Benefitfocus Inc (BNFT) 2015 Q4 法說會逐字稿

Good afternoon. My name is Sherilyn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Benefitfocus Q4 2015 earnings call.

(Operator Instructions)

I would now like to turn the conference over to Michael Bauer. Please go ahead.

Thank you. Good afternoon, and welcome to Benefitfocus' fourth-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 for a Q&A session.

As reminder, today's discussion will include forward-looking statements, such as first quarter and full year 2016 guidance, and other predictions, expectations and information that might be considered forward-looking under federal securities laws. The 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 change in 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 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, and thank you all for joining us today.

The fourth quarter was a tremendous finish to an excellent 2015 for the Benefitfocus team, as we continue to see strong demand for both new and existing customers. Our revenue growth for the quarter was 35%, and once again, our software revenue retention rate exceeded 95%.

The fourth quarter was our 10th consecutive quarter of exceeding the high end of our revenue and profitability guidance. For the quarter, total revenue was $54.3 million, and our annualized revenue run rate now exceeds $200 million.

This growth was driven by continued acceleration in our employer business, which grew 56% during the quarter. We also saw continued expansion in our non-GAAP gross margin.

For 2015, our total revenue was $185.1 million, an incredible 35% increase when compared to 2014, and non-GAAP gross margin expanded by approximately 840 basis points. I'm proud of these terrific financial results, and excited about the enormous opportunity ahead.

Today, we have an impressive 723 large employer customers, yet that represents only 4% of our addressable market of over 18,000 large employers in the US. As our momentum continues to build, we have a gigantic market opportunity in front of us.

Large employers continue to shift core operational activities to the cloud, and benefits management is high on their list. As large employers focus on bending the benefits cost curve, they are turning to our industry-leading enterprise benefits management platform to engage employees, provide better information, and enable better decisions. We believe our leadership position is allowing us to innovate faster and attract more partners to our ecosystem.

The fantastic success we had in 2015 has transformed Benefitfocus into a larger, more scalable company, with multiple ways to drive continued strong growth and profitability. As a result of this success, we now believe we will achieve adjusted EBITDA profitability in the fourth quarter of 2016, compared to our previous expectation of the middle of 2017, while also increasing our 2016 revenue outlook.

During the fourth quarter, we extended our leadership position through strong employer customer adds and continued PEPM expansion from our additional products. On the product front, we continue to make focused investments in new features that provide our clients with a superior user experience, new analytical tools, and core platform enhancement to scale the performance during the most critical period of the year, open enrollment.

Let me share some quick highlights to put the fourth quarter in perspective. First, we had a strong employer sales quarter that included 20 new large employer customers, a 54% increase from the year-ago period. Additionally, we continue our success with jumbo accounts, as we added a new employer with over 75,000 employees.

Second, we continued to execute on our land and expand strategy. We've seen impressive adoption across our new solution offerings, driving PEPM growth in both new and existing customers. During the quarter, over two-thirds of our new employer transactions included more than one product.

Next, the Benefitstore had another strong quarter, adding 16 new customers, and now exceeds 100 large employers using the solution, up from only 8 in 2014. Benefitstore enters 2016 with over 20 partner carriers who are selling volunteer benefits on the platform, and was recognized as a leading voluntary benefits producer during open enrollment for both MetLife and Aflac.

Similarly, our core advanced analytics solution had an impressive 2015, with 51 large employers who took control of their data by selecting one or both of our analytics solutions. And fourth, our partnership channel continues to strengthen, and is experiencing excellent momentum. Our partnership with SAP continues to exceed our expectations.

These fantastic results would not have been possible without the hard work and dedication of our Benefitfocus Associates. I'd 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.

Taking a closer look at our employer sales performance, wins this quarter include leading brands such as Lendlease Inc, Pacific Life Insurance, PGT Industries, TridentUSA Health Services, and Virginia Beach Public Schools. Let me highlight a few here.

Offering insurance since 1868, Pacific Life provides a wide range of life insurance products, and counts for more than half of the largest 100 US corporations as its clients. Pacific Life selected Benefitfocus marketplace, Benefit Service Center AC management and reporting and core analytics, over its existing HR system, for their 3,000 employees, due to our quarterly technology releases, integrated analytics, and the added value provided by our ecosystem.

Virginia Beach Public Schools employs over 18,000 individuals. The school system includes 55 elementary schools,15 middle schools, 12 high schools, and a number of secondary and post-secondary specialty centers. Virginia Beach Public Schools selected Benefitfocus Marketplace and our core analytics to support their efforts to improve communications and educate their employees regarding the benefits. Additionally, our ability to integrate employees claims data into our decision support tool and mobile capabilities contributed to their selection of Benefitfocus.

With over 4,000 employees, TridentUSA Health Services is the nation's leading provider of digital radiography, ultrasound, electrocardiogram and mobile clinic services. TridentUSA selected Benefitfocus Marketplace with our communications package and advanced analytics, to improve benefits plan management and support a strategic initiative to increase consumer directed health plan participation, while improving the ability to predict, manage and reduce healthcare costs. Additionally, with TridentUSA's highly skilled personnel traveling to more than 12,000 facilities throughout the United States, Benefitfocus' communication tools, modern user experience and mobile capabilities were key contributing factors in their decision.

Turning to the carrier business, our carrier team had a very successful 2015, adding 11 new carriers versus 3 added in 2014. With 54 of the top 100 carriers utilizing the Benefitfocus platform, our carrier team and solution remains the best in the industry, and a contributing factor to the success of our accelerating employer business.

I'm proud of the success we achieved and the progress we have made towards our long-term goals in 2015. Looking at our plans for 2016, we're focused on the following three priorities.

First, we remain focused on growing our large employer install base, through our direct sales force and expanding partner channel. Second, we will continue to execute on our land and expand strategy, and increase the number of products per customer. And third, continue to expand our gross margins and become EBITDA profitable in the fourth quarter of 2016.

Let's take a few minutes to elaborate on how our recent investments will drive success in 2016 and beyond. We entered 2016 with a seasoned direct sales organization and expanding partner ecosystem that is driving significant growth in our large employer business. Building this direct sales team and channel partnership program has been a key focus for us over the last two years.

We are now fully ramped, and are experiencing significant productivity gains. These gains will allow us to continue our growth, while only needing to add sales reps in targeted geographies. Our growing partner ecosystem will continue to supplement our capacity and extend our market reach with attractive customer acquisition economics.

Our relationship with SAP is an excellent example of the potential of our indirect sales efforts. Benefitfocus is an SAP solution extension partner, and fully integrates with their employee central. This has enabled us to leverage the strength of SAP's direct and indirect sales infrastructure, resulting in an impressive pipeline of business for 2016 and beyond.

In Q4, we extended our partnership ecosystem and joined Ultimate Software's UltiPro developer network, where Benefitfocus Marketplace will integrate wit Ultimate's HCM suite to unlock a new level of functionality and efficiency for HR leaders. We're still in the early stages of the market transition to cloud-based benefits management systems, and gaining share through significant new customer additions remains a core priority for the Company.

Our second focus is to expand the adoption of our new employer products, across both new customers and our existing customer base. Our land and expand strategy has been a success, as we saw impressive adoption of the new products we introduced last year at One Place, with the multi-product and higher PEPM sales extending the leadership position of the Benefitfocus platform. We believe we are well-positioned to build upon this initial success of selling multiple solutions to new customers, and expanding within our installed base.

In the fourth quarter, we created a new inside sales team, to focus entirely on selling into our growing employer customer base. We believe that this will further drive expanded PEPM revenue, while increasing our value customers receive from the Benefitfocus platform.

Our third focus is to continue to expand gross margins and become EBITDA profitable in the fourth quarter. In 2015, we demonstrated consistent execution on improving our profitability, with non-GAAP gross margin improving approximately 840 basis points during the year, and we outperformed our 2015 adjusted EBITDA guidance.

Across the Company, we are focused on ways to improve our scale and drive strong top line growth. Specific ways we will drive margin expansion to achieve adjusted EBITDA profitability target in Q4 include continued employer business growth, our employer business has outperformed our expectations, and we have reached the necessary scale in this business quicker than we originally anticipated. This has been driven in part by the success of our new employer solutions, which are driving materially higher overall PEPM pricing.

The Benefitstore has also outperformed, and we anticipate this solution will continue to drive both revenue growth and profitability. Since its inception, Benefitstore has driven substantially higher than market average voluntary benefit participation rates, resulting in profitable commission revenue streams for Benefitfocus.

As mentioned, we anticipate continued steadily improving productivity in our direct sales organization. Leveraging the investments we've made over the last two years, we enter 2016 with the most tenured sales organization in our history, equipped with an expanded portfolio of employer products that should drive higher PEPM pricing and enhance productivity of our direct sales reps.

Additionally, our expanding group of third-party system integrator partners has steadily increased its portion of our implementations. In preparation for 2016, we have added an additional delivery partner, and remain focused on enabling this channel to significantly grow its share of implementation work. This will help to drive our revenue mix towards higher-margin subscription software revenue.

We have some fantastic product capabilities coming in 2016, and in a few weeks, at One Place, our largest customer community event of the year, you will have an opportunity to learn how we're driving innovation and enabling our broad set of certified partners to sell, deliver and build on the Benefitfocus platform.

Finally, I'd like to think Milt for his insight and partnership over the past four plus years. We have been fortunate to have a strong financial leader, to help us navigate the IPO process and execute our strategy. I wish Milt a very happy retirement after the quarter, and I'm pleased that we have him on board as a consultant until April 2017.

In terms of our CFO search, we have hired an executive search firm, and have seen great results so far. And we will have more to report on in the coming months.

I'd also like to welcome Jim Restivo, our new Chief Technology Officer. Jim holds a Master of Computer Science degree from MIT, and brings more than 25 years of experience in the software industry, with expertise in cloud operations, product management, data analytics and information security. Previously, Jim was the CTO of Kenexa, and was a former IBM Vice President and CTO.

In summary, our strong fourth-quarter results capped a terrific year for the Company. We are incredibly excited about the opportunities ahead, and hope you watch our keynote presentation live from our website on Tuesday, March 8, from Orlando, Florida. We hope you join. With that, let me turn it over to Milt. Milt, take it away.

Thanks, Shawn, for your kind words. Once again, we're very pleased with our quarterly results, which exceeded our expectations and the high end of our guidance ranges, from both a revenue and profitability perspective, for the 10th consecutive quarter. I'll begin by reviewing the details of our financial performance, and then provide guidance for Q1 and the full year 2016.

Total revenue for the fourth quarter was $54.3 million, an increase of 35% compared to the fourth quarter of 2014, and above the high end of our guidance range of $51.2 million to $52.2 million. Driving the accelerated revenue growth in the quarter was a combination of new customer wins and significant add-on product sales to both new customers and our installed base.

Breaking revenue down further, software subscription revenue was $46.3 million, representing 85% of total revenue and growing 28% year over year, while professional services revenue was $8.1 million, representing 15% of total revenue, and up 95% year over year.

As a reminder, our professional services revenue is being positively impacted by the change in our customer relationship period, from 10 to 7 years, which we established 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. As such, professional services revenue growth should begin to normalize in 2016.

Looking at revenue by segment, employer revenue for the quarter was $30.4 million, up 56% compared to the year-ago period, while carrier revenue of $24 million was up 16% from the year-ago period. Let me now review the supplemental metrics we report on a quarterly basis.

We ended the fourth quarter with 723 large employer customers, an increase of 20 compared to 703 at the end of the third quarter, and up from 553 in the fourth quarter of 2014. While the second and third quarters are typically our biggest selling quarters, we saw strong deal activity in the fourth quarter, which was driven by the increased demand for our products that we've experienced throughout 2015. Additionally, with the demand for our add-on products in the employer business, we're seeing recurring revenue grow among both new and existing customers.

We also ended the quarter with 54 carrier customers, up from 43 in the fourth quarter of 2014. Our software services revenue retention rate once again exceeded 95% in the fourth quarter, for both carrier and employer segments, 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 $24.6 million, or a 45% non-GAAP gross margin. The 360 basis point improvement from the year-ago period reflects the increased scale in our business with 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.

Non-GAAP software gross margin of 63% was down 180 basis points year over year. One-time expenses associated with the jumbo employer transaction we announced last quarter negatively impacted non-GAAP software gross margin.

Adjusted EBITDA was negative $4.8 million in the fourth quarter, or negative 9% of revenue. This was significantly better than our guidance of an adjusted EBITDA loss of $8.2 million to $7.7 million, and compares favorably to negative $8 million in the fourth quarter of 2014. Our adjusted EBITDA was positively impacted by the revenue out-performance in the quarter, which largely falls to the bottom line, as well as increased efficiencies in our professional services organization.

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 partner channels, and greater up-sell activity with our new employer add-on products, such as Benefitstore. We continue to believe that we can achieve our long-term adjusted EBITDA margin of 20%, over time.

Non-GAAP net loss per share were $0.33, based on 29.1 million weighted average shares outstanding, significantly better than our guidance of a loss of $0.47 to $0.46 per share, and the year-ago period per share loss of $0.45, based on 25.6 million weighted average shares outstanding.

Looking at our GAAP results, gross profit was $23.9 million, our operating loss was $10.6 million, and our net loss per share was $0.43. Cash used in operations was $5.9 million, as we ended the quarter with cash, cash equivalents and marketable securities of $88.5 million.

Let me now turn to our outlook for the first quarter and full year of 2016. Starting with our full-year guidance, we expect revenue of $231 million to $235 million, which equates to year-over-year growth of 25% to 27%, an improvement from the preliminary outlook we provided last quarter. We are targeting an adjusted EBITDA loss of $13.5 million to $9.5 million, a non-GAAP net loss of $36 million to $32 million, and a non-GAAP net loss per share of $1.22 to $1.09, based on 29.4 million weighted average shares outstanding. Most importantly, we are planning to achieve adjusted EBITDA profitability in the fourth quarter of 2016.

This guidance reflects the continued progress of our strategic shift to recurring revenue streams, and increasing contribution from our employer segment. In 2016, we are targeting free cash flow in the range of negative $37 million to negative $32 million. We define free cash flow as cash from operations, plus purchases of property and equipment.

As our employer business continues to represent a growing percentage of our total revenues, and as we move an increasing number of our professional services engagements to our expanding network of third-party implementation partners, this shift will cause our deferred revenues to drive a use of cash. We anticipate this will impact free cash flow by approximately $11 million in 2016, and will moderate over time. We believe our improving profitability, our cash balances, and our available credit facility will provide us sufficient liquidity until we become free cash flow positive.

For the first quarter of 2016, we are targeting revenues of $54 million to $54.5 million, which represents year-over-year growth of 27% to 28%. From a profitability perspective, we expect an EBITDA loss of $7 million to $6.5 million, a non-GAAP net loss of $12.3 million to $11.8 million, and a non-GAAP net loss per share of $0.42 to $0.40, based on 29.2 million weighted average shares outstanding.

In summary, our fourth-quarter results reflect a tremendous finish to an exciting year at Benefitfocus. Driving these results and our increased 2016 outlook continues to be the strong demand from our cloud-based solution, as users demand a more comprehensive and efficient approach to managing their benefits. Given our expanded distribution and product portfolio, we are increasingly confident in our ability to continue delivering growth and long-term shareholder value.

Overall, our business is strong, and we'll continue to be a leader in our markets, with exceptional technology and first class customer support, provided by a winning team of Benefitfocus Associates. With that, we're now ready to take your questions. Operator, please begin the Q&A.

(Operator Instructions)

Stephen Lynch, Wells Fargo.

(Technical difficulty) last quarter. I'm just wondering maybe if you could break it down for us, how much of this was driven by stronger demand from the newer solutions, like Benefitstore or ACA reporting? Versus maybe did you see any outside contribution from the North Carolina deal in the quarter, or anything like that? If you could just help us figure out what drove the upside to what you had guided for previously, that would be great.

Hey, Stephen, Shawn, thanks for the question. There was something funny with the audio there. Do you mind redoing the first part of it? I got the second half, but the initial part of your question?

Yes, absolutely. Can you hear me better now?

Yes.

Okay. Yes, I was just wondering if you could give us a sense for what drove the upside to revenue in Q4, versus what you had guided for previously? Was it strong demand from newer solutions? Or was there any larger contribution from the North Carolina deal than you expected previously?

Yes, good question. It was a combination of things, Stephen. As we outlined on the last call, we had a terrific selling quarter in the fourth quarter -- or excuse me, the third quarter, with our largest employer deal ever, and a combination of additional sales of the new products that were introduced last year. So they were firing on all cylinders, and our implementation team did a spectacular time, getting customers live on time, or maybe even a little bit ahead of time.

So a combination of all those factors, really, just -- we hit it out of the park in the fourth quarter. And both businesses and the additional products were firing on all cylinders. So, clearly, gives us great momentum and confidence as we go into 2016 as well. So building on that great story that we have been talking about and investing in for the last couple of years.

That's great. And then, on some of the new software features you are adding, the number of employers you're adding to the business is very, very healthy. Clearly, there is strong demand. Can you talk about the new features that employers are really latching onto? Where you're seeing a lot of interest currently? Are there any particular features that came out with the winter software release that you're expecting to drive a lot of excitement, maybe at One Place? If you could just talk about that, that would be great.

Sure, excellent. Yes, just to recap for everybody on the phone, our strategy with our large employer business has been really a land strategy, with our core offering, the BENEFITFOCUS Marketplace, for enrolling and communicating benefits to -- all your benefits in one place. And, a year ago, we really began the expand part of that strategy, where we introduced a series of new products for employers to add on to the BENEFITFOCUS Marketplace, extending the value. And in 2015, it was -- really, the adoption was fantastic, across the board, all the solutions that we introduced.

As we went into the fourth quarter, a big winter release for us, one of the major new products that we actually introduced in the third and fourth quarter, for sales, was what we refer to as ACA management reporting. It's the Affordable Care Act, a new set of reporting requirements for the IRS. And that product has really just taken off like crazy. It is just incredible, and the uptick in the fourth quarter was fantastic. It's going to have a really great story for the next several years, for sure.

In addition to the compliance as a service of the ACA management reporting, our Benefitstore had an incredible year. We talked about now having over 100 customers on the Benefitstore, up from 8 the prior year, which was our pilot year in 2014. And we will be sharing results of the Benefitstore participation rates, and all of the analysis, at our upcoming One Place event, which is just a few weeks away, in March. It kicks off on March 8, in Orlando, Florida -- you can watch live stream on our website at benefitfocus.com.

Also, our core analytics offering for employers had a fantastic year. We mentioned, in the notes there, that we signed 51 new employers -- or 51 employers to the core analytics during the year. So just across the board, really fantastic. And I think another thing that's interesting, when we first rolled out these additional products, at the beginning of last year, we said that one-third of our new customer adds were buying more than one product. And by the fourth quarter, that number had surged to two-thirds. So, in the fourth quarter, the new customer adds, two-thirds of them were buying two or more products from Benefitfocus, which is clearly contributing to the revenue growth, the margin expansion, the retention rate, because of the added value.

And as we pointed out, we now expect to achieve adjusted EBITDA profitability in the fourth quarter of 2016, which is a lot sooner than we originally thought, which -- originally, we were talking about the middle of 2017. So, all those factors together really created great value for our customers, and the economics are flowing through into the profitability line, as well.

That's really great commentary. Thanks, Shawn.

Sure. Thank you.

Nandan Amladi, Deutsche Bank.

Thanks for taking my question. So, Shawn, in the financial guidance that you've provided for this year, if you had to rank order what factors are actually helping lift overall margins, obviously, the Benefitstore has done well for you. The ACA probably gave us a nice step-up in BPM. (Inaudible) changes, I think Milt said, expected to wind down. You also talked about sales productivity having increased. So, if you had to rank order, say, the top three factors that helped with the margin expansion this year, what might they be?

Yes, good question, Nandan. Thanks, and I will start with the EBITDA profitability in the fourth quarter, because I know there's a lot of different ways to look at margin, gross margin, whatnot. But if you think about us being able to pull that forward so substantially, and targeting profitability on adjusted EBITDA in the fourth quarter, I think you really hit on the one where you mentioned the sales force productivity. When Benefitfocus went public in 2013, we were building a big employer enterprise sales force in 2013, 2014, and 2015. And that team is awesome now. They are solid, tenured.

They continue to exceed our expectations. And we will add to that team this year, but it will be more of an incremental basis. It will be in targeted geographies that we've outlined. We are also expanding into the jumbo account market, thoughtfully, so there will be a couple of key adds there. But the team that we have in place is really showing great productivity. And when you combine that with our channel partners' strategy, and the performance of that strategy, you think about Mercer and the Mercer marketplace, and the success we're having there, adding SAP last year. And the SAP sales team is now trained on how to sell the Benefitfocus platform, and they sell it on their contract, and they can add it for their customers.

And then the system integrators, and how that's reinforcing that message that Benefitfocus has become the enterprise benefits management platform of choice. That's just giving us great scale and leverage. And then, as you look at the operating lines, more and more of our implementations are being done by system integrators now, which has actually had a great effect on our own ability to implement. As we teach other people how to implement the Benefitfocus platform, we improve our tools, we improve our own quality, and our efficiency goes up. And so those SIs have made us better, as well as taking on that work, which means that the majority of the software revenue -- the revenue will continue to be higher-margin software revenue.

So the combination of those factors are really giving us a tremendous outlook. And I would just add, the Benefitstore, our new service offering last year, is just fantastic. Over 100 customers, tremendous participation in this open-enrollment season, and great interest from both large employers, but also the ecosystem of partners that want to sell products in the Benefitstore. And as we look out in the fall of this year, into the fourth quarter, we think that's going to be a big contributor, as well.

Thank you. And a follow-up, if I might, on the system integration community buildout. I think you graduated your first class several quarters ago. As we look into 2016 and 2017, what percentage of new projects do you think they will be able to implement?

Hi, Nandan, this is Milt. Let me answer that one for you. I think, when we look at how we ended 2015, I would say that about 10% of the projects that we had in the -- within 2015, it was actually the end of 2014 when we graduated that first class. About 10% of the projects were done by an SI partner. You look at it into 2016 -- and I think we've talked about this a little before -- I think probably in 2016, 25% of our employer implementations are probably a good target for us to have.

And then, as I said earlier, as we look farther out into the future, I can certainly see 50% plus of our implementations eventually being done by a partner. It will never be 100%, certainly, but I can certainly see measurable amounts of implementations of our employer customers being done by a third party.

Thank you. That's all for me.

Terry Tillman, Raymond James.

Hey, guys, good afternoon. Milt, congrats on this life event for you, and we will miss you. I guess the first question is for you, Milt. In terms of the fourth and first quarter analysis, it looks like, while the overall revenue guidance is above where we were, as well as for the first quarter, so that's positive. But, sequentially, it's about flattish. And, historically, the fourth to first quarter does show sequential growth. Could you help us or isolate any kind of one-time or seasonal items related to some of your revenue streams, for each of the businesses, that could translate to a potential flattish revenue from 4Q to 1Q?

I think, to your point, Terry, usually, 1Q is a little bit stronger, a little bit more, I think, when we look at how we did in the fourth quarter. The fourth quarter being as strong as it was, certainly, we had that large jumbo account that came online in Q4 of 2015, contributed to some higher revenues in the fourth quarter. So I think that's probably the most significant contributor to what you're calling a flat revenue sequentially. And also, I think that the whole stand-alone value issue, as well, is what drove a little bit more revenue in the fourth quarter, as well, because we had just established stand-alone value in the middle of 2015.

Okay. And I guess -- sorry, go ahead, Shawn.

I would just add, Terry, that I think that some years -- actually, this year might look more normal to me. So we have a surge of implementing particularly employers and carriers in the fourth quarter, getting live for open enrollment. And then the pressure's off for a quarter or two. Certainly in the -- maybe in the last couple of years, we've had an uptick in quarter one. But, to me, it doesn't look uncharacteristic for there to be a big step-up in the fourth quarter. And then that just rolls across into Q1, and then we start the implementations for the following year. So I think it -- this actually looks correct for the way that the historical pattern has seemed.

Okay. And, Shawn, since I've got you there, in terms of -- as your business has scaled a lot more, and you've been having these additional points of channel distribution, and the sales force has grown. Competitively, has there been any change or evolution? So maybe we can look at it from the standpoint of ERP vendors -- obviously, SAP is a partner now. But whether it's ERP vendors or service bureaus or payroll providers, or even the HR outsourcers, could you maybe talk about competitive dynamics and the cast of characters that you would normally see? Has that changed much? Thank you.

Sure, thanks. What's really, I think, exciting about the Benefitfocus story is that the market opportunity, the TAM, the size of benefit spend in the US -- $1.6 trillion spent by employers, 30% of compensation goes into benefits. And that cost is rising, and they're wrestling with it. All that macro story is so intact -- and the Affordable Care Act, and the back and forth of the compliance issues there, is driving more and more need for a new solution. So our overall thesis has actually gotten stronger and stronger since the IPO.

But, on the flip side, the competitive market has actually come our way a bit. 2.5 years ago, when we went public, SAP would have been a competitor, an ERP competitor, and they have chosen the Benefitfocus platform, and they are a great channel partner for us. Of course, Mercer, great consulting and brokerage, leading the world in what they do, they've selected the Benefitfocus platform to be their new private exchange and having tremendous success in that area. So, folks that we would have historically competed with have selected our platform to standardize, going forward.

And that really helps us, even in our direct selling, because when we're out interacting with a perspective large employer, and they realize that we're powering these exchanges, we're powering very large carrier capabilities -- SAP is now using the Benefitfocus platform. Those things have really helped significantly in our direct selling. That, combined with our size now -- so we don't -- we're the leading independent enterprise benefits management platform. We're the first ones to get over $100 million. Now, at a $200 million run rate, going public was a big event for us.

So, in our mind, and actually in our interaction, large employers generally know who Benefitfocus is, and the sales are happening, I would say, even a bit faster than they have been. And we don't -- we haven't seen new entrants into the market, and we haven't seen the legacy payroll, or other ERP vendors, make any significant investment in their platform. If anything, I think they are busy addressing other issues, depending on whether you're ERP or payroll. And benefits is getting harder and harder for them to invest in, just because the demands, the complexity, the compliance, the consumerization, the need for data to help you make the correct decisions and offering voluntary benefits.

All those things are setting a higher bar. So, competitive landscape, in our mind, is like it was when we went public, but we would say it's probably even better for us, a couple years in.

Thanks, good to hear.

Yes, thank you.

(Operator Instructions)

John DiFucci, Jefferies.

Thank you. Shawn, you mentioned ACA, the Affordable Care Act, and the product you have. And I think you said it's going to be part of the story for the next several years. Just want to understand that. Because as far as the way I understand it, anyway, most large employers would have already had to comply with those regulations. And I think some of the smaller employers, they've been given some relief, and I think it's not until June that they have to reply, but those are small employers. So -- because it's something that's talked about a lot in the investment community. And it not only affects you, but a lot of others, a lot of payroll people, too. So what do you -- why do you think it's going to have a positive effect for some time to come?

Yes, just to clarify, John -- thanks for the question. First of all, the Affordable Care Act is a massive change in our healthcare system, with whole multiple layers of compliance associated with it. Several waves of that have already happened -- the employer mandate, the employee individual mandate, the requirement to provide coverage. This is really the first season where electronic filing for the IRS is required for employers and large employers. And, actually, all of them got a little bit of a stay, so it's been moved back a couple months.

But this is actually the first filing season for large employers, and they have to remit their filings electronic, based on their size. So all of our customers, 100% of our customers, have to -- for the first time -- file something called a 1094 and 1095 with the IRS. They have to file it electronically. And then they also have to provide those forms to their workforce, to the employees, for the first time. So it's a whole new filing, across the board. It's a very complicated filing, because you have to have this idea of a look back, and who was eligible.

There is dependent information that is required. Most payroll systems and HR systems don't have dependent information captured in those systems. So there's a whole host of new data that isn't historically captured by payroll or a tax-filing apparatus. Many of our employers also operate multiple businesses, multiple divisions. Oftentimes, they might not be on the same ERP or payroll system. And so Benefitfocus represents a collection point, because we have all their benefits from all their subsidiaries in one place. So, as we introduced that, the requirements really didn't become clear until the fall.

They were still giving draft requirements last summer. We were one of the first early filers to get certification for electronic submission. And, really, the details were still being worked out all the way into the open enrollment season. So it's a brand-new capability. 100% of the employers have to comply with it this year, for the first year, for 2015. And it will be something they will be living with for -- actually, for years and years to come. And it will undoubtedly get added to and clarified, and additional information will be layered on top of it.

So we built a platform to really handle all the aspects of compliance, this just being the most recent one, which created a surge in buying for this new product for us, is extremely successful, and our customers are counting on us to solve this for them.

But, Shawn, you wouldn't expect this surge to continue beyond now, would you? Or it would just be --

I guess your point is, we sold it to a lot of customers in the last couple of months. That's going to benefit 2016. Certainly, we would expect that to stay intact, and be part of our PEPM going forward. We would hope to then sell it to our new customers. So the way we would think about it is, it lifts our overall PEPM addressable market inside our existing customer base. And then, as it gets added to or changed, I guess there will be some opportunity for price increases and extensions of it, and so forth.

Got it. Okay, great, that's clear. And, Milt, if I could, can you explain the deferred revenue, the use of cash this year, again? You said $11 million. We hadn't modeled it that way, and I'm trying to understand. Again -- maybe it's as simple as repeating what you said, but I'd like to understand why that's going to have that negative effect again?

Sure. And I think, really, what we're looking at is, the balance sheet change of our deferred revenue balance is going to result in a reduction of that deferred revenue balance by $11 million, which is obviously a use of cash. The reason for that, certainly, is that we are taking -- or taking out of deferred revenue, and bringing that revenue onto the P&L, at a much faster rate than we're adding to the deferred revenue balance.

Some of the factors around that are certainly the shift in (inaudible) the employer business, and that's the faster-growing segment of our business, and doesn't have the large implementation projects, or professional services projects, that some of the carrier projects might have had that, in the past, have added significantly to deferred revenue. And also, the fact that we've now also shortened the customer relationship period from 10 years to 7 years. So we're accelerating the pace, or have accelerated the pace, that we're taking out of deferred revenue, because of that change.

And lastly, the notion of having achieved stand-alone value in 2015 now allows us to recognize revenue from implementation of professional services projects when they are completed, as opposed to bleeding them into the P&L, out of deferred revenue, over that seven-year customer relationship period. So all those factors result in a much faster reduction in deferred revenue from those things, and that's what's driving that $11 million use of cash in 2016.

Okay, I think that's helpful. Thank you very much. Thanks, guys.

Thank you.

Richard Davis, Canaccord.

Great, thank you very much. So, look, 95% dollar retention is awesome -- is really good. When people churn off, why does that happen? And then, is there things that you could do to get that dollar retention to reach the 100% level? And how would you think about that? Thanks.

Yes, good question. Thanks, Richard. Yes, so we retain our customers, I would say, at a industry-high rate of over 95%, is the way we put it. We don't break it out specifically, and give you the number every quarter. It's often well over 100%, because it would take into account adoption that would roll on, et cetera. When -- our retention last year was even better than the year before, if that gives you some flavor for the direction of it. So our ability to keep our customers on.

And I think the primary reason we would see a customer leave or [attrit] would be an acquisition. So if they are a smaller enterprise, and they get acquired by a larger enterprise, a larger enterprise has some other way to handle their benefits, then occasionally we will lose them. But more and more, that's going in our favor. As our account base grows, our customer size has gotten a lot larger. So I think we mentioned, on the last call, that we had a jumbo account merge with another jumbo account, and it resulted in a pretty significant win for Benefitfocus. Even though it didn't add a logo, it added a whole host of 50,000 plus employees to the Benefitfocus platform, through that merger. So actually, it's starting to become a source of growth for the Company.

Maybe one of the best things that we've done for expanding this idea of retentions, particularly dollar retention, is the introduction of the new products last year, Richard. We've talked about Benefitstore, the core analytics, the Benefit Service Center, and so forth. So as we sell those back into our base, as well as sell them to new customers, they are getting more value from Benefitfocus, from the relationship. There's more reasons for them to buy even additional things from us. Certainly increases our overall revenue retention rate, because it often increases it beyond that 100% mark, as you pointed out. So we're really happy with the direction of it, and we think we've done a lot of great things to actually improve what I would say was already a very industry-high retention rate.

Got it. And just a quick add-on question. So you've done a great job with SAP. Ultimate is a really good firm. Is it logical for us, as outsiders, to think that you might have other partnerships in the future, whether that -- and you touched on that a little bit. But a Workday, a Kronos, NetSuite, or I just don't know. Is that something that's rational for us outsider folks to think is possible? Thanks, that's it.

Yes. I think as our platform really emerges as an industry-leading platform, a platform standard, in the number of carriers that are integrated with Benefitfocus, we have actually over 1,500 different data exchange connections now. So more and more employers want to be on that platform that has that scale, that has all the products associated with it, that has the services and the ecosystem of that size. And we would think, naturally, that, that would bring more partnerships into view for us.

I think a historical pattern that's interesting is in our Carrier business. Our first health insurance carrier, years ago, was a Blue Cross Blue Shield plan, a regional Blue plan. And that -- we did a great job for them, using the Benefitfocus enrollment billing platform, which led to more and more Blue Cross Blue Shield plans selecting Benefitfocus. And, today, we even have the big national public companies. We have life insurance companies and the largest health insurance company. So it does seem to have an interesting effect, in a market where the advantage of having a leading platform outweighs trying to do it yourself.

And do it yourself becomes harder and harder to do, over time, particularly with what's happening in benefits, with compliance, and the consumerization of these programs, and mobile technologies, and big data and data analytics, and all the things you need to be relevant. So we're optimistic that you will continue to see our partner ecosystem grow. That said, there's nothing imminent where we need to continue to feed additional big partnerships, like SAP, to keep the model working. We have incredible visibility into 2016 and 2017, in our own sales force, in our booked business already, and into the channel partners that we have, like Mercer and SAP, are just doing fantastic.

Got it. Thank you so much.

Thank you, Richard.

At this time, we have no further questions. I'll now turn the conference back over to Shawn for any closing remarks.

Excellent. Thanks, everybody. Thanks for joining us. It's an incredible record year for Benefitfocus. We couldn't be more proud of the results. And, again, I'll shout out to all my Benefitfocus associates. You guys are building an incredible Company, and to see the business grow 35% year over year, and targeting EBITDA profitability in the fourth quarter of 2016, now with over a $200 million run rate, is just really incredible. So thanks for all of our associates, and all you do to make the Company great. And to our fantastic customers for selecting us, and allowing us to serve you. Hope to see everybody in Orlando, March 8, or online for our One Place keynote. Thank you so much. Have a great night.

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