Benefitfocus Inc (BNFT) 2014 Q3 法說會逐字稿

Good afternoon. My name is Londa and I will be a conference operator today. At this time, I would like to welcome everyone to the Benefitfocus third-quarter 2013 earnings conference call.

(Operator Instructions)

Thank you. I would now like turn the call over to Mr. Milt Alpern, Chief Financial Officer. Please go ahead.

Thank you, operator, and good afternoon, everyone, and welcome to Benefitfocus's third-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, Chief Financial Officer 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 fourth-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.

The statements are subject to a variety of risks and uncertainties, including the fluctuation of our financial results, general economic risks, the early stage of our market, management of growth, and a changing regulatory environment that could cause actual results to differ materially from expectations. For further discussion of the 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 can find important disclosures about those measures in our press release.

With that, let me turn the call over to Shawn and then I will come back to you at the end to provide details regarding our third-quarter results, as well as our updated guidance for the fourth quarter and full year 2014. Shawn?

Super. Thanks, Milt, and thanks to all of you for joining us today. Benefitfocus reported strong third-quarter results with both revenue and profitability that exceed the high end of our guidance range.

The total revenue for the quarter was $34.2 million, a 30% increase year-over-year. Both businesses contributed the strong revenue growth in the quarter with employer revenue increasing by 52% and carrier revenue up 17% year-over-year.

We had a strong quarter in both business segments, highlighted by the addition of 52 net new employer customers, a 68% increase of new employer customers year-over-year. Both carrier and employer customers are bracing the fundamental changes possible from the transition to the cloud-based benefits administration paradigm, which provides significantly more flexibility and the opportunity to get greater control over one of their largest and fastest-growing expense items.

More than 160 million people in the United States receive their health benefits through their employers, and the way in which they are shopping and enrolling for these benefits is undergoing a generational shift. As we've long anticipated, this market is migrating to the cloud in couple different ways depending on the needs and requirements of the employer.

The power of the Benefitfocus model is that however employers ultimately decide to move the cloud for benefits administration, we believe we are in a leading position to bring these lives onto our platform. For the majority of these 160 million lives, they're covered through companies where having a comprehensive benefits offering is a competitive differentiator in the market for talent.

For these employers, having control over the types of benefits offerings provided to their employees, whether medical, dental, supplemental, or voluntary benefits, is essential. Employers with this profile are struggling with the outdated and inflexible benefits administration solutions that limit their ability to upgrade the benefits they can make available to their employees.

They have previously seen the value of migrating their cloud into other areas of their enterprise, like CRM, travel and expense management, and talent management. And they are rapidly embracing a lower cost and greater flexibility of our cloud-based benefits management platform.

We service these employers with our direct sales team who are having great success in the early stages of penetrating this massive market, as evidenced by our growth in new customers and revenue to-date. At the same time, there is a meaningful segment of the market where employers are looking for the convenience of outsourcing their benefits administration needs to private exchanges.

Accenture estimates that up to 40 million lives will be on private exchanges by 2018, which is tremendous growth for market that did not even exist just a few years ago. We've seen private exchanges be of particular interest for certain employers who have many part-time employees and greater compliance burden under the Affordable Care Act.

Private exchanges, which offer substantially the same set the benefit offerings to all of their participants, can be a compelling solution for these types of employers. We expect the private exchange market to develop between broker-run exchanges and insurance carrier exchanges, as both groups look to best position themselves for the future.

We are extremely proud to be the platform for the largest broker-led private exchange market through our partnership with Mercer and their Mercer Marketplace. As Mercer recently reported, the number of lives in the Mercer Marketplace increased fivefold in 2014 to nearly 1 million lives, which is a terrific validation of this market and how the benefit focus platform benefits from its growth.

At the same time, there is incredible energy in the carrier market to transform how they are going to communicate and sell their products to employer groups going forward. Private exchanges represent the most significant change in distribution for insurance carriers since the rise of HMOs more than 20 years ago.

This is a strategic imperative for carriers who are making long-term investments and commitments to private exchanges to ensure they are properly positioned to take advantage of the changing benefits market. We are very proud to be powering a number of private exchanges from which including Aetna, CareFirst, a growing number of Blue Cross/Blue Shield plans across the country, among others.

During the third quarter, we signed a new private exchange agreement with Blue Shield of California, who has more than 3 million health members. We believe Benefitfocus is in a great position to grow alongside carriers in this market due to our long history of generating significant value for these customers.

We believe private exchanges represent a multi-billion dollar market opportunity. This has been validated by the tremendous month of activity in the market in the last 12 months to 18 months.

We believe one of the reasons that the Benefitfocus Marketplace offering continues to build significant momentum in the market is our incredible integration capabilities and the growing network effect created by over 1500 ecosystem data exchange connections. The way we see this strength manifesting itself in the market is in the unique ability of our customers to extend our platform with their own internal capabilities, with partnerships that they bring to the table, and with the acquisitions they make along the way.

Because many of our customers who are deploying their private exchange on the Benefitfocus platform are multi-billion dollar enterprises, they operate in many market segments and geographies. The ability of our platform is to help them adapt and mold their strategy over time is a very powerful enabler.

We have many examples of how our customers extend their marketplace through partnerships or through their own internal capabilities. One recent example is Mercer's acquisition of Transition Assist, a retiree exchange provider. We have worked with Mercer to integrate the Transition Assist functionality and services into the Mercer Marketplace, and in so doing, have strengthened their strategic positioning.

Similarly, we have worked on deep integrations with both eHealth and GetInsured for several of our marketplace deployments, allowing these customers to rapidly introduce new consumer products into the employer-sponsored marketplaces. The Aetna Marketplace, powered by the Benefitfocus platform, has a fantastic set of services provided by PayFlex, an acquired company of Aetna's. And more recently, Aetna announced the acquisition up bswift to further develop a consumer offering that we see as following this pattern's extensibility and flexibility with the Benefitfocus platform.

We see the continued pace of innovation, investment, and integrations as further proof that the private exchange market is a massive opportunity and still in the very early stages of development. Our deep integration capabilities, combined with the powerful network effect of our growing ecosystem, is enabling our customers to be extremely adaptive and flexible as the market rapidly develops.

Turning to our third-quarter performance, we had strong sales activity during the quarter with 52 new employer customers. Including McDonald's, Logan's Roadhouse, ICF Consulting, Keuhne + Nagel, ICOR, RHA Management, and Bauer Hockey. We now have 540 large-employer customers, which is a tremendous milestone for the Company as we crossed 500 large employers on the Benefitfocus platform.

McDonald's selected Benefitfocus and our communications portal in order to better communicate benefit options to their US-based employees, many of whom are eligible for the first time under the new rules of the Affordable Care Act. This agreement is similar to the Office Depot win we announced last quarter, and is a great example of how we are initially engaging with certain large customers who are in the early stages of their benefits administration transformation strategy and process.

While the PEPM pricing is lower initially with only our communications portal, we believe this is a terrific opportunity to deliver immediate value while these customers continue to evaluate their long-term benefits shopping and administrative needs, and puts us in a great position to sell our full platform in the future.

RHA Management Services, which provides leadership and operational support to RHA's various healthcare programs, selected the Benefitfocus HR InTouch Marketplace for their 4500 employees. RHA has a significant percentage of part-time employees, and they selected Benefitfocus because of our ability to manage benefits and employee communications for their entire workforce.

Our ability to provide federally-subsidized eligible employees with sophisticated decision-support tools was a key differentiating factor, and the key thing that we introduced at our One Place conference earlier this year. It's exciting to see that strategy and new technology be embraced by the market.

One of the main advantages of cloud computing in the software-as-a-service delivery model is that of frequent software releases. These rapid releases bring a fresh set of new capabilities to the customer community on a regular basis. We are very proud of our long track record of delivering four major software releases each year, and this quarter saw another leap forward for the Benefitfocus platform.

During the quarter, we introduced new solutions to enhance our compliance and analytics capabilities, including new reporting capabilities for benefits administrators that assist employers in gathering required W2 reporting requirements for the IRS, which we plan to leverage to comply with additional reporting requirements like the employer mandate in 2015.

Also, the certification for ICD-10 conversion for our Benefit Informatics product, which is a new industry standard diagnosis coding system that is being introduced next fall. We are very proud to have this capability in production well in advance of the required deadlines, thus providing our customers ample time for the transition.

We also introduced a new communication package that includes a suite of features designed to help employers reach employees with meaningful, engaging communication tools. This package provides great new decision-support tools, like a guided shopping experience and virtual shopping assistance, just in time for the open enrollment season.

The third quarter is also our most active implementation period as open enrollment season begins for most companies in early October. Just this week, we have seen our concurrent user count reach almost double the volume we saw in the same week last year. This is the busiest open enrollment season in our history, and reflects the growing number of customers on the Benefitfocus platform.

We are doing a tremendous job across the Company of successful implement our customers. And I'd like to give a shout out and my sincere thanks to all the over 1200-plus Benefitfocus associates, you guys are doing a fantastic job.

During the third quarter, we continued to make progress on our third-party implementation program and we remain on track to have the first class of certified third-party implementers to graduate from the Benefitfocus University by the end of the year. This will put them on track to begin delivering implementation services on their own in 2015 as planned.

Setting up our third-party implementation program and improving the efficiency of our implementation teams is a major focus for us, and is being led by our new Chief Operating Officer, Ray August. We have made strong improvements in our implementation efficiency in the recent months, which is enabling us to successfully implement the over 100 new large-employer customers we've signed in the last two quarters alone.

And we see significant opportunity to make further and meaningful improvements in the future. Ray has hit the ground running with the lot of excellent ideas and energy, and is a great example of the incredible talent we're attracting to Benefitfocus, who have experience to ensure successfully scale into a much larger organization over time.

As we mentioned on the last call, Ray comes to Benefitfocus having successfully lead software and service organizations with over 10,000 associates and over $3 billion in annual revenues. His experience is already showing great results in our scale, efficiency, and quality. These will be major themes for our management team going forward.

During the quarter, we also strengthened our leadership with two addition to our Board of Directors, Doug Dennerline is currently the CEO of Alfresco Software and has previously served as the President of Success Factors and also the Head of Enterprise Sales in the Americas for SalesForce.com. Lanham Napier joins Benefitfocus Board after recently retiring as the CEO of Rackspace, which he led for more than 14 years. We are so pleased to have these two executives with such a wealth of experience building and growing successful cloud-based companies join our Board, and we look forward to the future contributions.

In summary, we delivered strong third-quarter results from both a financial and operations perspective. We are seeing exciting demand activity across our businesses as customers embrace the tremendous value and flexibility of our cloud-based benefits administration platform can provide.

We believe that we have a clear leadership position in the market and remain focused on maximizing our opportunity in this multi-million dollar market. With that, let me turn it back over to Milt. Milt?

Thanks, Shawn. We are very pleased with our third-quarter performance, which exceeded our guidance on both the top and bottom line. I'll 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 fourth quarter.

Total revenue for the third quarter was $34.2 million, an increase of 30% compared to third quarter of 2013, and above the high end of our guidance range of $33.5 million to $34 million. Breaking revenue down further, software subscription revenue was $30.7 million, representing 90% of total revenue, and up 25% year-over-year. While professional services revenue was $3.5 million, representing the remaining 10% of total revenue, and up 96% year-over-year.

Our professional services revenue reflects the increase in number of successful go lives across both of our business segments, which enables additional professional services revenue to begin getting recognized ratably from our deferred revenue balance. Professional services revenue in the quarter also includes the impact on the acceleration of revenue recognition from changes to our customer relationship period for two carrier customers who are being acquired.

Looking at revenue by segment, employer revenue for the quarter was $14.9 million, up 52% compared to the year-ago period. While carrier revenue was $19.3 million, up 17% from the year-ago period. We believe the employer market is highly underpenetrated and represents a substantial growth opportunity for Benefitfocus.

In the third quarter, our employer business represented 44% of total revenue compared to 37% in the year-ago period. And we expect to see our revenue mix continue to shift in that direction and become a majority of our revenue in the near future.

Let me now review the supplemental metrics we report on a quarterly basis. We ended the quarter with 540 large-employer customers, an increase of 52 compared to 488 at the end of last quarter, and up from 379 in the third quarter of 2013. As a reminder, the second and third quarters are typically our largest selling quarters as customers look ahead to the upcoming open enrollment season.

We ended the quarter with 44 carrier customers, up 1 from the end of Q2. We continue to see soft -- strong sales activity within our installed base and are making good progress with the implementation at the six new carrier customers we won in the recent quarters, including UnitedHealthcare. Our software revenue retention rate was once again greater than 95% in the third quarter, which we believe continues to reflect the significant value our platform generates to our customers.

Moving down the P&L, I'll start by discussing gross profit on an adjusted basis, which excludes stock-based compensation, depreciation and amortization of acquired intangibles, amortization of capitalized software, and development costs. Adjusted gross profit in the third quarter was $13.3 million, or an adjusted gross margin of 39%, down from the 46% adjusted gross margin in the year-ago period. The decline in adjusted gross margin reflects the significant demand we continue to see from our solutions and the growing number of implementations we are undertaking.

This negatively impacts our services margins in the short term because we recognize expenses for professional services as incurred at the further revenue until a customer is live in the Benefitfocus platform, and then amortize it over a 10-year customer relationship period.

In addition, we have also made meaningful investments in our customer services organization to scale that group to successfully service our growing number of employer customers throughout this open enrollment season. As result of these investments, we do expect to generate notable sequential improvement in both our adjusted software margin and adjusted total gross margin in the fourth quarter.

Last quarter, we began providing additional disclosure around our adjusted gross margin in order to give investors better insight into the profitability of the business by aligning our professional services revenue and expenses in the period they are incurred. This new to gross margin assumes we recognize professional services revenue as delivered during the third quarter instead of the customer relationship period, which would've increased our adjusted gross margin in the quarter by 900 basis points.

As Shawn mentioned earlier, we are on track with our systems integrated program, which will enable us to shift employer implementation services work to our partners next year, and help us achieve progress toward 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 $11.8 million, an increase of 61% compared to the third quarter of 2013. R&D expenses were $11 million, an increase of 71% to the year-ago period, and G&A expenses were $4.2 million, up 69% compared to the year-ago period. The increase in operating expenses reflects the incremental investments we are making across our organization to position us for future growth in profitability.

Adjusted EBITDA was negative $13.5 million, or negative 40% of revenue. This is better than our guidance of an adjusted EBITDA loss of $14.8 million to $15.3 million, and compares to a negative $4 million in the third quarter of 2013.

As we have mentioned in the past, our adjusted EBITDA margin reflects the increasing investments we are making in our sales organization and products, in order to capitalize on our reissued position in this multi-billion dollar market. We believe these investments will position the Company for continued significant long-term growth and will drive increased shareholder value.

As our business achieves greater scale, we continue to believe that we can achieve our adjusted EBITDA target of 20%. Non-GAAP net loss per share was $0.62 based on 25.5 million weighted average shares outstanding, better than our guidance of the loss of $0.70 to $0.72 per share, compared to a per-share loss of $0.28 on 21.6 million pro forma weighted average shares outstanding in the year-ago period. Looking quickly at our GAAP results, gross profit was $10.8 million, our operating loss was $17.8 million, and our net loss per share was $0.74.

Turning to the balance sheet, we ended the quarter with cash, cash equivalents, and marketable securities of $60.9 million. This was down from $71.7 million at the end of the second quarter.

During the quarter, under the terms of our existing line of credit, the borrowing availability increased from 2 times to 3 times our monthly recurring revenue. At September 30, 2014, our borrowing availability under the credit line is approximately $17.4 million, which will expand as our monthly recurring revenue stream grows. In total, we currently have over $78 million of liquidity available to the Company, which we believe can support operations into the foreseeable future.

I'd now like to finish with our guidance for the fourth quarter and full year 2014. For the full year, we are increasing our revenue forecast to $135.3 million to $135.8 million, which equates to year-over-year growth of 29% to 30%.

We are targeting adjusted EBITDA loss of $48.2 million to $48.7 million. And a net loss per share of $2.31 to $2.33 based on 25.2 million weighted outstanding shares.

Turning to the fourth quarter, we are targeting revenues of $38.1 million to $38.6 million, which represents year-over-year growth of 26% to 28%. From the profitability perspective, we expect an adjusted EBITDA loss of $12.3 million to $12.8 million, and a non-GAAP net loss per share of $0.60 to $0.62 based on 25.6 million weighted average shares outstanding.

In summary, we are very pleased to have delivered a solid third-quarter performance, from both a financial and operating perspective. We remain focused on leveraging our investments to drive growth and further increase the scale of our business, and we believe this puts Benefitfocus in a very strong position to capitalize in this multi-billion dollar market opportunity.

With that, we are now ready to take your questions. Operator, let's please begin the Q&A.

(Operator Instructions)

Greg Dunham, Goldman Sachs.

Hello. Yes and thanks for taking my question. I'd like to start off on the employer side.

That was obviously a very strong number following what was a very strong 2Q. And part of that, I think, was previewed with the Mercer results, but could you give us a sense of how the non-Mercer employer growth has been tracking this year?

Sure. Yes, thanks, Greg. We are extremely pleased with the quarter-end results of our employer sales team crossing the 500 large-employer milestone. Getting to 540 is just incredible and we're super proud of that.

Just, if everybody's frame of reference, we define large employers as 1,000 or more employees, and we are really happy to see the way our direct sales force is performing as well as our private exchange in marketplaces. Keep in mind that in the private exchange marketplaces that we are operating, we only count employers that have 1,000 or more employees.

And the way that our customers report them might be slightly different, the timing of when they count them and whatnot, obviously, is at their discretion, so I would just reiterate how fantastic the quarter was for us. And two quarters in a row like that.

As you know from watching the Company, we do tend to sell most of our activity on the employer business in the second and third quarter. As employers gear up to get their new platform, their shiny, new, eloquently designed Benefitfocus platform for open enrollment season.

And so that drives a lot of decision making in Q2 and Q3, so that we are live on the Benefitfocus platform for the October, November, and December timeframe, which is leading to all the of implementation work right now. But really happy to see the way both of those things are firing.

Okay, great. Then maybe another question on the employer side. When you look at the profile of the employer, employers that you are adding, is there any reason to think that the revenue-per-employer customer should change going forward?

Should that continue to go up? Should it be flat? Or how should we think about that on a go-forward basis?

Yes, I think we are extremely happy with the pricing and the revenue per subscriber that we have in the market. It's something we've been thoughtful about for a number of years now. We really feel like we fit quite well and it is obviously being well received by evidence of the wins.

One notable jumbo employer that we announced is McDonald's, and similar to the Office Depot [win] we had in the prior quarter. In that case, we are doing, I would say, just a targeted number of these communication portal, our HR InTouch communication portal, only deals with certain large employers because they take many years to transform their benefits.

And we found, I guess, similar to what we found at our carrier business over the years, Greg, is a way to get into those large organizations, get a quick win for them, give them some really quick value. So in those cases, the pricing is a little bit less because it is just a communication portal, but we think it leads to much greater opportunity.

But that's kind of a limited program that we have there and we are happy with the early results of it. But the bulk of the rest of the businesses, I would call it, very stable or in line with what we would think from the pricing standpoint.

Okay. Last question, in the script you mentioned several times that you power Aetna's exchange. And in the last week, we saw the announcement that Aetna intends to acquire [bswift].

Can you talk about how, where you fit in to Aetna's strategy? And how they may fit in? And how does that evolve over time?

Yes, good question. And as the private exchange new phenomenon emerges, it really is creating an enormous amount of energy and momentum for our business. And an understandable amount of learning by a lot of people who are coming up [in spend] on healthcare, and how the Affordable Care Act is being implemented in these private exchanges, and what investments people are making.

So, in context, Aetna is a great long-term customer of ours. They've been a customer for over eight years now. We have deep, deep set of products and integrations throughout the Aetna organization. In their small, mid and large-employer market they use the Benefitfocus eEnrollment platform, eBilling, eSales, and a number of additional technologies.

That we're really proud of that relationship. We think it is a durable relationship, and all of our communication with them this week has been very positive.

I think as a company the size of Aetna or our other large customers, they're in a bunch of different markets, they're in consumer markets, they're in different geographies, they're in small business, large business, and to us, it really seems like a strategy that we've seen with other partners when they've made an acquisition that would end up bolting on or integrating with Benefitfocus platform.

I think specifically with this particular one, these guys were also in the employer business, I guess, and they had been doing some new consumer things and large employer. So, one way to think about it is, from an employer standpoint, it will be, obviously they'll have comments from Aetna's standpoint of what the intention is there, but everything that we've seen come out publicly has been around a consumer individual type of a play.

And we actually have several of those partnerships today, we mentioned [in the] script, like with eHealth and GetInsured, they sell individual products in multiple states that can manifest themselves inside the group marketplace.

So, I think time will tell and we'll see how that plays out, but I guess just from a macro standpoint, eight-plus years of deep integration with Aetna, and the bulk of the work that we have done with them, is different than this announcement would be. And I think really it has a potential, I would say, to enhance the overall marketplace dynamic, as opposed to [bid yeah] takeaway.

Okay, thanks. I'll leave it there and pass it on. Thanks, guys.

All right, man, thanks.

Nandan Amladi, Deutsche Bank.

Thanks for taking my question. So, Shawn, the first question is on the changes in Congress. If there are changes to the Affordable Care Act, for example, how much time would it take you to change, make changes in the business roles in the [flack pond] to reflect that to the end users?

Sure. Great question. The beautiful thing of our model, as you know, Nandan, is our ability to quickly adapt to configurations.

All of our customers at Benefitfocus are on the same version of our source code. When we make a release, like we do every quarter, everybody gets a fresh set of new capability, including compliance, and [that's] a growing concern for employers is how they comply with the Affordable Care Act and brokers and carriers. And it is propelled a lot of momentum and just energy in getting people to think about a new and better way.

What we see now is the Affordable Care Act is being implemented. I mean, there's millions of people covered [down] by the individual coverages, employers are implementing their programs. We don't think there's anything that would be, in the near term, would unwind the things that employers are going to have to comply with in 2015, 2016.

I think longer term, it just continues to emphasize the point that you need a flexible platform. You need a platform that has an engineering team that's focused on not only what the market requires and the dynamics about consumerism and mobile technologies, but also that can stay current with regulatory change.

What's likely to happen, in our view, is that they go in and make some tweaks to it and it probably becomes more complicated, not less complicated. So, certain provisions stay intact, but they have a different set of rules, they might be applied different to different businesses, which is just more and more complexity.

I was with our engineers this week and they were making updates to some of the technology that were actually regulations that were implemented under Clinton in the 90s. And those regulations are still being used and some are morphing a little bit.

So that theme of being able to rapidly adapt and the expectation that it gets more complicated, not less, is more and more of a reason for both employers and carriers to adapt to cloud-based technology. And with the scale of the engineering team that we have at Benefitfocus, we think we are the best option.

Thanks, and a quick follow up, if I might. On the trajectory of the system integration partnership and the rollouts of certified engineers to do your deployments. What is the scale of that heading into next year?

And if you can give us a rough idea of what percentage or what share of projects you will have them initially engage with during next year and year after?

Sure. Yes, well, it's been an incredible year to introduce that program. As you know, we start out with five system integrators, all five are actively involved and have people going through the certification program.

We expect multiple teams to come out the other side of the certification by the end of the year, so everything that we had talked about back in May when we introduced the concept, including the people that are participating, are really moving along quite well. The reception has been phenomenal, and we are beginning to see as they shadow some of the projects that we have. So all of that is on track the way we thought.

We think they'll be a market in 2015 doing implementations. We don't have a percentage yet, that's probably something we will talk to on the next call, Nandan, around how we'll measure success next year as far as percentage.

Clearly, we've been doing implementations at Benefitfocus for 14 years now. We have a big meaningful team that does that, they are fantastic. Many of our experts have been on that training and certification and partnership development, so we think it will be a good blend of solid Benefitfocus implementation people that can really serve our customers and the volume of renewals that we have.

With just an amazing amount of new work coming on the platform that these new SIs will be able to pick up and hit the ground running, so very happy with the results.

Thank you.

Sure, thank you.

Ross MacMillan, RBC Capital Markets.

Thanks a lot. First question that I have would just be along the lines of your large employers signings and carrier signings have actually been, I would say, a bit better than we'd expected. But we are seeing deceleration in that software services line.

And, I guess, my question is you addressed the point on pricing, so it is not so much a pricing issue. What are your thoughts around that line in terms of growth rate?

And maybe, could you provide any color as to why that did decelerate here in Q3? And maybe what your thoughts are around that lines trajectory for growth? Thanks.

Hello, Ross, this is Milt. Yes, I mean, good question. One of the issues around that the [comes a] deceleration in the overall gross margin has to do with the timing of carrier implementations.

I mean, these are things that are not as predictable, I guess, I'd say. As employers, we are adding many more employers over the course of the year.

I also think that other factors that have gone into the deceleration and the margin that you are seeing in the quarter, we're obviously still entering into sizable professional service engagements on both the carrier side as well as the employer side. On the software margins side, there's not -- here again, we are making investments in the service delivery side where we are staffing up implementing, we're staffing up to [taketicly] take care of the open enrollment season that we are in right now, and this is the largest open enrollment season that we've been in.

We'll begin to leverage these investments in Q4. Shawn touched upon the systems integration program where we're continuing to make investments. And also, in the third quarter, as we made a shift from utilizing external resources to help with our open enrollment needs, to opening our own call center and bringing our own people in-house to service the open enrollment requirements, there's been a bit of an overlap with some expenses in the quarter as we transition from those third-party resources to our own in-house resources.

Just leaving aside gross margins, just so I'm clear on this software services growth rate, the point you are making is that there can be some timing issues around larger carrier customers, is that the right takeaway on the growth rate for that line?

Yes, I think, this is a blended question that [there] we are talking about. So in the year over year compared to 3Q last year to this quarter, we had some big early activations last year in the carrier business. And this year we have activations, but the might have come a little bit later in the quarter or be in the fourth quarter.

So, that particular software revenue growth rate was really a phenomenon of the timing and size of activations of some of the carrier business, not really the employer piece of it.

Understood. And then, just on the professional services line. Obviously, that [rep] spiked up here and you said there was two factors, one was just the level of implementation work.

But then there was also, I think, a shortening of the revenue recognition period because some smaller carriers were being acquired. Does that imply that there's some one-time in that number and that that will decline sequentially?

I just wasn't clear on the impact from that second part? Thanks.

Yes. It is a one-time take, as we call it, as a result of a couple smaller carriers of ours that were acquired. And when, as a result of the acquisition, were notified that this is happening.

We then accelerate the recognition of any revenue that's in deferred revenue to the shortened relationship period, based on what we expect them to or when they expect to drop off the platform. So there was this one-time take, if you will, relative to these two small carriers in the third-quarter services revenue.

Probably you will see some of it still remaining in the fourth quarter, so they'll build some additional impact in the fourth quarter as result of that as well. But then, certainly, it will normalize again back in 2015.

And just, Milt just to be clear, can you quantify how big that was, the one-time element in pro services in that quarter? Is it possible to do that?

It was in the neighborhood of hundreds of thousands of dollars, okay? I think it was considered in our guidance, so it was not something that came as a surprise. We did build it into the guidance that we projected for the quarter, so again, it wasn't something unexpected and it's sometimes those things happen, so.

Great, thank you.

Sean Wieland, Piper Jaffray.

Thanks very much. So, among the new employer customers that you are adding, are any of them considering providing access to the marketplace to part-time employees or retirees? Or are these focused mainly on full-time employees?

Great question, thanks, Sean. Yes, as a matter fact, one that we talked about, RHA Management, they're [is] a lot of part time. And a big factor of their decision was along [that] our idea of the benefits for the whole workforce and everyone's eligible.

And so, as employers begin to roll out that new capability, we are excited to see the interest in it and the early adoption of it. I think it will be more of a 2015 going into 2016 phenomenon, as employers really begin to deal with the employer mandate and any adjustments that might come to that, obviously, as a result. But we see a lot of interest in that area, and several of them are actually selecting us, I'd say, for that reason.

Okay. Great. And then, any chance we can get a sneak peak on 2015?

(laughter) Either in terms of sustainability -- come on, you can't blame me for asking. (laughter)

In terms of sustainability of revenue? Or maybe, more importantly, the burn rate?

Yes, well, you know me, I'm an optimistic guy and having just put 52 new large employers on and so forth, we are quite excited. I think the are other exciting thing is to see, like Blue Shield of California select us for the new private exchange, and continued momentum there, great momentum on our existing private exchanges. Mercer, now, I'd say, in the lead with the largest broker private exchange.

So, a lot of good things happening from that front, and we're very pleased with the sales team we've added and the management that we are growing. Lot of talent that's being drawn to the Company for all the success that we are having, so we're really pleased with the trajectory.

And even things like the system integrator program, which we were just talking about the fact that we were able to introduce that and stick to our schedule, and we are predicting to have people get certified in the first year. That stuff all bodes well for, our thesis is playing out mostly the way we thought. As far as the burn rate, I'll let Milt tackle that one.

Yes, I guess, what I would say, Sean, is stay tuned to our next earnings call for year end and we'll give you the full lowdown on 2015 guidance. Unfortunately, I'm not going to give you a sneak peak now. But I certainly reiterate everything that Shawn said, as you can see that we had just another great quarter in Q3 relative to revenue growth and employer adds and everything is still going in the right direction. So, we're still very bullish.

Maybe I'd add one other thing, though, that we did put in the script, Sean, is we do think that there will be an improvement in the margin in the fourth quarter. We have a huge implementation this quarter and, but we were confident and put it into the notes that you can expect to see an improvement in the adjusted gross margins, software margin in the next period. And that is a good sign for all of us and shows that we are managing the business well.

That's great. Thank you very much.

Thanks.

Adam Klauber, William Blair.

Thanks, good afternoon. A couple questions. Could you just give us an idea of how the revenue works with the part-time employers?

I know when eHealth or GetInsured, they're paid on a commission basis if the part-time workers decide to get a subsidy policy. I guess, just an idea of how your revenue dynamics work in that situation?

Yes, great question. Currently, it is a subscription basis in most of our circumstances. So we have a subscription for the part-time employees. And actually, in particular, in the private exchange market, where some of our private exchange, our customers, who are deployed the Benefitfocus platform and they are using someone like eHealth or GetInsured, they have a partnership with them.

They're selling individual products through those platforms and we've integrated them. We've woven them in through our extensibility capabilities so that the part-time person could see a product from there. In that case, the funding model that those two have worked out is, we're outside the loop on that, but we get paid a per employee per month.

We do think there's opportunity for Benefitfocus going forward through our voluntary benefit offerings, and also, in particular, in this case, as we look at expanding our voluntary benefit program into more individual products, even health products going forward, that there's nothing in our near-term model that has a commission based on health products.

But as we expand and see new opportunity, particularly in the private exchange, we have more and more partners talking to us about that model. So we are evaluating that. We love the subscription base and the knowability and predictably of it, but we think there's probably some upside to us in the future in that area.

Great. That's helpful. I think you mentioned you won the contract to provide the private exchange to the California Blue.

Yes.

Is that their individual, small, mid-group, or large? Which exchange would that be?

It is across their group segment, so they have multiple group segments and they'll be rolling it out in stages, but it is across their group business. And they also have a meaningful presence in really in all market segments, but they'll be beginning with the group capabilities being rolled out in 2015.

Great customer. And actually an existing customer using our Benefitfocus enrollment and billing capability, and as they move forward.

And that's a real theme that we see with a lot of our carriers. The deep integration that we have, we can easily move them into the private exchange marketplace capability. Lots of flexibility and they can bring new products to market, so super proud of that one.

Okay. Staying with the carrier and the exchange topic. I would guess that within the carrier business, your exchange, and I'm not going to ask you what it is, but your exchange revenue is probably a smaller component today.

If we see the carriers grow their exchange business, does that mean that, in the next couple years, that could be a good growth area for you?

Yes. As a matter fact, I think the one we were just talking about is good example. So, we have an existing customer with the deep relationship using our eEnrollment, eBilling, eSales capabilities.

As we add private exchange, that's an additional incremental opportunity for Benefitfocus to provide more technology, more services to them, and it is an upside for us in the existing carrier base. Obviously, it's helping us win new carriers as well, but with the existing base, we think it is a real strong part of the story.

And would you give us an idea, within your existing base 40 plus carriers, how many are you providing exchange-related services to?

Yes, we haven't put a number out on the number of exchanges. I do see lots of companies talking about exchanges and some people have different words for them and stuff. It probably is something we will talk to in future calls, but we haven't published a number on the number of exchanges.

Actually, in some of our carriers, we would look at them as actually having multiple exchanges inside a carrier. So, small-employer exchange, mid-market, large-market, retiree, so in some cases, we actually have more than one exchange. Whether we would consider that to be one exchange for one carrier or four within one and how we would report that, we haven't broken that out yet.

We do feel very good about the natural uptick of our carriers buying the Benefitfocus exchange and implementing it, because they can leverage the existing rating integrations, the [date] exchange integration, the billing integrations. The years of work that we've done together, they get the benefit [in the] lift of that.

Great. And then, one on the employer business. Would you say your growth in [lives] that you're dealing with eligibility enrollment is similar to the growth we are seeing in the overall growth in the amount of customers? Or is a greater or less?

I think it's similar. The average deal size, I guess, would be another way to ask that, is it is been consistent. If anything, trending up a little bit.

But we are having a lot of success in the 1,000 to 5,000; 5,000 to 10,000, and obviously, you see some jumbo names starting to show up. So there hasn't been a big skew one way or the other. It certainly hasn't come down.

Okay. Thanks a lot.

Yes, thank you.

Richard Davis, Canaccord.

Hey, thanks, Shawn, it's DJ on the line for Richard. Maybe just one on implementation capacity. I mean, obviously, we've had 120-plus large employers over the last two quarters. The channel is not up and running yet. So, I guess, what are you seeing in terms of wait times for implementation relative to where you were at this time last year?

Yes, two years ago, we made significant investments in implementation staff, management, process, and a lot of technology. And so, the way we leverage the Benefitfocus configuration technology.

Last year, in 2013, we made additional investments in that area and we really see a lot of the benefit of that. Now our staff has grown, as you can see, and the expense is commensurate with the number of implementations. But the average days to implement is similar, maybe even a little bit less than it was, in years past.

Okay, got it. Thanks.

Sure, thank you.

Brian Peterson, Raymond James.

Yes, just a question on some of the sales investments you've made over the last year or so. Can you talk about how productivity metrics have trended? It may be relative to your expectations, and any improvement that we could see on productivity heading into 2015?

Sure, great question. Yes, at the beginning of year, we outlined the three major investment themes for the Company. Having gone public a year ago, we came into this year wanting to make sure we capitalize on the massive market opportunity.

And sales was one of those three. The other two were our system integrator program and then significant product investment in private exchange, which all three of those are working well.

I think what we learned in the last three or four years on sales, sales hiring, productivity, time-to-productive quotas, quota achievement, has been consistent. I'd say we are happy with our model. And we continue to tune it like any good software-as-a-service company would, but no real surprises there.

We have added some really strong talent this year, and you can see that obviously flowing through in the expense. But I'd say, we are on track with the hiring and also with the production of the team.

Okay, great. Thank you.

Yes, thank you.

Thank you. I would now like to turn the call back over Shawn and Milt.

Great. Well, thanks, everybody for joining. It's a super quarter. Again, I want to shout out all the Benefitfocus associates, you guys are, obviously, very busy right now taking us through our largest open enrollment season ever.

It's a privilege to serve alongside you and be your associates, I'm super proud of you guys and all of our super customers, as well. We think it is a real honor to serve you and we are having a blast helping you transform your benefits. And all of our stakeholders, thanks for tuning in and developing the Benefitfocus story with us, so we appreciate it.

And thanks, Milt, for joining me on the call. Thanks, operator. Everybody have a great night.

Thanks, everyone.

Thank you. And this does conclude today's conference call. You may now disconnect.