Benefitfocus Inc (BNFT) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Benefitfocus 2014 fourth-quarter earnings conference call.

(Operator Instructions)

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

Thank you, operator. Good afternoon, everyone, and welcome to Benefitfocus' fourth-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 first-quarter and full-year 2015 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 conditions, 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 a 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 will find important disclosures about those measures in our press release.

With that let me turn the call over to Sean. Then, I will come back at the end to provide details regarding our fourth-quarter results as well as guidance for the first-quarter and full-year 2015. Sean?

Thanks, Milt. Thanks to all of you for joining us today. I'm excited to report Benefitfocus delivered strong fourth-quarter results with both revenue and profitability that exceeded the high end of our guidance range.

Total revenue for the quarter was $40.2 million, an increase of 33% year over year. Both businesses contribute to the strong revenue growth in the quarter with employer revenue increasing by 47% and carrier revenue up 21% year over year. At the same time, we also generated 900 basis points of sequential and 500 basis points of year-over-year improvement in GAAP gross margin during the fourth quarter. We are seeing the power of our softwares and service business model at work as we scale.

We made an announcement earlier today that we had expanded our commercial relationship with Mercer. We are proud of our efforts that have helped position the Mercer marketplace as one of the largest broker-led private exchanges in the country. We are excited by the significant expansion of our relationship with Mercer and look forward to partnering with them to drive additional growth on the Mercer marketplace in the years ahead.

At the same time, Mercer has made a strategic equity investment of $74.7 million to acquire a 9.9% stake in Benefitfocus, which provides significant capital for us to execute on our long-term growth objectives. These commitments by Mercer, both financially and operationally, are tremendous validation of our leadership in the private exchange and cloud-based benefits administration market.

Looking at our fourth-quarter performance, we added 13 new, large employer customers, including the state of Delaware, Capellla Education Company, Lane Construction, Omnicell, Schneider Electric, and Summerwood Corporation, among others.

Schneider Electric is a global specialist in energy management with over 160,000 employees around the world and 25,000 employees and retirees in the United States. They were looking for a better way to enroll and administer their benefit program in the United States with a goal of lowering costs by increasing efficiencies and eliminating data errors in manual touches and improving the user experience. Schneider Electric chose Benefitfocus because of our modern user experience, the breadth and extensibility of our platform and our growing customer community.

Lane Construction Corporation, a 125-year-old construction firm that specializes in heavy civil engineering projects, selected Benefitfocus due to the breadth of our product offerings and our integration capabilities. Beyond Benefitfocus marketplace, Lane Construction will also be deploying our benefit service center and benefit analytics offerings in order to provide a comprehensive solution to their employees.

In the carrier business, we had a solid fourth quarter, including being engaged by CareFirst Blue Cross Blue Shield for their large group private exchange. We've gotten off to a strong start in 2015 by recently signing an expanded agreement with Anthem, who will deploy our eEnrollment, eBilling, and eExchange solutions to their Blue Cross Blue Shield plans in 11 states, including New York, Ohio, and Georgia. This expanded agreement with Anthem builds on the successes we've had, demonstrated together in Anthem's Blue Cross Blue Shield of Virginia plan over the last several years.

Looking at the full year, 2014 was a record year for Benefitfocus as we expanded our leadership position in both the carrier and employer markets. Some of the highlights for the year include: 53% year-over-year employer revenue growth; the addition of 160 new employer customers; 18% year-over-year carrier revenue growth, the fastest growth rate in years; establishing a leadership position in the private exchange market, now powering over 20 private exchanges in the market.

In 2014, the changes we've been highlighting in the benefits administration market, the shift to the cloud, the rise of private exchanges, and the consumerization of benefits shopping experience, became widely recognized by both employers and carriers. They have recognized that the traditional approaches to benefits administration are no longer viable from a business, cost, regulatory and constituent satisfaction perspective. At Benefitfocus we have seen this market change coming for some time, and 2014 was a year of investment to ensure we were well positioned to take advantage of this major secular trend.

We laid out for you at the beginning of last year, three specific areas of focus. I am pleased to say that our investments in each area are functioning well and ahead of expectations. I'd like to take a moment to highlight our success in each.

The first was to further increase the size and coverage of our direct sales organization in the employer business. We believe these investments were critical to ensure we had a well-seasoned sales force in place to properly cover this high-growth, under-penetrated market. I'm happy to say we have attracted a high number of high-quality, experienced sales professionals and managers across the country.

The second area where we made additional investments was in our private exchange marketplace technology, which is an area that has seen substantial growth in a short period of time. The additional investments we made in this area enabled us to support the significant number of new marketplaces I referenced earlier.

The third area of our investment was in the creation of our third-party implementation program. This is a strategic priority for the Company as it will help establish us as the cloud platform of choice for integrators, enabling us to bring a greater number of customers onto our platform more quickly while also increasing our scalability. This investment was a huge success in 2014, and I'm pleased to announce that the Benefitfocus University recently graduated our first class of third-party implementers from Deloitte Consulting, ROC Americas, HRchitect, Aasonn and Providence Technology Solutions, among others.

These companies are now out actively working on customer implementations, which will allow us to establish a standalone value for professional services, providing a material benefit to our future gross margins. A long-term benefit we hope to create with this program is a powerful network effect where world-class organizations would become brand ambassadors for Benefitfocus and ultimately help us generate sales. We have been pleasantly surprised to see early positive results in this regard, which we believe is even more powerful because we've (inaudible) getting referrals without even having a formal referral or sales program in place.

A great early example of this phenomena was with Aasonn, who brought us in to provide the benefits administration technology for a broader HR solution they were providing to Harte Hanks, a 4,600-employee company based in San Antonio, Texas. This is an early stage example, but we believe these partners have the potential to further broaden our market coverage.

We're proud of the hard work done during 2014 to make these investments successful and believe they are essential to positioning the Company for sustained long-term growth and improved profitability. I'd like to give a shout out to all of our incredible Benefitfocus associates for your passion, creativity, and commitment to building the world's best software and services. You all are truly amazing, and it's my privilege to work alongside of you every day.

Looking ahead, 2014 is an exciting year for our Company as we progress toward our long-term objectives. I'd like to lay out for you our three areas of focus for the year. The first is expanding our employer product offerings. In 2015 we are going to widen our focus on the employer market by introducing new product capabilities that expand the value we provide to customers. This will complement our continuing focus on landing new employer customers while now expanding the products and services we offer.

In a couple of weeks, at One Place, our largest customer community event of the year, we will be introducing several exciting new products for the employer market. Here are just a few examples.

The benefit store, an all new offering that expands distribution of third-party voluntary benefits to consumers. With the benefit store, it will be significantly easier for employers to make a broader array of voluntary benefits available to their employees. Benefit store will also provide Benefitfocus incremental monetization opportunities, as we have it priced to a flexible compensation model. We have demonstrated, over time, that our platform drives higher participation rates for voluntary benefits offerings, and we will now share in the upside generated by higher adoption alongside our customers and voluntary benefit providers.

We have had several early adopter customers use the benefits store for their employees during the most recent open-enrollment season and the results were very strong. We will be sharing these success stories at One Place and formally introducing the new offering to our entire costumer community.

Another new offering is the Benefitfocus data cloud and analytics, our new analytics offering, integrating hundreds of health data sources into a single data warehouse and providing online data analytics applications for employers, insurance carriers and all stakeholders. There is a massive amount of data generated on our platform from the millions of people who count on us for their benefits administration needs. We see a significant opportunity to leverage that data to better enable more informed decision making.

We are very excited about these and other new product offerings. You'll be able to watch our keynote presentation live via website on March 10 from Orlando, Florida. We hope you join.

The second area of focus for 2015 continues to be our private exchange marketplace platform. As we have seen, this is a dynamic and fast growing part of the benefits market, and we've established ourselves as a leader in this space. We are focused on extending the leadership by enhancing our platform and expanding into new market segments.

At One Place, we'll be introducing an all new, member experience and communication portal, which will, once again, revolutionize the consumer experience. For marketplace operators, this new experience will provide greater flexibility in positioning products and leveraging enhanced data analytics capabilities to drive better adoption of a wide array of benefit offerings.

We will expand upon the success we had in our strongest segments, small and large group employers as well as individual. We are seeing very strong interest from carriers in the individual market. Our marketplaces for individuals have seen a significant uptake in volume through 2014, including more than 45% growth in applications and a 41% increase in policies sold. This indicates that there is a substantial increase in qualified buyers utilizing the web to obtain health insurance. More than half of these buyers met the qualifications for auto-approval of their policies, demonstrating great improvement in underwriting efficiency.

We are also extending our reach into the retiree market, which presents many new and unique opportunities for the Company.

Our third area of focus for this year will be on scaling of business to increase margin. We are focused on leveraging the significant investments we made last year in order to drive improved profitability. Delivering improved gross margins is a top priority for our Management team, and I'm confident we will do so in 2015.

Besides the efforts in our professional services organization I've already discussed, we are targeting increased efficiency of our customer support services. We believe these priorities for 2015 appropriately balance making the investments necessary to position the Company to maximize the growth opportunity in this market while also putting the Company on a path to profitability.

We intend to make significant progress towards profitability in the coming years and anticipate reaching adjusted EBITDA profitability in the first half of 2017. We are committed to delivering both growth and profitability, which we believe will generate significant long-term value for our shareholders.

In summary, our strong fourth-quarter results capped a terrific year for the Company. Our rapid customer growth in employer business has resulted in over 550 large employer customers, yet leaves us with a long runway ahead as we have just 3% of the 18,000 large employers in the US. Our investments in the Benefitfocus private exchange platform have enabled us to become a leader in this dynamic and fast-growing segment of the market with over 20 market-leading exchanges now running on our platform.

We are incredibly excited about the opportunities ahead, and believe we are well positioned to continue delivering strong top-line growth while making substantial progress towards profitability.

With that let, me turn it back over to Milt. Milt?

Thanks, Shawn. As discussed, we are pleased to have delivered a strong fourth quarter with financial results that were above our expectations in both the revenue and profitability perspective. I will review the details of our financial performance, and we'll finish with our guidance for Q1 and the full year of 2015.

Before I begin, I'd like to review the terms of Mercer's strategic equity investment in Benefitfocus. Mercer purchased approximately 2.8 million shares of newly issued common stock representing 9.9%, post issuance, of the currently outstanding common equity in Benefitfocus at a price per share of $26.50. Net proceeds to Benefitfocus in this investment will be $74.7 million in cash. Mercer also received a wire from connection [loop] stock purchased, under which Mercer has the right to purchase an additional 2% of Benefitfocus common stock at any time during the next 30 months at $26.50 per share.

In addition, we separately announced earlier today that during the first quarter of 2015 we entered into an expanded $60 million credit facility, up from $35 million, which can be increased up to $100 million as our recurring revenue grows. With the strategic equity investment from Mercer and our expanding credit facility, we have significantly strengthened our balance sheet and substantially increased our financial resources and flexibility. We believe this will allow us to execute against our long-term growth initiatives and enhance our ability to take advantage of the generational shift to cloud-based benefits administration solutions.

We believe the capital provided from the strategic investment by Mercer by itself is sufficient to fund our growth priorities and maintain a meaningful cash balance as we work to achieve adjusted EBITDA profitability on the timeline Shawn referenced earlier.

Turning to our financial results, beginning with the fourth quarter, total revenue was $40.2 million, an increase of 33% compared to the fourth quarter of 2013, and above the high end of the guidance range. Breaking this down further, software subscription revenue was $36.1 million, representing 90% of total revenue and growing 28% year over year.

Professional services revenue was $4.1 million, representing the remaining 10% of total revenue and up 107% over the prior-year period. Our professional services revenue, similar to the third quarter, included the impact from the acceleration of revenue recognition from changes to our customer relationship period with several customers who are no longer utilizing the Benefitfocus platform. These were some of our smallest carrier customers who represent only a small fraction of our carrier software revenue.

Looking at revenue by segment. Employer revenue for the quarter was $19.5 million, or 47% growth compared to the year-ago period. While our carrier revenue was $20.7 million, up 21% from the year-ago period.

Now let me review the supplemental metrics we report on a quarterly basis. We ended the quarter with 553 large employer customers, an increase of 41% compared to 393 in the fourth quarter of 2013, and up from 540 at the end of last quarter. As a reminder, from a seasonality perspective, the fourth quarter is typically our lowest sales quarter, with approximately two-thirds of business signed during the second and third quarters.

On the carrier side, we ended the quarter with 43 carrier customers, up from 40 in the year-ago period, and compared to 44 at the end of last quarter. This does not reflect the impact of the Anthem transaction Shawn discussed earlier, which includes nine incremental carrier customers added in the first quarter of 2015.

Our software revenue retention rate was once again greater than 95% in the fourth quarter, and we believe is evidence of the significant value Benefitfocus generates for its customers.

Moving down the P&L, I will start by discussing gross profit on an adjusted basis, which excludes stock-based compensation, amortization of acquired intangibles and depreciation and amortization of capitalized software. Adjusted gross profit in the fourth quarter was $18.2 million, resulting in an adjusted gross margin of 45%. As expected, we saw significant improvement in our adjusted gross margin in the fourth quarter. This was driven by an improved, adjusted software margin, which benefited from increased scale as we began recognizing additional revenue from go-lives during open enrollment season, as well as the positive benefit from investments we made in our customer service organization to better service our employer customers.

Our fourth-quarter performance represented the highest adjusted gross margin in five quarters, and we expect to generate additional gross margin expansion in 2015.

In the second 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 view of gross margin assumes we recognized professional services revenue as delivered during the fourth quarter instead of the customer relationship period, which would have, again, increased our adjusted gross margin by approximately 600 basis points.

We anticipate being able to establish standalone value through this work in our employer business in 2015, which will enable us to recognize professional services revenue on a prospective basis in the period the work is performed and not over the customer relationship period. This will help bring our reported gross margin more in line with the alternative gross margin just discussed and put us in the path to achieve our long-term margin target.

Adjusted EBITDA was negative $8 million or negative 20% of revenue. This is significantly better than our guidance of an adjusted EBITDA loss of $12.3 million to $12.8 million, and compares to negative $5.1 million in the fourth quarter of 2013. Our fourth-quarter-out performance was driven in part by the revenue out performance, which largely falls to the bottom line as well as the timing of investments and new hires.

In 2015, we expect to begin realizing leverage from many of the investments we made in 2014, which is expected to drive significant improvement in our adjusted EBITDA margin. Some other items that will benefit margins in 2015 include exiting unprofitable customer relationships. We have reviewed each of our customer relationships and determined that several legacy contracts were too resource intensive and unprofitable. As a result, we decided to terminate those customer relationships in 2015.

This was not an easy decision, but having resource allocation discipline is an important part of improving our margin profile. This decision will have a short-term revenue impact beginning in the third and fourth quarters of 2015, which I will review when discussing guidance.

Also, increase in our international headcount. We are working to expand our global capabilities and have recently added two additional international sites to our long-standing primary location in Hyderabad, India. We believe these steps, coupled with the growing scale of our business, will contribute to our ability to achieve our long-term adjusted EBITDA target margin of 20% over time.

Non-GAAP net loss per share was $0.39 based 25.6 million weighted average shares outstanding, better than our guidance of a loss of $0.60 to $0.62 per share, and compared to a per share loss of $0.30 on 24.5 million pro forma weighted average shares outstanding in the year-ago period.

Looking quickly at our GAAP results, gross profit was $16.3 million. Our operating loss was $11.9 million. Our net loss per share was $0.54.

Turning to the balance sheet, we ended the quarter with cash, cash equivalents, and marketable securities of $56.2 million. This was a decrease from $60.9 million at the end of the third quarter. The cash balance does not reflect the impact of the $74.7 million of net proceeds expected from the Mercer investment.

Let me now provide a summary level of review of the results for the full year of 2014. Total revenue in the year was $137.4 million, an increase of 31% on a year-over-year basis, and representing acceleration from the 28% growth we delivered for the full-year 2013. Software subscription revenue was $125.1 million, representing 91% of total revenue, growing 28% year over year. Professional services revenue was $12.3 million, which represented the remaining 9% of total revenue, and was up 75% over the prior-year period.

On the employer side, revenue for the year was $62 million, which represents 53% growth from the year-ago period. On the carrier side, revenue for the year was $75.4 million, up 18% from the year-ago period. Adjusted EBITDA for the full year of 2014 was negative $43.8 million or negative 32% of revenue compared to negative $18.9 million or negative 18% of revenue in 2013. Non-GAAP net loss per share was $2.10 based on 25.2 million weighted average shares outstanding, compared to a per share loss of $1.22 on 22.2 million pro forma weighted average shares outstanding in the year-ago period.

Looking quickly at our GAAP results for the year. Gross profit was $50 million. Our operating loss was $58.9 million. Our net loss per share was $2.51.

Before I turn to look at our outlook for the first-quarter and full-year 2015, I'd like to review a change that we've implemented in 2015 to our customer relationship period. We have determined that we need to adjust our customer relationship period, which has been 10 years in both our carrier and employer segments, to 7 years. The impact of this change will be that we will recognize preferred revenue over this time frame going forward instead of 10 years. In 2015, this will positively impact our full-year revenue by approximately $5 million.

With that said, I would now like to turn to our guidance. Starting with our full-year guidance, we expect revenue of $170 million to $174 million, which equates to year-over-year growth of 24% to 27%. Our revenue guidance for the year includes $5 million on incremental professional services revenue due to the change in our customer relationship period that I just discussed.

This will largely be offset by a $4 million negative impact from the decision to terminate certain unprofitable customers, which will impact our software revenue growth in the third and fourth quarter. These items will result in a several hundred basis point shift towards professional services revenue in 2015.

We are targeting an adjusted EBITDA loss of $35 million to $39 million, non-GAAP net loss of $59 million to $63 million, and a non-GAAP net loss per share of $2.10 to $2.24 based on 28.1 million weighted average shares outstanding.

Please note that we have adjusted our definition for non-GAAP net loss and non-GAAP net loss per share. Going forward, these items will exclude stock-based compensation expenses, amortization of acquisition related intangible assets, and offering costs expensed. For comparability with our peer group, we will no longer add back interest expense on building lease obligations to these items.

For the first quarter, we are targeting revenue of $41 million to $41.5 million, which represents year-over-year growth of 34% to 35%. From a profitability perspective, we expect an adjusted EBITDA loss of $8.5 million to $9 million, non-GAAP net loss of $13.8 million to $14.3 million, and a non-GAAP net loss per share of $0.51 to $0.53 based on 26.8 million weighted average shares outstanding.

In summary, we are pleased to have delivered solid fourth-quarter results that reflect a strong finish to an exciting year for Benefitfocus. We have solid momentum in the market today. Today's announcement for the long-term commercial contract expansion and strategic equity investment from Mercer further enhances our ability to capitalize on the long runway of opportunities for growth in this dynamic, multi-billion dollar market while also making significant progress towards our profitability.

With that, we're now ready to take your questions.

(Operator Instructions)

Greg Dunham.

First one is for Shawn. The Mercer announcements, clearly it's an endorsement of the platform and the relationship. Can you talk about the importance of this deal to the Company and the rationale for why you felt now was the right time to make this agreement?

Sure, thanks, Greg. We've talked a good bit, leading into the IPO, and last year about our investments in the private exchange marketplace technology that Benefitfocus is building. We're just having so much success there, so much momentum in that private exchange market. It's a massive shift in our industry.

For those that are learning about the Benefitfocus story, one way to think about it is there's about 170 million people covered by employer benefits in the country. Employers spend about $1.6 trillion a year on those benefits. In some studies, such as the Accenture study, say that as many as 40 million of those people are going to move to a private exchange over the next four or five years. So, clearly, this is a big area of excitement. It's a big area of disruption in the market.

Our early success with Mercer, them now having the largest broker-led private exchange in the country built on the Benefitfocus platform, just really has created a great partnership with them. Great leadership in their team, and a partnership between our two businesses. It just seemed like a good time to continue to expand that.

As we also said, we are now powering over 20 marketplaces. Many of our insurance carriers have selected the Benefitfocus platform to power their small group and large group and now individual and retiree exchanges. It's just a huge, maybe the first inning of a big game in the marketplaces. This will provide ample capital to help invest in those areas as well as, as we've mentioned several times, allow the Company to execute on its plan towards profitability in conjunction with our continued revenue growth trajectory.

Okay, then one more for me. Clearly, the number of employer adds this year was a break-out year for the Company. Can you talk about how the competitive landscape has changed since going public a year and a half ago? How are the win rates today different than they were pre IPO? And how has that competitive shift changed?

Sure, Greg, great question. Our strategy continues to be a large employer sales force focused on what we call large employers, and they sell direct to employers at a 1,000 or more employees in our employer segment. We also have our carrier business. We have a sales team that sells directly to carriers. Both of those teams are doing exceptional.

I'd say what's really changed since the public offering, Greg, is the Company has much more visibility, much more awareness. When we call on employers now, they generally know who Benefitfocus is. They've heard about us. We're up from 393 employers a year ago to 553. We added 160 in the year, which is 41% growth in employer count. That's actually up from 37% growth in employer count the year earlier, so there's actually been an acceleration in that.

I just think the main difference is there's an awareness of our size, our scale, our ecosystem. One of the dynamics that might help make the point a little bit, too, is that I mentioned on the call that the system integrators are now beginning to introduce us into their channels. We talked about a win with Aasonn, which is one of the our first system integrators, brought us into a company called Harte Hanks, and they were doing a full outsourcing arrangement with them. That SI arrangement led to our win there.

We're beginning to see that network effect, that ecosystem effect, that brand awareness of Benefitfocus in the marketplace, as well as just attracting a really topnotch sales team. We're very excited about the momentum we're carrying into 2015.

Okay, great. Maybe one last one for Milt. Just make sure I have the numbers right. If you look at the guidance for 2015, you have a positive $5 million to pro serv, given the move from 10 to 7 years and then a negative $4 million as you're turning off some of these unprofitable customers. Is there any benefit outside of these numbers related to the VSOE establishment in the employer side or is that something that you're not necessarily counting on to add to revenues? Thanks.

Hi, Greg. That's a good question. I think with regards to the way you characterized it, you're right It was about $5 million up from the change in the customer relationship period that you mentioned, and then the elimination of some unprofitable opportunities that we focused on and rationalized this year.

With regards to what you're referring to as standalone value, really the impact in 2015 is minimal. I think that we will establish standalone value in the employer space, which will allow us on a prospective basis to change the recognition of the revenue relative to deals that we continue to do. Relative to our guidance, we're really not forecasting much at all of an increase in revenue in 2015 as a result of achieving that.

Perfect, thanks, guys.

Thank you.

Nandan Amladi.

Thanks for taking my question. Back on the Mercer relationship. Does this investment restrict your ability to sell to other customers? Clearly, you have 20 exchanges up and running already, but does it change any of the terms of the exclusivity or anything like that?

Thanks, Nandan, we appreciate the call. Our relationship with all of our big customers have big contracts, and we are always looking to protect their special sauce, if you will, their intellectual property, the way they do business. In Mercer's case, they have got some great consulting, great brokerage, great heritage in their brand. Clearly, the things that they bring to the table are special about Mercer and the Mercer marketplace, and I think that's why they're having a lot of success.

As we did mention, we now have over 20 marketplaces, private exchanges, many with our insurance carrier customers. We continue to pursue that business aggressively. We're still on the path of which we've had. We did mention that we have expanded our contractual relationship with Mercer. We're excited about their ideas going forward and the things they're going to lean in to on the Mercer marketplace. As far as specifics about the contract, really, it's the path that we've been on with them for a number of years.

A quick follow on, if I might. On the SI program, I know you mentioned you've graduated your first class of trained consultants. How much does that improve or increase your capacity to make these deployments? How many people did you have doing this before? Perhaps in percentage terms, if you're not willing to disclose the actual numbers, how much does it expand your capacity in 2015? What should we expect in say 2016?

That's a good way to think about it. First of all, we're very excited to have the Benefitfocus University in full production and a first class coming through with their certificates. We have another class in session right now with more consultants from the third parties going through that. We-- it will be our first year where these third parties are doing implementations on their own. We've talked in terms of maybe 10% or so of our implementations would be done by third parties, probably, in 2015. As Milt mentioned earlier, it will take the full year for that whole story to play out. We're well ahead -- I would say we're probably even a little bit ahead of our expectations on the numbers in the courses. So it's definitely increased our bench.

I think the bigger way to think about it is, as our win rate, our wins and the employers grow, they're helping us now. They're bringing us into their customers as they have existing customers, where maybe they are doing an SAP implementation or Oracle or something else. We now have an awareness in that community. As we win more business, we think that it gives us an elasticity to our capacity, a flexibility, so that as we ramp our business, we have a more knowable fixed headcount that we'll hire and bring on. As spikes come or surges come in our business, which we hope to see, the elasticity will allow us to absorb that work, provide great service to those customers without really affecting our long-term strategy towards profitability in our gross margin profile.

Thank you.

Thank you.

(inaudible)

Great, thanks. This is Kevin Dennean in for John DiFucci. Congratulations on the quarter and on the Mercer agreement.

Thank you.

Thanks, Kevin.

Just wondering if you could talk a little bit more about the software services revenue line? It grew 28% in the quarter. That's an acceleration versus the prior quarter. If we look at the middle quarters of the year, you really had some strong employer customer growth. I think it was 70 and 52 customers in the June and September quarters. My question is are those customers live yet, given the implementation times or are they up in the software revenue line in December? How should we think about those customers impacting the software revenue line in the first half of the year?

Good question, Kevin. This is Milt. What you point out is right about the fact that those customers we signed in the second and third quarters are going live. Many of them did go live for open enrollments the latter part of the year in the fourth quarter, and as a result what you did see is a pickup in the overall revenue line in the fourth quarter. I think, certainly, you'll see that move into the first quarter as well.

Okay, great. Just a follow up. Just wondering if you can talk about how the platform has performed as you've added more customers? If you can talk about any metrics or insights about the platform's ability to scale?

It's a huge part of the focus, and I would say the success of the platform -- we did an enormous amount of enrolling through the fourth period, our busiest open-enrollment season by far, with our large employer customers, with our carrier customers. Also, we hinted a little bit about direct to individual, we saw about a 45% increase in the actual applications coming through our individual marketplace now for our insurance carrier, so across the board, incredible volumes year over year.

We do have a specialized performance team. They spend all day, every day through out the year profiling the application, working on scale, working on the transaction volumes that are flowing through. We really had a wonderful open-enrollment season, availability up time, responsiveness and what not, so very proud of the team. It was really a very successful open-enrollment season for us. We are always improving, always investing. The good thing is, we saw this wave of growth coming a few years ago and did a lot in our data centers and our cloud technology, in our data cloud and across our performance teams.

We also work with our largest customers to profile their versions, their installations of the Benefitfocus platform. It's all running on one code base. It's all in the Benefitfocus cloud, but we're able to actually profile our specific largest customers and their utilization ahead of time. That's becoming more and more of our testing, is actually performance testing. It goes to the large customer relationships we have and how they help the Company scale up.

Great. Thanks very much. Thanks for taking my question. Congratulations again.

Thanks a lot.

Adam Klauber.

Thanks, a couple questions. On the Mercer relationship, I think you mentioned expanded commercial relationship. Could you add some more color, what that involves?

Sure. Thanks, Adam. With Mercer, we power the Mercer marketplace. It's their private exchange. They have over 20 different carrier offerings that they have in the Mercer marketplace. This is a relationship that goes back a couple years. It was a software services agreement. We've now expanded it to look out multiple years in their strategy and their plan in the Mercer marketplace.

I think they do a great job of talking about their numbers and the volumes and their plans, so we always let our customers speak to what their intent is in the market. Clearly, the message here is that they plan to continue to build significant presence in the private exchange marketplace, and their momentum this past year was just really phenomenal. We look forward to doing a lot more with them in the coming years.

Okay. Thank you. Then, as far as their ownership stake, the Company (technical difficulties) first right of refusal (technical difficulties) the company?

Adam, your phone was breaking up there a little bit. Can you try that again?

Sure, does Mercer's stake, do they have any first right of refusal that comes along with that stake?

That's a good question. We did mention they have a 2% warrant that they have an option. As far as other features of the agreement, do you want to talk about that?

Adam, what you'll see is that we'll file with our 10-K later this week with all the documents related to that transaction. A lot of the answers to some of the questions you might have will be incorporated in those documents that will be filed with the K.

Okay. Thanks. As far as the carrier business, you mentioned that you're building some more private exchanges. Is there any revenue component that's volume based, or is it all (technical difficulties) based still?

Good question. It's a bit of both. In our employer private exchanges, it's a subscription base. It's based on the number of employees that are on the platform. We have begun to introduce this idea of, we have an individual private exchange, which actually has the notion of policies sold associated with it.

We touched on a little bit the new benefit store offering, which is really going to be made available to all of our constituents. In that case, Benefitfocus, this past open enrollment introduced that, the benefits store, so that as voluntary benefits are purchased by individuals through the benefits store, we actually get compensation associated with that. We see that driving incrementally up our average sales price, our average revenue per subscriber in the customers that are using the benefits store. That's very early stage with that. We'll be talking more about that at the One Place conference in two weeks in Orlando, but some really exciting early results from there.

Okay. Thank you.

Thanks, Adam.

Ross MacMillan.

Thanks a lot. I think you just answered the first question I had, which was on the warrant. I think that was 2% of the outstanding shares on the residual on the Mercer warrant? Is that correct?

Yes, that's correct, Ross, 2% of the outstanding equity that they've got a right to buy at the same price they purchased the 9.9% stake at.

That's great. My follow up was on the customers that you're making that decision to discontinue supporting? Would I be thinking about those in the carrier segment rather than the employer segment or is it actually a mixture of both?

It's a little bit of both. There's a little bit more on the employer side, but it's a little bit of both. As we look at it, it's mostly, most of the impact or the larger part of the impact is in the second half of the year. It's a little bit in the first part of the year, but most of it is in the second part of the year.

Then, just one last one. Some of the customer wins you had in Q4 sounded quite large, like Schneider Electric. I was just curious, what is your view right now on being able to penetrate employers with 20,000, 25,000-plus type employee numbers, as a side to that, call it 1,000 to 20,000 employee segment?

Great question. We get up every morning and we think about these 18,000 large employers that are US based. We have 553 of them, which is 3% market share. There's just opportunity across the board. We're having a growing success with some really large customers. You mentioned Schneider, a great new customer.

One that we announced in the middle of last year was Brookdale Senior Living, which is about 80,000 employees. They went through open enrollment, very successful with us. Just a great relationship with that big complex company, a lot of locations around the country. Great to see the software perform so well for them. Matter of fact, they'll be actually at our One Place conference, and just a really great success story.

From a strategic standpoint, we haven't isolated just the jumbo accounts nor have we said we're going to stay just in the middle. We have coverage now across the market, and the bigger ones take longer, so we like being in those conversations. We think some of them might take one, two, three years to work through, just given the length of contracts they might have. We're very excited about the early results we're starting to see in some of the larger accounts.

Great, thank you.

Thank you.

David Hynes.

Hey, thanks. I think Ross just hit on my question around the carrier employer side. Maybe, Milt, help me reconciling between the EBITDA and the net income guidance, what are you assuming in terms of interest expense on the building lease? I know that changes a little bit. Are you assuming that increases in 2015? Just to help us build our model.

Yes, it's going to increase in 2015, DJ, because of the new building that we just opened up in January of this year.

Do you have a number of what that -- we should be thinking about for 2015?

I think about it in terms of $1 million to $1.2 million per quarter.

Okay, and it was $1.5 million in Q4, is that right?

That's what is was, I believe. That's right, yes.

Okay. Deferred revenue in the quarter, we generally see a sequential uptick in Q4. The growth was muted to relative to what we've seen the last couple of quarters. Anything we should know there? Does that have anything to do with changes in the services side of the business? Maybe just help us with that line?

I think it's, as we talked about on the call, there were a few changes in relationship periods for customers that are no longer using the platform that we took out of the deferred revenue. As we said, those were some smaller carrier customers of ours that really were not too significant to the revenue number, but we took those out of deferred. As you know, when a customer stops using a platform, we accelerate the recognition.

Okay, got it. That makes sense. Okay, thanks, guys.

Thanks, DJ.

Thank you.

Terry Tillman.

Thanks, guys, for taking my questions. Can you hear me okay, by the way?

Yes, go ahead.

There's been a lot of attention on Mercer. I echo congratulations that, but also Anthem that sounds really interesting and a big expansion, so nice job on that. Shawn, I guess my first question is, I've followed you guys for a long while now and watched you all scale the business. There had been primarily a focus on, in the employer business, trying to capture as many of those 18,000 potential units as you can.

You're talking about a couple new products you're going to launch at your user conference in a couple weeks. Is there any change or evolution here where maybe looking at how many net adds you have is the primary determinant and actually it's going to be shifting a little bit towards how much you get out of each one you already have? Or, should we still think about the main barometer of success is how many new customers you're adding?

Thanks, Terry. The main strategy is to add new customers, new large employers. I think as we approached in the last half of last year, 500 large employers and we spent more time with those employers, we realized that really now was a beautiful time to begin to unlock some of the additional value with the Benefitfocus platform. And not -- in no way a change of our growth strategy at all.

We still are going out, engaging with the 18,000 large employers, winning their hearts and minds, talking about the culture of the great software that we provide. Now that we have such a good large customer community, and our conferences are really vibrant and the folks love the platform and the technology, it's just brimming with ideas. The idea of, like the benefit store, providing more voluntary benefits to these employers, really came out of customer community interaction. We've been designing and thinking about it for years, but pretty patient with it. Now is the right time to do that.

Expanding our analytics offering, which we'll talk about at One Place, these are customer driven initiatives. The obvious beauty of it is, is it makes the platform that much richer for the customer, more sticky, increases our average subscription price per member, which we believe will lead to some additional margin improvement and ultimately a profitability in a couple of years. It just seems like the right time to do it, and 500 plus large employers is just a great base to do it with. It's still go out and win new large employers and bring them on. We'll just have more things to offer them now.

Okay. Milt, you talked about the puts and takes, the $5 million benefit and then from the customer lifetime value change and the $4 million impact from the culling your customer base. I'm just curious, though, did you go through your entire customer base and do this analysis, or was this just low-hanging fruit and we could actually see some more of this analysis and potential culling out of some of the unprofitable customers as the year progresses?

I think we did a pretty thorough analysis, Terry. What you see there in that number are the ones that -- were the ones that really we couldn't reach any agreement to fix. We did talk to a number of customers, and in some cases, fixed the problem that we had. Ray August, who joined the Company about six months ago now as our new COO, certainly is focused on customer profitability as a significant metric that he's driving his team towards. Together, with our teams, conducted this evaluation, and what you see in that roughly $4 million is the result of the ones that are -- I wouldn't call them low-hanging fruit, but after the thorough analysis of a good number of customers, the ones that we just couldn't really get to the point of being profitable.

Okay. I don't know if this will be for you or Shawn, but just my last question, and I appreciate you answering them, is related to UnitedHealthcare and Aetna. Aetna, obviously, that was -- we were getting a lot of questions from investors a short while ago when they made their acquisition of what's somewhat of a competitor of yours. So, maybe an update on Aetna and how that revenue relationship is? Is it intact? Then, anything on the update on how UnitedHealthcare is rolling out? Thank you.

Great. Thanks, Terry. We are super proud about our large customers. I would just say on those two that you call out, we are on track with them. We've continued to have a great relationship with Aetna. They've been on the Benefitfocus platform for eight years now, with electronic enrollment, electronic billing, our e-sales portal that powers a lot of their broker capabilities, and a newer introduction of the Benefitfocus marketplace in the last half of last year.

We still feel good about where we are with Aetna in their relationship with Benefitfocus this year. It's always, obviously, all in our guidance and everything. Then, United as we talked about, was going live in the fourth period, which it went live in the fourth period of 2014. We're on track with them as well, so thanks for pointing that out.

All right. Thanks, guys.

Thank you.

Thanks, Terry.

(inuadible)

Hey, guys. I was just looking to get a little bit more clarity on the Aetna relationship and also the expansion on the Anthem, which I know you touched on in the last question a little bit?

Yes. Just sort of mentioned the Aetna, but on Anthem -- Blue Cross Blue Shield of Virginia, which is an Anthem plan, has been a customer for a little over three years now. They use our electronic enrollment and electronic billing capability. Great relationship and great partnership with that plan, and we recently expanded that to now 11 of the Anthem plans. They'll be using the Benefitfocus eEnrollment, eBilling, and eExchange capability. They have a lot of systems in the different states. They're just a great partner and we're really proud of our team.

When an existing customer expands with you that significantly, it just say a lot about the technology, the professionalism of our staff and the service that we're providing and the value that we're providing. So we're very excited about that growth. We work with a lot of Blue Cross Blue Shield plans around the country. We've talked about Blue Shield of California, last call, CareFirst and so forth. It just is a good solid base of customers for us. We're real proud to have them.

Great. Thanks. Good job on the quarter.

Great. Thanks so much, we appreciate it.

(inaudible)

Hey, guys, can you hear me okay?

Yes, sure can.

Great. Listen, the results were stronger than we had modeled, and our model sort of works pretty well. Just curious was there any change in the average time per implementation or time between when the new customers sign and when you start to recognize revenue? Or was there more revenue being recognized per customer? The results were impressive.

No, John. I wouldn't say that there was any real shift in the amount of time it took us to get customers live. I think when you look at the performance that we had in the second and third quarters, where we added 122 new employer customers during that quarter. We obviously have to get these customers live in time for open enrollment, and work very hard to do so. As a result, that then starts to generate revenue when they go live during the fourth quarter, in time for open enrollment. That effectively is what drove the out performance, if you want to call it that, from where you guys were thinking.

Okay, great. One other question. How many customers are representative unprofitable? I'm just curious, do you anticipate any fallout regarding the perception of Benefitfocus and your customer commitment? Is that something that's obviously something to consider, but (inaudible)?

I had a tough time, John. I think you are talking about how many of the customers are in that the unprofitable category, if you will. And I'm not quite sure what the other part was. With regard to that, there were several. It wasn't a large number. It was several customers that resulted in that.

Okay. I guess the rest of the question. I'm actually sitting on a runway, do you have to manage any fallout from your customer base considering your commitment to them? I mean, if you're going to be pushing out some customers that are unprofitable, is that something you consider, is it something you've seen any fallout from?

I'll take that one. As one of the founders, I want all of our customers to be happy and stay forever. Obviously, these were some pretty long standing legacy customers where we had a fair number of services involved in them. We actually engaged with the customers over a long period and worked on it. Really, it was just -- in some cases, some of the customers are still here, it's just something we were doing for them that just wasn't in our disciplined approach going forward. We don't feel like there's any disruption from this.

There was plenty of notice, plenty of back and forth, and a plan put in place. We gave it a lot of thought and a lot of care. It's not something that we take lightly at all, and it's not something that you'll see in any routine pattern. It's just we wanted to look at the margin. We wanted to look at profitability. We wanted to look at where we were making our investments, long-term sustainable. This was just a thoughtful approach to that, and the customers were clearly involved in the process throughout it.

Great. Thanks, Shawn. Congrats (inaudible) thank you.

Thanks a lot. We appreciate it. Safe flight.

At this time there are no further questions. Do you have any closing remarks?

Thanks, everybody, for joining the call. Again, I'll shout out to all my associates at Benefitfocus and our great customers and partners, just a wonderful year. We're very excited about kicking off 2015. Thank you for joining us this evening. Appreciate it.

Thank you for your participation. This concludes today's conference call. You may now disconnect.