Progyny Inc (PGNY) 2019 Q3 法說會逐字稿

Good day and welcome to the Third Quarter 2019 Earnings Conference Call for Progyny.

(Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. James Hart, Vice President of Investor Relations. Please go ahead.

Thank you, John, and good afternoon, everyone. Welcome to our earnings conference call for the third quarter of 2019.

With me today are David Schlanger, CEO of Progyny; and Pete Anevski, President, CFO and COO. We will begin with some prepared remarks and then open up the call for your questions.

Before we begin, I'd like to remind you that today's call contains forward-looking statements, including statements about revenue, net income, cash flow, our ability to sustain profitability, our business strategy, our ability to acquire new clients and maintain existing clients, market opportunities and size, business performance, our industry outlook, financial outlook, plans and objectives for future operations and other non-historical statements as further described in this call and in our press release issued this afternoon. These forward-looking statements are subject to certain risks, uncertainties and assumptions, including those related to Progyny's growth, market opportunities and general economic and business conditions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Although we believe these expectations are reasonable, we undertake no obligation to revise any statement to reflect changes that occur after this call. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Descriptions of these and other risks that could cause actual results to differ materially from these forward-looking statements are discussed in our reports filed with the SEC, including our press release that was issued this afternoon.

During the call, we will also refer to non-GAAP financial measures such as adjusted EBITDA, net income as adjusted, adjusted EPS and net earnings per share as adjusted. Reconciliations with the most comparable GAAP measures are also available in the press release, which is available at investors.progyny.com.

I'd now like to turn the call over to David.

Thank you, [Jamie], and thank you, everyone, for joining us today. It's a pleasure to be here today for our first earnings call as a public company following our IPO in October of this year. I'm pleased to report that Progyny delivered strong results for the third quarter of 2019.

In a few minutes, Pete will walk you through the third quarter numbers in greater detail, but here are just a few of the highlights. Revenue increased 120% from the prior year period to $61.2 million. We achieved a 20.1% gross margin, which was up 190 basis points from the prior year period. Adjusted EBITDA increased to $5.5 million with an adjusted EBITDA margin on incremental revenue of 14.5%. We're realizing economies of scale across our business, and that's enabled us to achieve a more than 8x increase in adjusted EBITDA from the prior year period. We continued to generate positive operating cash flow both in the 3 and 9 months ended September 30, 2019. Assisted reproductive technology or ART cycles that our members utilized in the third quarter this year more than doubled from the prior year period. And as our 2019 selling season comes to a close, we are pleased to have received commitments from 57 new clients. This is a record number of new client additions for us and represents approximately 750,000 new covered lives.

As I mentioned, we completed our IPO on October 29 after the end of the quarter. We issued 6.7 million new shares, raising approximately $77 million in proceeds, net of fees and expenses. We're happy to have created a public market for our stock during a difficult market for new issues. Most importantly, the offering has increased awareness of both our brand as well as the issues surrounding infertility. While we have the opportunity during the road show to meet some of you on today's call, for the benefit of those joining today who are newer to Progyny, we wanted to take a few minutes to provide a brief overview of our company.

Progyny helps people have children by offering to self-insured employers a fully carved-out fertility and family-building benefit solution for their employees and their partners who we refer to as our members. Our mission is to make any member's dream of parenthood come true through a healthy, timely and supported fertility and family-building journey. Our success has been driven by our ability to generate superior clinical outcomes compared to national averages. Our members are getting pregnant faster and more often by having healthier pregnancies with fewer miscarriage and fewer high-risk multiple births. Pete and I were recruited to Progyny in late 2016 because the Board and principal investors recognized that, although Progyny was in its early stages and in need of experienced management, there was an opportunity to successfully disrupt a large market. After being in Progyny a very short time, we discovered that something even more exciting was possible. During our careers, we've seen the same themes unfold in health care: patients who are unsupported and left to figure out complex medical conditions on their own and who then make poor treatment choices and have to face the consequences of suboptimal treatment outcomes, employers that spend an enormous amount of money on health care without having a clear picture of what they're getting in return while seeing their costs escalating rapidly and physicians in an adversarial relationship with health plans and being restricted by those plans from practicing medicine in the way they believe is best for their patients. What was exciting to us was that Progyny was in a position to demonstrate that a great patient experience, superior clinical outcomes and more efficient use of employer health care dollars are not mutually exclusive, that all of those objectives can be achieved at the same time.

Before I cover what we do uniquely at Progyny that makes this possible, I'd like to provide some background information on our market and business. I mentioned before that we operate in a very large underserved market. Our market for fertility benefit solutions is large because infertility is a common health condition affecting 1 in 8 couples, making it more prevalent than diabetes or asthma. And both the incidence of infertility and the demand for treatment is growing, in each case driven by societal factors. First, many couples are waiting longer than ever to have children, even though fertility declines with age, and there's a growing acceptance of nontraditional paths to parenthood such as when LGBTQ couples and single parents choose to start their families. To translate this into dollars, if you look at just the number of in vitro fertilization cycles performed annually, this was an approximately $6.7 billion market in 2017, and this market has been growing at over 10% annually for several years before that. Despite these large numbers, we believe the potential market for IVF cycles is at least twice as large because approximately half the people who need treatment aren't getting it because they can't afford it.

In addition to the number of IVF cycles, we also look at our addressable market based on the potential number of employer customers for our fertility benefit solution. In the United States, there are 8,000 large self-insured employers, representing 69 million covered lives. As of September 30 of this year, we had 84 clients, representing 1.4 million covered lives. So our penetration rate is only about 1% to 2%, which puts us in the very early stages of penetrating our core market of large self-insured employers. Today, we work with many of the world's leading companies, and those companies represent a broad cross-section of over 20 different industries, including media, manufacturing, food and beverage, pharmaceuticals, technology, consumer packaged goods, energy, retail and financial services. What this demonstrates is that fertility is truly a universal health issue and that regardless of the industry or the demographics of the workforce, covering fertility is relevant to every employer in every industry. That's because fertility coverage is increasingly being recognized by employers as a required element of a competitive health benefits plan and employers want to demonstrate that they are responsive to the needs of their workforce. Because of the high prevalence of infertility and the costs of treatment, employees are asking for fertility coverage and the availability of that coverage is frequently cited by employees as a primary reason they want to work for or stay with a company.

Beyond the positive impact on their workforce from a recruiting and retention perspective, Progyny provides to its employer clients a cost-effective fertility benefit solution by reducing both fertility treatment costs and the high-risk maternity and neonatal intensive care costs resulting from IVF-related multiple births. The foundation of our value proposition stems from the fact that we are able to demonstrate to our employer clients that we deliver superior clinical outcomes when compared to national averages. Our pregnancy rate is higher and our miscarriage rate is lower. As a result, we have a 26% higher live birth rate than national averages reported by all fertility clinics to the CDC. With a higher live birth rate, employers spend less money overall on fertility treatments because their employees are getting pregnant with fewer cycles.

As part of our program, we educate our members on best clinical practices and empower them with a benefit design that allows them to pursue a course of treatment most likely to result in a healthy singleton birth. As a result, we have a much higher single-embryo transfer rate, which helps drive a 70 -- 78% reduction in the rate of multiple births as compared to national averages. One of the most common complications associated with multiples is preterm births, with fewer multiple births and employers spend significantly less on the high medical costs of preterm births such as C-sections, NICU expenses and the ongoing care associated with chronic health conditions that low-birth-weight babies often suffer from. A logical question that some investors have asked us is how we are able to drive these superior clinical results and whether there is one key difference that explains what we do better. The answer to that is -- the answer is that it's really the combination of 3 essential elements that are unique to our platform.

First, unlike the traditional health plan model, we have a plan design that is focused on generating the best outcomes rather than limiting the utilization of services. We provide access to the latest technologies that are correlated with better outcomes and always provide coverage for a full treatment event. This lets doctors provide a tailored course of treatment for each patient because all of the necessary tools are available and individual treatment decisions are based solely on generating the best outcomes rather than making compromises in care due to cost and affordability issues. Second, we provide an unprecedented level of support to each member with a dedicated patient care advocate who gives the member extensive guidance and education. This is an inbound and outbound model providing support at critical points before, during and after treatment. On average, our patient care advocates interact with each member 15 times during the course of treatment. Our outcomes, particularly our rate of single-embryo transfer, demonstrate that an educated and supported patient makes better medical decisions. And third, we've curated a network of the top fertility specialists in the country. Approximately 30% of the doctors in our network don't broadly participate in conventional carrier networks because of the historically difficult relationships that they've had with the carriers. We believe that they choose to work with Progyny because our plan design allows them to practice the best medicine, and they know that a Progyny patient is a supported patient inclined to make the best decisions.

But it's not just who's in our network that's unique. It's that we actively work hand-in-hand with our doctors to ensure that our members are benefiting from the utilization of best practices and enjoying the best outcomes. We collect real-time outcomes and treatment data directly from our doctors on all of our members that undergo treatment. This data allows us and our network position to quickly identify issues, adjust and make continuous improvements.

In summary, at Progyny, we're unique in that we are successfully creating value for all of our key constituents. We are supporting patients to make informed and better treatment choices leading to superior clinical outcomes. Employers are benefiting from the most cost-effective fertility solution and are receiving detailed reporting so they can understand the drivers behind those superior results, and our physicians have the tools and support they need to practice the best medicine for the unique needs of each of their patients.

Now I'll turn the call over to Pete to walk you through the financials in greater detail.

Thanks, David.

I'll start today by taking you through the key drivers of our third quarter results, and we'll then give you insight into our expectations for the fourth quarter and full year.

Starting with the highlights of our third quarter results. We generated $61.2 million in revenue. That's an increase of 120% as compared to the $27.8 million in the third quarter last year.

Looking at the drivers of our year-over-year increase in revenue. Fertility benefits increased 90% from $26.4 million in the third quarter last year to $50 million in the current year period. The growth was driven by the higher number of clients and covered lives. Pharmacy benefits revenue increased from $1.4 million in the third quarter last year to $11.2 million in the current year period. As a reminder, Progyny Rx wasn't available during most of the 2017 selling season and went live only with a select number of clients in 2018. As a result, our revenue this quarter benefited from having Rx available for the entire 2018 selling season and was therefore sold into significantly more accounts, both new and existing.

As of the end of the third quarter, we had 84 clients, representing 1.4 million members. This compares to 80 clients as of the end of the second quarter this year and 33 clients as of the end of the third quarter last year.

Turning to our utilization rates. There were 3,763 ART cycles performed in the quarter, which is more than double the number of cycles performed in the same quarter a year ago. We report ART cycles consistent with the way the CDC does, and it reflects IVF treatments, frozen embryo transfers and egg freezing. Our utilization rate of 0.52% for all members in the third quarter was comparable to a year ago. While this is an important measure of overall engagement but because it includes our male members and captures all services, we believe that the utilization rate for female members is most relevant because our revenue is driven principally from our female utilizers. Our utilization rate for female members was 0.47% this quarter compared to 0.45% a year ago. It's important to note that utilization rates will vary from quarter to quarter due to a number of factors, some of which are the timing of when new clients go live, the time of the year and the demographic mix of our clients.

Turning now to our margins. Gross profit of $12.3 million for the third quarter increased 144% from the $5 million reported for the same quarter a year ago. Our gross margin of 20.1% for the third quarter this year reflected an increase of 190 basis points from the third quarter of last year due primarily to increased operating efficiencies.

Looking at our operating expenses. Sales and marketing was 5.2% of revenue in the third quarter of 2019, an improvement of about 70 basis points compared to the same quarter last year. General and administration -- I'm sorry, general and administrative costs were 9.9% of revenue, an improvement in 44 -- 440 basis points from the prior year period. The improvement in all of these measures reflects greater economies of scale in sales and marketing due to our nearly 100% client retention rate. Customer acquisition costs are primarily incurred in year 1 with a new client. And in general and administrative costs, where we see leverage as we build out our back-office and support functions and apply these efficiencies over a larger base of revenue.

With these improvements in margins, our adjusted EBITDA increased substantially from $0.7 million in the prior year period to $5.5 million in the third quarter this year. Adjusted EBITDA margin on incremental revenue was 14.5% for the third quarter this year.

Net loss attributable to common stockholders was $8.2 million or $1.10 per share in the third quarter compared to a loss of $1.1 million or $0.20 per share in the prior year period. The increased loss was attributable to an $11.2 million noncash charge in the third quarter associated with the increased valuation of the outstanding convertible preferred stock warrants, which are required to be remeasured each period. With the closing of the IPO and the transition from a private company to a public company valuation, the valuation adjustment and remeasurement was finalized. In conjunction with the IPO, these convertible preferred stock warrants were converted into warrants to purchase common stock and are no longer subject to remeasurement since their conversion. Net income as adjusted for the third quarter of 2019, which adjusts for the impact of the conversion of preferred stock as well as the outstanding options and warrants, was $3 million or $0.03 per share on the basis of 87.2 million weighted average diluted shares outstanding.

Turning now to our balance sheet and cash flow.

Cash flow provided by operations was a record $5.9 million in the third quarter as compared to cash used by operations of $0.5 million in the prior year period. We have cash flow from operations positive for the first 9 months of 2019, reflecting an improvement of $5.8 million compared to last year. With the strength of our cash flow, we closed the third quarter this year with $7.7 million of cash on the balance sheet and no debt.

As a reminder, our IPO was completed on October 29 after the close of the third quarter, so you will see those proceeds reported on the fourth quarter -- on our fourth quarter balance sheet.

Turning now to our expectations for the fourth quarter and the full year.

In the fourth quarter, we're projecting revenue to be between $65 million and $66.5 million, reflecting growth of 123% to 128%. We expect fourth quarter adjusted EBITDA to be between $3.8 million to $4.1 million. Net loss from continuing operations is projected to be 4 billion -- $4.4 million to $4.7 million, reflecting a $5.8 million noncash charge associated with the final valuation and remeasurement of the convertible preferred stock warrants net income as adjusted for the fourth quarter of 2019, which again adjusts for the impact of the conversion of the preferred stock as well as the outstanding options and warrants, is projected to be $1.1 million to $1.4 million or approximately $0.01 per share on the basis of 98 million assumed weighted average fully diluted shares outstanding.

For the full year 2019, we expect revenue to be between $229.6 million and $231.1 million, reflecting growth of 118% and 119%. We expect full year 2019 adjusted EBITDA to be between $18.3 million to $18.6 million. We expect full year 2019 net loss from continuing operations to be $8.6 million to $8.9 million, which includes $18.2 million of noncash charges associated with the valuation and remeasurement of the convertible preferred stock warrants which is finalized with the IPO. Net income as adjusted for the full year 2019, which adjusts for the impact of the conversion of preferred stock as well as the outstanding options and warrants, is projected to be $9.3 million to $9.6 million or $0.10 to $0.11 per share on the basis of 89.2 million assumed weighted average fully diluted shares outstanding.

Before I turn the call back over to David, I want to provide an update on our selling season.

The 2019 selling season is largely over, and we are now in the implementation phase with the new clients. During this process, clients finalize both their contracts and benefit selections. We also get a clearer sense for their number of covered lives. Although infrequent, clients could give us a verbal commitment and then push out their implementation date till later in the year or could fail to execute their contracts. In addition, the early weeks of the new calendar year are extremely important in helping us actively estimate the utilization we would expect to see with our new clients. Accordingly, we will be in a position to issue financial guidance for 2020 on our next quarter's earnings call, which will be on the basis of finalized contracts and benefit decisions and once we have started to see utilization patterns of our clients after the start of the year. But we do want to provide you with insight today for the commitments we received in this selling season.

During the 2019 selling season, we're pleased to have received commitments from 57 new clients, representing approximately 750,000 covered lives, which is consistent with the growth expectations that we set for ourselves at the beginning of the year. This is a record number of new clients for us and is now our fourth straight year of adding a higher number of new clients than we did in the previous year. Our success with Progyny Rx has also continued. A year ago, 68% of new clients took the benefit. This year, in the 2019 selling season, approximately 75% of the new clients did as well. The vast majority of the 57 new clients are expected to go live on January 1, 2020. Some clients wanted to begin their program sooner and are already reflected in the 84 clients we reported for the third quarter of this year, and a handful will start through Q1 and Q2 of next year. When we report our fourth quarter results, we'll be in a position to provide you with final client counts and the related covered lives. We will issue guidance for the first quarter and full year 2020 reflecting those wins.

With that, I'll turn the call back over to Dave.

Thanks, Pete.

Earlier, I highlighted a few of the reasons that we've been able to achieve and sustain our high rates of growth. To that earlier list, I should add Progyny's unique culture. This is a mission-driven organization where people across all levels and all functions want to help make a difference in the lives of our members and help them achieve their dreams of building a family. Beyond our collaborative culture and our focus on employee training and career growth, that's an important reason why we enjoy such high levels of employee satisfaction and low levels of voluntary attrition.

This year, we've continued to make substantial investments in our team, particularly in key leadership positions. To highlight 2 of our recent hires: First, Mark Livingston joined this summer as Executive Vice President of Finance. Mark has a successful track record of transitioning entrepreneurial entities into high-growth, disciplined businesses. He was previously the SVP Finance and CFO International at Scripps and has held senior finance roles at Emerson Reid, Emdeon and Hess. Second, Lisa Greenbaum also joined this summer as our Chief Client Officer, responsible for revenue generation and business development. Lisa has over 25 years of experience in health care with senior roles at HealthStream, Merck, Procter & Gamble and, most recently, WebMD where she was Group General Manager of Professional Services and also held multiple executive-level roles in sales. Although Lisa joined midway through our 2019 selling season, she has made an immediate impact, bringing in energy and focus to our new sales and account management process. We know she will take what is already working with our go-to-market approach and bring it to the next level.

As I've been discussing, our workplace culture is very important to us. For the second year in a row, we were named to Modern Healthcare's list of the Best Places to Work in Healthcare. This award recognizes outstanding employers in the health care industry nationwide. We recently received a few additional recognitions. We were named to Crain's New York Fast 50 for the second straight year and, in the spring of 2019, to the CNBC Disruptor 50 list for the third year in a row. We are proud to have successfully graduated from the disruptor list because of our recent IPO.

Another positive consequence of our growth is that we need more space for our growing number of employees. We'll be moving into a new headquarters in New York in the first quarter of 2020 and are very much looking forward to our new corporate home.

We'll now open up the call for your questions. If you aren't able to ask us a question today, we are appearing at the Piper Jaffray Health Care Conference tomorrow and are also participating in the Citi health care conference next Wednesday. We hope to see you there. With that, operator, can you please provide the instructions to ask a question?

(Operator Instructions) Our first question today will come from Anne Samuel with JPMorgan.

Congrats on the quarter. I was hoping maybe you could touch on any highlights from the recent selling season. Are you seeing any new types of clients or industries interested in the product?

The nice thing is that we continue to sell to a diversified group of clients, representing a diversified set of industries. The macro trends all remain really positive. And what we are starting to see is that when we successfully penetrate a particular industry, because the employers in that industry are competing for the same talent, that we tend to start winning other new clients in that industry. So we're seeing some network effect, if you will, within industries. But again, all the trends remain very positive.

That's great. And then I was hoping maybe you could speak a little bit about what you saw in terms of organic same-store growth within your existing clients within the quarter.

We -- Anne, that's not a number we break out separately from our overall growth number. I think we have disclosed that the majority of the growth you see from a revenue perspective is driven by new client adds. But there's definitely -- same-store growth is a contributor. Same-store growth is made up of 2 factors. It's both the opportunity to upsell some of our customers. And also, many of our customers have been hiring and adding employee head count. But again, that's not a number we've broken out.

Our next question will come from Sarah James with Piper Jaffray.

So strong results all the way down the line and 2020 sales better than we expected. You guys have recently been out there in the market, and I get that it's sort of fluid right now. But can you talk a little bit more broadly about sentiment, how you're finding the appetite for carving in Progyny Rx this year?

Sure. I mean again the -- our clients that have taken the entire benefit including Progyny Rx are certainly enjoying the benefits of it in that there's a superior member experience, and we're actually saving them money. Approximately, this year, we disclosed 70% of...

75%.

75% of our new customers took the integrated program with Rx included, which is up...

Slightly from the 68% last...

From the prior year. So again, really strong success selling it in. You need to keep in mind that at many of our clients, selling in the pharmacy benefit involves a separate decision maker. So the process is a bit more complex. And oftentimes, clients want to get the medical benefit up and running and deal with that other mechanical process within their organizations after they get the medical benefit up and running. And so again, it provides us a nice upsell opportunity.

Great. And then can you talk a little bit about the pipeline you have for growing sales reps and PCAs? You guys have a nice step function up for next year. So how do you prepare for that from an operating model perspective? And then have you get your pipeline set for the type of growth that you're going to see over the next couple of years?

Peter?

Yes. I'll start first with the PCAs. The PCAs that we need relative to the staffing models that we have based on the new clients and covered lives that we sold are in place already, being trained and will be ready for 1/1. And everything that we do contemplates the growth that we anticipated, same thing with our implementation teams, et cetera. As it relates to the sales force, the sales force already has new seasoned sales reps added as well as a pipeline of sales reps that we're interviewing. Those are generally always added over the next, I'll call it, 60 to 90 days so that they're in place for the selling season, which generally starts for us in earnest in February of next year.

Our next question will come from Michael Chery (sic) [Cherny] with Bank of America Merrill Lynch.

Congratulations on reporting your first public quarter. I want to [hand it back a little] to Anne's initial question about the customer adds. You talked about a lot of the same industries continuing to show support. As you think about your new role as a public company, and maybe this will be a better question for a couple of quarters down the road, how do you think about the mix from a size perspective? And in the past, since you've had a couple of customers that really have a meaningful level of average new members per client, how do you think about that range of potentially jumbo-type wins among the employers that you're targeting?

Well, we're certainly targeting larger employers, but larger employers, as you recognize, cover lots of different sizes. So -- and kind of we have structured our sales force to be efficient in going after employers of different sizes based upon kind of the seniority and seasoning of the individual sellers. So -- and again, I think you can see -- it was in our S-1. You can see that we are well represented across the various size cohorts. We continue to expect to be able to do that. So we'll continue to sell across all of those employer segments and sizes and, again, continue to look to expand the industries we work with. And as we've spoken about previously, we're not just focused on corporate employers as we think about the opportunities. There's other types of employers that self insure governmental agencies and organizations. For instance, we won our first school district, metropolitan school district. I think that's a good example of a new type of employer that will be good, that we are going after.

Great. And then a question for you, Peter. Having completed the IPO, obviously, that gives you some capital availability. As you think going forward, especially since you're already generating positive free cash, positive EBITDA, how do you think about the dry firepower you have on the balance sheet? And how do you think about the best opportunities to deploy that going forward to drive growth?

The first answer I'll give you is there's nothing specific that we've identified at the moment relative to what we're going to do with that. But I think there's a lot of opportunities both vertically within the industry that we can look at. We've given examples in the past of things like potentially owning a [specialty] pharmacy, potentially doing other services within the fertility industry in addition to what we're doing today on the medical side, et cetera. And the second piece is, as we think about tangential opportunities, we would utilize those funds as well as the funds that we generate from the business today to start exploring new opportunities outside of fertility, not only within fertility. We'll certainly keep everybody up-to-date as we progress exploring those ideas in the upcoming year.

Our next question will come from Steve Tanal with Goldman Sachs.

Congrats on the IPO.

Thank you.

I just wanted to sort of pick into the client adds and understand sort of how that may be moving the numbers. So I guess the pull forward into Q3, 4 more clients than we anticipated at quarter end. I'm just trying to understand when those clients came on and how they may have impacted revenue, utilization or any other line items, if you could comment on that.

I don't have a breakout of the exact dollar amount. They came online mostly at the end of the quarter. They weren't huge relative to overall lives, but they did come on earlier than their normal plan years. So it wasn't hugely significant relative to incremental revenue from those clients vis-à-vis the overall installed base on the 80 clients that we entered the quarter with.

Got it. So no impact on the utilization rate really that's worth calling out or anything.

No. That's why the -- because they were not huge clients, even if their utilization rate varied from the overall book of business, which, by the way, does vary client by client, it wouldn't have an impact on the overall utilization rate because the overall number of covered lives added was relatively small.

Got it. Okay. And kind of thinking about the remaining 53, I guess, what number [does it] start in 2Q? We sort of modeled mostly 1/1 starts. And so I'm trying to figure out, does this amount to the timing shifts in that to sort of a pull forward or maybe a bit of a pushback of revenue? I'm just trying to think about that.

Between Q1 and Q2 and part of why we're not perfectly clear on exactly when they're going to start is the timing changes relative to what they're thinking. And so they could start earlier in Q1. They could start right at the beginning of Q2, et cetera. Between both of them, it's literally a handful of clients with not a huge number of lives. And so at the end of the day, there's not a significant delta from our original expectations of what Q1 might start at, which is why we included in our comments the majority of clients and lives will be live 1/1, with a handful of them starting at the -- during Q1 and/or the beginning of Q2.

Got it. Okay. That's helpful. And then I guess just given the varying start dates. I mean, are you guys seeing more opportunity to add new clients perhaps, I guess I would call it, off cycle, right, outside of the 1/1? It seems like clients are willing to tack the benefit on in the middle of the year. Am I reading too much into 1 quarter here? Or is that something you guys are maybe seeing?

So it's a good observation in that this year has more off-cycle clients than we've seen in the prior year. I don't know that that's a trend yet. I don't know if 1 year in a row makes a trend, but it certainly is a positive trend relative to last year. But it's not something that we push for. It's something certainly that we explain when we both sell and implement. That's always an opportunity, but it's not something that we push for. It's usually the clients' decision and directive that they want to do it or not. But yes, it is an accurate observation that this year, we seem to have more off-cycle clients than we did a year ago, in the selling season a year ago. But I don't know that 1 year yet makes a trend, but certainly positive so far.

Got it. Okay. That's helpful. And then maybe just last one for me. We're trying to back into sort of revenue sort of unit economics here. And so fertility revenue, I think, includes PEPM fees now, the per employee per month fees, if we're not mistaken. I think, [whether or not] that it may look to us as a female utilizing member, sort of revenue per female utilizing member may have declined a little bit year-on-year. Is that an accurate read? And if so, what drove that? How are you guys thinking about that?

So a couple of things. One is the PEPM is allocated across both the fertility and pharmacy benefit. And two, the average revenue per ART cycle is a function of mix, not a function of decline versus price or anything else like that. It's simply that the, first, different cycles are different dollar amounts relative to dollar amount per cycle, and they vary. And second is there is variation across the country relative to price. So usually, the fluctuation is not only usually but consistently, historically. And today, the fluctuations are a function of mix, not a function of some other pricing trends or anything else like that.

(Operator Instructions) Our next question will come from Daniel Grosslight with SVB Leerink.

Congrats on a strong debut here. I just want to kind of -- I wanted to ask about the competitive intensity now that you have kind of opened up this market. Obviously, it's a first carve-out, publicly traded carve-out benefit design. It's great for your branding, and it's great for you to build the market. But you might have a lot of copycats out there now coming forward. So I was wondering if you could just touch on the competitive intensity now that you're a public company and if you've seen any rumblings of the large MCOs trying to replicate what you're doing out there.

So a couple of things. We have not seen those rumblings, which has been consistent with what's happened in the last several years. And you also have to take into account the time of the year that we are sitting in and when we went public. In the prepared remarks, we talked about the 2019 selling season largely coming to a close. So again, we are -- and our potential customers are kind of winding down efforts to bring on new things for next year as they focus on the things they're committed to and getting them implemented. So the -- and as Pete said before, the selling season in 2020 will start in earnest February of next year. And that's when you can get a better read on what the environment is. But we -- what we're seeing, and obviously we continue to talk to customers all the time, and potential customers, is a positive macro environment, excitement around what we're doing, how different it is, how unique it is and that we create -- as I said in the prepared remarks, we make the situation better for all the key constituents. Our members are happy. They're getting better outcomes. Our employer customers are saving money, and physicians feel like they actually can practice medicine solely focused on creating the best outcomes. So that is really a powerful message in the marketplace. We expect it to continue to be.

Got it. And as you continue to build a bolus here with all these new member adds, I'm curious if there's room for you to improve the reimbursement rates at your network. Is there any room for gross margin improvement by reducing payments to your providers?

There's opportunity to improve it marginally, not significantly. Part of the reason for that is that all the clinics that are in our network have different contractual arrangements that start and end in different periods of time. And the opportunity is usually mostly around those that renew where we have the highest concentration of covered lives. And as we do that, though, part of those savings, we do share back with our clients. And so overall, the margin improvement around the reimbursement rates is going to be marginal, but we do expect to improve that over time.

This will conclude today's question-and-answer session as well as today's conference. Thank you for joining us today, and you may now disconnect.