Benefitfocus Inc (BNFT) 2021 Q1 法說會逐字稿

Greetings, and welcome to the Benefitfocus First Quarter 2021 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Patti Leahy. Thank you, Patti. You may begin.

Thank you, operator. Good afternoon, and welcome to Benefitfocus's First Quarter 2021 Earnings Call. Joining me today are Steve Swad, President and Chief Executive Officer; and Alpana Wegner, Chief Financial Officer. Steve and Alpana will offer some prepared remarks, and then we'll open up the call for questions.

Before we begin, let me remind you that today's discussion will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those statements, including impacts of COVID-19, reliance on key personnel and development of our market and business. For more information, please refer to risk factors discussed in our most recent Form 10-K filed with the SEC.

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

With that, I'll now turn the call over to Steve.

Thank you, Patti. I'm looking forward to sharing the great start we had to the year. But before we do that, I'd like to begin with the leadership announcement we released this morning. On behalf of the entire Board, I could not be more excited to share that Matt Levin will be joining Benefitfocus as the company's President and Chief Executive Officer, effective next week.

Let me share why the Board and I believe Matt is the right person to lead the company going forward and why we believe now is the right time to make this change. Matt brings over 2 decades of deep industry experience centered on driving growth and value creation in the Ben Admin, health insurance and health care technology industries. He also has well-established executive relationships across our industry with employers, health plans, consultants and brokers. Most importantly, he shares my conviction and the conviction of our Board that there is tremendous opportunity to unlock and create value at Benefitfocus. Matt comes to us from ADP, where he most recently led strategic planning, corporate development and their venture portfolio. Prior to ADP, Matt was Head of Global Strategy at Aon, where he largely focused on its health care businesses.

One of his largest contributions there was growing its benefits administration business through the launch of Aon's health care exchanges, which remain amongst the largest and most successful in the country. Before that, Matt was part of the turnaround of Hewitt Associates, where he helped recenter the business around benefits administration and adjacent capabilities. He was also part of the core team that led the merger between Hewitt and Aon. The common thread woven throughout Matt's experience is customer centricity and his ability to identify strategies, partnerships and adjacencies to drive innovation and fuel revenue growth.

Now let's shift to why we believe it's the right time to make this change. As I've previously shared with you, a key area of focus for me has been to attract more top talent to this company. We came across Matt as part of our broader search to continue to strengthen the leadership team. We knew he was capable of filling a variety of roles. And after getting to know him, it became clear that he was ideally suited to lead the company in its next phase of growth.

A few years ago, I stepped off the Board to serve as CFO, and now CEO, and we've made real progress. It's a good time for me to return to the Board and hand the reins to Matt since we are executing well on our plans to return the company to growth. To that end, I'm pleased to report that we've reestablished our SaaS enrollment business as the most important priority. We've reengaged our associates and reoriented the company to put the customer at the center of everything we do. Our focus on operational excellence is improving customer service and guiding our near-term product road map. We have moved the company from consuming cash to generating cash. And we've attracted some very strong talent to drive necessary changes in the business. We continue to prioritize building the absolute best team in the industry, and Matt will accelerate this.

Last quarter, I told you we believe successful execution around our core initiatives could increase bookings, improve customer retention and continue to drive operating leverage in the business. We made good progress in each of these areas during the quarter. Specifically, we exceeded the high end of Q1 guidance for all metrics.

Both SAP and employer channels had a strong quarter. Q1 revenue retention improved year-over-year, and we improved EBITDA margins and grew free cash flow. Additionally, we are pacing well against our subscription booking targets, and we remain focused on driving to the Rule of 40. With this foundation in place, the Board and I believe this is the right time and Matt is the right person to help take this company to the next level.

In speaking with Matt, I know he's eager to get started. And importantly, he shares my belief that our top priority is to grow our SaaS enrollment platform and to serve our customers with excellence. He also shares my belief that when we take good care of our customers, other avenues for growth will open up. This is where we believe Matt's deep industry expertise and his track record for growing through adjacencies and creating valuable partnerships will be so valuable to Benefitfocus going forward. I will remain on the Board for the remainder of my term. And I will stay on as an adviser to Matt to ensure a smooth transition.

I'd also like to acknowledge other actions this quarter to continue diversifying our Board and strengthening its independence with the addition of Coretha Rushing, former CHRO for Coca-Cola and Equifax. While only working with her for a few months, it's clear to me that her experience and skills bring tremendous value to our Board and our company.

Finally, before handing off to Alpana, I want to thank the team at Benefitfocus. Our associates have demonstrated incredible resilience and dedication, while also raising the bar to better serve our customers. Most importantly, they've supported one another and grown stronger as a team through what has, no doubt, been one of the most challenging times in recent memory. I appreciate each and every one of them and know we would not be where we are today without them.

With that, I'll turn it over to Alpana to discuss our Q1 results in more detail. Alpana?

Thanks, Steve. I'm pleased to share the results of our quarter and give an update on the progress we're making executing against our strategy. First, we continue to see the employer market gaining traction as evidenced by a few notable wins, including a global software company and national convenience store retailer, both leaders in their space. Also, as Steve commented, our SAP channel had another strong quarter, and I'm encouraged by some key competitive wins for which our quality and service were the deciding factors.

As we focus our employer solutions more upmarket, In the quarter, we saw ARR of our new wins increase 60% on average per customer compared to Q1 of last year. Second, we are seeing indications that our focus on customer service and customer engagement is improving our performance. For example, our Q1 software revenue retention was above 95%. Up meaningfully from above 90% in Q1 of last year.

We also experienced a significant reduction in performance credit, which are typically seasonally high in Q1 following OE, reflecting our improving service levels.

And third, in terms of operational excellence, we're making progress automating data and improving the end-to-end customer experience. We've mobilized a dedicated team to improve our automation and data quality with the goal of extending our lead in the industry for data transfer.

We are streamlining data exchange, strengthening our core data validation framework and investing in platform enhancements such as real-time data processing through APIs. Operational excellence will be an ongoing area of focus as we target increasing customer NPS and expanding our operating leverage.

Now turning to Q1 results in more detail. Total revenue of $65.1 million was above the high end of our guidance, driven primarily by 2 factors: first, an acceleration of the timing of platform revenue from second half into Q1; and second, subscription revenue performed better than expected due to lower service credits as a result of improved customer service. Q1 revenue was down 2% compared to last year, driven primarily by lower professional services revenue. Year-over-year subscription revenue was down 1%, primarily due to the anticipated continued runoff of our legacy agreement with Mercer.

Professional services revenue performed as expected and was down 17% year-over-year, primarily due to lower levels of customer requests from health plan customers. Q1 platform revenue increased 29% year-over-year to $7.8 million, well above our expectations, primarily driven by transaction activity taking place in Q1 that was expected to occur in the second half of the year.

On a GAAP basis, gross profit was $36.5 million, representing a gross margin of 56%. On a non-GAAP basis, gross profit was $37.1 million, representing a gross margin of 57%, which is up from last year's 50% gross margin. The improvement in non-GAAP gross margin reflects cost management actions taken in Q2 of last year to streamline our expenses.

On a GAAP basis, software gross margins were 67%, up from 64% in Q1 of last year. Our non-GAAP software gross margins were approximately 68%, which is more than 300 basis points greater than last year. This increase is a result of higher-than-expected platform revenue, the benefits of cost management actions taken in Q2 of last year and the operational excellence initiatives underway.

Professional services GAAP gross margins were 6% versus negative 5% in Q1 of the prior year. On a non-GAAP basis, PS gross margins were 9%, better than Q1 of last year, which was negative 3%. This reflects an increase in utilization, heightened focus on profitable professional services and our continued focus on automation.

GAAP net loss was $2.1 million and GAAP net loss per share was $0.11. This compares favorably to the GAAP net loss of $11.1 million and GAAP net loss per share of $0.34 in Q1 of last year. Non-GAAP net income was $2 million and non-GAAP net income per share was $0.01. This compares favorably to non-GAAP net loss of $6.7 million and non-GAAP net loss per share of $0.21 in Q1 of 2020.

Q1 adjusted EBITDA was $14.8 million, exceeding the high end of our guidance and up 260% versus prior year. Our Q1 adjusted EBITDA margin was 23% compared to 6% last year. Our adjusted EBITDA when compared to our guidance was positively impacted by our revenue outperformance.

Now let's move to the balance sheet and cash flow. We ended the quarter with approximately $189 million in cash and marketable securities. In addition, we have our full $50 million line of credit available to us. As we think about uses of cash, we are prioritizing investments in partnerships and tuck-in acquisitions to accelerate our growth strategy.

Moving on to free cash flow. We generated $8.3 million of free cash flow in Q1 compared to negative $11 million in Q1 2020. Free cash flow is a non-GAAP measure that we define as cash provided or used in operations, less purchases of property and equipment and excluding restructuring costs.

Moving on to net benefit eligible lives. Total NBELs were 18.3 million in Q1, up 5% year-over-year and roughly flat versus the prior quarter. Sequentially, growth in low-value consumer lives were offset by declines in health plan line. As we mentioned last quarter, because consumer lives are lower value from a financial perspective and our strategic focus is on ARR from our core platform offerings for employer and health plans, in Q2, we terminated our unprofitable relationship with Shipt, which comprise the majority of consumer lives on the platform. This will result in a reduction of 1.9 million in NBELs in Q2. And as a reminder, we do not expect any meaningful impact to revenue as a result of these lives coming off of our platform.

Touching briefly on real estate and the future of work at Benefitfocus. We are managing to a real estate footprint that assumes fewer of our associates will work from the office on a full-time basis. As previously noted, we have been assessing options to reduce our physical footprint and sublet or exit certain locations.

Since we last reported to you, we have sublet a portion of our headquarters office space, which is expected to result in an impairment under GAAP in the range of $3 million to $4 million in the second quarter. As a reminder, impairments are excluded from our non-GAAP outlook.

Shifting to our Q2 outlook. For Q2, we expect total revenue of $58 million to $60 million, with the largest year-over-year decline being in professional services. Sequentially, we expect platform revenue to be lower as Q1 benefited from timing. We expect adjusted EBITDA between $8 million and $10 million, and we expect non-GAAP net loss between $3.6 million and $1.6 million, which represents non-GAAP net loss per share of between $0.16 and $0.10 based on 33 million basic shares outstanding.

For the full year, we are maintaining our guidance as communicated last quarter. We expect total revenue between $254 million and $260 million. We expect adjusted EBITDA between $44 million and $50 million, representing 18% EBITDA margin at the midpoint of revenue and adjusted EBITDA. And we expect free cash flow between $20 million and $26 million. As a reminder, there are 3 key factors which impact our outlook for the year: first, the expectations that employer bookings return to pre-COVID levels during this critical Q2 selling season. Based on what we are seeing so far this quarter, there are positive indicators that demand is returning; second, we factored in the risk that certain health plan customers renew at lower levels in the second half of the year, primarily because of their exposure to the SMB market.

And last, impacting 2021 is the planned reduction of $5 million to $6 million of certain noncore revenue. This includes legacy on-prem and unprofitable professional services Connecture revenue and the runoff from Mercer.

To help with modeling, as I mentioned last quarter, we continue to expect revenue to flatten out in the second half of the year as we begin to experience the seasonality of go-live. This means we expect Q3 revenue and EBITDA to be relatively flat versus Q2 of this year. That would be followed by our seasonal increase in Q4.

In closing, we are pleased with the solid start to the year and feel optimistic that our second quarter selling season is off to a good start, which is a key driver for our return to growth next year. On a personal note, I am grateful to Steve for his leadership during a particularly challenging time for our company. We are in a stronger position, thanks in large part to his steady hand.

I'm excited about the experience and leadership Matt brings to the team and look forward to working with him to build on the foundation and create substantial value for our customers, associates, partners and shareholders.

With that, Stephen and I are happy to take your questions. Operator?

(Operator Instructions) Our first question comes from Sean Wieland with Piper Jaffray.

It's Piper Sandler now, but all good. Congrats on all the developments here today. My first question is on the new leadership. Realizing Matt isn't here yet to speak for himself, but really, what are the changes that you're trying to signal in terms of strategy or priorities with the appointment of Matt? Specifically, you mentioned reprioritizing the SaaS enrollment platform. Maybe you can expand on that a little bit?

Yes. Thanks, Sean. Nice to hear you. I think you've got it. I want to start out by -- Matt and I have spent a fair amount of time together and top of mind for Matt as he sees a ton of opportunity at Benefitfocus. And the Board and I think his experience and his skills and his industry knowledge, industry contacts are just excellent -- an excellent fit to drive this company forward and take it to the next level.

With respect to specifics around strategy, the guy hasn't started, I'm certainly not going to speak for him. But we spent a lot of time together, and what's clear to me is his view is that the company should continue its primary focus around its core SaaS business, its core enrollment business. And so much like the focus that I've had over the last year or so, he is going to continue that. And that is a natural start for him.

And then second to that, again, with equal conviction is his perspective that we have to deliver on our commitments to customers. I've been calling that operational excellence. And so I think you'll see him continue in that vein as well. And then from that, he and I also share the view that when you have a growing healthy customer base, you can bring to that base additional adjacencies and -- to help accelerate the growth.

And so I think we've got to give them a couple of days to get in and get his feet on the ground. He is very knowledgeable of our company. He's very knowledgeable of the space. I don't think it's going to take him long. And I think you're going to see him hold tight to the core and then build around it with adjacencies.

That sounds good. And then a question on the service revenues. You called out some things going on among health plans, expand on that a little bit. And why are they under pressure, and when does that pressure begin to ease.

Yes, I'll start and then maybe Alpana, you jump in. You might recall, Sean, that our contracts with health plans have minimums in them. I'm sorry?

I think Sean, just to clarify your question, was your question around the professional services because we had some around professional services decline as a result of health plans, is that -- just to clarify your question.

It was, but always interested on where Steve has taken us to.

I'll do both, Sean. On subscription revenue, which Alpana appropriately points out, our contracts have minimums in them. And as Alpana pointed out, we're seeing the lives in that SMB part of the business decline, and we're expecting and we have planned for a reduction in that subscription revenue in the back half of the year. That's one thing that we called out. And the second thing that we called out is that there have been just fewer change order requests which come in -- which result in lower professional services revenue. Those are the 2 points. And Alpana, I don't know if you've got anything else to add.

No, I think that covers it.

(Operator Instructions) Our next question comes from Matt Coss with JPMorgan.

Just a question on why some of that transactional activity that was expected to occur in the second half come into Q1. I guess if you expect to occur in the second half, that's a pretty big pull forward. So any more color on that would be helpful.

Yes, Matt, this is Alpana. Thanks for the question. We, as you know, open enrollment in Q4 is a big volume driver for us in the transaction revenue or the platform revenue. And we estimate items such as performance bonuses and some true-ups on enrollment. In the past, historically, we've seen those true-ups and those bonuses come in the second half of the year. And this year, for reasons that are sort of outside of our control and driven more by our partners, we saw some of those come in earlier in the year. And so that's really what was driving the pull forward there.

Okay. So sort of how to do with things not totally under your control, it sounds like, okay. And then I guess when we look at the outperformance this quarter and is that -- and then there's no sort of update to the full year revenue guidance. And so are you expecting incrementally more challenging parts of the business in the second half than you were, say, a quarter ago when you guided?

Yes. Other than the benefit that we see in Q1 from that platform timing, really the remainder of our expectations from a full year perspective are holding. And so what I would say is that we're seeing, similar to what we guided to last quarter, kind of a Q2, Q3 low point in the year, return in seasonal revenue in Q4. And the assumptions that we had that were driven both around employer and finishing out this selling season that's critical for us in Q2 as well as some of the -- what Steve commented on just a few minutes ago, some of the risk that we modeled into our plan for the second half on health plans, those are all still holding for us. And so we're maintaining our guide for the full year at this point.

(Operator Instructions) There are no further questions at this time. I would like to turn the call back over to Stephen Swad for any closing comments.

Thank you all for joining us tonight. It's been an honor to lead this company, and I'm excited to turn the reins over now to Matt. We're executing well against our plan and bringing in great talent into the organizations. I feel better today than I have at any point in my tenure here, and I'm optimistic that the company is heading in the right direction. Thank you so much.

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