Benefitfocus Inc (BNFT) 2016 Q4 法說會逐字稿

Greetings and welcome to the Benefitfocus' fourth quarter of 2016 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Bauer. Thank you, sir. Please begin.

Thank you, operator. Good afternoon, and welcome to Benefitfocus's fourth 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 then we will open the call for a Q&A session.

As a reminder, today's discussion will include forward-looking statements such as first-quarter and full-year 2017 guidance and other predictions, expectations, and information that might be considered forward-looking under federal securities laws. These statements reflect our views as of today only and should not be considered as representing our views as of any subsequent date. These statements are a subject to a variety of risks 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 in a changing regulatory environment, that could cause actual results to differ materially from expectations. For a further discussion of the material risk and other important factors that could affect our actual results, please refer to our annual 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, everyone and thank you all for joining us today. The fourth quarter capped a strong year for the Benefitfocus team filled with strategic and financial accomplishments. With an expanding product portfolio, the largest sales force in the company's history, and long-term secular and industry tailwinds at our back, we are well positioned as we head into 2017.

Looking back at the full-year 2016, it was a very successful period for Benefitfocus in the validation of our business model and strategic positioning. In addition to our continued market-leading pace of innovation and the roll out of our enhanced go-to-market strategy, we're very proud of our strong financial performance, which includes total revenue of $233.3 million, annual revenue growth of 26%, gross margin improvement of nearly 400 basis points, and achieving adjusted EBITDA profitability for the second half of the year. Additionally, our customer relationships remain strong as evidenced by revenue retention rate that once again exceeded 95% for the year and fourth quarter.

In the fourth quarter, we delivered total revenue growth of 15% year-over-year and adjusted EBITDA of $2.9 million or 5% of revenue further demonstrating the benefits of our growing operational and financial scale. Also during the quarter, our employer revenue segment increased 21% over the prior year as our installed base of large employer customers increased to 833. The growth in our employer business reflects continued momentum with enterprise accounts and solid traction from our expanded portfolio of products from both new and existing customers resulted in continued PEPM expansion.

However, we did see the impact of the presidential election on new customer additions in our seasonally light fourth quarter. As healthcare was a major theme of the election, we saw employers pause their decisions as they processed the likely changes to the Affordable Care Act, a dynamic that also impacted contributions from our private exchange segment. While the timing of regulatory changes impacting the near-term, we believe these changes will be a tailwind to our business as we have seen in prior election cycles.

2016 was a milestone year for Benefitfocus as measured by our progress across each of our primary corporate objectives for the year. Our first goal was profitability. In 2016, we achieved adjusted EBITDA profitability in Q3 a full quarter ahead of our target and expanded on that trend with additional EBITDA improvement in Q4. These results demonstrate the financial benefits from our growing operational scale, which we expect to continue into 2017 and beyond. I'm very proud of the Benefitfocus team as they completed this transition of profitability while continuing to grow our business.

Our second goal was to implement a new segmented employer sales structure. To execute on our land and expand sales strategy we moved to a multi tiered sales model for our employer business at the start of 2016. Our new segmented model allows us to better address our diverse employer market with the following recently rebranded sales coverage team. Enterprise accounts, which focused on employers with over 10,000 employees, strategic accounts, which sell to employers with between 1000 and 10,000 employees and our back-to-base team, which sells to our large and growing installed base of employer customers.

And our third objective was to drive product enhancement and platform efficiencies to unlock the benefits of operational scale. The open enrollment period remains the most important performance gauge for Benefitfocus, and I was very proud of how platform responded this year with our best open enrollment to date. We delivered a 52% improvement in system response times, system uptime in excess of 99.9%, and zero unplanned hardware downtime during open enrollment.

The multiple benefits of our solutions performance include positive customer experiences, particularly enterprise accounts, higher revenue retention rates, and continued expansion of our gross margins. As we exited 2016 with an annual revenue run rate in excess of $250 million, we believe our business model has passed a significant threshold, one which reflects the dividends from our technology investment, market momentum, and business scale and together positioned Benefitfocus to drive long-term value to our shareholders from both top line growth and profit expansion.

Let me now share two key customer wins from the quarter. Within our employer segment a large manufacturer with nearly 13,000 employees selected Benefitfocus marketplace, BenefitStore, Benefits Service Center, and Core Analytics. This enterprise account chose our platform to provide a better overall user experience and to help their employees make better decisions, reduce administrative complexity and manual processes, and promote the value of their total awards offering, which contribute to the goal of being an employer of choice.

In our carrier segment we engaged with an existing single state Blue Cross Blue Shield customer who is utilizing our platform for roughly 10% of their membership with the remaining 90% supported by Legacy in-house systems. The customer conducted an application rationalization study and elected to migrate all of their membership volumes to the Benefitfocus platform.

The carrier will benefit from improved functionality, faster time to market, reduced operational expenses, and unified customer experience as they consolidate their enrollment and billing systems onto our platform. This transaction and similar ones from throughout 2016, will not only drive meaningful recurring revenue growth but also serve as templates for our refreshed carrier sales process, one focused on cross-selling into our installed base and implementing adoption strategies to increase our company's share of membership volumes.

In Q4, we also took two very important and validating steps towards establishing Benefitfocus as the market standard. You may recall in early 2016, we introduced the Certified Carrier Program to provide our carrier and employer customers access to a pre established product configuration and integrations across leading life and ancillary carriers. The program drives operational efficiencies for all participants lowering distribution costs and increases sales of [volunteer] products across our installed base of employers and carriers.

During the quarter, Accord the global data standard-setting body for the insurance industry, adopted our technology as the industry first standard file format for the life and ancillary insurance carriers. This is a significant achievement; One that provides an independent validation of the flexibility and completeness of our technology standards and Benefitfocus' increasing market leadership position.

In another key validation achievement, The Hartford signed on as our first Certified Carrier Program customer. The Hartford selected Benefitfocus for the overall group set up, operational efficiencies, and ability to increase product sales on the Benefitfocus' platform to be sponsored enrollment distribution channels. Once fully deployed, we believe that the Certified Carrier Program will generate meaningful recurring revenue for our business.

Moving on to our product initiatives, in the fourth quarter we demonstrated that innovation remains core to our culture. We announced a number of new features including our premium billing capability, which streamlines benefits administration for large employers by providing additional visibility to reconcile carrier billing. And speaking of innovation, in just a few short weeks we will showcase our terrific new product roadmap at our annual One Place user conference in Orlando. Our keynote will be webcast on March 14 and I encourage you to join to get a glimpse of some of this year's exciting advancements.

Turning to 2017, the company continues to be well positioned to benefit from a number of important market dynamics. We believe that our platform scale is a competitive advantage and that we are becoming the platform standard. This is evidenced by both our employer and carrier adoption, our strong open enrollment system performance, and our continued R&D investments.

Additionally, we have made significant strides in growing and improving our employer sales team and remain optimistic that the private exchange market holds the potential to return to meaningful growth in future periods. However, as mentioned earlier, in the near-term we are incorporating a more cautious approach to our 2017 Outlook, which reflects the timing of the implementation of the new administration's health care policies.

Let me address several of these items in more depth starting with an industry perspective. As we saw with the new Affordable Care Act in 2009 and 2010, there was a short-term impact to new customer signings while employers and carriers digested the regulatory and industry changes. That period was followed by a significant acceleration in both of our businesses as employers and carriers moved away from their legacy systems to our cloud-based software-as-a- service platform.

Because we deploy our software in one code base with new releases of functionality four times per year, our customers were able to more rapidly and cost-effectively adapt to these large industry changes. As in the past, we expect complexity and change to drive growth in our business.

We also believe employer-sponsored benefits will be even more valued and favored in the coming environment. One example is that an emphasis on consumer directed healthcare, high deductible health plans, health savings accounts, and voluntary benefits will combine in a new powerful way. This shift to a more personalization of benefits will put additional strain on Legacy Systems and paper-based processes further highlighting the tremendous value of the Benefitfocus platform.

Given the new administration's enthusiastic support for consumer directed healthcare and tax reform, we believe employer-sponsored benefits will only grow in importance for our market segment. This positions us well to capture additional market share over time. Also, as noted last quarter, private exchange growth was muted in 2016. We remain positive about the long-term value proposition of private exchanges. We have increased our joint sales activities with these partners. Entering 2017, our partners have fine-tuned certain product offerings, tightened carrier integrations and focused on personalization of benefit designs for each employee and their family.

From a company perspective, we're focused on expanding and strengthening our sales and partner channels. As we mentioned on our last call, while last year's employer sales model changes to successfully accelerate our results in both enterprise and back-to-base accounts, longer enterprise account implementation timelines, and fewer strategic account sales reps during 2016 will impact our 2017 revenue growth trajectory. Importantly, however, we achieved our Q4 sales hiring target and now have the largest sales force in our company's history. This includes growing our strategic account team, which now stands at over 35% more reps than at the end of Q2 2016.

Similarly, we have expanded the size of both our enterprise accounts and back to base teams to support the strong momentum achieved by both of these teams in 2016. Now that we have the team in place we have accelerated our investment in our new and existing sales associate enablement program and remain confident that as our team continues to ramp and build tenure we have positioned Benefitfocus for a successful 2017 selling season. Additionally, building a vibrant partner ecosystem remains a major focus and we have made substantial enhancements that should begin to benefit the company in 2017.

In Q4, we formally launched our BenefitStore preferred partner program to increase our sales velocity within the brokerage community. We have launched the program with two large brokerage agencies. We feel that this is an important milestone for our company as we build our brand within the brokerage and consulting community with a formal set of programs that serve them and their clients. The size and attractiveness of the Benefitfocus market opportunity remain exceptionally compelling and in the year ahead we're focused on the following three priorities, that will position us for continued long-term success.

Our first priority is to grow our business. We have made significant investments in our strategic enterprise and back-to-base sales teams and believe we have the right group in place to have a very successful 2017 selling season.

Our second goal is to continue to improve profitability as well as to achieve positive free cash flow by the fourth quarter of this year. With our technology platform and services demonstrating operational scale we also expect both gross margin and EBITDA margin to improve meaningfully with the growing size of our business, which in turn will drive positive free cash flow over time.

And our third objective is to drive continuous innovation and efficiencies in our world-class product and platform for our customers. The benefits administration market is massive, complex, and evolving. The wider array of health plans and the growing importance of cost management for both employers and employees in a dynamic environment underscore the value proposition of our flexible modern and cloud-based software platform for both employers and carriers.

Embedded in our best in class platform are more than 1,500 data exchange connections and an unmatched partner ecosystem that has been built over the last 16 years. These represent huge strategic advantages that not only create significant competitive differentiations but also enable our business to enjoy growing profitability while still being an early stage of a massive market opportunity. With 833 employer customers out of 18,000 large employers in the US, we have a long runway to expand in front of us.

I want to take a moment to thank all of the Benefitfocus associates who made 2016 such a terrific year. Thank you for all that you do to make Benefitfocus such a great company. Before I hand the call over to Jeff, we're now announcing today that Jeff has decided to leave Benefitfocus and return to a role in private equity backed business.

Jeff will continue to be our CFO through the end of April to assist in an orderly transition and the closing of our first quarter. I want to thank Jeff for his any contributions in his short tenure, Jeff has had a meaningful impact on the business including assisting us on our path of profitable revenue growth. We wish him well in his future endeavors. With that, I'll hand it over to Jeff.

Thank you, Shawn. It has been a difficult decision making process for me, while striking the balance between personal and professional commitment is rarely easy. I believe the requirements of a high-growth public company environment, when coupled with my weekly commute from Atlanta, make a return to private equity a better match for me at this stage of my career. I want to thank you, Shawn and the rest of the Benefitfocus team for your partnership in my time here. As Shawn mentioned, I will be with the company through the end of April to assist in an orderly transition and the closing our first quarter.

Now, moving on to our financial results, I'm pleased with our strong Q4 results including the early traction from the recent improvements we've made within our sales organization, which represent important input in positioning us for a successful 2017 selling season. I will start with the details of our financial performance for the fourth quarter and full-year 2016 and I'll finish with guidance for Q1 and the full-year 2017.

Total revenue for the fourth quarter was $62.6 million, an increase of 15% compared to the fourth quarter of 2015. This result was within our guidance and reflects contribution from sales of new products to both new and existing customers, high revenue retention, and strong professional services performance. However, as we have discussed, our growth in the quarter was partially offset by the timing of certain new enterprise customer deployment, the impact of our employer sales force transition, muted private exchange growth, and the dynamics of modeling BenefitStore's contribution.

Employer revenue for the quarter was $36.7 million up 21% compared to the year ago period. Carrier revenue of $26 million was up 8% compared to the same period last year benefiting from accelerated revenue recognition from a professional services contract in the quarter. Removing this professional services impact, our carrier revenue growth would have been more in line with the prior quarter's performance as the carrier wins we have highlighted throughout 2016 will not start generating meaningful revenue until 2017. In aggregate, both our employer and carrier segments performed in line with the expectations we provided during our call-- our Q3 call in November.

Breaking revenue down further, total software subscription revenue was $52.5 million representing 84% of total revenue and growing 13% year-over-year. Employer software subscription revenue was $34.7 million and grew 25% year-over-year. The growth in both employer and total software subscription revenue was in line with our expectation. Total professional services revenue was $10.2 million representing 16% of total revenue and up 26% over Q4 2015.

Non-GAAP gross profit totaled $30.9 million representing a 49% non-GAAP gross margin, which compares favorably to the 45% non-GAAP gross margin in Q4 of 2015. This nearly 400 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 57% was down from the prior quarter and year ago period while the professional services gross margin improved to 9%. The sequential and year-over-year improvement in professional services gross margin reflects the continued benefits of efficiencies in several areas of our services organization. Specifically, higher capacity utilization, the merging of certain product specific delivery teams, continued productization of our implementation services, and improved billing discipline continue to drive substantial improvements in professional services margins. Consistent with our typical seasonality, open enrollment drives higher software cost. Year-over-year decrease in software gross margin was primarily due to product revenue mix, a higher allocation of support and infrastructure cost to our software services, and certain nonrecurring charges.

As our platform investments in innovation drive greater efficiencies within software services and the profitability of professional services improves, we remain confident in our ability to achieve 300 to 400 basis points of consolidated gross margin improvement again this year while satisfying the demands of our growing business.

Similar to last quarter, I continued to be particularly pleased with our strong year-over-year and sequential improvements in adjusted EBITDA results. Q4 adjusted EBITDA was $2.9 million or 5% of revenue, which is above our guidance and reflects significant progress from 2% of revenue in the prior quarter and negative 9% of revenue in Q4 of 2015. Our adjusted EBITDA was positively impacted by our revenue growth in the quarter and gross margin expansion that reflected the benefits of our scale, the strength of our platform and revenue retention.

Indicative of our increasing operational scale, during the fourth quarter total operating expense continued to decline as a percentage of revenue on a sequential and year-over-year basis. Importantly, Benefitfocus is committed to thoughtfully balancing investments in our business to drive meaningful growth in both revenue and profitability.

Non-GAAP net loss per share was $0.09 based on a 30 million weighted average shares outstanding count and was above our guidance for a loss of $0.14 to $0.11 per share and the year ago period loss of $0.33 per share. GAAP results for the quarter include gross profit of $30.1 million representing a margin of 48% and an operating loss of $5.1 million translating into a net loss per share of $0.24. For the full year 2016, our total revenue increased 26% to $233.3 million, our non-GAAP gross margin improved to 50%, up from 46% in 2015, and our adjusted EBITDA improved to a negative $1.1 million or a negative 0.5% of revenue from a negative $32.2 million or a negative 17% of revenue in 2015.

Moving to the balance sheet, we had to Q4 with cash, cash equivalents, and marketable securities of $58.9 million. Total deferred revenue declined by $3.9 million sequentially to $75.8 million. As discussed in prior quarters the decline in deferred revenue largely reflects our shift away from lower margin carrier professional services engagement. On the statement of cash flows, cash used in operations totaled $2 million for the quarter and compares favorably to the $5.9 million used in operations during the year ago period. With our cash flow trajectory strengthening and as we continue to grow our business with our improving margin profile, Benefitfocus is on track to become free cash flow positive by the fourth quarter of this year.

Turning to guidance, as Shawn previously highlighted, we believe we are well positioned to gain share in the massive benefits administration market and experience the benefits of our growing operational scale. We anticipate the first half of 2017 to be constrained by the factors we have previously highlighted. In addition, we expect Q2 growth rate comparisons will be impacted by the shift of ACA revenue into Q1 from Q2. However, as we begin to recognize revenue from certain enterprise accounts we signed in 2016 and generate new orders from our expanded sales force during the 2017 selling season, we anticipate a higher second half revenue growth rate.

Now moving on to guidance for 2017. For the full year, we're targeting revenue in the range of $263.5 million to $268.5 million. From a profitability perspective, we expect adjusted EBITDA of $13 million to $17 million, a non-GAAP net loss of $11.5 million to $7.5 million, and a non-GAAP net loss per share of $0.37 to $0.24, based on 30.9 million weighted average shares outstanding. Additionally, we expect free cash flow, which we define as cash provided by or used in operations, less capital expenditures, to be positive by the fourth quarter of 2017.

For the first quarter of 2017, we're targeting revenue of $62.5 million to $63.5 million. We expect adjusted EBITDA of $2 million to $3 million, a non-GAAP net loss of $4.5 million to $3.5 million and a non-GAAP net loss per share of $0.15 to $0.11, based on 30.6 million weighted average shares outstanding.

In summary, 2016 was a milestone year for Benefitfocus, one that positions the company to accelerate the benefits of operational scale and strengthen our leadership position in the multi billion-dollar benefit management market. In 2017, we are focused on driving long-term shareholder value through top line growth and improved profitability, which together we forecast will drive to a positive free cash result for the company by the fourth quarter. 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)

Richard Davis, Canaccord.

(Technical difficulty) -- working with brokerage on that side of the equation and the partners and all that, is there or any kind of -- threading the needle is not the right word but in terms of channel relationships with regard to your existing customers what you need to navigate there? And then, the second question is, I know you can't guide for 2018 but just notionally does this feel like it's a business that something that could be 20% plus grower? Or is it really kind of the 15% to 20% grower longer-term? Because you've outlined all of the opportunities so that self-evident, so those are the two questions I normally have to ask. Thanks.

Thanks, Richard. Yes, we just completed, I think, a terrific year 2016 and for me, as a Founder and watching Benefitfocus grow over the years, I think the management team has done a great job of getting the Company profitable again. And now, we focused on that profitable from adjusted EBITDA standpoint in 2017 and beyond, and getting to free cash flow a positive is a great milestone for us so we are really proud about that.

And as we updated our employer sales team last year as we've outlined on the last couple calls, our enterprise team is 10,000-plus, is really surging. So we had a terrific year. The timing of some of those larger deals, obviously, they go live a little bit longer than our midsize employers because that's having a little bit of near-term impact as we talked about and then the Benefitstore that way we've begun to work with brokers.

So those things, that we talked about in the last call, I think the management team is really addressed significantly increase our sales team, our strategic accounts, which were now calling it 1,000 to 10,000 account groups it's over 35% larger than it was the middle part of last year. So all the things that we knew about as we came through that transitional year to profitability, the management team has done a terrific job of setting up for success in 2017.

The thing that the changed since the last call is really the presidential election. I think that was something that got attention, obviously, from our entire country and as the new administration, new Congress, lay out their proposals to change some of the Affordable Care Act interestingly enough, Richard, the actual proposed updates and changes are all very pro-Benefitfocus.

They would be very positive for our company things like moving to more consumer-ism and healthcare, more consumer directed health plans, high deductibles, bigger emphasis on health savings accounts. Those all need to be wrapped with voluntary benefits and another programs, which we think is a recipe for great success for Benefitfocus with our modern platform software-as-a-service delivery model and we think it's going to put a lot of strain on Legacy platforms.

We did see this in 2009 and 2010 as the Affordable Care Act was designed and implemented a little bit of slowdown followed by an acceleration. So yes, your point about what should the growth rate be going forward for the Company as we come through this, I call it short-term or near-term macro environment with healthcare. We definitely the company in the market size would line up for a 20%-plus growth rate, absolutely.

We only have 833 out of 18,000 large employers, we've got approaching 5%. The runway is long, we clearly are reaching incredible milestones, [$250] million revenue run rate, the system performance for open enrollment was just fantastic. So we are very optimistic about the business in the long term and appreciate you asking that question because it's something we really have thought a lot about as we prepared our plan for 2017.

Your quick question about the partnership's, we did introduce a new preferred partner program in the quarter, as we rolled out the Benefitstore we've seen a lot of excitement by brokers around the country. So we wanted to formalize the program for them that would give them insight into the Benefitfocus Benefitstore products, help them work with their customers, give them a way to use the Benefitfocus platform and the Benefitstore to their customers advantage.

We thought that through, we've been very patient in the designing of that and it might actually be a little bit of the opposite of the way you ask the question. We think it actually might -- we think it will remove some of the overlap of the way brokers work with Benefitfocus today and provide them a nice on ramp to recommend our Company to work with the consulting community and we think it fits nicely with our ecosystem of carrier partners, and the other channels that we have. So again we're -- thoughtful question, Richard and I appreciate it.

Very helpful. Thank you so much.

Sure.

Frank Sparacino, First Analysis

Hello, guys. Maybe first off just on the client adds, obviously 2016 in terms of the absolute number down from what we saw in 2015. Shawn, I don't know if you can provide some color in terms of -- I've seen the average client size was higher this year versus last year, maybe with respect to the total live data to the platform. Any comments you can make there?

Sure. Yes, as we talk about the last couple of quarters, it really leading into 2016 -- a year ago this time, we announced that we had a new enterprise sales team, focus on calling on 10,000 or more employees.

That was the result of really some key wins we had in 2014 and 2015 as larger and larger customers were learning about Benefitfocus, I think as a result of our IPO building our brand, our sales force was getting bigger. As we took a portion of our sales force and really dedicated them to that market, they've had a terrific year. So the overall number of client adds wasn't as great but the actual size of the customers were materially bigger.

We talked about, in the last two quarters of one customers over 120,000 employees defiantly were over 50,000 employees so overall, we are seeing the average size go up. We are also seeing employers attach more products.

Our PEPM has gone up consistently, which we think definitely translates into even higher retention rates. Although we already have, I think, probably industry high, better margin over time margin expansion. And really, at the end of the day the customers deriving more and more value from the Benefitfocus platform.

Now, the thing that we did in this last two quarters, was go back into the strategic accounts team, which sells in the 1,000 and 10,000 lives and really increased that team significantly. We did some internal promotions, which we're always very proud of, we have a great management team in there and that team's larger. We've done a lot with our onboarding, training, and working with the team to make sure they all get ramped up for this year's selling season.

I think all very good moves for the Company in the long term, in the near term, I think coupled with the election and the whole healthcare dynamic, as we mentioned in the remarks just got us -- we laid out a little bit more cautious Outlook for 2017 but as we get into the second half of 2017 we would see revenue growth rate accelerating from all the factors that we were discussing.

The only other thing I think I'd add, Frank just to -- from a numerical perspective. On the average deal sizes, they were up slightly in the quarter continued progress there, and then up more significantly obviously year-over-year when you take all four quarters together continued momentum on that front specifically.

Thank you, guys. I'll jump back in the queue

Great, thanks.

(Operator Instructions)

Ross MacMillan, RBC Capital Markets.

Thanks for taking my questions. Shawn, I was just curious given the Q4 customer adds obviously were a little bit below your expectations and you mentioned the election. Any signs of that beginning to fall or any signs as we sit here in mid to late February that we're moving past that freeze?

Yes, yes. I would describe it as our pipeline in our activity is really growing very well. But with a combination of our the number of salespeople that we have, the increase size of the team, and for the brand awareness that we now have typically in the enterprise market and the Back-to-Base team, so there's I would say very good activity in the sales pipeline.

Another maybe more qualitative thing that we're seeing, Ross, is we, as many folks know, do our annual user conference, we call it One Place it's where all the customers come together. Our registrations are up year-over-year, which is a sign of our customer community but also prospects. But we do a local version of that we call it One Place Local, and demand for these local events has really increase substantially. So we have made commitment to do 56 One Place local events around the country, and the ones that are in the first quarter have, I would characterize as, terrific participation.

In fact, is one in New York City tonight, so if you are New York, anybody you want to stop by our One Place Local, you can check that out. This is where a group of folks get together and hear about that Benefitfocus platform, our state of employee benefits, industry-leading research. So there's a lot of great activity in the benefit space, I think it's just a matter of time before the employers begin to make their decisions of how they will implement any changes that are coming with the new policy.

That's helpful. And then, just to be clear, I think Jeff, last quarter you said you would hope to grow a bit better in 2017 than your Q4 FY16 growth rate, turned out it's at least at the midpoint, slightly lower. Is all of that just a reflection of the bookings environment that you saw in Q4 or are there any other factors that have contributed to that slightly lower growth Outlook?

Sure, Ross. When we spoke last quarter on the potential trends coming out of at the point at which we were in Q4, of 2016, and looking ahead into 2017, I think our commentary specifically was that we anticipated a second half higher growth rate on that front. So I think we still envision that and that is reflected in the growth -- in the projections we provided. I think the one meaningful variable that we have talked about that happen after we gave that guidance specifically, was the outcome of the election as Shawn talked about on the call.

In the just one follow-up maybe, Jeff, on gross margins for the software line, because we're slightly lower, but you made some comments suggesting that, that was going to turn around. Maybe you could just drill down on that and give a little bit of color as to why those trended down and maybe why and when they will begin to improve again. Thanks.

Sure. I think we are in aggregate very pleased with the gross margin performance of the business up 400 basis points for the quarter and for the year and up over 1,200 basis points over the last couple of years.

We like what we are seeing when we look ahead, if you apply a rough rule-of-thumb and just look at our incremental revenue what margin is that coming in at, i.e. what additional cost are we having to add to support that revenue in Q4. For 2016, that was somewhere around a 65% to 75% metric again just the yardstick there. But it gives us encouragement, I think, something that we've proven the ability to do over time and we do expect to continue to see.

For software specifically, as we talked about all have some product in revenue mix dynamics as well as some overhead absorption as we continue to see scale and the rest of the business but grow our software team more in line with revenue. We do expect some meaningful economies of scale and efficiencies to kick in, in addition to the overall scale of the software and related support side of the business, just getting bigger, getting more efficient, making better use of the tools and the resources that we have available to us.

We do anticipate increased automation. That's on our technology roadmap. Continuing to take manual elements out of the aspects of the product out of it.

Then infrastructure is another major area that we believe there's room for improvement. So there's no shortage of opportunities and I think we are very optimistic about being able to continue we pointed that out as well in our forward-looking commentary about adding another 300 to 400 basis points to the overall gross margin in 2017.

Thanks, so much.

Thanks.

Brian Peterson, Raymond James.

Thanks, gentlemen. So, Shawn, I just want to be clear on your election related comments. Are you seeing a delay in potential prospects making a buying decision or is that also a dynamic for signed customers are actually delaying implementation.

Good question. Thanks for clarifying. There's no delays on implementation's. As a matter fact the customer community is very active and our Back-to-Base selling team had a terrific 2016 and already off to a good start in 2017.

It's more around the prospect community and I think this is pretty broad-based in just the benefits and healthcare space. We don't see anything different in the competitive environment. Matter fact, I think we are in our strongest position that we've been in as a public company given the size the scale, the performance of our system during the open enrollment period was just best we've ever seen, which is a testament to our engineering team.

Really a terrific system uptime 99.9% and a great system speed. So I think what we've seen is just, I called it a short-term or near-term pause as prospects evaluate, talk internally, interact with their company management about their strategy around benefit. All of it is really leading to, I believe, what would be a very nice tailwind leading to consumer-ism, a wide array of benefits, more emphasis on shared cost model, health savings account adoption, but also other types of account based products.

Those will require more voluntary benefit programs to fill gaps each were purposely built for. I think that will put strain on Legacy Systems and Legacy vendors who operate more on call center model or paper-based system or on prem. So it's definitely just the timing of how the implementation of some of the things come.

Got it. Thanks for clarification. So if I think about how that relates to the 2017 revenue Outlook, how much visibility do you have into that number? Or maybe asked differently, if I look at the first-quarter guidance versus the full-year guidance, how much of that you already have under contract?

First quarter, we had almost all of it under and very high degree of 2017 revenue

I think as you work into the year as you would expect that visibility goes down as it is driven by -- not to the tune of the majority of our business, but the new incremental contribution from our revenue standpoint to our 2017 result, is driven by the new business we are adding and we have the dynamic of a busy season. Our peak selling cycle comes in Q2 calendar Q2, a lot of other companies will see that more in a traditional enterprise sales cycle in Q4.

In that kind of a scenario, we would arguably have more visibility. If we were calendar year, because we just be coming out of that and in a calendar Q4. But we have that Q2 point, which is an important period for us heading into Q3 as parts of additional revenue contribution.

What we do have, as you would expect, we do have visibility into and as far as leading indicators go is our pipeline, and the dialogues that our salespeople are having out in the market [in active] sales cycle today. So those certainly provides us and that is up in terms of activity levels from where we were last year.

I would add another important component. Achieving EBITDA profitability and seeing free cash flow of profitability or positively free cash flow by the end of the year, we have great visibility into how the business is functioning.

The margins are improving, the profitability is improving. So as we look out to 2017, I think we've got some great levers and we as a management team always plan this once we got through $250 million in run rate or so, is to add revenue plus the profitability together and have both those levers to drive and create value in the business. We are really proud of the accomplishments and the path that we're on, and we think that's going to make the Company much more valuable over time.

Got it. Thanks, guys.

Thank you.

John DiFucci, Jefferies.

Thank you. Maybe this answer is implied in what you said about free cash flow being positive by the fourth quarter, but do you expect free cash flow profitability to be sustained from the fourth quarter onward, guys? Or is it -- do you expected it to be on an annual basis like how should we be thinking about that going forward?

Good question, John. It's a milestone for us that we're very excited about just as we passed the EBITDA milestone this year, and it's one as with EBITDA that was newer for the Company at least since coming public. I think we've quickly come comfortable with the have good line of sight visibility into it and view EBITDA based on our guidance is something that we certainly expect to stay positive. And EBITDA -- focusing on EBITDA and just obviously is a proxy for our free cash flow guidance.

And we do expect that free cash flow as albeit lagging EBITDA by about a year to be positive. In terms of it staying positive, it does have a bit more of a seasonality to it, particularly Q1 for us calendar Q1 for us is more of a cash expenditure heavy period of time. We have just a lot of, in addition to things like bonus, and what you would expect to see from a compensation cost impact in Q1.

We also pay for a lot of our software services, subscriptions, enterprise systems, et cetera in Q1. So Q1 for us is typically a low a negative cash flow period of the year.

While we expect that to be less of a cash use certainly as we head on from the Q4 milestone next year we are anticipating as we get into beyond those periods for that to be a sustained positive number when you look at it across a period of time. So that was, put differently we would expect it to be positive for 2018.

Okay, great. That's really helpful, Jeff. And the second question I have -- and last question I have, is for both Shawn and Jeff and it's a difficult question to ask. But Jeff your the second CFO to leave after only a very short stint. So rather than us are trying to guess some more on this tomorrow, especially given the guidance for this year, is there any more detail you can give us on this, just because it just I'm sure it's going to make people question in a lot.

No, I understand and thanks for asking the question, John. I appreciate the candor and in all candor, in my response, this is important for me to articulate that this was a very difficult decision. I was attracted to the Company with -- and remain very enthusiastic about its prospects, the market opportunity, the franchise in its position within this market were, are, and will be very compelling to me.

Fundamentally, though when I married the dynamics -- for me of the commute from Atlanta, and the demands of the public company, and the personal sense of duty and obligation to be here as much as possible, as part of his team and making the Company successful going forward. I really had to start to weigh the trade-offs that I was making on the personal front and I do think a return to PE provides for me at this stage of my career, a more balanced and matching up with some of those dynamics for me going forward.

But I owe a lot to the team here I have enjoyed my time here and will be here through the end of April to close out here in Q1 and do what I can to make the transition as smooth as possible.

Okay. Go ahead, Shawn. What your comments?

Yes, I would just add, first of all, Jeff's done a great job. He really helped us with his private equity background, look at the Company differently, I would say really enjoyed working together even though his tenure was short.

The results have been strong, the way that we look at the Company is through Jeff's lens in his eyes have really helped us. I think you're seeing that in the profitability, the updated EBITDA forecast, and free cash flow and so forth. It's been good but at the end of the day, the dynamic with having an opportunity -- we didn't really mention it but his next opportunity has a base in Atlanta, so be able to be home a lot more with his family.

The demands of the public company, I think this is first time Jeff has worked in public company setting like Benefitfocus and it's just a big job and requires a lot. I would complement Jeff on his work ethic and his commitment to the Company, I think, matching all that up and having an opportunity to get closer to home, unfortunate timing but I think the Company's better off with a relationship we've had, albeit short.

Okay, well, thank you, guys for addressing that.

Absolutely. Thank you.

Stephen Wardell, Chardan Capital Markets.

Hello, guys. Just wondering, can you tell us about what you're seeing in the market so far from different size employers and from carriers? What are the differences in their interest in the product in the coming selling season? Any comments on how their behavior in this year is this different from last year?

Yes, good question. I think even though we kind of talked about the election and a little bit of the near-term caution that maybe that's bringing. Our sense already even it's early in the year, is that having the election settled and seeing a direction coming is I would say actually putting energy in the market. We did some really great carrier deals in the second half of the year, we did one really large Blue Cross Blue Shield of arrangement at the end of fourth quarter in December. Existing customer they really expanded the relationship with Benefitfocus significantly.

Our carrier team has a lot of good stuff in there pipeline so on the carrier market, I think you're going to see them begin to implement technology that's going to get them closer to the customers more consumer oriented healthcare. That's going to work better with health savings accounts and how that whole dynamic of selling works itself out.

I'm certain that the carriers, particularly life and ancillary carriers, are wanting to move and have whole new set of products around voluntary benefit programs. We're really proud of announcing that Hartford is our first certified carrier partner, which I think is another signal of carrier stepping into technology in particular the Benefitfocus platform in an expanded way.

On the employer side, I would kind of characterize it similarly. They have the election results now, they know there's going to be some change to the Affordable Care Act. I don't believe people think it's going to be totally repealed at all, I think people think it's going to be changed and altered.

Some aspects of it that are good will remain and some aspects that they're able to change will be more consumer oriented. All of that, historically, has been very good for Benefitfocus because the legacy systems are hard coded their single instance they are hard to maintain and they don't modernize well.

At the same time, we're engineering a four software releases year, matter of fact we have got one this weekend. They bring a whole great fresh new set of technology mobile, enrollment for example and data science to our customers.

So as we interact with the employers there were say I would a growing interest in moving to the cloud now -- and just now being the next couple of quarters to next year or so. We think it's going to be ultimately very good for the Company.

Great. Thank you.

Thank you.

Thanks, Stephen.

Ladies and Gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Shawn Jenkins for closing remarks.

Great. Well, thanks, everyone for joining us tonight. We're really proud of the results of 2016 and want to give a special shout out to all our Benefitfocus associates.

You guys are just incredible, you're a blast to work with, and your building a terrific Company. Thank you for the best open enrollment that we've had and the system performance and the engineering of great products.

I really look forward to seeing our entire customer committee at one place in Orlando in a couple of weeks in Orlando on March 14. So thanks again, and here's to a great year.

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