Benefitfocus Inc (BNFT) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Benefitfocus third-quarter 2016 earnings conference call.

(Operator Instructions)

Please note, this conference is being recorded.

I will turn the conference over to your host Michael Bauer, Director of Investor Relations for Benefitfocus. Thank you, you may begin.

Thank you, operator. Good afternoon. Welcome to Benefitfocus' third-quarter 2016 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 Jeff Laborde, our Chief Financial Officer. Shawn and Jeff will offer some prepared remarks we then will open the call for Q&A session.

As a reminder today's discussion will include forward-looking statements such as fourth quarter and full-year 2016 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, recruitment and retention of key personnel, general economic risk, the early stage of our market, management of growth, and a changing regulatory environment that could cause actual results to differ materially from our expectations.

For a further discussion of the material risks and other important factors that could affect actual results please refer to our annual report on Form 10-K and 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.

Great. Thanks, Mike. Good afternoon everyone and thank you all for joining us today. During the third quarter Benefitfocus delivered strong results that exceeded our expectations. Total revenue increased 28% during the quarter and with adjusted EBITDA of $1.1 million, we achieved profitability a full quarter ahead of our expectations. This is a significant accomplishment for our Company and we believe this year-over-year improvement of over 2100 basis points in EBITDA margin, demonstrates the operational leverage inherent in our business.

During the quarter we once again delivered revenue retention rates in excess of 95% and employer revenue in the quarter increased 55%, as our large employer count increased to 827. Both our revenue retention rate and the growth in our installed base underscore the value we provide large employers as they continue to transition benefits management to the cloud. As we discussed last quarter, we also believe the growth in our employer business strengthens our carrier business.

Our insurance carrier clients recognize that our investment in the employer market flows through to their platform and with over 50 of the top 100 insurance carriers as customers, we remain focused on helping our insurance carrier clients add more subscribers to the platform and cross sell additional solutions onto our installed carrier base. As we look ahead to 2017, I would like to provide some perspective on the market dynamics we are seeing taking shape and how Benefitfocus will benefit from them in the coming year.

The first is that we continue to benefit from a secular shift as large employers move core operational activities, such as benefits management, to the cloud. During the quarter large employers continued to turn to Benefitfocus to help them engage employees, improve benefit personalization and plan fit, reduce benefits expense, and streamline administration and compliance. One highlight during the quarter was our continued momentum in the national account segment, as our recently formed national count sales team closed six national accounts up from three in the year ago period.

A second key market dynamic is the continued shift of employers offering a wider array of health plan designs, including high deductible health plans. To enable this shift an employer needs a flexible modern software platform. The wide array of supplemental benefits and their linkage to these new health plan designs, requires a new way to communicate to employees. The combination of our consumer mobile first design and our Benefitstore offering is really unlocking the power of this move for employers. We believe we're in the early stages of this generational shift and stand to benefit for years to come.

A third dynamic is the significant increases in insurance premiums in the individual market on the Affordable Care Act public exchanges. While we do not serve this particular segment of the market, we do believe it will result in some tailwinds for both our carrier and employer businesses. The primary impact will be refocusing of the market back to employer-provided health insurance.

We're already seeing increased activity in our carrier sales pipeline as it relates to investments in their employer group businesses and ways to expand their offerings to those employers. We also believe that our employer business will further grow as the value of the benefits they provide will become a competitive advantage in the labor market. This we believe will result employers moving faster to the cloud and to modern consumer experiences for their employees.

With these markets dynamics as a backdrop, let me share some highlights of the quarter. I'll start with our employer business where we saw a sustained increase in average deal size and great traction from our expanded employer solutions. For example, during the quarter average deal size increased approximately 125% on the heels of large new customer bookings, product mix and back to base strength.

In particular our new national accounts team continued to exceed our expectations with the six national accounts I mentioned earlier. Let me highlight a few of these national account wins. In July we closed a multi-year, multi-product transaction at a massive retailer with 120,000 employees. This employer selected Benefitfocus Marketplace, Core Analytics, and Benefit's Service Center to improve efficiency and eliminate extensive manual tasks required by the company's previous legacy systems.

The scalability of our platform, employee communication capabilities and mobile first strategy were also cited as key contributors for their selection of Benefitfocus. During the quarter we continued to strengthen our position in the higher education market by adding two marquee universities in the Midwest. First a large public research university selected Benefitfocus Marketplace, Core Analytics, and Benefitstore for its 19,000 employees. Also in the quarter we added a large private research university that selected Benefitfocus Marketplace and our Core & Advance Analytics solution for their 20,000 employees.

Additionally during the quarter a national retailer with over 38,000 employees selected Benefitfocus Marketplace, Core Analytics, and Benefit's Service Center to improve their existing benefits administration process, increase employee satisfaction and free up their HR team resources from the time-consuming administrative task of their legacy benefits enrollment system. Our back to base sales team also posted another strong quarter.

We continue to close add on transactions into our install base and also over two-thirds of our new employer customers continue to select more than one product. These positive developments drive higher average annualized recurring revenue per transaction. During the third quarter we added 24 new large customers. This was lower than the year ago period, as a result of two main factors. First as it had been noted by the major private exchange sponsors, the 2016 selling season experienced slower growth than previous years.

We remain optimistic however on this private exchange channel and believe this business should steadily improve as private exchange sponsors fine-tune and optimize their offerings. The economics for employers and exchange sponsors remain compelling and deploying private exchanges on our flexible adaptive platform remains the most effective way for participants to benefit from this new market opportunity. And second, our large employer sales team continues to ramp up.

As we shared last quarter we transitioned roughly 25% of our employer sales capacity to focus on national accounts at the start of 2016. This reassignment means we had less coverage and less tenure focused on the 1,000 to 10,000 employee segment when compared to 2015. During the third quarter we begin ramping this team and have an aggressive hiring plan as we prepare for 2017.

Shifting to our carrier segment, demand for our solution continues to strengthen. As we have highlighted throughout the year we have focused on carrier business on two priorities that will drive a return to multi-year revenue growth and further strengthen our leadership position within this highly strategic segment of the market. First, with over 50 of the top 100 carriers on our platform we are making great progress cross-selling solutions into our install base. And with the assistance of our expanded carrier focused market adoption team, we are implementing strategies for our carriers to grow the size of their memberships on our platform.

And second, we continue to focus our carrier business towards recurring product revenue and profitable professional services revenue. The results of the past three quarters have been really encouraging and the execution during the third quarter was strong. As we had six large renewals, while also increasing our penetration within our installed base. Let me provide an example from the quarter that highlights the success of our carrier sales team.

Earlier this year we begin conversations with a large eBilling customer that had yet to broadly deploy our eEnrollment solution. Working closely with this customer we were able to support a platform consolidation to Benefitfocus and migrate the carriers group business onto Benefitfocus' eEnrollment platform. Moving to Benefitfocus lowered the carriers operational cost and will help improve group retention and engagement. The impact in our carrier business is also meaningful as we increased our strategic importance with a large customer and added over $1 million in incremental annual recurring revenue.

During the quarter we also hosted our first Carrier Executive Forum here in Charleston. During the course of the event, over 20 SVP level executives from the country's largest health and voluntary insurance carriers joined us for two days of engaging discussion focused on consumerism and technology in the insurance industry. We expect the event to play a meaningful role in accelerating our pipeline as we head into 2017 and look forward to reconvening the group on a regular basis.

From a product perspective, our Autumn release -- in our Autumn release we extend our mobile capabilities to support full mobile enrollment. Customer feedback for this new capability has been wonderful. One benefits leader for a large retailer with more than 44,000 employee shared the following. We've had a great response to the mobile app so far, as our store employees really need a portable, mobile way to enroll in our plans. It speaks to our audience and our innovative culture.

Our One Place 365 Idea Community continues to be a source of strength for Benefitfocus and was responsible for several new and important features delivered within the Autumn release. Our Idea Community is the first crowd-sourced product innovation platform in our industry and the Autumn release represents a major milestone. Together with our thriving customer committee, we're delivering innovation that the market really loves.

As I reflect on year-to-date 2016, I'm so proud of the progress we have made on our primary strategic objectives. In particular, I believe our focus on operational scale and continued growth will result in Benefitfocus becoming a much larger and more profitable Company over time. Entering 2016, we made a decision to concentrate our efforts on achieving adjusted EBITDA profitability by the fourth quarter. As I outlined today, we have achieved this important milestone one quarter ahead of our expectations.

Looking ahead to 2017, I'm very excited about the expanding employer sales go-to-market team and the performance of our carrier sales teams. With the market dynamics in our favor, we made great progress during the quarter on our aggressive sales hiring plan as we ramp up our employer back to base and carrier sales teams heading into 2017. I continue to be impressed each day with the caliber of talent we are attracting to Benefitfocus.

While we are executing well on our long-term plan, we also anticipate some short-term revenue implications as a result of our focus on national accounts in 2016, the continued rapid the development of the Benefitstore and some muted near-term private exchange growth. Let me share some of the details on each. First is the implementation timeline and revenue impact associated with an our national accounts business, as we ramp up this customer segment.

Many of these accounts with 10,000 plus employees are simply more complex and will go live during 2017 versus our historical cadence of customers going live during the third quarter or fourth quarter of the same year that they signed the contract. In addition, the shift our focus by our sales organization towards national accounts, resulted in signing fewer 1,000 to 10,000 employer customers than our original expectations.

As noted earlier we are actively hiring to expand coverage in this market segment and will be in position for a strong selling season in 2017. With regard to Benefitstore as I previously mentioned demand remains very strong. However, the revenue from voluntary benefits commissions will lag our initial expectations due to a combination of differing adoption rates across insurance products and our decision to provide commission splits with select brokers.

We have been forming strong relationships with our customers existing brokers around the country and now are including them in the Benefitstore program. While this impacts our near-term revenue share, it strengthens our relationships in the broker community and provides positive momentum to the sale of other solutions like the Benefitfocus Marketplace Platform. And finally, as I noted earlier, many of the private exchange sponsors experienced slower growth during the 2016 selling season when compared to the prior-year. We remain excited about the long-term economics of this business and have plans in place to improve the performance of this channel in 2017.

As we enter 2017 with a terrific product roadmap that will be showcased in the few months at our One Place user conference and a clear path to profitability, I feel very good about our growing sales footprint and am confident in our ability to deliver a strong 2017 selling season.

Our multi-year investments in our products and our platform are really beginning to show tremendous operational scale, which is leading to improved profitability, expanding gross margins and increased speed of our implementations. We are on a long-term path to building the platform of the future for our massive $1.6 trillion benefits industry. This industry is huge and complex, yet we uniquely understand it and have built the technology to truly transform it.

Our progress in many areas, but especially national account employers, is a strong indicator that as employers move en masse to the cloud the Benefitfocus Platform is becoming their platform of choice. Finally as we the head into our busiest time of year with open enrollment, I want to extend a special thank you to all of our associates who have been working so hard to ensure the success of our customers.

Our success would not be possible without your dedication and passion. Thank you for all that you do make Benefitfocus such a great Company and have such great Company culture. Now I would like to welcome our new CFO, Jeff Laborde. We're fortunate to have Jeff join our leadership team and welcome the contributions that will come from his extensive financial experience in years to come. With that Jeff, take it away.

Thanks for the introduction, Shawn, and many thanks to the broader Benefitfocus team for the warm welcome. Today marks my seventh week in the seat as CFO and I have been working closely with the leadership team to come up to speed on the business as well as to get acquainted with the members of my finance team. I'd like to highlight how impressed I have been in my interactions with management across the Company, the Benefitfocus culture, our new product offering pipeline, and the dynamic market that we are focused on.

I believe we have an outstanding opportunity to reinforce our leadership position as the benefits management platform of choice heading into 2017. In addition to coming up to speed on the business, I have also devoted a significant amount of time to understanding the details and attributes of the Company's broader financial profile. An early fruit of these efforts is reflected in our announcement on Monday of the opportunistic expansion of our revolving loan facility.

Specifically, the amendment increases the size of our aggregate loan amount from $60 million to $95 million. Additionally, we extended the term to a new three-year period. We were pleased to work once again with Silicon Valley Bank as our syndication agent and in addition to upsized commitments to the facility from our existing lenders, welcome Goldman Sachs to the lender syndicate. Combined with our significant progress on our adjusted EBITDA targets, we believe we're well positioned from a liquidity perspective for the foreseeable future.

Turning to our Q3 results, I'll begin by reviewing the details of our financial performance and then I'll finish with our updated guidance for the quarter. Total revenue for the quarter was $58 million an increase of 28% compared to the third quarter of 2015. This result was at the high end of our guidance range and driven by sales of new products to both new and existing customers, as well as strong revenue retention. Employer revenue for the quarter was $35.4 million up 55% compared to the year ago period and carrier revenue of $22.7 million was flat compared to the same period last year.

Both revenue segments performed in line with our expectations for the quarter. Breaking revenue down further, total software subscription revenue was $49.3 million representing 85% of total revenue and growing 25% year over year. Employer software subscription revenue was $31.9 million and grew 50% year over year. As highlighted last quarter, the sequential decline in software subscription revenue reflects ACA related revenue that was recognized upon completion in Q2.

Total professional services revenue was $8.7 million representing 15% of total revenue and up 43% over Q3 2015. The year-over-year increase in both employer and carrier professional services revenue reflects a number of factors, including improved scheduling of services work with the creation of our new open enrollment reservation system, as well as higher implementation and other consulting activity levels from our new and existing customers.

Moving down the P&L, our non-GAAP gross profit totaled $29.7 million representing a 51% non-GAAP gross margin. This compares favorably to 50% in the prior quarter and 43% in the year ago period. Importantly during the quarter we experienced accelerated year-over-year gross margin improvement for both our carrier and employer segments. The almost 800 basis point improvement over last year reflects the benefits of ongoing revenue growth, increased operating efficiencies, and cost management efforts. The non-GAAP software gross margin of 60% was down from the prior quarter and year ago period, while professional services gross margin improved to a negative 1%.

The sequential and year-over-year improvement in professional services gross margins reflects several areas of progress in the professional services organization, including higher capacity utilization the combination of certain product specific delivery teams and continued privatizing of our Implementation Services and new releases of our software. The decrease in software gross margin in the quarter was primarily due to revenue mix and higher open enrollment cost than typical.

During the third quarter we started ramping our seasonal investments in support of our new user populations earlier than in past years both in connection with our new reservation system and for our largest employer client. For this years open enrollment the contract with our largest employer customer included the additional support of over 200,000 retirees. To support this large additional population we started open enrollment earlier in the year and with additional support resources.

As our continued platform investments and innovation drive greater efficiencies within software services and the profitability of professional services improves, we remain confident in our ability to continue to meaningfully expand gross margins while ensuring the best possible experience for our customers.

Moving on now to adjusted EBITDA, we were pleased to report that the Company achieved a major milestone in the quarter with adjusted EBITDA becoming profitable one quarter ahead of plan. Q3 adjusted EBITDA was $1.1 million or 2% of revenue. This was significantly higher than our guidance of an adjusted EBITDA loss of negative $4 million to negative $3.5 million and represents nearly a $10 million increase over the negative $8.8 million, Q3 2015 result. Our adjusted EBITDA was positively impacted by our revenue growth in the quarter and the ability to translate progressively more of every dollar of revenue into gross margin contribution due to our ongoing scale, technology, and services improvements. Indicative of our increasing scale during the third-quarter total operating expenses declined as a percentage of revenue on a sequential and year-over-year basis.

Importantly as an organization, we remain focused on balancing additional investment in the business with our overall revenue growth and adjusted EBITDA profitability. Non-GAAP net loss per share was negative $0.14 based on 29.7 million weighted average shares outstanding. This result was better than our guidance for a loss of a negative $0.34 to negative $0.32 per share and the year ago period loss of negative $0.46 per share based on 28.8 million weighted average shares outstanding.

Looking at our GAAP results, gross profit was $28.9 million representing a margin of 50%. Our operating loss was a negative $6.5 million and our net loss per share was a negative $0.29. Moving to the balance sheet, we ended Q3 with cash, cash equivalents and marketable securities of $55.3 million. Total deferred revenue declined by $3.9 million sequentially to $79.7 million and as discussed in prior quarters largely reflects changes we have made in our carrier professional services engagements to reduce the number of both lower margin and the deferred revenue recognition carrier professional services engagements. On the statement of cash flows, cash used in operations totaled $627,000 for the quarter an impressive improvement of over $8 million cash used from the year ago period, reflecting our top-line growth and improved margin profile.

Looking ahead as I enter my first full quarter here at Benefitfocus, I will be spending a significant amount of time initially on certain more strategic areas and actions, including: Companywide budgeting for calendar 2017, enabling our organizational drive for profitable revenue growth, and continuing our gross margin expansion, as well as evaluating further opportunities for improvement.

I'll now turn to our outlook for the fourth quarter of 2016. For Q4 2016 we are targeting revenue of $62.3 million to $63.3 million. From a profitability perspective, we expect adjusted EBITDA of $1.5 million to $2.5 million, a non-GAAP net loss of negative $4.2 million to negative $3.2 million and non-GAAP net loss per share of negative $0.14 to negative $0.11, based on 29.8 million would average shares outstanding. Additionally we are narrowing our full-year 2016 free cash flow guidance to be in the range of negative $37 million to negative $34.5 million.

Although we are early in my tenure and our 2017 planning is underway, I'd like to provide some initial perspective on 2017. We are making steady progress against a number of our long-term model targets. As noted previously, now that we have achieved adjusted EBITDA profitability we're ramping up our investments in our sales organization and are focused on the following four primary financial objectives for 2017. First, is to grow revenue. In 2017 we plan to invest in both our employer and carrier sales organizations to improve upon our fourth-quarter revenue growth rate. Second, to continue to incrementally expand gross margins. Third, to achieve adjusted EBITDA profitability for the full year and fourth, to drive towards free cash flow positive by the end of the year.

In summary, I'm excited about our opportunity and believe we are well-positioned to further strengthen our leadership position in the multi-billion dollar benefits management market. We're ramping sales force and improved profitability. We believe we are well-positioned to deliver strong growth and long-term shareholder value.

With that, we're now ready to take your questions. Operator, please begin the question-and-answer session at this time.

Thank you.

(Operator Instructions)

Brian Peterson, Raymond James.

Yes, thanks guys and thank you for taking the question. Shawn, just want to hit on your comments a bit. I know you mentioned three drivers that may cause a little bit of a shortfall in 2017 maybe versus what we historically expect. Is there any way that you'd be able to size those in terms of the magnitude on a rough basis?

Good question, thanks Brian, and yes. So from our perspective what we're seeing as we look into the new year, first of all is this national accounts business. I mean we're having an exceptional year there and as you recall we took about 25% of our sales capacity and put it in that national accounts team at the beginning of the year and they are doing fantastic. They're way ahead of plan.

As we sign these large national accounts with 10,000 employees or more, what we would expect and what we see happening is rather than those customers going live normally in the fourth quarter of the same year, so call it this time for this open enrollment, many of them will actually go live in the first half or middle of 2017. So that's going to have an impact both on this fourth quarter and the next couple of quarters. The good news though is like we talked about in the remarks, in the third quarter we saw average deal size up by 125%. And so it was really big customers with multi-product sales.

The next piece is the Benefitstore. That's a new product for us over the last year and a half or two years. It's extremely popular with customers. But as we dial it in, as we fine-tune it, we've begun to work with more brokers around the country who are working with customers already and doing really including them in the Benefitstore program. And so part of the dynamic there is instead of Benefitfocus receiving 100% of the commission for the Benefitstore products we'll be in some cases sharing that with the broker. Which we think is a great strategic decision because it kind of widens our footprint with these brokers and we think will lead to additional sales.

And then the private exchange really across the country market has been a little softer than the year before. We are actually optimistic on the private exchange over the next couple of years, but if you look at those I don't know if I have a percentage which one is bigger; they are actually all kind of similar I would say. But we think in each of those cases we believe that going to 2017 we've got plans to not just mitigate them, but actually build upon them, particularly towards the second half of 2017.

Got it and just a follow-up on that. With some of the national accounts is it typical in those situations that they would ramp with you guys in a time period that's not consistent with open enrollment where they might use the legacy platform this year and ramp you guys up over the course of the year? And then in the third quarter or the fourth quarter of 2017 then you would be live for open enrollment. Is that kind of the cadence you are seeing with those customers?

Yes great question, great observation too. Just a little bit for the audience so our normal selling season at Benefitfocus would be to sell -- decisions get made in the second or third quarter for most employers to use the new Benefitfocus Platform for their open enrollment, which happens to be going on right now. We finished those implementations in the third and fourth quarter.

With the national accounts we tend to fit more into an overall enterprise move to the cloud. These are great multi-year agreements, huge customers. We rattled off a series of them over 20,000, 30,000, one is over 100,000 lives. So often times we'll be coordinated with other activity that's going on inside the carrier. We have some that will go live in the second quarter of next year, for example, third quarter, and as you would expect if we sign them this year, the goal would certainly be to get them live prior to open enrollment of the following year.

There is a really nice sort of a trade-off if you will, it does allow us to smooth our implementations a bit. So if you think about our implementation resource being so heavy going into open enrollment season, which it will continue to be with majority of our customers, but with the national accounts we'll actually be able to do a lot of work on the implementations in the first and second quarter of next year. We have the resource to do it and so we think that will actually be good for our resource allocation, actually help professional services margin as a result. So it's good outcome.

That's a perfect segue for one more -- I'll just sneak one in for Jeff here. But the services margins were actually much better than we expected and I know you mentioned the scheduling or reservation system utilization. Is that something that we can think of as sustainable going forward given anything you just said, Shawn, or are we still going to have some puts and takes there? Thank you.

Well, I'll start and let Jeff chime in. We definitely have invested a lot in our product, in our implementation, methodology, in the tools that we use, the quality checks that we have that are automated. And so just as an organization with scale we're getting better and better all the time. I just was looking at a customer, over 30,000 employees just went into open enrollment this week and gave us a 10 out of 10 on their implementation. We are extremely proud of that very large customer and that great feedback.

So with scale, with the operational excellence, with the work Ray August, our President, has been doing, we are getting better, our implementations are getting faster and we've got more tools to manage them. So I do think it is a theme that is definitely sustainable and I think it will carry into our carrier business But I'll let Jeff, who is studying this phenomenon, to add a little bit.

I think you largely covered it Shawn. A lot of the changes are well underway and we are reaping the fruits of those efforts. We do expect there to be some movement around as you would expect puts and takes from quarter to quarter, but the broader trend line is absolutely one of long-term improvement. And it is, as you can imagine, an area that I plan to spend a lot of time on going forward.

Thanks guys.

Great, thank you.

Frank Sparacino, First Analysis.

Hi guys. Shawn, just coming back to the private exchange for a minute, I guess just maybe further clarification on the first question in terms of do you think that's a 1%, 5% type of headwind as you enter 2017? And then when you look at longer-term in that space, what makes you optimistic? Are there certain parts of the market, whether it be some of the large [base] employer groups that are maybe moving in that direction? Or any additional color would be helpful.

Sure well I'll start with the second half. The private exchanges are a terrific overall service offering and benefits -- a way to really put a wide array of benefits in front of an employee base. And we find in particular types of employers and industries tend to be -- to see tremendous lifts. So the economics and the multi-year view and the way you can bundle products together in private exchanges is definitely, to me, as someone that has been in this industry for a long time is every bit as exciting. And we're every bit as optimistic about what it can do for employers and the employee and their family, as say four years ago when I think the broader market was just getting that term for the first time.

So there was a lot of enthusiasm in the first couple years of the roll out of the private exchanges and coordination with Affordable Care Act and all the national conversation. I'm more convinced than ever that the economics inside those private exchanges work very well for a percentage of employers. And as the private exchange operators fine-tune their messaging and do the work that they need to do in the selling cycle, I think we will see expansion of the private exchange market no doubt.

And to the point of headwind, we think our revenue at Benefitfocus on private exchanges will actually grow next year. So there's no headwind as far as you mentioned 1% or something like that. So we would say that private exchange revenue at Benefitfocus would be up next year, it just may not be up at the rate it was from say two years ago at that initial rate that it had been growing at. I think longer-term it does sort of equal out and we'll be stronger, but just to clarify that point.

Thank you.

Sure.

John DiFucci, Jefferies.

Hey, guys. This is Joe on for John. Thanks for the question. It looks like after a bit of a disappointing year in carrier, you're starting to have some positive momentum there with the executive forum and some upsell opportunities. Can you just talk about the medium-term and longer-term outlook in that business? Do you think we can have a path to double-digit growth again? Thanks.

Sure, yes we are particularly excited I would say for a lot of reasons on our carrier business. And so we did host a first carrier executive forum in Charleston. It was terrific attendance of SVP and EVP level execs from health and life insurance companies. A couple of things that we really see happening and I mentioned it in some of the remarks.

With the Affordable Care Act and the individual market and this price increase that is happening we're kind of going back to a national conversation about that. And to me and to the carriers what it is reemphasizing is the value of employer-based benefits which is the platform that Benefitfocus provides. And so the carriers are looking for ways to win more employers, provide more value to employers, and particularly offer more products. Health insurance companies are looking at partnerships so they're adding new products themselves that they can sell into the employer space. And so we see a real -- a growth in our carrier pipeline around these themes of employer-provided benefits bundling programs together.

A couple of areas of real strength that we see and we mentioned last quarter and this quarter a little bit, our eExchange, which is actually our data transformation service. We've been doing some work in that area and have had some several deals where carriers are using our eEnrollment today but they want to expand and offer eExchange and perhaps eBilling. So bundling of products. But we definitely see an uptick in the growth and we do believe we can get back into the double digit growth in the carrier business in the years to come for sure.

Okay thank you and then as we see a mix shift slow down in logo wins, but more of a mix shift towards these large national accounts, can you just break down the value proposition both revenue and profitability wise of the larger deal wins versus the smaller ones? I would assume there is an implied discount per user, per month. So I was just wondering if you could kind of talk about the value proposition? Thank you.

Yes totally. Well, on the economics they are similar. So actually it's a phenomenon that we see in the benefits space with our bundling. When we sell to a large employer say over 10,000 employees they tend to actually buy more products. Generally because they're coming away from perhaps a consultant or outsourcing arrangement and they are used to having a pretty broad bundle of services.

And as we've introduced more services and more products over the last couple of years I think it's one of the keys that's helped unlock this national accounts space for us so we can do that analytics for them, our Service Center, the Benefitstore. Of course the great mobile capabilities we're providing, the Benefitfocus platform. The actual discounting, the PEPM, we don't discount a lot for size. Obviously there's some economies of scale to us to having a 40,000 employee customer on the Benefitfocus Platform and we share that in the appropriate way with employer.

But in our gross margin profile would not look any different, we would say, in the national accounts space from downmarket. Matter-of-fact you could argue conceptually at least that might be a little bit better because we can tend to have more products bundled together and we get tremendous leverage. So we will be doing one payroll data exchange, we'll do one health plan with that large employer. Whereas if we were doing say 10 or 15 or 20 smaller employers we have all that duplication of data exchange. So there's actually some pretty good economies that go up market.

And maybe just a last thought. Because we are so expert at these enterprise carrier arrangements, long multi-year agreements, substantial volumes on the platform, I think we're uniquely capable of interacting with these large employers and understanding the size and scale and how to manage them. So I think our brand is getting stronger and stronger in that market at a pretty rapid clip.

Thanks, Shawn.

Sure.

Ross MacMillan, RBC Capital Markets.

Thanks so much. Shawn, I just wanted to ask just so I am clear in my head, I missed some of the comments earlier, but I think you said although obviously all the employer units are down, the average deal size was up on average 125%. So that would suggest that it was pretty nice healthy growth in, call it, ACV or UARR. I was coming up somewhere north of 30% and I just wanted to make sure I was understanding that correctly. Maybe you could just confirm my math there, if that's fair.

Sure, well I can say you're right, our average deal size is up 125% over the prior year. The other thing I would say is our total net subscriber adds for the year is up year-to-date. I don't know the 30% number, but I think the overall impression that you are I think giving me is correct, I'd have to think about the ACV number a little bit but --

Okay that's helpful. And then just, I'm sure you've had the question on the private exchange partnership you have. I think you made a comment that you are optimistic that maybe by second half of next year we could see things begin to pick up in that market. I wanted to get, just test you on Cadillac tax or other potential drivers for that space that you could see emerging on the horizon. Is there anything in particular that makes you more optimistic about that market looking either late next year or into 2018?

Yes it's a good question. To me, as an employer myself who buys benefits and then someone that studies this industry obviously every day, the economics of the private exchange are very compelling for a certain percentage of employers. Certain profiles, employers and workforces if they move to a private exchange can really gain significant I would say and multi-year cost curve management. So typical employer sees an increase in their health insurance every single year basically forever.

And what the private exchange operators are doing and particularly the ones that are using the Benefitfocus Platform because of the technology, the way they can bundle products together, the analytics they can use, and some of the ways they can really negotiate these programs over multiple years, they are able to get control of these healthcare cost and that is a very compelling thing. In addition they are able to put more benefits in front of the employer -- employee so things like voluntary benefit programs, other HSA related programs really make for a great experience for the employee.

And for whatever reason this particular year 2016 across that industry was not as strong as we'd seen in the last couple of years. The value proposition to me is every bit as compelling. With the Presidential election I think a lot of questions will certainly get answered next week. I think regardless of which way that election goes we see tailwinds from that being resolved, we see carriers and I think private exchange operators investing in the private exchange and marketing them. And I think employers will be probably more free to begin make those decisions again next year.

Great, thank you.

Thank you.

Nina Deka, Piper Jaffray.

Hey, guys. Congrats on the profitability this quarter.

Thank you.

Thanks.

So let's see you mentioned that the productivity of the sales team focusing on the national accounts is directionally performing better than originally expected. Are you also seeing any tailwinds from the SAP partnership with respect to the national accounts? Do you believe that is also enhancing your visibility and helping sign some of these larger deals?

Yes, great question. Definitely SAP and the relationship and the great work that we are doing with them, I mean we are jointly at their conferences, working with their customer base and their new sales activity. The integration that we now have with SAP employee central and the way that the Benefitfocus Platform and the SAP products work is getting better each quarter. We had our big Autumn release in September and in December our Winter release.

We continued to add great capability to make the Benefitfocus Platform, the SAP software work even better. So as we naturally interact with these national accounts, these jumbo many times big global organizations, that relationship and the work that we do together certainly helps us. I think that combined with what was mentioning earlier, Nina, about the bundle of products that we are now offering in the market and our seasoned salesforce. The tenure really across our employer sales team but in particular in our national accounts team, we have many people now that the with us two, three, four, five, six, even seven years, which is way back for us since starting the employer business. And there's been some great promotions in there this year and just really that team has got their stride.

So what we are doing is we're naturally backfilling the folks that we were promoted into those national account roles and into management and we're aggressively hiring into our what we call our large employer activity 1,000 to 10,000 lives. We have some great folks that are joining the Company and as Jeff can add we have all that baked into our plan. And we'll continue to be EBITDA profitable even as we significantly ramp our sales team. And the SAP relationship is a big part of that go forward as well.

Thanks, that's helpful, and then also how long do you think it will take for the newer reps who will focus on the less than 10,000 employer market to be fully productive?

Yes we have a natural onboarding cadence. Our model, our thesis, I guess a year or two before went public going back four or five years, has really gotten dialed in. We've gotten I'd say pretty expert at the type of salesperson that can be very successful at Benefitfocus because we want them to enjoy a lot of success. And with our brand becoming more well known, with our product portfolio becoming more broad, and our -- more folks or more companies know about Benefitfocus and we are really becoming that platform standard, it gets quicker and quicker for these folks to come up to speed.

And our training, our onboarding process, we've invested a lot in that area of the last couple of years. So there still is sort of a break in time and then we have the natural selling season. So our plan is to bring folks on now and have them trained and in the field so that they can sell into the second and third quarter of next year, which obviously activates revenue in the third, fourth quarter of the late 2017.

Yes, and it's Jeff, and I would add that we as you know moving to the three-pronged model from the historical one team approach, there are different ramp times depending upon the specific among back to base in particular who we see ramping faster. And in particular and their ability to cross sell some of the sales cycles are shorter et cetera, more at-bats. Versus the enterprise at the higher end, the more longer-term sales cycle, more sophisticated customers, those folks take a bit longer.

Okay thanks and then just one more. The carrier executive forums, was there anything actionable that came from those meetings in terms of potential new product development and what might be the time frame of any impact coming from these meetings?

Yes great question. Yes that's the actual design of the meeting and so it was a working group. As we mentioned 20-plus folks, 20 large carriers and we talked at length about their plans for the new year, areas of investment for the particular insurance company. And actually put some work groups together so there's a fair amount of work that came out of that. As we plan our R&D budget and our product roadmap for the carrier business going into the new year.

We plan to hold that group roughly semiannually so what we'll do it every six months or so and there's good follow-up from each of the participants. It was just great to see that. Rarely do you have health plans and ancillary and life insurance companies in that same type of intimate format. And really a lot of strength going on in that area so more to come. We will keep you posted.

Great, thank you.

Thank you.

Thank you.

(Operator Instructions)

Ladies and gentleman we've reached the end of the question and answer session. I would like to turn the call back over to management for closing remarks.

Super. Well thanks, everybody, for joining the call tonight. And just incredibly proud of all of our Benefitfocus associates for reaching the major milestone of EBITDA profitable and such a great open enrollment season that we are a now in. And really proud of you and really excited to be working with Jeff in the executive team here. He's become a quick friend and we look forward to he and I doing many, many calls together. So thanks so much and have a great night.

Thanks everybody.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.