Benefitfocus Inc (BNFT) 2020 Q4 法說會逐字稿

Greetings, and welcome to Benefitfocus' Q4 2020 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded. I would now like to turn the conference over to your host, Patti Leahy, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon and welcome to Benefitfocus' Fourth Quarter 2020 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 will 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-Q filed with the SEC. Additional information will also be provided in our upcoming Form 10-K filing for the year ended December 31, 2020.

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 today's earnings press release.

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

Thank you, Patti, and welcome, everyone. I'm pleased to be with you this afternoon following a fantastic One Place user conference last week, where we brought together over 1,000 members of our ecosystem. One Place truly is one of our industry's hallmark events where we host an incredible audience of customers, prospects, business partners and thought leaders from our industry. A big thank you to the Benefitfocus team and everyone involved in delivering such an impactful event.

Before I get into the priorities of the company and the progress we've made, let me step back briefly and remind you why our customers need us. Benefitfocus makes enrollment and benefits easy. We serve 2 big markets: health plan and employer. For employer, we make the administration of benefits easier for HR departments, and we provide data and insights to help them take actions to reduce health care costs. For health plans, we provide core enrollment, data and billing services to make their back office more efficient. Our flagship product provides quoting to enable a more unified end-to-end offering, which positions the health plan's offering in a more relevant way to the broker community. We believe our products are necessary for employers and health plans because they enable employees and members to enroll in and access their benefits.

Now let's get into the progress we've made since I became CEO, and let's talk about a handful of key priorities that we are executing on to drive shareholder value. They are: one, engage our associates to increase productivity; two, improve customer service and increase customer engagement to drive higher satisfaction; three, adjust our cost structure to generate sustainable, profitable growth; four, set the strategic direction of the company to return to growth, and finally, strengthen our Board, governance and sustainability practices. Our success measures focus on improving employee engagement, our corporate culture, customer satisfaction, subscription revenue, EBITDA, free cash flow and, of course, share price performance.

Let's go into these priorities that we have to unlock value. First, engaging our associates to increase productivity is a very big lever. It can have fast and lasting impact. I've engaged in an active listening tour since assuming my role as CEO and have spoken with over 500 associates and hosted monthly all hands with the entire company. I've heard loud and clear, our associates want more focused and simplified processes to better serve our customers. I take this feedback to heart, and I'm committed to improving the end-to-end customer journey. I am seeing signs that the culture of the company is improving. Associate engagement is up. Associate productivity is up. Glassdoor ratings are also up.

In addition, I'm working to continue to strengthen our leadership team. Two areas of immediate focus are to recruit a CMO and Head of Customer success.

Turning to improving customer service and increasing customer engagement to drive higher customer satisfaction, I've talked with over 200 of our customers. And as a result, we've expanded customer quarterly business reviews and our focus on operational excellence for our customers. The biggest part of operational excellence is to deliver a successful open enrollment, which we did. As a result, our customer sat score from enrolled employees exceeded 90%, and our NPS for employer customers was up meaningfully. I'm incredibly proud of our team and the progress we've made to date.

Our next priority to unlock shareholder value is adjusting our cost structure and generating profitable growth. I'm pleased to share that we reported $44 million of adjusted EBITDA in 2020, which is more than 2x the prior year, a strong proof point that we are beginning to see operating leverage in the business.

Once we did the heavy lifting to adjust our cost structure, I turned my focus to setting the strategic direction of the company. The strategic growth priorities I shared with you last quarter haven't changed: invest in the core enrollment business, extend into fast-moving adjacencies connected to employee engagement, and deliver more impactful insights to participants of the ecosystem by leveraging our data assets. Enrollment, engagement and data.

Enrollment is foundational to our business. It's a critical application for our customers. This year, we're increasing our platform's capabilities to deliver better customer experiences. For example, we're simplifying employer administrative services to relieve customer pain points. We're streamlining the onboarding and annual open enrollment experience for employees. And we're expanding our quote-to-pay health plan solution into larger groups. I am pleased with our focus here and expect this to help attract new customers and prepare us for an even better OE in 2021.

Increasing employee engagement with their benefits is another important growth priority. Employers are asking for our help making benefits for their workforce easier to understand, navigate and engage with. Benefitfocus is well positioned to do this. With over 2 decades of industry experience, we have the technology, the data and the benefits knowledge to help our customers. We plan to use these assets to strategically extend our expertise beyond enrollment to include health navigation.

Health navigation is designed to help employees make more informed decisions when using their benefits, which should naturally increase satisfaction and reduce costs for both employees and employers. We believe integrating this offering into the enrollment workflow and supplementing it with our data will lead to higher levels of engagement. We're working to bring a new product to market later this year to address this priority and drive growth in 2022.

Our final growth strategy is to use our world-class data to create insights and efficiencies for our clients. We're leveraging our industry-leading data assets to innovate and add products to complement our core offerings, both through partnerships and internal development. The combination of our scale and data allows us to offer products and services that are highly targeted, highly personalized and highly impactful for employers, employees, health plans and brokers.

As an example, we're exploring a new partnership offering that leverages our existing data to identify pharmaceutical spend inefficiencies and use advanced automation to achieve significant savings for both employers and employees. We have an excellent opportunity to leverage existing data assets to help our employer customers reduce health care costs, deepen our relationship with them and increase ARR over time. Based on a review of our claims data, we estimate an initial incremental ARR opportunity with existing customers to be approximately $10 million to $15 million.

The final piece I'll share today aimed at unlocking shareholder value is our priority to strengthen our Board, governance and sustainability practices. We recognize the importance of ESG to our stakeholders and have published our first sustainability report. This can be found on our website and highlights the strength of our data privacy, cybersecurity, and human capital policies and practices.

From a governance perspective, the Board is focused on ensuring that it continues to operate independently and diligently on behalf of all shareholders. As we have previously disclosed, the Board is in the process of recruiting another independent director, who we expect will bring fresh perspectives and relevant expertise to our Board.

We also recently announced that Doug Dennerline will become our new independent Chairman as of the upcoming annual meeting. This week, with the goal of further increasing board independence, the Board and Mason Holland, one of our founders, agreed to forgo Mason's previously announced Board adviser role and observer rights, which were otherwise slated to commence at the annual meeting. Mason plans to continue as a major shareholder of the company and is fully supportive of our Board, the fresh and growing leadership team, and the company's clear focus on driving shareholder value through focused, profitable growth and excellent execution on customer commitments. We believe these are all solid steps in the right direction. We will continue to listen and identify ways to advance our ESG efforts and disclosures.

Looking forward, I see COVID headwinds dissipating. I see Mercer headwinds diminishing, and I see the successful execution of the initiatives that I've outlined, increasing bookings, improving customer retention and continuing to drive operating leverage in the business.

I believe executing on our plan will achieve revenue growth rates of approximately 8% to 10% by 2023 and approximately 30 to 35 points against the rule of 40. We plan to add to our rate of growth through tuck-in acquisitions.

I believe in our plan and our ability to deliver it. I'm confident that we have the right strategy, the right assets, and we are building the right leadership team to create substantial shareholder value.

With that, I'll turn it over to Alpana for a deeper dive into the numbers and our outlook.

Thank you, Steve. I'll start with the Q4 financial highlights and then cover our 2021 guidance. And last, I'll share with you our midterm financial targets. Let me start with some context for our financials.

When the pandemic hit last March, we swiftly adjusted our cost structure, and we've made excellent progress to improve our liquidity, margins and profitability. We continue to feel some pressure from the pandemic on the top line. This is reflected in our 2021 outlook. However, we are pleased that the environment appears to be improving for our employer customers as evidenced by some key wins in the fourth quarter. These wins include another new state health plan in the western United States, a win at a large national retailer, a win with a technology leader in our partnership with SAP, and a large customer renewal with a Fortune 200 company.

Turning to our results for the fourth quarter. Total revenue for the quarter of $76.2 million was above the midpoint of our guidance range and down 13% compared to fourth quarter of 2019. This was driven by lower subscription and professional services revenue. Subscription revenue was down 9% year-over-year, primarily due to the anticipated continued runoff of our legacy agreement with Mercer. Professional services revenue was down 26% year-over-year to $13.9 million, primarily due to reduced levels of new business as a result of the pandemic and a shift away from unprofitable professional services contracts. Q4 platform revenue declined 8% year-over-year to $17.4 million. Our platform revenue from life and ancillary products in Q4 increased 28% year-over-year. This was offset by declines in specialty and broker commissions due to lower levels of new business.

As a reminder, the timing of platform revenue recognition depends on the type of product purchased. Platform revenue from L&A products purchased is recognized evenly over the year following open enrollment, whereas specialty and commissions are recognized all at once in the period the purchase is made.

On a GAAP basis, gross profit was $41.3 million, representing gross margins of 54%. On a non-GAAP basis, gross profit was $43.2 million, representing gross margin of 57%, which is up from 53% last year. This improvement in non-GAAP gross margin reflects the cost management actions taken in Q2 to streamline expenses, invest in automation and improve efficiencies.

On a GAAP basis, software gross margins were 67%, down from 68% in Q4 of last year. Our non-GAAP software gross margins for the fourth quarter were approximately 69%, which is about 60 basis points less than last year. This decline is a result of decreased high-margin Mercer revenue. We expect software gross margin will improve in 2021 as we realize the benefits of operational excellence initiatives underway.

Professional services GAAP gross margins were negative 5% compared to negative 13% in Q4 of the prior year. On a non-GAAP basis, professional services gross margins were roughly breakeven for the quarter, better than Q4 of last year, which was negative 11%. As a reminder, we expected professional services gross margins to be down sequentially in Q4 given the seasonal increase in contract call center staffing associated with OE. We are pleased with the advancements we've made in this area and the expected improvements as we continue to increase utilization and expand our automation efforts.

Q4 adjusted EBITDA was $20.2 million, exceeding the high end of our guidance and up approximately 62% compared with Q4 of 2019 EBITDA of $12.5 million. Our Q4 adjusted EBITDA margin was 27%, up 1,200 basis points year-over-year. Our adjusted EBITDA, when compared to our guidance, was positively impacted by higher-than-expected revenue as well as improved operating expenses. This improvement reflects the operational improvements we have made and illustrates the operating leverage within our business.

GAAP net income was $3.1 million, and GAAP net income per share was $0.04. This compares favorably to the GAAP net loss of $3.8 million and GAAP net loss per share of $0.12 in 2019. Non-GAAP net income was $8.7 million, and non-GAAP net income per share was $0.18. This compares favorably to non-GAAP net income of $1.9 million and non-GAAP net income per share of $0.06 in Q4 of 2019.

Now let's move to the balance sheet and cash flow. We ended the quarter with approximately $186 million in cash and marketable securities. In addition, we have our full $50 million line of credit available to us.

Moving on to free cash flow. We generated $13.4 million of free cash flow in Q4 compared to $2.5 million in Q4 of 2019. We generated full year free cash flow of approximately $20 million compared to consuming $32 million in 2019. 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 it excludes restructuring costs.

Moving on to net benefit eligible lives. Our total NBELs in Q4 were 18.3 million, up 6% year-over-year and up 1% from Q3. The year-over-year improvement is primarily due to higher consumer lives on the platform from our Shipt relationship. As a reminder, while these lives have high potential over time, they currently are of low value from a financial perspective because they are platform-only lives purchasing voluntary benefits and not recurring subscription model.

Given our strategic focus on ARR from the employer and health plan market and reduced focus on direct to consumer, we are terminating our unprofitable relationship with Shipt, which comprise the majority of the consumer lives on the platform. I expect this will result in a decline in NBELs beginning next quarter. We are continuing to evolve our lives metrics and plan to share more on this as we progress through the year.

Before we move on to our guidance, I'll offer some context on the future of work at Benefitfocus. We believe our associates should work where they can be most productive and engaged, whether that's in an office, home or a hybrid of both. Based on our experience, our teams have been able to productively work from home, and we expect this to continue in the long term under a hybrid approach. We're actively assessing options to reduce our physical footprint and sublet or exit certain locations, which could result in a future impairment under GAAP.

Shifting to our outlook for 2021. Our revenue outlook for 2021 is shaped by a handful of these factors. The first factor is the impact of our lower Q2 2020 bookings due to the pandemic, which then had a ripple effect on our 2021 revenue outlook. Bookings in an otherwise normal selling season would have been realized as revenue beginning in the third and fourth quarters when new groups typically go live. This was not the case in 2020.

The second factor is our expectation for health plan customers potentially renewing at lower revenue levels. Health plans serve small and midsize businesses, and these businesses have been negatively impacted by unemployment trends. Our existing contract minimums largely protected revenue in 2020 against this decline. Our expectations for 2021 account for the potential that health plans renew at reduced NBEL and revenue levels in 2021. When small and midsize businesses recover, we expect these renewal rates to return to historical levels in future periods.

To a lesser extent, our outlook also reflects the nonrenewal of lower-margin noncore legacy Connecture business as we focus our efforts on the parts of our business that are foundational and scalable.

The third factor is our expectation for platform revenue to perform similar to 2020, including growth from new business, which is partially offset by reduced commissions. During this year's OE, total premiums from voluntary benefits increased nearly 20% to $1 billion, whereas participation was flat.

The last factor shaping our outlook for 2021 is improving spending trends in our employer market. Customers and potential customers are coming to the table ready to make investments as we saw in Q4. This comes after a period of delayed customer decision-making due to the pandemic. Assuming the pressures from the pandemic continue to lift, we expect to realize a more customary level of employer demand in 2021, allowing the company to return to growth in mid-2022.

In 2021, we will continue to be focused on profitability, margin expansion and investing to restore organic growth in 2022. The path to revenue growth is linked to improved customer retention and new bookings. Our expectation is our shareholders should be able to see proof points of this strategy by the end of 2021.

For the full year 2021, we expect total revenue between $254 million and $260 million. To help you with your modeling, we expect the first half of 2021 to reflect a low watermark for revenue and then expect in the second half to see the normal seasonality of implementation and go live.

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.

For Q1 2021, we expect total revenue of $59 million to $61 million, with the largest year-over-year decline being in professional services, consistent with our shift away from lower-margin services. We expect adjusted EBITDA between $9 million and $11 million; and we expect non-GAAP net loss between $5.1 million and $3.1 million, which represents non-GAAP net loss per share of between $0.16 and $0.10 based on 32.3 million basic shares outstanding.

Shifting gears to our midterm targets. As mentioned earlier, we expect to return to revenue growth by mid-2022. As we look at our targets over the next 3 years, by 2023, we expect revenue growth of approximately 8% to 10%; adjusted EBITDA margin reaching approximately 22% to 25%; and cumulative free cash flow over the 3-year period through 2023 of $80 million to $100 million, with the biggest driver being EBITDA. This will result in a total of 30 to 35 points against our rule of 40 target.

All of these factors assume a return to pre-pandemic business conditions. We are also actively seeking strategic acquisitions to help accelerate our growth, which would be incremental to these targets.

In closing, we are pleased that we have established a more profitable foundation for the business in the midst of navigating the challenges of the pandemic. I'm optimistic that the business environment for our products and our services is beginning to improve. And I'm excited about the opportunity to execute on our strategic growth priorities and create a more sustainably profitable business while unlocking substantial shareholder value.

Thank you. I'll now turn it over to the operator for questions.

(Operator Instructions) Our first question comes from the line of Brian Peterson with Raymond James.

So just to kind of start off, I know there were a lot of content there. But just if we think about some of the things that are maybe noncore or lower margin that you're maybe exiting, is there any way to kind of size the revenue or the lives impact of that just so we can kind of maybe look at our models and say, hey, this isn't as core going forward? So how do we think about what is core? And how do we evaluate that base going forward?

Yes. Brian, this is Steve. We are not in a spot to provide more guidance than we just gave. We are going to -- when we come back to you with Q1, we're going to introduce some more measures about lives. And maybe at that time, we'll be able to give you some tighter estimates on lives through that disclosure that's intended to match closer to subscription revenue.

Yes. And Brian...

Okay. Understood. Oh, Sorry, Alpana. Go ahead. Sorry, go ahead.

So a little bit more and we did give a lot of content there. And the one area that we did highlight was just the consumer to direct. And those Shipt lives that I mentioned where we're terminating the contract is a nonprofitable contract for us right now and not a core area of focus. What I'd say from a modeling perspective and from a revenue is it is not a meaningful contributor to revenue today. So while you'll see those lives coming off, you're not going to see sort of a commensurate revenue indicator.

Understood, understood. And so I thought I heard that some confidence in the employer market potentially coming back in 2021, and obviously, that maybe helps the growth in 2022. Could you maybe give a little color behind what's giving you guys some optimism about the selling season in 2021?

Yes. Brian, a couple of things. We're seeing customer activity up. We're seeing RFPs up. We're seeing customers coming to the table wanting to improve their systems around benefits. And so that's what's giving us some confidence.

We're also seeing the close rate of the pipe improve, and so that's driving our confidence. And then as you think about growth drivers to 2022, in addition to that, those -- the engagement product and the pharma product, we also believe will contribute to growth in 2022.

Our next question comes from the line of Chris Merwin with Goldman Sachs.

Okay. I just wanted to ask a bit about the platform revenue growth in Q4. Can you talk a bit about what impacted that? I think you also talked about a certain number of lives going on the platform. Obviously, I just want to think about the impact in Q4? And how we should think about the direction of lives growth as we move into 2021?

Yes. Chris, this is Alpana. So lives are the biggest driver from a volunteer benefit perspective; and as I noted in my comments, that the timing of that revenue has sort of 2 elements to it. One relates to the current year's participation in OE and the purchasing that takes place, and the second one has to do with those areas in which we are -- or those transactions in which we are a broker of record and have some commissions.

And so what I would say is that we're expecting is part of our 2021 outlook that -- to see a consistent performance on the platform revenue as what we saw in 2020. And so we do expect from this year's OE and the growth in premiums that we saw that there would be growth. However, as we continue to shift away from actively seeking to be broker of record as part of our broker strategy and the relationships that we have with the broker community, that will be an offset to that growth.

Okay. Understood. And then just another question on sales cycles. I know efficiency is a focus, and you can do that by managing head count. But also I mean to the extent that sales cycles come in, that could be a benefit as well, I'm sure. So just curious, anything you can say about as demand comes back, what you're seeing happen with those sales cycles?

Yes. One more time? What was that question?

How sales cycles have been trending in terms of the length of them (inaudible).

Oh, yes. Thank you. Yes, they hit lows in Q2 of last year and have been building ever since. And Q4 was by far the most activity we've seen since the pandemic. And we're seeing all kinds of green shoots, like the marketing -- the digital marketing that we're using is showing high returns. As I said, the customers are engaging with us. Prospects are engaging with us. And so our general feel in that employer market is it's stronger, and it's getting stronger.

Our next question comes from the line of Matt Coss with JPMorgan.

So you noted that employer customer demand improved in that health care plan because they're exposed to the SMB market and have been more challenging. Have health care plans -- has the demand there bottomed? Or do you see sort of light at the end of the tunnel? Just kind of where are you with health care plans in terms of when you'd maybe get to a recovery? And then as you do recover and work towards growth beginning next year, where do you see sales and marketing spending going, as it's gotten pretty low as a percentage of revenue?

The health plans, we saw a dip in Q4. And as Alpana mentioned, we're modeling declines as renewals come during 2021. Importantly, the way we -- our contracts work is they have floors and not ceilings. And so as those businesses restore to the market and get on our platform, the contract would automatically pick up the bump. But into 2021, we are forecasting declines. And in the quarter, Q4 of 2020, we saw a decline. We're hopeful that, as we look into 2022, that stabilizes and improves; but through 2021, we've got it going down.

As it relates to sales and marketing, we have made pretty meaningful changes in the efficiency of that business, certainly from 2019 to 2020 and again in 2020 and 2021. And so we are going to invest more in marketing in '21 than we did in '20. But that line item as a percent of revenue, we think will tighten a little bit.

(Operator Instructions) Our next question comes from the line of Sean Wieland with Piper Sandler.

It's Jess Tassan on for Sean. I think we were just interested to know if you could talk through kind of the course of a customer's contract. Over that lifetime, what happens to pricing? So just outside of platform revenue, do you have opportunities or levers to drive price? And if so, what are they? And do they require any kind of incremental R&D investment to be able to realize?

Yes. Maybe I'll start; and Alpana, you jump in. Pricing has been flattish in both markets, and where you see improvement is from bundling or upsells. And that's why you're seeing us talk about new product offerings that we can sell into our base, like the pharma offering I mentioned as well as the health advocacy product that we're looking to take the market. But overall, pricing is flattish.

The contracts specifically vary. Sometimes they have some marginal CPI increases. Sometimes they don't. They're fixed fee. And they're normally multiyear, and then they renew. And sometimes they renew multiyear, and sometimes they renew annually. Alpana, anything? Yes? Is that helpful?

Yes, it is. And then just as a follow-up, could you remind us what the impact of Mercer was in 2020 and then just what the go-forward impact is anticipated to be?

Yes. We had previously indicated that we were looking for Mercer to be around $8 million in revenue in 2020, and it performed pretty close to what we had anticipated. And so there were no big surprises there.

And then as it relates to 2021, we are not anticipating any sort of meaningful headwinds coming from Mercer. We think -- I feel like those are behind us, and so we're not specifically guiding. But what I would say is we're not anticipating growth in that business, and we've modeled in normal churn assumptions that would take place in sort of the Mercer's base business that would then carry over to us as those groups come off the platform.

There seems to be no further questions left at this time, and I would like to turn the call back over to management for any closing remarks.

Thank you, everybody, for joining us. I hope you got from today's call that we have a plan. We're executing on that plan. We're driving profitability. And we have a plan for growth. And I look forward to sharing our progress as we go through the year. Thank you very much.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.