Benefitfocus Inc (BNFT) 2015 Q3 法說會逐字稿

Good afternoon, my name is Patsy and I'm your conference operator for today. At this time I would like to welcome everyone to the Benefitfocus Q3 2015 earnings call.

(Operator Instructions)

I would now like to turn the call over to Michael Bauer.

Thank you. Good afternoon and welcome to Benefitfocus' third quarter 2015 earnings call. We will be discussing the operating results announced in our press release issued after the close of market today.

Joining me today are Shawn Jenkins, our Chief Executive Officer, and Milt Alpern, our Chief Financial Officer. Shawn and Milt will offer some prepared remarks and then we will open the call up for a Q&A session.

As a reminder, today's discussion will include forward-looking statements such as fourth-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 of any subsequent date.

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

During the course of today's call we will also refer to certain non-GAAP financial measures. You can find important disclosures about those measures in our press release.

With that, let me turn the call over to Shawn.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us today.

Before I begin I would like to welcome Mike Bauer, our new Director of Investor Relations. Welcome to the team, Mike.

The third quarter was an exceptional quarter for the Benefitfocus team as we are experiencing strong demand from new customers and once again our customer software revenue retention rate was over 95%. As large employers continue to migrate core activities, such as benefits management, to the cloud, we extended our leadership position through large new contracts, expansion on a PEPM basis with our additional solutions, and new software upgrades ahead of our busiest time of the year, open enrollment.

As employers and carriers look for partners to help them streamline and manage their benefit spending, Benefitfocus continues to stand out based on our technology platform, excellent domain expertise and breadth of product offering. As a result, we are meaningfully increasing our 2015 guidance and believe our strong momentum will continue into 2016.

Let me share some quick highlights to put the quarter in perspective. First, we had a record employer sales quarter that included 41 new large employer customers and the largest employer deal in the history of Benefitfocus. A $46 million, 3.5 year, multi-solution agreement with the North Carolina State Health Plan.

The combination of larger employers, new customer wins and significant add-on product selling to both new customers and our installed base resulted in a significant increase in employer selling activity compared to the third quarter of 2014. Second, we continued to execute on our land and expand strategy into our existing customer base, both in the large employer and carrier segments.

We've seen continued adoption across our new solutions offerings driving PEPM growth in both new and existing customers. We also introduced BENEFITFOCUS ACA Management Reporting during the third quarter to strong demand from clients and have received certification as an approved transmitter allowing us to electronically file required ACA compliance documents with the Internal Revenue Service on behalf of our customers.

Third, we've seen increased customer demand for BenefitStore, which ended the quarter with 88 customers, up tenfold from 8 at the beginning of the year. As clients introduce lower cost health plans, such as a high deductible health plan, they are working with Benefitfocus BenefitStore to introduce voluntary benefits and wellness programs that help round out the benefits offering for employees and their families.

And finally, our partnership channel is experiencing excellent momentum. For example, our partnership with SAP is exceeding our expectations.

This was the strongest quarter in Benefitfocus history and I'm excited about the strategic direction and momentum of our business. Looking specifically at the results for the quarter, revenue and profitability exceeded the high end of our guidance range for the ninth consecutive quarter.

Total revenue of $45.4 million increased 33% year-over-year and was driven by employer revenue growth of 53% and carrier revenue growth of 17%. Non-GAAP gross margin was 43%, up 1,000 basis points year-over-year. These are fantastic results that would not have been possible without the hard work and dedication of our Benefitfocus associates.

I would like to give a shout out to our entire team. You all are doing amazing things and creating an incredible company. Thank you for all that you do to serve our customers and each other.

We believe we are in the early stages of an enterprise shift to the cloud for core activities such as benefits management. For context, we now work with 703 large employers yet there are 18,000 in the US that could benefit from the Benefitfocus platform. Alongside a shift to the cloud, the consumerization of healthcare is a trend that is growing rapidly and employers are focused on providing their employees with better information to support better decision-making.

Our combination of user centered design, access to data and insights that improve employee plan fit and focus on decreasing administrative costs position Benefitfocus as a leading alternative to outdated processes and stagnant benefit modules and legacy systems. With approximately 4% of our targeted 18,000 large employer market, we have a unique opportunity to further leverage our thought and market share leadership positions.

Let me provide some additional color on our recent successes with large accounts. From a market perspective, the Affordable Care Act and last quarter's Supreme Court decision regarding King versus Burwell continue to provide a considerable tailwind to our business. With greater certainty in future regulatory requirements, we are beginning to find that large employer clients are entering execution mode.

Our activity in jumbo employer space continues as we signed three new agreements with jumbo employers in the quarter. The first one is a west coast-based technology company with whom we have signed an agreement to provide our benefits management solution to their more than 30,000 US based employees.

The second is an existing jumbo account that merged with another jumbo employer creating a combined organization with approximately 150,000 employees. Extending our existing BENEFITFOCUS Marketplace and benefit service center relationship, while ACA management reporting for the combined group was added.

Finally, our new North Carolina State Health Plan agreement is a $46 million, 3.5 year, multi-product deal that further validates our ability to support large enterprise organizations with the Benefitfocus platform. With over 300 agencies and 500,000 active and retired members, the North Carolina State Health Plan is larger than most Fortune 500 companies.

The BENEFITFOCUS Marketplace will support online enrollment, which consists of more than 15 types of coverage across the complex network of city governments, K through 12 public school systems, colleges, universities and other agencies. In addition to BENEFITFOCUS Marketplace, we will also be providing them our Benefit Service Center and our new BENEFITFOCUS ACA Management and Reporting.

During the September quarter, we continued to make impressive progress on our three strategic priorities that we laid out at the beginning of the year. Let's take a few minutes to review the progress we've made against these priorities. The first area of focus is expanding our employer product offering.

Building off of the momentum from the products introduced earlier this year at one place, we recently introduced the BENEFITFOCUS ACA Management Reporting Solution. With organizations facing the first quarter 2016 requirement for filing employee health insurance coverage data, on IRS forms 1094 and 1095-C, this is a timely release that has been very well received by the market.

This new offering is built from the ground up by our engineering team and will serve as the foundation for our future compliance products and services. We continue to see strong interest in adoption across all of our employer products. We also saw impressive growth on the average number of products per customer for both new and existing relationships during the quarter. One particular solution that is exceeding our expectations is the BenefitStore, which experienced a tenfold increase in adoption in less than one year.

As employers place more responsibility on employees through high deductible health plans, our clients are introducing voluntary benefits to help employees cover the deductible gap. The benefit for our partners is clear: BenefitStore's consumer first perspective drives substantially higher than market average voluntary benefits participation rates. We are very proud of our initial success and look forward to bringing additional products to the BenefitStore to help employers, employees and their families lead better lives.

The second area of focus is to further extend our leadership in the private exchange market. The private exchange market is dynamic and fast-growing part of the benefits landscape.

Our partner, Mercer, recently announced that the Mercer Marketplace, which is powered by Benefitfocus, will serve an anticipated 1.5 million lives during the 2016 benefit year, a 42% year-over-year increase. With Mercer's Marketplace demonstrating continued cost savings and companies embracing the platform's flexibility, it is not surprising to see growing enrollment interest from both new and existing customers. While it remains early in terms of private exchange adoption, the interest from large enterprises considering a move to private exchanges continues to increase.

Our third area of focus for 2015 is scaling the business, increasing margins. We continue to execute on meeting our profitability targets as gross margins during the quarter expanded 1,000 basis points.

Our third-party system integrator channel is doing very well and taking on an increasing portion of implementation engagements. Across the Company we are focused on additional ways to improve our efficiency while remaining diligent with our expense management.

We are also excited about the strong start of our SAP partnership, which speaks to the significant opportunity within this large installed base. The SAP partnership reflects a significant positive shift in the competitive landscape for Benefitfocus through our ability to scale our platform and achieve flexible integration with leading ERP and emerging cloud platforms. With our leadership in cloud-based benefit management becoming increasingly apparent, we anticipate our partner channel will continue to strengthen and grow over time.

Taking closer look at our employer sales performance, wins this quarter include leading brands such as Flowers Foods, Ubisoft Entertainment, Potash Corporation, Sargento Foods and Steve Madden. Let me highlight a few here.

Flower Foods, which operates 41 bakeries around the country, has selected BENEFITFOCUS Marketplace to help their more than 9,600 eligible employees manage their healthcare benefits year-round. They've chosen Benefitfocus because of our ability to reduce healthcare costs, automate manual processes and simplify the addition of volunteer benefits through the Benefitfocus BenefitStore.

Ubisoft Entertainment is a leading creator of interactive entertainment with over 7,400 employees. This San Francisco-based firm selected Benefitfocus because of our step-by-step enrollment experience that is tailored to the individual user. Beyond enrollment, Ubisoft will take advantage of our Benefitfocus communication portal and mobile app which will give employees year-round on-demand access to their benefits information.

Potash Corporation, the world's largest fertilizing company by capacity, selected BENEFITFOCUS Core and Advanced Analytics. With eligible employees worldwide, it is important for Potash Corporation to have organized and up-to-date data they can generate with the push of a button. They will also use this tool to gain insight into what's really driving cost and create more adaptable plans based on historical health plan data.

Turning to the carrier business, we had a strong third quarter adding three new carrier customers, bringing our total carrier count to 55, up from 44 last year. We continue to see an uptick of carrier customers purchasing our Advanced Analytics Solution to meet their client reporting needs. For example, one new carrier customer selected Benefitfocus to help solve the challenges it faced integrating its medical and pharmacy claims, as well as member eligibility data, into a consolidated data warehouse. We will meet this carrier's extensive data integration needs and provide an easy-to-use reporting solution that will put health plan information at the fingertips of many internal and external stakeholders.

We remain committed to delivering innovation during the year with our quarterly product release cycle. During the third quarter, we continued to accelerate our pace of innovation with the Benefitfocus platform autumn release.

A benefit of our model is frequent software updates and our autumn release is critical for our clients as it is the big release to proceed open enrollment. Included in this recent release was the general availability of our Core Analytics offering which we previewed at One Place Conference in March. The Core Analytics Solution powers administrators to make smarter decisions about their benefits programs through visualized analytics dashboards and insight into what their data means to them.

This new product offering illustrates another way that Benefitfocus is expanding its value in the market by addressing its customers' needs in new and innovative ways. The analytics team also achieved ICD-10 certification ahead of schedule, an important accomplishment as we begin to sell and market our Advanced Analytics Solution to more large employers and now insurance carrier clients.

In addition to our investment in the platform, we continue to make progress in our Company-wide client experience initiatives which we call Customers at the Heart. One example is our ramping Six Sigma project which is improving processes that we expect to drive continued improved customer metrics in addition to creating efficiencies that will result in cost savings.

Further, we were particularly pleased with the inaugural season of our client road show, One Place Local. Feedback has been overwhelmingly positive as our power users embrace the idea of having a venue to share best practices, discuss opportunities and network with our product leaders. We are thrilled with our progress in 2015 and excited about expanding this great customer platform to engage clients and generate new leads for our products around the country.

Finally, I would like to welcome Kevin Hamilton, our Senior Vice President of Marketing. Kevin joins us from CEB and Opower, where he led sales and marketing teams. He is responsible for the Company's overall marketing strategy and will focus on brand awareness, demand generation and product marketing. I'd also like to congratulate Chris Shee, who was recently promoted to Senior Vice President of Employer Sales after six years with Benefitfocus and 14 years as a sales leader at ADP.

In summary, we had a very strong third quarter. We continue to execute well against our strategic objectives and benefit from the secular shift to the cloud. We are incredibly excited about the opportunities to further help our expanding customer base. Additionally, we believe we are well-positioned to become a significantly larger and more profitable company over time, as we extend our leadership in this multi-billion dollar market opportunity.

Before I turn it over to Milt, please mark your calendars for One Place 2016, which will be held in beautiful Orlando, Florida on Tuesday, March 8 through Thursday, March 10. One Place 2016 is bringing together the brightest minds in benefits administration. As registrations are already tracking well ahead of last year's event, One Place 2016 promises to be a must-see show.

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

Thanks, Shawn. Once again, I'm very pleased with our quarterly results which exceeded our expectations from both a revenue and profitability perspective. I will begin by reviewing the details of our financial performance and then I will finish with an updated guidance for the full-year 2015 and outlook for the fourth quarter. And additionally, I will provide a preliminary 2016 revenue outlook.

Total revenue for the third quarter was $45.4 million, an increase of 33% compared to the third quarter of 2014 and above the high-end of our guidance range of $42.9 million to $43.4 million. Driving the revenue out-performance was a combination of new customer wins and significant add-on product selling to both new customers and our installed base.

Breaking revenue down further, software subscription revenue was $39.3 million, representing 87% of total revenue and growing 28% year-over-year while professional services revenue was $6.1 million representing 13% of total revenue and up 74% year-over-year. As a reminder, our professional services revenue is being positively impacted by the change in customer relationship period to 7 years from 10 years, which we instituted at the beginning of 2015 for both the carrier and employer segments. And by the establishment of standalone value at the beginning of the third quarter for certain professional services in the employer segment.

Looking at revenue by segment, employer revenue for the quarter was $22.8 million, up 53% compared to the year ago period. While carrier revenue of $22.6 million was up 17% from the year ago period.

Let me now review the supplemental metrics we report on a quarterly basis. We ended the third quarter with 703 large employer customers, an increase of 41 compared to 662 at the end of last quarter and up from 540 in the third quarter of 2014. Year-to-date, we added 150 large employer customers, up from 147 during the same period in 2014.

Overall, we saw good deal activity in the third quarter and have experienced strong demand throughout 2015. Additionally, with the launch of our add-on products for the employer business, we are seeing PEPM growth in both new and existing customers. As a reminder, the second and third quarters are typically our largest selling quarters as customers look ahead to the upcoming open enrollment season.

We ended the quarter with 55 carrier customers, up from 52 at the end of last quarter and 44 in the third quarter of 2014. Our software revenue retention rate was once again greater than 95% in the third quarter, which we believe is strong evidence of the significant value our platform generates for our customers.

Moving down the P&L, our non-GAAP gross profit was $19.7 million or 43% non-GAAP gross margin. This represents a 1,000 basis point improvement from the year ago period. Software margins were up 500 basis points year-over-year and down 100 basis points sequentially. The year-over-year improvement 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 and the establishment of standalone value in the employer segment. The sequential margin declined as a result of seasonality regarding open enrollment.

Adjusted EBITDA was negative $8.8 million or negative 19% of revenue and is better than our guidance of an adjusted EBITDA loss of $10.1 million to $10.6 million. And an improvement from negative $13.5 million in the third quarter of 2014. We continue to believe that we can achieve our long-term adjusted EBITDA margin of 20% over time.

And 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 partner sales channel and greater upsell activity with our new employer offerings particularly BenefitStore.

Non-GAAP net loss was $0.46 based on 28.8 million weighted average shares outstanding. Significantly better than our guidance of a loss of $0.53 to $0.55 per share and the year ago period per-share loss of $0.66 on 25.5 million weighted average shares outstanding.

Looking at our GAAP results, gross profit was $19.2 million, operating loss was $14.8 million and our net loss per share was $0.58. Cash used in operations was $9 million as we ended the quarter with cash, cash equivalents and marketable securities of $85.2 million.

Turning to guidance, for the fourth quarter 2015, we are targeting revenue of $51.2 million to $52.2 million, which represents year-over-year growth of 27% to 30%. From a profitability perspective, we expect an adjusted EBITDA loss of $8.2 million to $7.7 million and a non-GAAP net loss per share of $0.47 to $0.46 based on 29 million weighted average shares outstanding.

During the fourth quarter we expect incremental revenue and initial implementation expenses associated with the North Carolina State Health Plan to both be approximately $3.2 million. For the full year, we now expect revenue of $182 million to $183 million which equates to year-over-year growth of 32% to 33%. We are targeting an adjusted EBITDA loss of $35.5 million to $35 million and a non-GAAP net loss per share of $1.94 to $1.93, based on 28.3 million weighted average shares outstanding.

While we don't expect to provide preliminary next year's guidance on our Q3 calls as a matter of practice, given our strong results, ramping new employer solutions and the signing of the largest employer transaction in the Company's history, we thought it would be beneficial to provide some early direction on 2016 top line growth.

Our preliminary top line guidance takes into account the following: strong momentum of the employer business, expected participation rates for BenefitStore products in its first full year of adoption, approximately $7 million to $8 million of incremental revenue from the North Carolina State Health Plan agreement and carrier growth that is expected to be slightly below our long-term mid-teens growth rate due to a very difficult compare resulting from our strong performance in 2015. Taking all of these into account, we anticipate 2016 revenue to grow approximately 25% over the midpoint of our updated 2015 guidance.

Further, I want to reiterate our commitment to a path to profitability and achieving EBITDA breakeven at the midpoint of 2017. We plan to provide detailed full-year guidance on our fourth-quarter and full-year 2015 earnings call.

In summary, Benefitfocus delivered strong third quarter results that exceeded our expectations on both the top and bottom lines. As evidenced by our results, we are benefiting from strong demand for our cloud-based marketplace solution as user demand, a comprehensive and efficient approach to simplify the complexities of benefit management. Given our expanded distribution and product portfolio, we are increasingly confident in our ability to continue delivering strong growth and long-term shareholder value.

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

(Operator Instructions)

And our first question comes from Nandan Amladi. Nandan?

Thank you. Thanks for taking my question. Hello, Shawn and Milt.

The first question is on the ACA filings. What sort of incremental PEPM are you getting from this automated new feature?

Great question, Nandan. Thanks. We are excited about delivering the new ACA Management Reporting Solution built by Benefitfocus for our customers and this IRS 1094 and 1095-C filing is due in the first-quarter of next year, and there is just an enormous amount of activity and we are excited about the results.

We are not breaking out the PEPM on it yet, actually what we are doing in many of the cases is it's going to be an annualized solution and many of our customers are looking actually at multi-year agreements so it does have an incremental lift to the PEPM. But we are not able to publish the price as of yet. Might be something we do on the next call

Okay. Then the next question is on the BenefitStore, clearly a lot of success going from 8 to 88 customers.

What is the commission structure there, because I know I think you talked about this at One Place where you are expecting basically to get sort of a sales commission which should be a fairly high margin relative to, even the subscription line in your income statement. So can you provide some framework on how we should think about that?

Sure. Great question.

I tell you what: we're really excited about the first full-year results of the BenefitStore, as we mentioned we have 88 customers now signed up so far this year in the BenefitStore, up from eight at the beginning of year. And, just in context for everybody on the call, what we are doing with the BenefitStore is we're providing voluntary benefits, benefits that an employee and their family can select and pay for out of their payroll deduction or credit card or direct deposit from their checking account.

These products are things that help them as they shift to more high deductible health plans, things such as critical illness policies or disability programs and other life insurance programs. We are in the open enrollment season now and so as employees go through, if their employer has selected the BenefitStore, they will see one, two, three, maybe as many as four additional benefits that they can purchase.

When they purchase those programs, they are buying them from our partners that are in the BenefitStore, we now have 13 different insurance companies providing products in the BenefitStore, up from three last year. So it's a whole host of the top names in the industry.

Then Benefitfocus will actually receive commission compensation on those purchases. And they come in different forms depending on the product. The way it will work into our financials is, in 2016, these are policies that are really starting January 1, 2016, and so the Company will recognize that revenue on a monthly basis in 2016.

Thank you.

Thank you.

Our next question will comes from Richard Davis. Rich?

Hello, thanks, guys, it is actually DJ on the line for Rich. Shawn, I was hoping you could give us a sense of what percent of bookings are coming from selling new products back into the installed base? When you step back and look at the year-to-date customer adds versus a year ago, it is not great.

It is fine but the customers are getting bigger but I presume a lot of the bookings are coming from selling analytics and eBilling and this ACA stuff back into the base. Can you help us think about how those adjacent products are contributing to the bookings mix?

Yes, great question. This is really our strategy and it was at the beginning of year when we laid out, expand, adding products to the employer mix. And as we went really from one main product that our employer sales team was selling for the last couple years, at the beginning of year, we added four more at One Place and now five with ACA Reporting so our sales team now has six things to sell to a customer.

The results have just been fantastic, so for example, we mentioned on the prepared comments that the third quarter was actually a record sales quarter for our employer sales team. I know that the second quarter we added 90 some employers, this quarter we added 41 or so, but actually the selling was bigger. A record quarter, bigger than the third quarter last year and actually bigger than the second quarter.

It is a combination of multi-product sales, we are getting a much higher PEPM with multiple products into both new customers as well as additional, existing customers are buying our products at accelerating rate like such as the BenefitStore and the ACA Management and Reporting. So it is had a significant impact, as you can see, on the quarter from those numbers.

The other thing that's happening is, we are signing much larger employers, as you saw the record employer deal that we signed with the State Health Plan, we also had several other jumbo employers in the quarter. And there's some really significant deals there that also are multi-product deals, so it is really great because it helps contribute to margin improvement as you can imagine, customers are seeing more value out of our platform overall.

The number that we gave on the last call, we were seeing about a third of the new deals coming in having one or more of these add-on products, is holding steady maybe even a little bit better than that in this quarter. But on the new deals and then the existing customers are attaching a lot of these additional products as well.

Got it. Then talking about the jumbo employers, it is good segue into a follow-up question around the implementation channel. What's the philosophy on pushing these larger implementations to partners?

Is that something you want to keep control of and make sure it goes smoothly? Are you comfortable pushing them to those newly trained partners who are in the field? How are you thinking about managing those rollouts?

It is actually, it is a very natural process for us. As we interact with a prospective employer and then we win that deal, some percentage of those employees are already working with a system integrator.

For example, in our SAP partnership, those SAP customers often have one of the premier consultants in there doing a lot of other cloud work with them. In those cases it is very natural and even in several of our wins, the SI is bringing us into the deal. So in the segment I would say of the selling, the customer actually would prefer an SI, they've worked with them already and they have that happening.

There's some other fact patterns where some of the customers will be moving from one payroll vendor or one legacy system onto another one and they're engaging the SI community in that and they are kind of a natural lead. When it's a more modest size employer, I would say several thousand employees up to 5,000, 6,000, 7,000, and it is just a short time window we can do those implementations ourself, our team is doing fantastic.

Our action implementations are faster this year than they were last year and the performance has been wonderful. So we are lining them up nicely, the SI community is really doing a fantastic job and we are really proud of the way that they are working together with our own resources.

Got it. Okay. Thanks, guys. I will pass the line.

Sure, thank you.

Thank you. Our next question will be from John DiFucci. John?

Thank you. Welcome aboard, Mike, to the Benefitfocus team. Shawn and Milt, the employer revenue growth accelerated in the quarter, 53% as you point out.

But new adds, as someone pointed out just a little while ago, and Shawn you said it too, year-over-year declined. The number of new adds is lower this year but it was a difficult comp too. And even though we don't have an exact breakout yet between software services and pro services for the employer group, it looks like you saw higher employer software services per customer.

There's a lot of moving parts here, I know, and the timing is, obviously, important but I just want to make sure that I'm thinking about this right and that the new, recently signed largest deal ever with an employer deal and the other jumbo deals, they are not included in this quarter's employer revenue, I would assume. Should we expect a new trend here, of growing revenue per employer customers, at least over the next few quarters?

Yes, I will take the first part of that and I will let Milt talk about the actual timing of the revenue.

The employer add number to us, because of the SaaS nature of the business and because of the seasonality of customer selling, is in our incentive system and in our timing and everything is probably less important than maybe, obviously traditional software companies, where signing at the end of the quarter is a big deal. We don't do discounting at the end of the quarter, our guys are not tied necessarily to the logo. So logo to us, in September and October, is the same thing because they are going to take four or five months to implement.

Whether they move, particularly this late in the season, many of the logos that we signed in the third period don't go live until first part of next year. So it's not, I don't think, out of the ordinary for us to see 10 or 15 logos in a quarter be different than the year before. In this particular quarter, it is interesting because, as you point out, we had 10 or so less than last year but the selling was so much bigger.

It was bigger than the 92 that we did in the second period, so it is just a stellar quarter and I think it just might be the timing of some of the logos, some of the smaller logos that you will probably see show up in the next couple quarters. From the timing of when you'll see the revenue, I will let Milt talk about that.

Hello, John. Certainly what Shawn said, the 41 net new customer adds certainly contributes to the revenue growth but also significantly greater add-on product sales to existing customers, as well as the new customers, has the effect of increasing the PEPM and the revenue that drives the result of that.

Also the State Health Plan deal that we mentioned, most of that will show up post Q3. There was about a $1 million of revenue recognition in Q3 from the State Health Plan deal which contributed to the growth, but certainly the vast majority of it will show up later as we move through Q4 and into 2016. I think, as I had said on the call, that in 2016 we expected to be about $7 million, $8 million of revenue contribution, incremental revenue contribution I should say, from the State Health Plan under this new contract.

One thing I do want to point out as well, as Shawn said, the selling activity in the third quarter of 2015 outpaced pretty significantly that of the third quarter of 2014. But also, another important thing to note is that the selling activity in the third quarter of 2015 actually grew at a faster rate than our revenue growth in the third quarter of 2015. I think that's an indication that the selling activity, in spite of what you point out as 41 net new adds, the selling activity was quite considerable and overall in the third quarter.

So, Milt, when you say selling activity I assume you are talking about the amount of business that was actually sold in the quarter versus the revenue recognized in the quarter or the growth?

Absolutely. I'm talking about the selling activity that took place in that quarter.

Okay. And then if I could just a follow-up. That large deal, I was actually surprised to hear that you actually recognized some revenue in this particular quarter and that's a little different, right? Because typically you sign a deal in the quarter and it takes somewhere, four to five months, for implementation and you usually don't start recognizing revenue until that time. Am I correct on that?

I guess you mentioned three jumbo deals including that one large deal. But should we be expecting that similar four to five months to implementation or would it be -- might it take longer for such large implementations?

Yes, so all three of the jumbos will be live this year. You will see the bulk of it in the fourth quarter.

And the one, the largest one, the reason there was some revenue in the period was it was just a fact pattern where they were coming off of a national consulting, one of the outsourcing consulting firms. It was a bit of a speedy need to get the thing up and running so we worked very quickly, much faster than normal to get components of the system up and running very quickly and therefore we were able to recognize some revenue.

It is not the typical model, particularly for that large of a customer but it worked out great for them and our team did a fantastic job.

Okay, great. I'm sorry, just to go back to -- I'm sorry it was a multi part question, but just in our model, the way we model you guys, it seems like we should be thinking about the amount of revenue per customer going up a little bit here -- in the employers group.

Yes.

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

Thank you.

Thanks, John.

Our next question is from Ross MacMillan. Ross?

Thanks. Shawn and Milt, can you just, on the North Carolina State deal, the $46 million, can you help us understand how you would expect that ultimately to split between software versus professional services?

I'm assuming the revenue taken up front is mostly services but how would you expect the $46 million to get divvied up over time?

Certainly some of the upfront stuff is the implementation cost of getting them up and running in the third and fourth quarters. Certainly when you look at it, it's a 3.5 year deal. It's worth about $46 million over that period of time, the large majority, the large majority of that revenue, certainly once we get past the third and fourth quarters of 2015 is the monthly recurring revenues.

Great, thanks.

Thanks. Okay

Sorry, did you say a percentage? 90%?

Yes, probably 90% is what the monthly recurring revenues will be once we get past the first quarter or two of getting them up and running in the third and fourth quarters of 2015.

So that is maybe $3 million or $4 million of services and then most of the residual is then software recurring?

Software recurring. Yes. Call it $4 million, $4.5 million of implementation services and then the balance is recurring.

Great, that is great. Then on the employer side, any way we can frame the magnitude, you've got 41 new employers signed versus 52 last year, which is down about 20%. But it sounds like the bookings value was up. Any sense of the magnitude of how much that was up year over year to help us understand just that average deal size shift?

The selling, the employer selling in this quarter was double the employer selling in the third quarter of 2014.

Wow. That's impressive. Then finally just, Milt, just wanted to clarify something on the long-term deferred revenue that stepped down, was that just a function this quarter of the CRP or is there anything else that influenced that number particularly this quarter?

No, it is primarily the result of standalone value and an increasing of the percentages being done by implementation partners and the CRP, obviously creating a faster, speedier recognition of deferred revenue onto the P&L.

Great. Thanks a lot. Congrats.

Thank you.

Our next question is from Adam Klauber. Adam?

Thanks. Good afternoon. On the BenefitStore, I think you mentioned you are up to 80 clients, that's a pretty good number.

Could you give us an idea of how many members that would be? Or potential members, I know all them may not buy, but how many potential members do you have there?

That's a great question. Yes, a couple things, I don't have a breakout of the actual members. Just using some historical public data, our average employer size through the last couple quarters has been around 3,000, a little over 3,000 lives. So if you have 88 customers actually in there, it would be 270,000 or so, just using that average.

I think the BenefitStore customers are fitting into that kind of mold to get you in the ballpark. It would be plus or minus that a little bit. But what's exciting about it is the uptick from rolling it out in a pilot mode last year and then adding tenfold the customers.

As we are in the open enrollment period what will be nice about the BenefitStore for visibility purposes on the Benefitfocus model is, by the time we close out the year we will have these open enrollments done and we will know what all the purchasing was by these individuals and we will have a very clear sense of what the revenue impact will be for 2016. So when we provide guidance for next year on the next call, the Benefitfocus or that BenefitStore line item, inside the employer business, obviously, will be great visibility which is just a wonderful aspect of the overall visibility of Benefitfocus.

Great. Okay. Then on the ACA compliance, I think you mentioned you're just beginning to roll it out so, obviously there's big demand for that product and clients need to take care of that in the next year or two. Would you say next year could be a much bigger sales year given that you just rolled it out?

Yes. I would characterize it as very brisk right now in that area.

I think all employers are really just realizing that this is right around the corner so we have some early adopters that helped us design the solutions, some of our great top customers and then once we rolled it out this quarter we just had an immediate uptick. There's still an enormous amount of selling happening in this quarter.

I would expect there to be work even happening in the first quarter of next year as possibly employers who thought they might have another way to handle it, spreadsheets or whatever, come back to us, so it is just really a great solution, our engineering team built it internally. And, Adam, we intend to use that really as a platform for additional compliance products that we'll be rolling out as before (inaudible) matures, as it is adjusted, as things happen, we think it is just a really wonderful, new, [sustained] product that will help us expand our additional compliance offerings going forward.

Okay, thanks. And then, finally on SAP again, it's still very early, but have you had some early wins there this year?

On the SAP transaction, yes. We have.

We talked about it, that was announced at the end of the first quarter, beginning of the second quarter and we even talked about having a few wins in Q2 of this year and then we've had some additional wins in Q3 as well. So we are getting some good early traction from that SAP relationship and I think that certainly will give us an opportunity over time to be a significant contributor to revenue.

Okay, thank you.

Thank you.

And, that concludes the Q&A session for the call. Closing remarks?

Excellent. Well, thanks everybody for joining the call and again just a shout out to our team. We are in the busiest season. We are having our record open enrollment and we're really proud of the results so thanks for joining us today.

I do have one question if you would like to take it, from Frank Sparacino with First Analysis.

Sure.

Hello, guys. Thanks, I thought I was in the queue but I guess not.

Real quick, Shawn or Milt, I'd be curious to get your thoughts on the private exchange side of things since most of the data coming out of the consulting firms as well as some of the more independent vendors suggest relatively modest growth, I think. But continued growth but I'd be curious to get your perspective on what you see 2016 and really what drives perhaps an inflection point on that (inaudible)?

Great question, Frank. I will say from our internal plan, if you look at our 2015 plan that the management team put together and how it is playing out for Benefitfocus and our story, we are actually on track or a little bit ahead of the plan with the adoption.

We actually added another carrier during the quarter. One of the carrier wins actually was an additional private exchange and the exchanges that we have in the market are doing as well as we thought they'd do or maybe even a little bit better.

We have a long view in this market. We've been in the benefits management and working with insurance carriers and employers for 15 years now, so I think the long-term promise and the size and the scale that folks have been talking about in 2017, 2018, 2019, is a very likely outcome.

The fact that you had a huge surge last year and then this year is maybe the growth is maybe more 40%, 50% as opposed to 100% last year. I think that's how you would expect this to play out as early adopters move and then the early majority begins to come online.

I will say that the cost savings that employers that are seeing on the private exchanges that we operate are fantastic. Significant decrease in their medical spend, very good retention of the employees in those programs, good feedback, good customer satisfaction.

So I think it is definitely a big part of the change in the industry and the way it is playing out this year is almost exactly what we would've thought and what we baked into our model and as you can tell we are actually increasing our guidance here significantly so if anything there's been a little upside.

Thank you.

Thank you.

And we do have a question from Stephen Lynch, Wells Fargo. Stephen?

Hello, guys, thanks for squeezing me in. Like Frank, I also thought I joined the queue but I guess not. (laughter) No problem at all.

So, Milt, I know that you mentioned the plan still to achieve EBITDA breakeven in the middle of 2017, but given the lift in 2015 guidance and how well things are going right now, would you consider accelerating the PATs profitability if you had the chance to do so? Or would you rather stick with the timeline and continue to reinvest in the business?

I think at this point, Stephen, I think we are comfortable. At the beginning of 2015, we publicly stated that we would be EBITDA profitable by the middle of 2017 and I think we are going to stick with that, okay?

I think that certainly as things play out over the course of the next 18 months or so we will make adjustments as necessary to our plans and to our business but right now I think it's still, that's our mantra. We are marching to that. We have a plan to achieve an EBITDA breakeven in the midpoint of 2017 and right now that's what we are going to stick with.

Thanks. And then just one more in the same vein as Frank was asking about private exchanges. Wondering if you could give us an update on the number of private exchanges you are powering currently? And maybe also, could you give us a sense for what portion of the revenue base is currently driven by private exchange relationships? Thanks.

We added one new private exchange in the quarter so we are up to 27 private exchanges and they're a combination of large employer private exchanges, mid and small market and even some individual ones for some of our Blueplan partners and some great activity. We don't break out the revenue or the -- we don't segment it out on a separate basis but it is growing, it is a very healthy part of our tailwind story.

Thanks, guys.

Great, thanks so much. Appreciate it.

Thanks, Stephen.

And we have a question from Terry Tillman. Terry?

Can you hear me?

Yes, Terry, just fine.

It is a risk of asking something repetitive because there's been a bunch of earnings calls after the close but I just wanted to ask a bigger picture question -- and again, I'm sorry if this has been touched on, but as this market matures and evolves, I'm curious what kind of strategic partnership opportunities are relevant or maybe it is a little more in the offering, in terms of whether it is large SIs? Obviously, you have a few that you are working with, and then some boutique firms in terms of helping you install software but are you seeing the broader landscape of IT service companies or system integrators?

Where are they in terms of waking up and realizing the significance of this market opportunity, is that something near term or more intermediate term or is that still more of a longer-term dynamic?

I think it is coming closer, Terry, it is a great question. We are proud to have Deloitte in our initial SI group, along with some other great firms that focus on human capital management. We are seeing increased interest even from some of the big national firms.

We have not announced another partnership yet but specifically like if you look inside the SAP community, many of their SIs actually are resellers for SAP and now that Benefitfocus is on the SAP pricelist those SIs can actually sell our product as they would any other SAP product. I think there is some interesting near-term upside for us there, going deeper into those.

Clearly, if they sell a bundle of SAP cloud solutions and we are part of that they would be doing the implementations which would bring them into our SI program so a lot of good momentum there. We actually have a growing interest on our carrier side of our business as well.

We have not certified SIs yet on the carrier side and don't have stand alone value there yet, but I think that is something that we will be talking about in 2016. Whether it happens in 2016 or 2017, we are not sure yet. But I think we have a growing interest in large, the larger SI firms to work with our insurance carriers as their business models really change substantially.

Okay, thanks, Shawn.

Thank you.

Thank you and once again, that concludes the Q&A for the call.

Super. Thank you.

Thank you. Any closing remarks? Thank you and this concludes today's conference call. You may now disconnect.