Benefitfocus Inc (BNFT) 2015 Q1 法說會逐字稿

Good afternoon. My name is Bailey and I will be your conference operator today. At this time I would like to welcome everyone to the Benefitfocus Q1 2015 earnings conference call. (Operator instructions) I would now like to turn the conference over to the CFO, Milt Alpern. Please go ahead sir.

Thank you operator and good afternoon everyone. Welcome to Benefitfocus' first quarter 2015 earnings call. We will be discussing the operating results announced in our press release issued after the close of market today. I am Milt Alpern, the Chief Financial Officer of Benefitfocus, and with us on the call today is Shawn Jenkins, our Chief Executive Officer.

As a reminder, today's discussion will include forward-looking statements, such as second-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 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 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 10K 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 these measures in our press release.

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

Great. Thanks Milt, and thanks to all of you for joining us today. Benefitfocus carried a significant business momentum into 2015 with a strong first-quarter results that exceeded the high end of our guidance range from both a revenue and profitability perspective. The total revenue for the quarter was $42.7 million. An increase of 39% year over year that was driven by employer revenue growth of 57% and carrier revenue growth of 25%. Non-GAAP gross margin of 48% was up 600 basis points sequentially and 1,000 basis points year over year. During the first quarter we made great progress against our three strategic priorities for 2015. Which will position us well to achieve our objectives this year and generate meaningful growth in improving profitability in the years ahead.

I would like to take a few moments to review our progress in these three strategic areas so far this year. Our first key area is expanding our employer product offerings. As a Company, we have done a great job in recent years increasing our large employer customer base to 568 at quarter end, which is double the size that we had at the end of 2012. The consistent theme we have heard from many of these customers is that they want Benefitfocus to expand our products and services to help them further unlock the power of their benefits while lowering their costs.

This type of lend then expand strategy has always been part of our long-term product road map and during the first quarter we achieved a major milestone with the introduction of several new employer product offerings at our One Place user conference. These include the Benefit Store, our new capability for voluntary benefits such as critical illness, hospital indemnity, accident, legal, and life insurance offerings that enable employers to expand the benefits offered to their employees at no additional cost to the employer. Through the Benefit Store we've simplified the voluntary benefit selection process for both the employer and employee while at the same time expanding the number and type of benefits made available.

Next is our core and advanced analytics, which dramatically enhance the ability of benefits administrators to aggregate large data sets to make more informed decisions. These new solutions aggregate healthcare and benefits data from multiple sources and translate it into actionable information that helps employers identify cost drivers and design plans that better meet the needs of the workforce.

Next, our eBilling payment capabilities for employers. Employers can now consolidate invoices and payments and have advanced reconciliation features that make it simpler and much more efficient to manage the ongoing billing process. In creating this new capability we leveraged our 10 plus years of engineering for carrier eBilling and payments as a great example of how our one platform, two market strategy is an advantage for our customers.

And finally the Benefits Service Center. Our new member support offering that provides employers and their employees a team of dedicated support specialists who are passionate, well-trained in our technology and specializing in benefit support and thus providing a far superior experience than traditional legacy third-party support providers.

Customer reaction to these new products and services at One Place and in the weeks following has simply been tremendous. Our community of customers are embracing the vision of the suite of solutions that can dramatically improve the quality and cost efficiency of their benefit offerings. The introduction of these products provides a meaningful up-sell opportunity that significantly increases the potential PEPM pricing we can achieve going forward.

An example of the early impact of these product introductions and the success of our land and expand strategy are the 17 customers we signed for the Benefits Store offering in the first quarter, which compares to a total of eight customers all of last year during our limited rollout. We see significant opportunity with the Benefit Store in particular which provides Benefitfocus the ability to generate compensation and directly benefit from improved employee adoption of voluntary benefits.

Our second area of focus for the year is to further extend our leadership in the private exchange marketplace. We have built the most comprehensive private exchange platform in the market and we continue to make significant product enhancements to best serve the needs of this dynamic and fast-evolving market. We continued adding new product exchanges during the quarter and now support a remarkable total of 25.

An exciting new private change win during the quarter was CareFirst's large employer marketplace. CareFirst, the Blue Cross Blue Shield plan in Maryland and Washington D.C., is a longtime benefit-focused client who is already using our marketplace solution to power their small employer exchange. The great demonstrations of momentum we had with the private exchange market and our ability to leverage our long track record of success with carriers into the new growth opportunities. CareFirst is also a powerful example of our differentiated approach to the private exchange market and we're the only platform that supports individual, small employer, and large employer, and retiree marketplaces.

Our third area of focus for 2015 was scaling the business and increasing margins. We got off to a great start in this area by delivering our best gross margin performance since becoming a public company. One of the areas we are beginning to see a notable improvement in, is the efficiency of our implementation team, which positively impacts revenue as more customers come onto our platform faster. The entire Company is focused on driving greater efficiency and scale by continuing to provide a world-class customer experience. We feel very good about the progress we've made in recent quarters.

Taking a closer look at our first quarter performance, we found 15 new large employer customers, including Arizona Chemical Company, Chicago Mercantile Exchange, the Facchina Group of Companies, Giant Eagle, the H. Lee Moffitt Cancer and Research Institute, Hoss's Steakhouse and Sea House, and McCarthy Holdings, among others.

Giant Eagle is one of the largest family-operated companies in the country and operates over 400 grocery stores. The key differentiator in this transaction was our ability to integrate with their existing enterprise software systems which will help them extend useful life of certain legacy platforms. Our benefit service center was an additional differentiator due to our ability to handle complex eligibility requirements in a seamless fashion for their very large workforce.

The Chicago Mercantile Exchange is part of CME Group, the world's leading derivatives marketplace. They chose Benefitfocus based on our user interface, our deep data integrations, and our ability to serve the growing proportion of its employee base choosing high deductible health plans. They are also integrating a tailored incentivized wellness program into their benefits offering, which demonstrates the flexibility of the Benefitfocus platform. Additionally, they chose our new core and advanced analytics solution, an exciting early proof point on the demand for expanded employer product offerings.

The H. Lee Moffitt Cancer Center and Research Institute, located in Tampa, Florida, has been ranked as the top-ranked hospital for cancer care in the Southeast for more than a decade. They chose Benefitfocus due to our elegant user experience, integrations with Equifax workforce solutions, automation of life events and reporting efficiencies for things like tracking of variable hours and enrollment notifications. It's also an exciting win as the implementation will be managed by one of our third-party system integrated partners, Providence Technology Solutions.

These great new customer wins help demonstrate the added value of our new expanded employer product offerings. We've also continued to work to expand our distribution capabilities, and we're excited by the announcement we made earlier this week that we have signed a reseller agreement with SAP. Through this agreement, which builds on our existing cooperation with success factors and integration of Employee Central, SAP will resell the Benefitfocus marketplace as SAP US Benefits Managed by Benefitfocus. This cloud application extends SAP's market-leading core human resources and talent management solutions and will streamline online enrollment, employee communications, and benefits administration year-round for customers' US-based employees. It's a very exciting announcement.

in our carrier business, we have gotten off to a strong start on developing implementation plans and timelines for the nine Anthem customers that we announced in our last call. We're seeing the largest insurance carriers in the country turn to Benefitfocus to introduce our advanced capabilities, which is a great validation of the value our platform delivers for carrier customers.

Finally, we recently announced the promotion of Ray August from Chief Operating Officer to President and COO. In this expanded role, Ray will be responsible for all of our operations, customer initiatives, and our day-to-day performance. As CEO, I will continue to focus my time on the Company's long-term strategy, our product innovation, and communicating our message with great passion. I will also include -- I will also continue to help develop our Company's unique culture, which we view as key to our success. I'm thrilled to have Ray take on this new role and believe that this expanded management structure leverages our respective skill sets to ensure Benefitfocus is best positioned over both the short and long term.

In summary, we continue to perform at a very high level in the first quarter and are well positioned to deliver another strong year performance. We are executing well against our strategic objectives, and our investment in expanded employer and private exchange solutions can increase the value we can provide our customers. This is a great time for Benefitfocus and we believe we are in an excellent position to continue to deliver strong top-line growth and improving profitability. We are in the early stage of a massive $1.7 trillion benefit industry moving to the cloud, and we're thrilled to be a leading part of this transformation.

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

Thanks Shawn. We are once again pleased to have delivered strong quarterly results that exceeded our expectations from both a revenue and profitability perspective. I will begin by reviewing the details of our financial performance and then I'll finish with our updated guidance for the full-year 2015 as well as our outlook for the second quarter.

Total revenue for the first quarter was $42.7 million, an increase of 39% compared to the first quarter of 2014, and above the high end of our guidance range of $41 million to $41.5 million. The revenue outperformance in the quarter was due in part to increased efficiencies in our professional services organizations. As well as several customer implementations that occurred sooner than we had anticipated. Breaking this down further, software subscription revenue was $37.8 million, representing 88% of total revenue and growing 32% year over year. While professional services revenue was $4.9 million, representing 12% of total revenue, and up 125% year over- ear.

Professional services accounted for a larger percentage of revenue in the first quarter as a result of the change in our customer relationship period which accelerated the recognition of professional services revenue. As a reminder, last quarter we announced that we changed the length of our customer relationship period for both our carrier and employer segments to 7 years from 10 years. Looking at revenue by segment, employer revenue for the quarter was $20.9 million, up 57% from the year-ago period while carrier revenue was $21.8 million, up 25% from the year-ago period.

Let me now read you the supplemental metrics that we report on a quarterly basis. We ended the first quarter with 568 large employer customers. An increase of 150 compared to 418 in the first quarter of 2014. And up from 553 at the end of last quarter. Overall, we saw good deal activity in the first quarter of this year. Our new employer customer count reflects the shifting timing of our annual customer event, One Place, this year from May to March. And our introduction of limited time bundled pricing packages to our new employer product offering.

We also ended the quarter with 52 carrier customers, up from 43 in the first quarter of 2014 and at the end of last quarter. Our carrier customer count reflects the nine incremental carrier relationships from the expanded agreement with Anthem that we announced in our last earnings call.

Our software revenue retention rate was once again greater than 95% in the first quarter, which we believe is continued evidence of the significant value our platform generates for our customers.

Moving down to P&L, our non-GAAP gross profit was $20.6 million, or 48% non-GAAP gross margin. This represents a 600 basis point improvement over the last quarter and a 1,000 basis point improvement from the year-ago period. And is the highest non-GAAP gross margin we have reported since being a public Company.

There are several factors that drove the significant gross margin expansion that we saw in the first quarter including increased efficiency in our professional services organizations, accelerated revenue recognition due to the change to our customer relationship period, and seasonally lower professional services engagement. In the quarter, had we recognized professional services revenue as delivered, instead of over the customer relationship period, our adjusted gross margin would have been 300 basis points higher.

In addition, software gross margins were up 400 basis points year over year, reflecting the increased scale in our business among both our direct and indirect customers. Adjusted EBITDA was negative $7.8 million or negative 18% of revenue, and is better than our guidance of an adjusted EBITDA loss of $8.5 million to $9 million. And compares to negative $8.8 million in the first quarter of 2014. Our EBITDA outperformance was the result of our revenue outperformance, which largely falls to the bottom line. We continue to believe that we can achieve our long-term adjusted EBITDA margin of 20% over time.

Non-GAAP net loss per share was $0.40 based on the 26.7 million weighted average shares outstanding. Significantly better than our guidance of the loss of $0.51 to $0.53 per share, and compares to per-share loss of $0.46 on the 24.5 million weighted average shares outstanding in the year-ago period.

Looking quickly at our GAAP results, gross profit was $20.2 million. Our operating loss was $12.5 million. And our net loss per share was $0.55. Turning to the balance sheet, we ended the quarter with cash, cash equivalents, and marketable securities of $107.4 million. Up from $56.2 million at the end of the fourth quarter and includes $74.5 million in net proceeds from the Mercer investment we announced in February. During the first quarter we also had greater than usual cash outlays due to several one-time items that were paid in the quarter, including expenses associated with our One Place conference, which we hosted during Q1 instead of in Q2 as we've done in the past.

I would now like to finish with our guidance for the second quarter and full year 2015. For the full year, we expect revenue of $172 million to $175 million, which equates to year-over-year growth of 25% to 27%. We're targeting an adjusted EBITDA loss of $35 million to $38 million and a net loss per share of $2.10 to $2.21, based on 28.1 million weighted average shares outstanding. Turning to the second quarter, we're targeting revenues of between $41.8 million to $42.3 million which represents year-over-year growth of 29% to 31%.

From a profitability perspective, we expect and adjusted EBITDA loss of $11.2 million to $11.7 million and a non-GAAP net loss per share of $0.57 to $0.59 based on 28.5 million weighted shares outstanding. As a reminder, last quarter we shared our adjusted 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 acquired -- of acquisition related intangible assets and offering cost expense. For comparability purposes we no longer add back interest expense on building lease obligations for these items.

In summary we are very pleased to have delivered a strong start to 2015 with first-quarter results that exceeded our expectations on both the top and bottom line. There continues to be strong demand for our platform as benefits management becomes increasingly complex, and we believe we are well-positioned to capitalize on the momentum in this highly dynamic multi-billion-dollar market.

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

(Operator instructions)

Greg Dunham, Goldman Sachs

Shawn, the first one is for you. You mentioned the 17 customers that signed on to the Benefit Store, can you talk about the business model with some of those offerings? And where are you finding the most traction?

Yes, thanks, Greg. We're really excited about the launch of these new expanded product offerings that we talked about at One Place. There's really been fantastic reception, and Benefit Store in particular is a new offering that we have made available, commercially launched at One Place.

What we're doing there is we're working with existing customers and working it into our agreements with our new customers as well. And it is a way for them to add additional voluntary benefits. Many of these benefits they have never offered before or they have offered in some more restricted fashions. So they can offer, say, critical illness insurance or additional life products and so forth.

And by working through the Benefit Store, which is a brokerage operation that we have set up, we bring in the offerings to the employer, They make their selections and then we weave them into the enrollment experience. Because we are both designing the software and also working with the volunteer benefit providers, we're able to get much higher adoption of these programs. We are able to communicate them better, use data to drive the decision process, make it all the same part of the seamless experience for the employee.

So we're seeing much higher adoption rates by the employees as they make the selection. The business model, specifically to your point, Greg, is a combination. In some cases we get a PEPM throughout the year. And/or they share in the compensation or the commission structure of these products.

So, the 17 customers that we added in the first period, up from eight of all of last year, in our limited rollout, will have volunteer benefits presented to their employees when they go through open enrollment either this summer or if they're a fall open enrollment later this year.

Then based on the effective date of those benefits, let's say that they have a fall open enrollment season, benefits will be selected. The way the revenue actually then shows up for Benefitfocus would be January 1 of the following year, so it would be a 2016 revenue factor. And then we would get paid or we would begin to recognize a monthly amount of that compensation structure going forward.

Perfect. That's helpful. And then one more for me. The SAP announcement is a big announcement obviously. But you had a relationship with the Success Factors before.

Can you compare and contrast the difference between what you had in place before with Success Factors? And what is new and how does it affect the business going forward? Thanks.

Thanks, we're so excited about this. I tell you what, it's just a massive arrangement for us. We're working with the folks at SAP and they're having their Sapphire Conference in Orlando right now and we're just getting great, great interest from their customers. So we had been working with Success Factors, a company they acquired several years ago. And our Success Factors relationship flowing through to SAP, was a integration with Success Factors, we had worked on a set of APIs between Benefitfocus and Employee Central so that the data can move back and forth.

And we kind of had a joint selling arrangement. They would introduce us in some of their -- into their prospects and whatnot, and then the Benefitfocus folks would come in and do the demonstrations and we would win the account. And those accounts would buy from Benefitfocus on our contracts. We had a lot of success with that; we've grown that business. We have gotten tighter integration and I think really it is proving ourselves and since the public offering and Benefitfocus getting larger and larger and our increased R&D investment and whatnot. We are really excited to announce this next phase.

What is different now is really it is a much deeper relationship. So we will be going deeper on the technical integration, sharing the way the user experience will work, for example, so that employees of SAP across their product portfolio will be able to inherit that experience into the Benefitfocus platform. I think structurally the biggest difference is SAP can now sell this on their own contracts and the SAP salespeople will be equipped with the demonstration, with all of the information about the products.

So the SAP sales force feet on the street in their accounts, existing accounts and prospective accounts, will be able to sell Benefitfocus. They will be able to price Benefitfocus. They will be able to contract with Benefitfocus and bring the deal all the way through to closure.

So really exciting opportunity for us and just, since the announcement, we've already had a great deal of activity of excitement. So really proud of that.

Perfect. Thanks guys.

Sure. Thank you.

Nandan Amladi, Deutsche Bank

Thanks for taking my question. So first one for you, Milt. Gross margin clearly best in your recent history. There are still a lot of moving parts this year. So how should we think about what the trajectory looks like for the remainder of this year going into next year?

Yes, hi, Nandan, thanks for the question. Certainly, we achieved a non-GAAP gross margin in the first quarter of 48%, which is up about 1,000 basis points from where it was in the first quarter of last year.

A couple things to think about. Part of the increase in margins, some of that was due to the acceleration of revenue as a result of the change in our customer relationship, which basically added about 2% of the 10% increase that you see. And as we talk about margins going forward, I think that, as is our typical trajectory, you will see margins in the second quarter as we make some increased investments in certain areas, as we ramp up for our open enrollment season and so forth, I think you will see margins dip some, but then certainly come back as we get into the last quarter of the year.

And when you look at what we're looking at for the year, I think you will see a substantial increase in margins overall for the year, although I think 48% is probably the high.

Okay. Thank you. And a question for Shawn. The number of new employers added. You had a couple of large ones, like Giant Eagle, that you added this quarter. But the total number perhaps came a little bit lighter than people were expecting. So as you sign some of these larger customers, is that a function of longer sales cycles? Or can you characterize what might have happened this quarter?

Well, I think the biggest change when you look at the year is that we had historically had our One Place conference in May, so last year was in May, this year we moved it up to March. We did something interesting in the middle of March when One Place was held. We introduced a series of new expanded product offerings for the employer base as you have seen.

And when we did that, we put some pricing bundles together, both for new prospective customers, deals that were in flight in the first quarter, as well as existing customers. But we had to give them more time than, like, 2.5 weeks. So we actually created a pricing situation where you had until really into the month of April to get that pricing, those bundles. It affected almost every deal that we had in flight.

Some of the deals that we announced, actually all the deals that we announced today on the call, bought one of those. They either bought the service center or the analytics or the Benefits Store. So we saw a flurry of activity about these new products. People wanted to see what they were, they wanted to understand the pricing. And we kind of effectively moved the March 31 date back for signing pressure to give everyone a little bit more time to digest these new products.

So it was expected. It was sort of designed -- as you know, our model, you have been studying our company for a while. Our big selling season is really the second quarter and third quarter. And we've got great deal activity. We're really optimistic about the year, as you can see from our guidance and whatnot.

So it was really more of a phenomenon of moving our conference and the dynamic of the new products that we introduced. At the same time, we had really great new big customers in there. And the customers that did buy from us, the new adds were adding more than just the core platform.

So really the underlying message is that idea of adding, expanding the offering is really working quite well. And the other phenomenon I would say, too, Nandan, is we added 17 Benefit Store customers in the quarter, up from eight the year before. But really it was zero in the first period of last year. So you compare just the Benefit Store adds alone, zero in the first quarter of last year, 17. There is a ton of momentum in the business.

And maybe one other point. We added nine carriers this quarter. I don't have the number in front of me what we added in the first period last year, but it was probably one or two. So huge carrier quarter. And that is the beauty of one platform, two markets, is each quarter you've got different surges happening, whether it is the Benefit Store or the carrier business.

But those are some of the dynamics that -- really we continue to give you the guidance that we've have got, and really optimistic on the year.

Thank you.

Terry Tillman, Raymond James

This is Brian Peterson in for Terry. Congrats on the quarter, guys. So I know you had a lot of large new carrier wins this quarter. Just curious how the delivery is going there? Any potential update on the onboardings of some of the SIs to help you deliver some of that business? Thanks.

Great question. With the carrier adds, the big carrier momentum in the quarter was our expansion with Anthem. Anthem, Blue Cross Blue Shield and their affiliate plans. And just for a little bit of update for folks, we have been working with the Blue Cross Blue Shield of Virginia plan for the last couple of years and through our success they really earned the right to add these nine additional states which they will be rolling out the Benefitfocus eEnrollment, eBilling, and eExchange capability.

We're off to a really good start. It is a big implementation for us. It will take 2015 really to do the full implementation. So the bigger the carriers are, the more complexity, the longer they take. We are feeling very good about that. We are off to a really strong start and deepening that partnership. Because we had worked with them for a number of years, we have close relationships already in place and a lot of data exchange had already been happening between our companies. But we're really off to a good start there.

The second piece of your question was around the SI community. And as we talked about a little bit, we graduated our first set of SI system integrators in December. We just announced that program in May of last year. So that was the beginning of the University, the training, the certification.

We were really excited about the system integrators that came into the program in 2014. We finished our first class in 2014 as we had laid out and they are now doing implementations. We are well on track there to have system integrators -- actually they are working on projects right now with our employer business. So we're super excited about that dynamic.

I would say one other thing there too that you kind of heard and see in the results here. We pulled some revenue into the first quarter from some faster go-lives. And there is this wise proverb that says he who teaches learns twice. One of the things that we found from the system integrator program is that as we teach third parties how to implement, we're getting much better implementing ourselves.

So by putting the curriculum together and the discipline for other people, it has improved our own implementation process even faster than we were already doing on our own. So we're seeing benefit from the SIs coming up to speed. But it has also really been great for our own internal implementation as well. Couldn't be more pleased with the results there.

Okay. Good to hear. And just a comment on the selling season as you guys head into the second and third quarter. Any update on the number of RFPs that you're seeing this year? Are you seeing a catalyst potentially from the ACA? Just any qualitative thoughts there. Thank you.

Sure. I don't have an RFP stat for you. I think that the year is going as we thought it would go, so the level of activity -- we increased our sales presence last year, actually every year for the last several years. And we're real happy with the team that we have and the talent that we have been able to attract. I think we have got the best [SAS-based] sales team in the industry right now.

So they are executing; they are extremely busy. The announcement with SAP has created even more activity. Our expansion with Mercer and the amount of activity that they are seeing in the Mercer marketplace. We now have 25 private exchanges, which creates all sorts of additional activity for our team. So it is a busy time, I assure you, and there's a lot of enthusiasm.

There is nothing specific in the Affordable Care Act right now that has changed as far as our talking to employers. There may be a question a little bit later that if someone has a specific question about an element of the Affordable Care Act, we'll be glad to handle that. But specifically to your question, nothing has certainly slowed down the selling with the Affordable Care Act. The tailwinds are still intact. There always nuances going on in there. But that fact pattern is still very much intact.

John Nuficci, Jefferies.

Great, thanks very much. This is actually Kevin Dennean standing in for John. Congrats on the quarter also. Shawn and Milt, I know you talked a little bit about the SAP resale agreement. But wondering if you could expand on it? Success Factors, obviously, as a large installed base.

But can you maybe quantify what your expectations are for the agreement in terms of customer net adds, and incremental revenue opportunity over some multiyear view? And then also, if you could talk a little bit about what the economics look like. Does Benefitfocus handle the installations? Is it a third-party integrator? Just any more color that you can give us on the SAP resell agreement.

Excellent. Sure. I will start and, Milt, you can chime in. The 2015 impact on revenue, we don't think -- there's nothing different about the guidance that we have given you on the revenue, although we have updated it for this quarter and increased it a bit as you can see.

So the real impact is we believe it will put a lot more activity into our sales pipeline. It certainly increases the number of people that are in the market with the demo and the ability to communicate the Benefitfocus platform. As far as the metrics around their existing customer base and that kind of stuff, we don't have anything to publish for you there. I think, as we get deeper into the formal public relationship, having it out there a bit more in the coming quarters, we will probably say a bit more about it.

So I think of it more as a 2016 phenomenon. Building our sales pipe now. More introductions and activity on the front end.

The beautiful thing about the economics is it works just like the rest of our subscription model. So SAP customers can buy the Benefitfocus technology from SAP on their contract. And they can contract with them. We will do the implementation directly through our Benefitfocus resources or they can use a system integrator.

I think the SI program that we put in place was actually very impactful in expanding our relationship. So they can uses the great system integrators that are now trained on Benefitfocus platform, many of which also do a lot of SAP, or success factors implementation. So for those customers using a SI, they can buy the implementation from the SI, contract with them, buy the technology from SAP, contract with them.

But once they go live on the Benefitfocus platform, it will continue to be a per-employee per-month subscription model similar to the pricing that we have in the market now, obviously. And then I think some of the real beauty of it is, though, the tighter integration with the SAP platform. As we do our releases and SAP does their releases, we will keep those in sync for those customers.

And then those customers do have the ability to begin to purchase our additional products and services over and above the core offering there. I think it creates an additional expansion opportunity in the out years as well.

That's great. Thank you very much.

Sure.

Adam Klauber, William Blair

Thanks. A couple of different questions. You obviously had a lot of success with the Mercer exchange market last year. Would you say the activity or the RFPs for the Mercer exchange is higher this year than last year?

That's a good question. Mercer as a public company reports their numbers, they put the numbers out. We don't comment specifically on the Mercer pipeline or their adds. They did have a call recently and they were very optimistic on the call of what they were seeing. And so I probably would kind of refer to their public comments on it.

Clearly their enthusiasm for the Mercer marketplace, the success they have had in the last two years has just been phenomenal. I think their expansion and investment with Benefitfocus is a pretty clear indication, I would say, of their optimism for going forward. But specific metrics around their pipeline or their customer adds that they are expecting, I'd refer you to their comments that they have got out on that.

Okay; that's fair. And as far as the general employer selling season, I have heard from a number of people in the market that it is a quite active season. And in general, are you going to situations more directly from your sales force or is it more on an RFP basis?

Most of the work that we do is direct with our sales team, and we have, as I said earlier, just an incredibly talented software as a service cloud-based sales team out in the field. Many of them have been with us for two, three or four years now and they are building their patch, and their territories are getting very well-developed. They have a lot of great relationships.

We do a lot of regional events. We do lunches and we call them city tours and whatnot. So we're hosting events in these cities and we are working primarily directly with the employers. I would say that things like the Mercer marketplace and our relationship with Mercer, our carrier, private exchanges and more and more, I think the big consulting houses that, as we become a public company, as Benefitfocus has gotten a lot bigger, we're showing up on more traditional RFPs and that process has increased for us.

But still our primary mode of activity has been just direct contact with these employers. And then working with all of their influencers and the consultants that they have historically worked with.

Right. Okay. And then finally on the SAP relationship, obviously that is a huge, huge win for you guys. With the selling season being really almost at its peak now, now and the next month or so, will that relationship probably be more important for next year's selling season than this year's selling season?

Yes, I definitely think so. I think SAP is just a huge company with such broad customer base. I do know that benefits is really high on everybody's list. And I think that we do have some opportunity there to pull some stuff through that channel this year.

But primarily we are looking at it as deepening that relationship. There is a lot of training of the SAP sales force to do. There's a lot of collateral and so forth to push into their organization which we are prepped and ready to do. But I think it will be more of a 2016 type of thing.

One kind of obvious way to think about those, anybody that might be sort of quasi-considering it this year, maybe they were already in our pipe. Clearly any SAP customers that are already in the Benefitfocus pipe, we would be optimistic and hope that this deepening relationship and their public announcement about it and they have a great blog on there -- on Mike Ettling's blog post there at SAP, the head of their cloud, HR cloud, that is a great read if anybody wants to check that out.

We think that type of relationship with our teams is going to really help those customers that maybe were already moving through our pipe feel that much better about moving forward with Benefitfocus.

Great, thanks a lot.

Super, thank you.

Steven Lynch, Wells Fargo.

Hey, guys, thanks for taking my questions. Just to start out, I was wondering if you could give us some -- maybe an update on how things are progressing with the effort to establish standalone value for professional services? Does that still seem probable by the end of the year?

Yes, Stephen, this is Milt. Thanks for the question. Absolutely. As Shawn alluded to before, directly spoke to the fact that our systems integration partner program, which we graduated the first partners out of our training classes and certification classes at the end of last year, is off and running. We have actually got system integration partners who are actively in the process of performing implementations today. And certainly our expectations which we had set to have standalone value established in the second half of the year is certainly still very, very achievable and expected.

Okay, I got it. It does look like revenue per employer client maybe hit an all-time high in the quarter. And I know you mentioned that you saw both some larger clients maybe in the quarter, as well as higher product adoption across the portfolio. I'm wondering, though, if maybe you could give us a sense for which one of those drove most of the strength? If it was leaning towards one or the other?

Well, I think from the growth that we saw in revenue in the first quarter, certainly, as we said before, really primarily comes from the timing of some implementations that occurred in the first quarter that were ahead of schedule, which I think certainly is just a testament to our ability and some of the efficiency that we are achieving in our professional services and implementation organizations.

Also in the first quarter, certainly, on the software side, we get the benefit of a full quarter's worth of all of the implementations that occurred in the fourth quarter of last year. So that is kind of an expected increase in revenue that we see in the first quarter of every year. And lastly, I think we have talked about before that, particularly in the carrier side of the business, you see some, what I will say, reshuffling or rationalizing of customer counts, or the number of lives that carriers are supporting on our platform. And so there is usually a little bit of revenue, a modest revenue bump, that we get as that reshuffling takes place the beginning of every year.

And maybe I will just add a little bit to that. As far as the slice of that that was about revenue per employee or the metric around -- getting at the size of the employers. Our average size of employer has been steadily increasing over the last couple of years, really, and it is not any sort of change in strategy. We're not exclusively going after larger and larger ones.

Any employer that has 1,000 or more employees, we are engaged in promoting Benefitfocus to them. But I think the public offering and the size and the scale of Benefitfocus and the awareness has naturally brought us into more and more larger conversations. And as those have flowed through the system, we added 160 employers last year, put a lot of those on in the fourth quarter, and some of those were bigger.

So it is probably a trend that has been in the works for a little while and you are just seeing that manifest itself really from the big fourth quarter adds.

Got it. And then I guess maybe finally, could you give us some color on why Q2 revenue might be down sequentially? Was there some sort of benefit in Q1 that is not going to recur? Or is this related to an earlier-than-expected rolloff of some of those older, unprofitable relationships that you're planning to terminate this year?

Yes, I think primarily, as I said a moment ago, I think we realized some revenue in the first quarter a little bit earlier than expected, that was typically expected to go live in the second quarter. So you'll typically see it then, as a result, a bit of a leveling off in revenue growth in Q2. But to your point about the rationalization of some of the unprofitable customers that we talked about at year-end, you will begin to see some of that in the second quarter, naturally. It was expected. And as I said, it was something that we did to certainly improve the profitability of our business.

Okay, thanks, guys.

Thank you.

Ross MacMillan, RBC Capital Markets.

Shawn, when I think about the Mercer relationship, can you help me understand -- so last year I think it went from, these are round numbers, but call it 200,000 active lives to about 1 million active lives. When did those roll on? Did those sort of roll on in Q4 and they are fully in the numbers in Q1? Is that the right way to think about it? Maybe you could help me understand that.

And second, either Shawn or Milt, when I think about the pricing of Mercer and I think about what you traditionally said about your employer PEPM being $3 to $5 and carrier PEPM about, call it $1.00 or $1.25. Where does Mercer sit in that range? Thanks.

Yes, sure. Thanks, Ross. So the first part you have right. So Mercer adds -- and all of our channel partners, private exchange adds, follow a very similar pattern. They go through an implementation process depending on when the employer wants to do their open enrollment season. Once they go live we begin to get that subscription revenue, so that all tracks well. They are generally on by the end of the fourth period and then they show up for 100% effectively of the first period.

Because Mercer is such a big partner and there are ongoing big projects and so forth, they do have a bit of a characteristic that sometimes mirrors a little bit of the carrier business, where we might activate some additional functionality we have been working on in another quarter kind of separate from the actual employer cadence. So we do see a little bit of additional steps up to new tiers or something like that, depending on the volumes that they are running through. But for the most part it follows the pattern of employers come on in the third or fourth period and then you begin to see that.

As far as the pricing goes, I know that folks are always trying to triangulate our pricing with the public companies we deal with and what they report. One metric that has always helped me in this business understand big aggregate numbers here is we charge effectively a per-employee per-month rate at Benefitfocus, the individual who is employed.

Many times what you see reported from folks that are aggregating, you will see a membership number or a full subscriber number. And that would add the dependent. It would add the spouse or the kids if they are on the policy. We don't necessarily get more money for those additional dependents, but when you take a bigger number like 1 million subscribers or 2 million subscribers, sometimes you'll see those numbers don't tie directly to what you would calculate to be our pricing model. That's because we're focused on the employee count and kind of everyone else rides along to that number.

Specifically though, our private exchange pricing is between our carrier and our direct employer pricing. A single employer buys from us and they get that pricing that we have offered to them. Carriers buy in massive bulks from us and we do one-time implementations and feed all that through.

A private exchange in this case is getting the benefit of that bulk pricing, but it is still a multi-carrier and there are a lot of moving parts in there. So it is kind of -- it is in between the ranges that you were talking about.

And keep in mind too, Ross -- this is Milt -- that obviously in that indirect model with Mercer, a lot of the expenses of the sale and even in the implementation in some cases, are borne by them. So the pricing model is an indirect model where there is an expectation that some of those costs are going to be borne by Mercer.

Yes, that makes sense. And one quick follow-up just on the carrier side. I remember last quarter, Shawn, I think you talked about your success in Q1, I think it was with Anthem, and some, I guess, subsidiaries of Anthem. Was that the lion's share of the growth in the carrier number this quarter? I missed the earlier part of the call, so I'm not sure if you made any comments around that. Thanks a lot.

Yes, no problem. Anthem Blue Cross Blue Shield plan is a national publicly traded company, an umbrella. We had net -- nine carrier adds in the first quarter. All of those were Anthem plans, individual states that came through this umbrella agreement.

Each of them will be getting the Benefitfocus electronic enrollment, eBilling and eExchange technology, and they are on a staggered rollout that has -- the implementation discovery and work has already begun. Literally it will take all of 2015 to get that implementation really solidified.

Thanks.

At this time there are no audio questions.

Okay. Thanks, everybody. We appreciate everybody joining for the call and we will talk to you again next quarter. Thank you, operator.

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