Benefitfocus Inc (BNFT) 2015 Q2 法說會逐字稿

Good afternoon. My name is Robin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Benefitfocus Q2, 2015 earnings conference call.

(Operator Instructions)

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

Good afternoon everyone, and welcome to Benefitfocus' second-quarter 2015 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 at Benefitfocus, and with me on the call today is Shawn Jenkins, our Chief Executive Officer.

As a reminder, today's discussion will include forward-looking statements such as third-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 10-K which is on file with the Securities and Exchange Commission and our other SEC filings.

During the course of today's call, we will also refer to certain non-GAAP financial measures. You can find important disclosures about those measures in our press release. With that, let me turn the call over to Shawn. And then I'll come back at the end to provide details regarding our second-quarter results, as well as our updated guidance for the third-quarter and full-year 2015. Shawn?

Thanks Milt, and thanks to all of you for joining us today. Benefitfocus had a record quarter and experienced significant demand across both business segments in the second quarter, which was highlighted by a record 94 net new large employer customers added. From a financial perspective, revenue and profitability exceeded the high end of our guidance range. Total revenue of $42.7 million increased 32% year over year, and was driven by employer revenue growth of 45% and carrier revenue growth of 21%. Non-GAAP gross margin of 46% was up by 1,000 basis points year over year for the second consecutive quarter.

Companies increasingly recognize that legacy benefits administration offerings are ill-equipped for the changing benefits landscape and are bracing the enhanced flexibility and user experience of the cloud-based benefit-focused marketplace platform. We are seeing a greater number of employers evaluate their long-term benefits offerings, while they also realize the significant level of disruption occurring in the market, whether from new government regulations or the consumerization of IT and healthcare. These trends are driving a need for a more comprehensive solutions that give employers cost-effective ways to provide a broader range of employee benefits while also gaining greater insight into benefits usage in order to bend the cost curve of one of their largest expenses.

Let's take a few minutes to review the progress we've made against our three strategic priorities halfway through the year. The first area of focus is expanding our employer product offerings. This was the first full quarter we had our five new employer products: the BenefitStore, core and advanced analytics, eBilling, benefit service center and video available for sale for our employers.

We are incredibly pleased with the demand we are seeing from both new and current customers, which validates there is a substantial up-sell opportunity in our employer market that can drive additional revenue growth over time. During the quarter, we had significant success selling additional products to our base and selling multiple products to new customers In particular, BenefitStore's seeing strong customer adoption and is in a position to see strong participation rates during the upcoming open enrollment season. We are also focused on expanding the list of carrier partners offering products in the BenefitStore, and I'm pleased to share that we've doubled the number of carrier partners in the BenefitStore since launch, Including carriers such as Humana, TransAmerica, Lincoln Financial Group and Mass Mutual.

Our second area of focus for the year is to further extend our leadership in the private-exchange market. We continue to expand our private exchange base by adding a large group marketplace for a big Blue Cross carrier. This represents the 26th private exchange Benefitfocus has signed in only a few years. Our product platform in this market is also expanding and creating additional opportunities for us with both new and existing customers. During the second quarter several of our private-exchange customers purchased additional services and functionality, which demonstrates their long-term commitment to the marketplace model and the Benefitfocus platform as a way of interacting with and delivering value to their customers.

Our third area of focus for 2015 is scaling the business' increasing margins. We made excellent progress in this area with our second consecutive quarter generating 1,000 basis points of gross margin expansion. Particularly encouraging was our ability to keep software gross margins equal to the first quarter, even as we begin to gear up for the upcoming open-enrollment season. This reflects greater customer support efficiency, our continuously improving user experience and increasingly robust customer community program.

We had our first successful third-party system integrator implementation go live in the quarter as we begin to have a greater percentage of implementated by our partners that will further improve our margin and profile. We are also leveraging our increased global resources to provide speed for our customers and flexibility for our teams.

Turning to our carrier business, we had a very strong quarter with a number of meaningful expansion wins in our existing customer base, including MetLife and United Healthcare. In addition, the notion of one platform/two markets really showed its power in the quarter with the signing of our first carrier customer, a regional Blue plan, adding the BenefitStore to their private exchange. This is a tremendous testament to the network effect we are having in the market, how each of our products builds upon each other and how we are leading the industry in a new model of marketplaces.

The changing benefits landscape also had profound implications for the insurance-carrier market, which is seeing a generational shift in the distribution of payment for their products. Carriers recognize they need to significantly upgrade their technology in order to compete in a market with more choice and more consumers than ever before. For example, during the second quarter one of our carrier customers purchased our Advanced Analytics offering, allowing them to make more informed decisions and ultimately be a stronger competitor in this growing and dynamic market. We have established deep relationships with many of the largest carriers in the market and are in a great position to grow with them over time.

Taking a closer look at our second-quarter performance, we signed a record number 94 new large-employer customers including American Eagle, Arctic Slope, a regional corporation, Biaggis Ristorante Italiano, Credit Suisse Securities, Education Corporation of America, Gate Petroleum, Jim Beam Brands, Smash Burger and the University of Dayton Ohio, among others.

American Eagle is a young adult apparel and accessories company with over 40,000 employees. The company chose Benefitfocus to drive success of their strategic initiatives, things like increasing employee participation in wellness programs. Our track record of success with other large retail clients and their unique employee populations and needs, as well as our expertise in employee communication were key differentiators in American Eagle's decision-making process.

Credit Suisse, a leading global financial services company, was an exciting new customer win in the quarter. They purchased our Benefitfocus Advanced Analytics offering to improve their benefits process by gaining better control over their data and generating insightful reports that can drive savings. Our expanded product portfolio made it possible to provide value to a jumbo employer like Credit Suisse.

Biaggis, the casual Italian restaurant chain in the Midwest with 1,700 employees and over 20 locations, selected the Benefitfocus marketplace to help them manage the significant change in their benefits-eligible employee population. The ACA's coverage mandate for employees working more than 40 hours a week and the related employee communication and compliance requirements meant Biaggis needed a more efficient way to manage benefits for its multilingual and mobile workforce. In particular, our communications portal will significantly improve the benefits on-boarding process for new employees, which is a big issue in industries that have high volumes of new employees each year.

Education Corporation of America, which owns and operates private colleges across the United States as well as online, selected the Benefitfocus marketplace and our BenefitStore to make it easier for their diverse workforce of more than 3,000 benefit-eligible employees to select and enroll in the benefits that best suit their unique needs. Among some of the key reasons they chose Benefitfocus are our seamless user interface, deep functionality and consumer-driven health plans support features.

Gate Petroleum was another exciting Q2 win. Gate is one of the largest privately-held companies in Florida with over 3,000 employees. It chose Benefitfocus marketplace and our communications package because of our exceptional user interface, something we hear very often, and functionality, deep-data integration and strong partner relationships with companies like Wage Works, Success Factors, Equifax and others.

From a market perspective the Supreme Court's recent decision in King versus Burwell, which kept in place the existing subsidy structure for federally-facilitated marketplaces, provides customers greater confidence that they can plan for their future benefits needs as part of the new benefits landscape. And we are seeing them move forward.

Our success in establishing Benefitfocus as the clear leader in the cloud-based benefits administration is also driving exciting partnership opportunities that expand our distribution reach, including last quarter's announcement of our strategic resale agreement with SAP. We've gotten off to a strong start with SAP, including signing our first joint customers in the second quarter. We are still early in the process of establishing our joint go-to-market efforts and building a pipeline, but these initial deals demonstrate the significant opportunity in SAP's installed base.

As we mentioned previously, SAP now has Benefitfocus products on their price list which can be sold by SAP salespeople and contracted on SAP agreements. It's important to note that historically ERP vendors were some of our competitors, and now we are partnering with the industry's largest company. This is significant shift in the competitive landscape, and we believe demonstrates the power of the Benefitfocus platform to scale to these very large organizations and achieve flexible integration with the in-place ERP in emerging cloud platforms.

The changing benefits landscape also has a profound implications for the insurance-carrier markets, which is seeing a generational shift in the distribution and payment for their products. The ACA's efforts to constrain the rising cost of healthcare is putting pressure on the profit margins of carriers and brokers, which is one of the driving factors behind the recent wave of consolidation in the industry. Benefitfocus is well positioned to gain from this consolidation for two reasons.

First, we have a very strong customer relationships with the largest carriers who are positioned to become even larger over time through acquisitions. More importantly, our flexible cloud-based platform significantly improves the efficiency and accuracy of the carriers' billing and enrollment processes while also providing new distribution opportunities and an elegant consumer shopping experience through our marketplace offerings.

We continue to push the pace of innovation during the quarter with the release of the Benefitfocus platform's summer release, which included more than 400 additional features, the most in our Company's history. And while the sheer scale of our release was significant, three themes that we outlined in One Place 2015 back in March remain intact. Marketplace plus administration plus analytics continue to guide our investment decisions.

Let me provide just a few examples. In our marketplace's platform we continue to work on reimagining our consumer experience that will go live for our employer customers in time for their open enrollment. Previewed at One Place 2015 in March, the new experience leverages behavioral design in a mobile responsive framework to improve the enrollment workflow. More importantly, provide access to better information and highly personalized recommendations.

For the employer, we've also included advanced branding capabilities that provide a level of configurability unmatched in the market. From an administration perspective, we continue to invest in our user experience for our power users, the benefits administrators. We believe designing for this group both helps take cost out of the system for our employers and increases in our client satisfaction.

Two new features are worth mentioning here. Our participation dashboard provides real-time access to participation during open enrollment through dynamic shareable reports. Another new feature, our employee history timeline, provides point-in-time visibility into benefits eligibility, reducing the amount of time spent answering individual queries, eligibility audits and bill reconciliation.

From an analytics perspective, our clients are looking to us to not only unlock the value trapped in the date, But also to simplify the way in which they share insights across the organization. In the summer release we extended role-based access across our reporting capabilities for employers, carriers and brokers to enable them to have filters across multiple employers.

In addition to our significant investment in the platform, we continue to make progress on our company-wide client experience initiatives, Customers at the Heart including One Place 365, which is our new online customer engagement portal and One Place Local, our new regional road-show series. Both are off to a terrific start and build on our annual One Place conference framework.

For One Place 365 we see a lot of excitement from our client base. This customer engagement portal supports a virtual community across our entire client base. We're using the platform to stay in touch with our users, solicit new product feedback, communicate new functionality and share best practices. In the first 45 days following the launch of the portal we've seen over 10,000 unique log-ins from our power users, the benefits administrators.

Supporting One Place 365 and our One Place user conference is One Place Local. This is our first year leading a new client road show, and the early results are very exciting. We have eight One Place Local events scheduled through the third quarter and each of them is designed to bring our power users together to share best practices, discuss challenges they're facing with regard to some of the larger trends like the Affordable Care Act, and network with our product leaders. All of our events are hosted by clients, and it is certainly a Tier 1 list with clients such as Brooks Brothers in New York, New Balance in Boston, Lincoln Financial in Philadelphia, just to name a few. To date we scored very highly on these events, and they're clearly a great tool for both engaging existing clients and generating new leads for our products.

To summarize, our second-quarter results were strong across the board and reflect the impact of the paradigm shift in benefits administration to cloud-based platforms such as Benefitfocus. Our expanded distribution and product portfolio have further increased our opportunities to drive significant growth in the foreseeable future. We believe Benefitfocus is well positioned to become a significantly larger and more profitable Company over time as we extend our leadership in this dynamic, multibillion dollar market opportunity. With that, let me turn it back over to Milt. Milt, take it away.

Thanks, John. We're very pleased with our second-quarter results, which exceeded our expectations in both a revenue and profitability perspective. I'll begin by reviewing the details of our financial performance and then I'll finish with our updated guidance for the full-year 2015 and our outlook for the third quarter.

Total revenue for the second quarter was $42.7 million, an increase of 32% compared to the second quarter of 2014 and above the high end of our guidance range of $41.8 million to $42.3 million. Breaking revenue down further, software subscription revenues was $38.1 million, representing 89% of total revenue and growing 28% year over year. While professional services revenue was $4.6 million, representing 11% of total revenue and up 82% year over year. As a reminder, our professional-services revenue is being positively impacted by the changing customer relationship period that we instituted at the beginning of 2015 for both the carrier and employer segments, to 7 years from 10 years. Looking at revenue by segment, employer revenue for the quarter was $20.8 million, up 45% from the year-ago period, while carrier revenues were $21.9 million, up 21% from the year-ago period.

Let me now review the supplemental metrics that we report on a quarterly basis. We ended the second quarter with 662 large employer customers, an increase of 94 compared to 568 at the end of the last quarter and up from 488 in the second quarter of 2014. As a reminder, the second and third quarters are typically our largest selling quarters as customers look ahead to the upcoming open-enrollment season.

We also ended the quarter with 52 carrier customers, up from the 43 in the second quarter of 2014 and consistent with the end of last quarter. As a reminder, we added nine incremental carrier relationships in the first quarter of this year as a result of the expanded agreement with Anthem. Our software revenue-retention rate was once again greater than 95% in the second quarter, which we believe is evidence of the significant value our platform generates for our customers.

Moving down the P&L. Our non-GAAP gross profit was $19.6 million, or a 46% non-GAAP gross margin. That represents a 1,000 basis point improvement from the year-ago period. Software margins were up 800 basis points year over year and flat sequentially in what's otherwise a seasonally weak quarter, which reflects more disciplined spending as well as the increased scale in our business among both our direct and indirect customers. Additionally, we are realizing the impact of increased efficiency in our professional services organization and accelerated revenue recognition due to the change to our customer relationship period.

Adjusted EBITDA was negative $10.7 million, or 25% of revenue, and is better than our guidance of an adjusted EBITDA loss of $11.2 million to $11.7 million and compares to a negative $13.5 million in the second quarter of 2014. We continue to believe that we can achieve our targeted long-term adjusted EBITDA margin of 20% over time. We are confident in our ability to scale our margins due to the increased use of third-party implementation partners, an increasing percentage of our sales that we expect to come through our indirect channel, and greater up-sell activity with our new employer offerings, particularly BenefitStore. Non-GAAP net loss per share was $0.53 based on 28.6 million weighted average shares outstanding, significantly better than our guidance of a loss of $0.57 to $0.59 per share, and compares to a per-share loss of $0.65 on 25.2 million weighted average shares outstanding in the year-ago period.

Looking quickly at our GAAP results. Gross profit was $19.1 million, operating loss was $16.4 million, and our net loss per share was $0.64.

Turning to the balance sheet. We ended the quarter with cash, cash equivalents and marketable securities of $88.5 million compared to $107.4 million at the end of the first quarter.

I'd now like to share an update on our progress towards establishing standalone value for professional services. As expected, we established standalone value for professional services in our employer business at the beginning of the third quarter. We will now recognize professional services revenue in the employer business at the time of implementation as opposed to over the customer relationship period. As a reminder, the significant majority of our professional services revenue is related to our carrier business. So the overall P&L impact from the establishment of standalone value in the employer business will be relatively modest. There can also be some quarter-to-quarter variability on the timing of when professional services revenue is recognized after we've established standalone value based on the timing of go-live.

Lastly, as you may have seen last week, we filed a registration statement with the Securities and Exchange Commission for a secondary offering of up to 2.875 million shares by Goldman Sachs, one of our long-time shareholders. The offering is comprised entirely of secondary shares. Accordingly, Benefitfocus will not be receiving any proceeds from this offering.

Turning to guidance. For the full year we expect revenues of $174.5 million to $176.5 million, which equates to year-over-year growth of 27% to 28%. We are targeting an adjusted EBITDA loss of $35 million to $37 million and a net loss per share of $1.93 to $2 based on 28.2 million weighted average shares outstanding.

For the third quarter we are targeting revenues of $42.9 million to $43.4 million, which represents year-over-year growth of 25% to 27%. From a profitability perspective, we expect an adjusted EBITDA loss of $10.1 million to $10.6 million and a non-GAAP net loss per share of $0.53 to $0.55, based on 28.7 million weighted average shares outstanding. As a reminder, the impact from the decision to terminate certain unprofitable arrangements will start to be reflected in our results from the third quarter.

In summary, Benefitfocus delivered extremely strong second-quarter results that reflect the growing demand for our platform and the increasing scale of our business. We remain well positioned to help companies address the complexities of a changing benefits administration landscape and are confident in our ability to deliver strong growth and long-term shareholder value. With that, we're now ready to take your questions. Operator, please begin the Q&A.

(Operator Instructions)

Your first question comes from the line of Nandan Amladi with Deutsche Bank.

Good afternoon. Thanks for taking my question. Shawn, you touched upon the cross-sell and up-sell opportunity among the carriers, employers as well as your exchange customers. Can you characterize what the up-sell path looks like for each of those? I'm talking about exchange as a separate segment, just so you can highlight it.

Sure. Thanks for the question. Big theme for us that we rolled out at One Place was this idea of expanding our employer offering. We introduced a series of new products for the employer market at the beginning of that expansion. And what we actually saw was some of those being -- some of those new offerings being picked up by our private exchange customers, which is a really exciting development.

So we operate 26 private exchanges now. And we actually had first couple of private exchanges pick up the BenefitStore, which is a really exciting dynamic if you think about it. A lot of the private exchanges are individual carriers, health plans, offering their products and also subsidiaries or whatnot. And we're seeing a real desire for those exchange operators to introduce a series of other voluntary benefits.

So we've taken our BenefitStore concept, which offers voluntary benefits to the employer. Employees can buy those benefits at their option. They volunteer basically to buy them. We're having great success in the employer market. But specifically to your question, Nandan, about the private exchange. We saw an uptick of that BenefitStore there, really for the first time. And quite frankly way ahead of our expectation. We also did some selling in the quarter around the Advanced Analytics, another employer offering that we rolled out at March at One Place. And we've seen the carriers begin to attach that to their private exchange offering as well.

So -- and then a third bucket, I would just say, is expanding the scope of the private exchange functionality of the operators. So now that the private exchanges are in the market, whether it's for small employers or large employers or individuals or retirees, we support all four on the Benefitfocus platform. We're beginning to see those partners, whether they're carriers or brokers, come back and add additional things that they want to offer to sell to their customers, extend the functionality around billing capabilities, do things like more real-time quoting of certain products and whatnot. So I'd say we're kind of going into the 2.0 phase of the private exchange where these big entities are really standardizing on the Benefitfocus platform, investing heavier in it, which is always a good sign as it kind of gives you a window into their thinking of how big the opportunity is going out in the future.

And also if you could frame for us the per employee per month road map for the segments that you just outlined?

Yes, sure. I'll just give you a couple additional data points that we had queued up. This is our first full quarter of the expanded product offering for the employer segment. And we actually saw a little bit better than one-third of the employers attaching one or more products.

Now, we haven't begun to break you out yet the PEPM of those particular products, but I think it is really a healthy sign to see both new customers and then also back to the base selling of these offerings. As I mentioned, a little bit over one-third of the contracts that we did during the quarter had one, and many of them had more than one, of the attached offerings.

When you look at the carrier business specifically, that has been an expansion story for a number of years now. Generally about 50% of our selling in any given year is 50% the new carriers buying and about 50% of the selling is up-sell. And those PEPMs are -- they vary, depending on the service and the quantity of contracts and length of term and whatnot.

Thank you.

Sure.

Your next question comes from the line of Terry Tillman with Raymond James.

Good afternoon, guys. I had a couple of questions. I guess Shawn, the first question just relates to last quarter I think you had talked a little bit about -- because you had gotten the question about employer wins and could it have been higher. And I think you had said that maybe some of the packaging of some of these new products and putting together in some bundles may have taken some time for customers and prospects, even at One Place to investigate that. Would you say that some of the really strong new employer wins in 2Q, some of that was probably what would have been naturally occurring business in 1Q?

The reason why I ask this, I'm trying to get a sense how we should think about an expectation for 3Q. Should we assume that you actually build on that 94? Could it maybe be down a little bit but still seasonably strong because it's just artificially higher in 2Q?

That's a great question. I will say, Terry, that something that we're seeing this year, and I think it speaks to the phase of the market adoption that we're going in, is historically 2Q is our biggest quarter as it was again this year, 94 net adds. I'll just pause for a minute and give a shout-out to our management team for building great client references and our sales team for winning so many, 1,000-plus employers. It's just incredible to see that adoption. And we continue to see that.

During the middle of the year, employers get ready for their open enrollment. They need to buy in the second and third quarter. I'd say a fair amount of our pipeline now is looking out to 2016, 2017 and 2018, particularly as we go upmarket we're seeing larger and larger deals, both in our pipeline and in our wins.

Those, along with our SAP arrangement and that channel partner, tend to be a little less characteristic of signing in Q2 or Q3 to get ready for open enrollment. And they're really more around re-platforming, moving to the cloud, generally connected to perhaps other projects that they have going on inside their IT shop, which I believe bodes well for Benefitfocus as we scale and grow and become a larger platform. So the idea of the acute timing of Q2 and how significant that is in the year I think is actually going to change a little bit. I believe it will still be the dominant quarter for the number of years to come. But we're seeing more openness of employers to look at possibly signing later in the year even and getting a head start on next year, or possibly starting earlier in the year and changing their implementation cadence up a little bit.

Specifically to your question, we did land 94, a record number. I wouldn't over-read that as what it might mean for Q3. As I said, I think we're really starting to see a lot of conversation around employers getting ready for 2018 and the Cadillac tax. Even if that were to move around a little bit or change in timing, we're hearing a lot of -- much more longer-term strategy. And those decisions tend to get made once that strategy's set.

Okay. And Shawn, you proactively talked about the consolidation in the carrier market and what that could mean for your business. You're probably on the winning side of many of the M&A trades that are being proposed. And you talked about efficiencies so your platform could be a value-add.

What I'm curious about, one of them in question in Anthem, you got a lot of business right now that's supposed to be rolling out. Have you seen any near term impact, though, to implementation schedules? Or is there anything that you've contemplated in terms of the outlook for the carrier business because there could be some bumps in the road, if you will, because some of these M&A trades? Then I have quick follow-up for Milt. Thanks.

Yes, totally. Certainly our industry, healthcare in particular and benefits at large, has gone through a generational shift with the Affordable Care Act and the regulatory environment and the cost pressures it puts on the carriers and their pricing. I think with the recent set of announcements that we've heard just in the last 60 days or so, we're thankful at Benefitfocus that the acquiring companies are customers of Benefitfocus, and that historically has meant that we're going to get more business, more subscribers come onto our platform would be the idea.

And also if you look into the strategy, what's going on, kind of across the board whether it's in the health plan or the life companies or the other types of benefits, even wellness centers, these companies are lining up additional products to sell into their base. And that means they need a more sophisticated way to represent those products, to handle that data, to allow their members to see them and get billed for them and pay in a consolidated fashion. So really I would think they're wonderful themes for the use of the Benefitfocus platform, really across the board. But it's clear that they're going to need flexible technology and they're going to want to invest in, I would say, cloud-based technology as they make these migrations.

Specifically to your question about Anthem, we're feeling very good about that implementation. We announced that earlier this year. Obviously they had been in talks with the various parties, what they were thinking throughout the -- for a year-plus in their acquisition strategy. I think their roll-out and their timing with Benefitfocus was probably contemplated in that. We haven't seen anything that would make us think it's going to materially affect the roll-out of the Anthem implementation.

Okay. And Milt, in terms of -- you had talked about now you've hit that milestone, and congrats on the standalone value on [per cert PS] on the employer. What about the carrier side? Because I think that was one of the strategies originally as well, is at some point have standalone value. Is there any chance that could happen in 2016? Thank you.

Thanks, Terry. We did -- we were successful, as you say, in establishing standalone value in the employer segment. And as I said, as most of the professional services work that we do is on the carrier side, the ability now to recognize revenue on the employer implementations over the implementation, or at the point of implementation as opposed to recognizing it over the customer relationship period does provide some acceleration, But -- albeit certainly modest compared to what it would be on the carrier side.

With regards to that, I think it's possible that at some point, maybe in the back half of 2016, that we're able to establish standalone value for carrier services, clearly, as you know, those are more difficult, more complicated implementations. And it's going to take a little while longer to bring a partner or two up to speed to be able to perform an implementation on a carrier independently of Benefitfocus, which would be required for us to establish standalone value on the carrier side of the business.

Thanks.

Next question comes from the line of John DiFucci with Jefferies.

Thank you. I guess I have a couple -- just a couple. As you guys pointed out, you had a real nice uptick in the new large employer customers this quarter. Are you seeing any trends at all in the size of those customers? Are they getting smaller or larger or just staying about the same size?

Great question. A couple things. One of the things we're actually seeing is a lengthening of the agreements, and particularly among the larger ones. And we are seeing in our pipeline and actually in our wins some bigger and bigger deals. We've got -- we added six employers in the first half that are over 20,000. And so as we go upmarket, those deals are entering the pipe more than we've seen historically. I think also the SAP relationship adds to that dynamic, in addition to just the Benefitfocus platform scale and our size and more people learning about the Company now that we've been public for two years now. So we do see both in the pipeline and also in the wins some larger and larger customers. Overall, the average size is incrementing up.

However, in any given quarter we might sign a handful of sub-2,000 accounts that would possibly skew that average in a particular quarter. But to us it feels and looks like the average size of the employer is increasing. And in addition to that, from this expansion strategy, we're now attaching more products to those deals so they're getting bigger, both because the employers are getting bigger but also because we're selling more products to them and the terms are getting longer, or the length of the contracts. All really good signals for what we're seeing.

Great. Thanks, Shawn. I have a follow-up for Milt. Milt, cash balance declined by about $20 million this quarter. And I just want to just get ahead of this and have you address it publicly so I don't get a ton of questions tomorrow on it. How should we be thinking about that going forward?

Good question, John. It looks like the cash burn is about $20 million. Actually, its probably just about $16 million when you consider the $4 million repayment on the line of credit. And when you look at the cash burn that we've experienced in the first half of 2016 (sic), I mean, I wouldn't necessarily say it's indicative of what to expect to see for the balance of the year.

Remember, there are a couple of things that -- a couple of somewhat unique cash disbursements in the first half of the year. There was about $5 million worth of building-related cash disbursements that were made. And also remember that too, in 2015 was the first year that we had One Place in the second -- in the first quarter as opposed to second. So you might see -- that reflects a little bit of a difference, although on a total-year basis, not. I would say that it's not necessarily indicative of what you'll see in the second half. I think there was some uniqueness in the first half of the year in terms of cash disbursements.

Certainly as we look out in 2016 where we're certainly expecting to make significant improvements toward our objective of an EBITDA breakeven in the middle of 2017, I think you'll see leveraging from not only our revenue growth but also some operational efficiencies that we're certainly beginning to see, as we've seen recently, and will continue to see as we move forward in our operations from some of the operational type of efficiencies and improvements that we've implemented. And also the leveraging of now utilizing third-party systems (technical difficulties) for integration partners to do implementations for us removes a lot of the -- it removes some cash, but also removes a lot of the unprofitableness from the model as well.

That's helpful. If I could, just a follow-up to that, Milt. Can you just -- and I believe it sort of floats, but could you tell us about what the balance is on your line of credit, or what's available if you so chose to? It sounds like you paid off some of it, but -- .

The line of credit right now, I think there's a $5 million balance that's outstanding at the end of June. The line of credit that we renegotiated with a consortium led by Silicon Valley Bank in the first quarter basically was a $60 million line of credit that's predicated on a multiple of our recurring software revenues. It's 4 times our recurring software revenues, and certainly those have grown. So the $60 million line, albeit for the $5 million that's outstanding, is what's available to us.

Okay. Great. Thanks a lot. Nice job, guys.

Thanks.

Thank you.

Your next question comes from the line of Richard Davis with Canaccord.

Thanks. Two questions. So you've had a lot of success, and you kind of touched a little bit on this in the preview discussion, with SAP and Success Factors. Is there any reason why you would not work with additional HR partners, whether it's Ultimate Workday, Oracle, whatever, things like that? Or is this something that's more kind of semi-exclusive?

It's not exclusive, Richard. It's a good question. I think as we get more and more customers with a particular -- that use a particular payroll company or ERP vendor, or in Mercer's case, broker, we tend to win a really good reputation there. Those customers begin to talk about Benefitfocus in glowing, loving terms, as we would expect. And the data we ship back and forth really works out so well. And we build this kind of organic base, which is what happened with Success Factors and then SAP.

We do have data integrations with, really, all the major payroll vendors and ERP vendors. We ship a ton of data back and forth, PeopleSoft or Lawson or Ultimate Software, and are very good at that across the spectrum. So I think hopefully in time we'll see ways to formalize those relationships, work with those customer communities from us. It starts more organically, and really taking great care of our customers, regardless of the system we're using. And then our reputation tends to develop within that.

Got it. I think it was -- was it Ray that got promoted to President, was it last quarter, as I recall? Has he done anything particularly different now that he's not COO? Or is it just kind of wearing different color shirts or whatever?

It's a good point. For those on the phone for the first time, this is Shawn speaking. I've been President and CEO for 15 years. And we promoted Ray August, our COO, to take on the President's title. He's done a wonderful job, as you can see. Andy Howell is running sales, is just doing fantastic. Imagine a quarter where you grow by 32%, you add the record number of customers, 94 major enterprises, while you increase gross margin by 1,000 basis points, actually in a quarter when we tend to staff up a lot getting ready for open enrollment. The management team is just doing fantastic.

One of the real benefits, I believe, to our customers and eventually to our shareholders, is it's giving me even more time to spend on the product, the invention, the design of the products, the introduction of new products and working with our ecosystem partners to make sure that we have the just absolute best array of products, both in the BenefitStore and our app store. Really proud of what Ray's done, what Andy's done, Milt and the entire team. The results are across-the-board spectacular.

Super. Thank you so much.

Thank you.

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

Thanks, good afternoon. Would you say the private exchange with Mercer, is that business running ahead of what it was last year?

That's a good question. Mercer does a good job of putting out a whole bunch of stats as they go into the open enrollment season. And we really follow their lead on what they disclose and the numbers and whatnot. So I can't comment directly on their progress. I do know that they're having a heck of a run with the Mercer marketplace. And they're very proud of their relationship with us, as you saw earlier in the year where they made an investment in the Company and expanded their relationship. So we're feeling really good about the work that we're doing with them. But as far as their actual numbers, we defer to them to report on them.

Okay. And then as far as the larger clients, say 10,000 and above, would you say you're having more conversations during selling season this year than last year? And do those tend to be -- go later in the season?

Well, the first part, yes. Our 10,000-plus, 20,000-plus and 50,000-plus buckets are more active than they ever have been. And we historically had not had a specific national accounts team. We wanted to be in all regions and talking to all of the employers. And we felt like as we went public and the Benefitfocus brand grew and our scale grew and our larger customer wins grew that we would naturally begin to move upstream, which is what's happening. Things like the SAP arrangement, and their customers obviously are massive. So that's brought us into a lot of large conversation as well.

We definitely have more activity in that pipe. That pipeline is -- tends to buy a little less seasonal. So they'll buy when they're ready and when their strategy is set. I don't know that it's necessarily later in the year as much as it is the bigger they are, they tend to be thinking already about 1/1/17 and getting ready for next year's open enrollment. And with multiple geographies, international, they might roll out in a specific area. I think as those come, they'll come maybe a little bit more spread throughout the year.

Okay. Thanks a lot.

Sure.

Your next question comes from the line of Sean Wieland with Piper Jaffray.

I thought that the HealthTap partnership was interesting, that you announced during the quarter. Can you comment on that at all? And specifically what are the conversations among your employer customers like regarding telehealth? Why did you choose HealthTap, and then how do the economics work of this relationship?

Good question. I tell you what, just in general on the topic, Sean, I was with some great customers last week. And just spending some time with them, talking about their implementation and their roll-out. And we spent a lot of time on their wellness initiatives, on telehealth, on new models of delivering care. This is a big employer, about 40,000 employees. And then I went to another meeting and had the exact same conversation, different type of workforce and whatnot. And so [it sounds] just like every conversation I'm having with our customers now, they're looking to Benefitfocus to talk about who works well in the wellness arena, who's innovating in telemedicine, who can help us with our employee population that has more and more high deductible health plans, who can coach people through various scenarios.

So we have in our ecosystem a very active set of individuals that work at Benefitfocus that are taking inbound requests, a lot of partners want to partner with us, given the size of our audience, 25 million people using the Benefitfocus platform. We are -- we put those through a filter of where do we already have common customers where we can jointly work with an existing customer to advance an integration.

And then as far as the economics go on HealthTap in particular, or most of our -- in the wellness area, it depends on if we bring the customer to them and we're attaching them to one of our contracts, they might be a referral fee or even a revenue share. In some cases, they're bringing us into their customer base and there might be a referral fee going in the other direction. So the relationships, we really try and maximize the flexibility for the customer so they can buy in the right paper.

But a shift, really, about -- from last year, and we're seeing it more this year, is more and more people -- more and more customers want to buy from Benefitfocus these additional services. They want to attach them to our service agreement, they want to attach a service level agreement, which would be an umbrella that Benefitfocus provides. And then in many cases they actually want to pay Benefitfocus and then have us compensate the third parties through an arrangement. In those cases we generally do get paid a fee for managing that whole relationship.

All right. Thank you. And then quick one for Milt. The commentary around the revenue recognition in professional services, that was baked as of January of this year. There was no incremental change to that during the quarter, so am I right in thinking that those P&L impacts were factored into your guidance, or no?

Yes. We basically had anticipated, Sean, as we say, establishing standalone value in the employer space, remember, in the middle of 2015 and we did. So going forward the standalone value impact for the second half of the year is baked into our guidance, and had been in the total year guidance that we established the beginning of the year as well.

Got it. Thank you very much.

Thanks.

Your next question comes from the line of Ross MacMillan with RBC Capital Markets.

Thanks a lot. Shawn, of the 94 employee -- sorry, employer customers added, any sense for how material Mercer is in that mix, or maybe more broadly, the indirect channel in that mix?

Sure. Yes. As somebody asked just a minute ago, as far as the Mercer breakout, we don't break out their numbers. And quite frankly, the way they will report them when they go into open enrollment, sometimes the timing of the way we count them and the signing is a little bit different than they might. So it just depends if they're an existing customer of theirs and when they sign up with Benefitfocus and whatnot. So kind of triangulate between their numbers and ours can be a little bit of a chore.

But I'll say that, as I mentioned before, they're obviously very happy with the production of the Mercer marketplace, as illustrated by their investment in Benefitfocus earlier in the year and expanding their agreement. We have a lot of great projects going on with Mercer and looking out multiple years. So very exciting. We have said consistently, though, that that new customer account continues to be the majority, is our direct sales force. The bulk of that number is sold directly by the Benefitfocus staff.

Okay. And I think you made a mention of 20,000-plus employer customers, you said six in the first half. In total, what sort of portion of the employer base is in the 20,000-plus? Is that a lot more than six? Could you maybe help us understand that dynamic?

Yes, it's a good question. Ross, I don't have that number in front of me here, what actual the count is of the 662, how many are 20,000-plus. I do know that in our activity in our pipeline now, we're seeing more and more of those show up. And we do have a team now focused on those larger employers more exclusively. They tend to be two-, three-year long cycles. So a lot of it's still yet to come. Adding six in the beginning of the year and many more in the pipeline, we feel is a good, strong that we may start breaking that out in future quarters. But I don't have the actual total number.

Okay.

In front of me.

That's helpful. And then just one for Milt. Just on the quarter itself, what was the CRP impact this quarter? Do you have that in hand?

It was about between $1 million and $1.3 million, Ross, on revenue.

Okay. Just one last one from me. When you guided for calendar 2015 originally you made some commentary around unprofitable customers and that would have a dampening impact in the second half of the year. Is that still the assumption with the updated guidance, and is the magnitude of those unprofitable customer revenues coming off still consistent with what you said before? Thank you.

Yes. I mean, there's a small impact on unprofitable customers in the second quarter, but certainly the balance or the bulk of what we talked about the beginning of the year, we'll see in the third and fourth quarters of 2015. So yes, it's still in line, and certainly the majority of the impact is going to be in the second half 2015.

Great. Thank you.

Thanks.

Your next question comes from the line of Stephen Lynch with Wells Fargo.

Hey, guys. Two quick questions. First, revenue per carrier client was up a fair amount year over year. I was just wondering if you could talk about what's driving the improvement there, whether it's mostly expanded software adoption by the carrier clients? Or is a large part of it being driven by growth in enrollment within the private exchange partnerships?

I would say it's both, Stephen. Certainly we continue to see the carrier relationships increase through adoption. We've always said that about 50% of the growth that we see in the carrier business comes from the base, as well as the other 50% obviously coming from new logos. So yes, with regard to that.

And I guess the second part of your question is also true. That what we're seeing in terms of carrier growth coming from more and more marketplace adoption, as we talked about. We now have 26 customers that we're powering marketplaces for, and certainly many of those are carriers. So both areas are providing the growth in the carrier revenues that you're seeing.

Okay, thanks. Next maybe a big picture question for Shawn. I know in the past you guys have mentioned that your employer client base has an above average adoption of high deductible health plans compared to the industry. So I was curious if we could get your thoughts on where you see overall high deductible health plan penetration going? I think most industry reports peg it somewhere around 20% of employer-sponsored lives today. So where do you -- what's your best guess about where that could top out? And how long do you think it takes for us to get there? Thanks.

Great question. I think that one thing that comes to mind in the question is, I think that there's so many things that are happening to make it easier for people to select a high deductible health plan, whether it's the influx of voluntary benefits, gap filler insurance, programs that can fill that hole between your deductible and when the insurance kicks in. A lot of those products didn't even exist a couple years ago or they weren't sold real effectively. And they're really just now coming onboard. Combined with the market's -- the individual's ability to understand what they're being presented.

If you just go back a couple years, the presentation of what a high deductible health plan was and how many options you had and what that really meant was so confusing and frustrating. It's almost -- it's kind of surprising even that the industry's gotten as high as it has, given the difficulty with the legacy systems and paper-based enrollment.

So in a sense, we have 662 large employers. We only have 4% of the addressable market, and we're growing rapidly. There's so many more employers yet that have really gotten, I'd say, a fresh way to communicate that. That to me it just feels like there's a tailwind that's going to continue to make it easier and easier for individuals to understand these programs, for carriers to innovate around how the programs will be designed to make them more flexible. And this idea of using data as the foundation, or data to provide insight so that you can really understand, is this program going to be the right thing for me and my family. Those just feel like tailwinds or accelerants. I think there's many years to go of expansion of not just high deductible plans, but really I'd call it a more well-rounded program for the individual which possibly means buying some [less] insurance in certain areas, but then trading that with buying a bit more voluntary or appropriate insurance given their fact pattern.

As far as peg a percentage into the future, I don't have one that rolls off the top of my head. I think it's going to be a higher percentage than it is today. And I think it's going to continue to run for a number of years yet.

Thanks. That's great color.

Sure.

At this time there are no audio questions. I'll turn the call back over to the presenters for the closing remarks.

Okay. Well, thanks everybody. Glad you tuned in for our call, and we look forward to talking to you again next quarter.

Thank you very much.

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