me I think it's a pretty big endorsement of this concept of all you benefits in one place, we talked about a lot of Benefitfocus and the Benefitfocus technology's ability to actually put forth in front of an employer and all of their workforce any type of benefit that you might want to market or sell to them.

So, I think the size of the customer is a huge milestone. We're extremely proud of our win there. I think the other way to think about it is just the endorsement of the platform, its ability to scale, and this vision that we've had for years of all your benefits in one place and how important that is now in the changing market dynamic.

Okay, got it, thanks a lot.

Sure, thank you.

Next question comes from the line of Adam Klauber with William Blair.

Thanks. Good afternoon. One or two followups on the employer market. From what we heard, the selling season got off earlier than usual I guess. One, is that true. And, two, could you give us a sense are RFP's a lot -- are RFP's up a lot this year compared to last year?

Great question. I might say it a little different, Adam. I do not know that we got off earlier. We did have a great first quarter. I guess in some sense employers have been thinking about Affordable Care Act and what it means to changing their benefits as they enroll into this next year. They've had an additional year to think about it and so perhaps there was a bit of a head start. But, in general, we still expect Q2 and Q3 to be big quarters, big meaningful quarters for our direct employer business as well as our private exchange, really our channel market that's feeding that.

As far as the RFP's go, I do not know that that is an usual amount of RFPs. They're always the larger the employer, the more thoughtful they tend to be as far as evaluating their strategy. One of the things that I'm seeing a lot of personally is this on-premise -- large employers with a traditional on-prem [HRAS] system and they're looking at the benefits administration module and they're wondering if it can really handle the communication and the Affordable Care Act as well as things like voluntary benefits and the other important aspects.

And that is generating a fair amount of thoughtful insight by those employers and the linkage to our implementation program or our system integrator is not direct but the indirect I would say implication is that those large employers that have a traditional HRAS our ERP or on premises system, they realize that it is time to modernize for the Affordable Care Act and the communication and those system integrators who have helped them implement and maintain those systems I think that the fact that we now see our program getting off to such a great start is probably a further indication that there is a lot of thought going on inside of enterprise is about moving to the cloud for benefits management.

Thanks. That's helpful. I'll followup on that. With the client switching over again, if you want to use the last quarter as a data set, ballpark how many of those are switching to either an exchange or a more complex benefit? Maybe they're adding an HSA or high deductible, just ballpark how much are switching over because of that or due to that?

Sure, I do not have a breakout for you necessarily in the first quarter as far as private exchange, but I would say -- that is a good, thoughtful question about the ballpark; 50% or better of our customer kind of the energy of the disruption that opens the door for Benefitfocus has to do with a material change in the benefits. It could be something as simple as an HSA plan, introducing a high deductible health plan, generally there's some event like that, not necessarily a massive shift to define contribution is not required. They could still be offering several traditional health plans, maybe they're introducing just one or two more in addition to savings vehicle.

Often times there will be a voluntary benefit or two associated with that strategy to offset some of the gap in there. So, it's usually a couple of factors like you're pointing to that are associated and I would say at least half of the deals we win would have something like that. That is consistent with the accelerating momentum we've seen in our employer business as more and more employers realize they need to modernize, they need to update, need to get visibility into their cost structure, and they need to get a better way to communicate to all of their employees all their benefits.

Great. That's helpful. Just one last question. I'm not sure if you disclosed this at all, but of the first quarter wins, again just a ballpark, how many came direct and how many came from channel partners?

Yes, Adam, this is Milt. We announced, as we said, 25 new employer customers and the majority, the vast majority of those came direct. The channel is still developing for us. We have tremendous opportunities. The marketplace partner that we are comprising the channel today in the first quarter the vast majority of the 25 came direct.

Great. Very helpful. Thank you.

Thank you.

There are currently no further questions.

Okay. Thank you, Operator, and thanks everyone for joining us tonight for our first-quarter earnings call, and we look forward to talking to you again at the end of the second quarter. Thank you.

Thanks everyone.

Again, thank you for your participation. This concludes today's call. You may now disconnect.