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Edited Transcript of BNFT earnings conference call or presentation 2-Aug-18 9:00pm GMT

Q2 2018 Benefitfocus Inc Earnings Call

Charleston Aug 14, 2018 (Thomson StreetEvents) -- Edited Transcript of Benefitfocus Inc earnings conference call or presentation Thursday, August 2, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jonathon E. Dussault

Benefitfocus, Inc. - CFO & Treasurer

* Michael Bauer

Benefitfocus, Inc. - IR

* Raymond Alexander August

Benefitfocus, Inc. - CEO, President & Director

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Conference Call Participants

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* Adam Klauber

William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Financial Services and Technology

* Brian Christopher Peterson

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Frank Sparacino

First Analysis Securities Corporation, Research Division - SVP

* Joseph Anthony Gallo

Jefferies LLC, Research Division - Equity Associate

* Nina D. Deka

Piper Jaffray Companies, Research Division - Research Analyst

* Ross Stuart MacMillan

RBC Capital Markets, LLC, Research Division - Co-Head of Software Sector

* Steven William Wardell

Chardan Capital Markets, LLC, Research Division - Senior Equity Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Benefitfocus Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I'd now like to turn the conference over to Michael Bauer, Senior Director of Finance and Investor Relations. Please go ahead.

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Michael Bauer, Benefitfocus, Inc. - IR [2]

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Thank you, operator. Good afternoon, and welcome to Benefitfocus' Second Quarter 2018 Earnings Call. We will be discussing the operating results announced in our press release issued after the close of market today. Joining me today are Ray August, our President and Chief Executive Officer; and Jonathon Dussault, our Chief Financial Officer. Ray and Jonathon will offer some prepared remarks and then we will open the call up for a Q&A session.

Before we begin, let me remind you that today's discussion will include forward-looking statements such as third quarter and full year 2018 guidance and other predictions, expectations and information that might be considered forward-looking under federal security laws. These statements reflect our views as of today only and should not be considered as representing our views of any subsequent date. These statements are subject to a variety of risks and uncertainties, including our continuing losses and need to achieve GAAP profitability, the fluctuation of our financial results, recruitment and retention of key personnel, management of growth, the early stage of our market, cybersecurity risk and a changing regulatory environment, that could cause actual results to differ materially from expectations. For a further discussion of the material risk and important factors that could affect our actual results, please refer to our quarterly report on Form 10-Q and other SEC filings. During the course of today's call, we will also refer to certain non-GAAP financial measures. You can find important disclosures about those measures in our press release.

I'll now turn the call over to Ray.

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [3]

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Thanks, Mike. Good afternoon, everyone. Benefitfocus had another solid quarter. We continue to make progress on generating faster recurring revenue growth, improving our profitability and driving long-term shareholder value. We're pleased with our Q2 results. We exceeded the top end of our revenue guidance. We exceeded the top end of our profitability guidance. We're pleased with our bookings performance, and we're well positioned for our future with BenefitsPlace. The improvement in our business for the first half of 2018 is a result of several key factors.

First is our focus on adding lives and increasing average revenue per user, or ARPU. This strategic shift and our investments in sales and marketing have reinvigorated both our direct and indirect sales teams. Second, our operational investments in data are increasing efficiency and driving higher value for our customers and partners. And third, the market continues to show strong demand for our platform. Since announcing BenefitsPlace in March, we have accelerated carrier, supplier and broker adoption, a strong indication that the platform is adding value to all stakeholders in the ecosystem.

Because of our solid Q2 and first half 2018 results, we are increasing the midpoint of our 2018 revenue guidance. We remain confident in our ability to accelerate our recurring revenue growth in 2019. Our momentum is strong. We remain focused on improving sales execution, expanding revenue opportunities and strengthening our core. Let's review progress during the quarter on these priorities.

Beginning with sales execution. We drove further operational alignment internally and made steady investments in our direct and indirect sales teams. Both are contributing to increasing the number of lives on our platform and ARPU expansion. This enhanced our bookings performance in Q2 and the first half of 2018. Our sales teams are focused on increasing the number of lives on the platform by targeting direct sales with strategic and enterprise accounts, by adding channel partnerships with new brokers, and by focusing on our Mercer and SAP channel relationships. Our channel partnerships gained momentum in Q2. SAP posted another strong growth quarter, and we ended Q2 with a Premier Broker signed in almost every major market in the country. These brokers can now actively drive sales of our solutions and further engage consumers on our platform.

In Q1, we launched our Premier Broker program to more closely partner with the influential broker community and to provide us a new and efficient sales channel. We are seeing strong demand for our market-leading solutions to help the brokerage community better serve their clients. Investing in our partner distribution channel and embracing our indirect sales community have been meaningful pivots in our sales strategy. Both have driven a more efficient increase in the number of lives and ARPU expansion on our platform.

In the second quarter, we added 49 large employer customers, up from 40 in the prior year period. This represents a year-over-year increase of 23%. And we increased our carrier customer count to 56, up from 53 in the prior year period. With our strategic transition to a broader platform opportunity, we recognize the need to provide greater transparency into our current business.

Since our IPO in 2013, Benefitfocus has huge -- used large employer logo count to demonstrate our business evolution from a carrier-focused sales model to an employer-focused sales model. As our platform strategy with BenefitsPlace expands and as we focus our direct sales resources on larger transactions to drive additional lives on our platform and increase ARPU, we are in the process of revising our key external metrics. For the remainder of 2018, we will continue to provide large employer and carrier logos as a measurement.

In conjunction with our 2019 reporting, we plan to introduce new metrics associated with the lives on our platform. We believe this will increase insight into our business model, and we believe the logo count will be a less meaningful metric to evaluate our business. We plan to stop providing logo count as a measure in 2019.

Turning to our second priority, expanding revenue opportunities. In Q2, we experienced strong year-over-year growth in existing customer bookings. We've also made progress to expand revenue opportunities through BenefitsPlace. Both of these factors increase ARPU. We launched BenefitsPlace to optimize the consumer benefits experience. BenefitsPlace gives employers better choice, provides better options for consumers and ensure families have greater peace of mind. BenefitsPlace is a recognition that our platform purpose must drive value for every participant in the ecosystem.

By partnering with industry-leading carriers and suppliers, we provide a one-of-a-kind consumer experience for benefits. And while the consumer purchases benefits to protect their health, their wealth and their lifestyle, we generate value for the entire ecosystem, the buyer, the broker, the seller and us. In return for this value, Benefitfocus receives repeatable transaction revenue from carriers and suppliers. We generate referrals from brokers and provide better protection for consumers.

Since launching BenefitsPlace, we have made excellent progress on enabling the first phase of consumers for open enrollment, on adding new carriers and suppliers and on increasing employer and consumer participation. Sellers want to be on BenefitsPlace to reach their consumers. During Q2, we added 2 of the country's leading insurance carriers, Allstate and Transamerica. This brings our BenefitsPlace carrier total to 6, including Aflac, Cigna, The Hartford and Genworth. We also added 7 more specialty products to BenefitsPlace. At the end of Q2, we have 12 specialty products representing health companies like Med-Enroll and HealthSherpa; wealth companies like SOFA and Kashable; and lifestyle companies like InfoArmor and Pet Assure. Together, these benefits will provide consumers and their families with leading cost-effective benefit options through every stage of life. We plan to continue adding carrier and specialty products to solidify our position as a platform of choice in the benefits industry.

The combination of multiproduct adoption, insightful data-driven analysis, our ability to deepen consumer engagement through mobile and the platforms network effect demonstrates our value as a strategic distribution partner. These investments are helping us monetize our existing base of over 20 million consumers while, at the same time, adding new lives to the platform. Benefitfocus is aligning the entire benefits ecosystem to best serve the consumer and deliver peace of mind. As consumers purchase core specialty and voluntary benefits through our platform, our entire ecosystem wins. We continue to optimize the consumer experience to increase transactions for BenefitsPlace carriers and suppliers. Doing so increases the stickiness of our platform, drives up participation and increases repeatable revenue.

Increasing consumer product purchases on the platform drives higher carrier and supplier revenue and more commission for our Premier Brokers. Carriers and suppliers add additional product; brokers add more of their employer customers; employers gain access to a broader set of products; and consumers have greater choice through an elegant experience. This is the network effect of our platform in the simplest of terms.

Our third priority is to strengthen the core of our business. In Q2, through focused investments in data and improved operational efficiencies, we materially increased our software and consolidated gross margin as well as our adjusted EBITDA margin and maintained our strong revenue retention rate of over 95%. Our continued purposeful shift from professional services to recurring and repeatable revenue is fundamental in driving continued and incremental gross margin improvement. This enables us to make targeted investments in sales and marketing as well as in R&D. Further, we continue our investments in innovation.

In our Q2 release, we extended our industry-leading data exchange capabilities with additional enhancements in data validation and automation. Automation leads to better margins, which remain a key area of focus with our platform strategy. For HR administrators, our latest release also helped simplify complex file management by improving enrollment capabilities and reporting and analytics functionality. We entered 2018 as a company with a strong foundation and have demonstrated our capabilities as a benefits platform of choice.

To extend our thought leadership position, we continue to invest in our people and new executive talent. Last month, we hired Ken Haderer to the newly created role of Executive Vice President of Global Operations. Ken brings over 2 decades of experience leading world-class global benefits brokerage and consulting firms. Most recently, he was a President of North America at Mercer. We are excited to have Ken on our team and we'll leverage his industry and operational expertise to help accelerate our strategy.

To recap, we are pleased with our Q2 and first half of 2018 results. We've made solid progress against our 3 strategic priorities: improving sales execution; expanding revenue opportunities; and strengthening our core. We've completed 3 quarters in a row with strong execution. We've continued to strengthen the fundamentals of our business to drive long-term shareholder value, and we've invested in a world-class leadership team. We remain dedicated to a culture of excellence and customer success. We believe we have never been better positioned to achieve operational excellence and support the success of our customers.

Now I would like to turn the call over to Jonathon to review our financial results. Jonathon?

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Jonathon E. Dussault, Benefitfocus, Inc. - CFO & Treasurer [4]

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Thank you, Ray. I'll begin by reviewing the details of our second quarter financial results and then provide guidance for Q3 and fiscal 2018.

Total revenue for the second quarter was $60.6 million, an increase of 10% compared to the second quarter of 2017, and was above our guidance range. Our growth in the quarter reflects sales of products to both new and existing customers and high revenue retention. The revenue in excess of the high end of our prior guidance was primarily driven by the timing of professional services, commissions associated with off-cycle enrollments and favorable accounting treatment from a large customer contract that shifted revenue recognition to the second quarter.

Breaking Q2 revenue down further. Employer revenue was $39.4 million, up 17% compared to the year-ago period, and was driven by growth in our software services revenue stream. Carrier revenue was $21.2 million, down 1% compared to the second quarter 2017. This reflects the difficult comparison due to the previously discussed partial migration that occurred in the third quarter of 2017 as well as the timing of professional services revenue. Total software services revenue was $48.3 million, an increase of 13% year-over-year. And employer software services revenue was $30.7 million, an increase of 22% as compared to the second quarter of 2017. In aggregate, software services benefited from approximately $2 million of timing items in the quarter. Total professional services revenue was $12.3 million, a decline of 2% over Q2 2017, and represents the timing of the completion of service work in the quarter.

GAAP results for the quarter include gross profit of $29.9 million, representing a margin of 49%; software gross profit of $31.8 million, representing a margin of 66%; and an operating loss of $11.1 million, contributing to a net loss per share of $0.45. Non-GAAP gross profit totaled $30.8 million, or a 51% non-GAAP gross margin. This compares favorably to the 47% non-GAAP gross margin in Q2 2017. Non-GAAP software gross profit was $32.3 million or 67% non-GAAP gross margin. This is up from the 65% non-GAAP gross margin in Q2 2017. This represents an over 380 basis point improvement in consolidated non-GAAP gross margin and over 150 basis point improvement in non-GAAP software gross margin. This improvement was driven by the combination of better-than-expected revenue growth, improving operational scale and revenue mix.

We also continued to drive consistent year-over-year improvements in our adjusted EBITDA results. Q2 adjusted EBITDA was negative $560,000 or negative 1% of revenue. This significantly exceeded our guidance and compares favorably to the negative 7% of revenue in Q2 2017. Our adjusted EBITDA continues to be positively impacted by the combination of recurring revenue growth, gross margin expansion and increasing operational scale. Non-GAAP net loss was $7.7 million and was above our prior guidance.

Moving to the balance sheet. We ended Q2 with cash of $53.3 million. Total deferred revenue declined $2 million sequentially to $51 million. This sequential decline reflects the ongoing shift away from our traditional large carrier service contracts and our strategic focus on driving repeatable transaction-based revenue.

On to the cash flow statement. In Q2 2018, cash used in operations totaled $1.1 million. Free cash flow, a non-GAAP measure that we define as cash provided by or used in operations, plus purchases of property and equipment, was negative $3 million. This was in line with our expectations. Year-to-date free cash flow has improved by nearly $2 million as we continue to make progress towards becoming free cash flow positive.

Now let's move to guidance. For the third quarter of 2018, we are targeting total revenue of $58 million to $60 million. This reflects the timing of revenue items previously discussed that shifted into Q2 from Q3. From a profitability perspective, we expect adjusted EBITDA of negative $4 million to negative $2 million, a non-GAAP net loss of $11 million to $9 million and a non-GAAP net loss per share of $0.35 to $0.28 based on 31.9 million weighted shares outstanding. Our profitability guidance reflects the impact of the timing of revenue previously discussed.

Due to our steady execution, we are raising the midpoint of our revenue and profitability guidance for full year 2018. This includes total revenue in the range of $253 million to $258 million; we expect adjusted EBITDA of $7 million to $13 million; a non-GAAP net loss of $23 million to $17 million; and a non-GAAP net loss per share of $0.72 to $0.54, based on 31.7 million weighted shares outstanding.

Our business is undergoing a transformation. As our sales team is focused on growing lives and expanding ARPU, primarily through BenefitsPlace, our economic model is evolving, and we will be positively impacted by this strategic shift. Our business will benefit from repeatable, high-margin transaction-based revenue that complements our traditional SaaS subscription revenue stream to create a dynamic platform model. To better educate investors about this transformation, we are planning several investor events.

In Q3, we will be presenting at the Canaccord Growth Conference and Deutsche Bank Technology Conference. Furthermore, to provide a more comprehensive overview of our platform strategy and better context to our evolving economic model, we plan to host an analyst event in the fourth quarter. Stay tuned for a specific date and location.

In closing, we are proud of our first half performance and are confident that by improving sales execution, expanding revenue opportunities and strengthening our core, we are well positioned to accelerate our recurring revenue growth in 2019 and drive significant shareholder value.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is coming from the line of Brian Peterson with Raymond James.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [2]

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Congrats on the strong bookings so far. Just want to hit on that a bit. Obviously, it's been better than you've expected so far this year. Can you just help us understand, how should we think about that impacting revenue growth in 2019?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [3]

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Yes, thanks very much, Brian. We're real proud of the team and what they accomplished so far this year. This marks our third consecutive quarter of continued strong execution, where we both been increasing our revenue and we've seen our booking momentum really pick up. And we looked at several factors that caused that. One, our sales execution is strengthening. Not only did we increase the number of logos by 23% -- and by the way, for the year, we're already at 87 versus 77 for the entire year last year. We've -- we're really seeing a terrific take-up in our broker community. We have over 40 brokers who signed up with Benefitfocus. We're seeing our margins expanding. We've had a 380 basis point increase in our gross margins, and our BenefitsPlace launch is really resonating. We have 6 insurance carriers on our platform. We have 12 specialty carriers. And that's really going to drive ARPU for us in the future periods. So we're excited about that. So in summary, if you look at our strong execution, it gives me great confidence in our ability to accelerate revenue growth for recurring revenue into 2019 and beyond.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [4]

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And Ray, you hit on this a bit, but with BenefitsPlace, I realize it's still early, but I think there's some debate with investors on how much that could add next year. Could -- can you just help us on the monetization and maybe anything you can share in how we should think about that contributing to growth next year?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [5]

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Yes, thank you. And as we think about BenefitsPlace, what BenefitsPlace does for us is it drives our ARPU. Every single carrier that we commit to BenefitsPlace, they're providing incremental revenue to us as a company. So if you look at the 7 (sic) [6] insurance carriers and the 12 specialty carriers, whenever a consumer purchases a transaction, any transaction as long as it's relative to one of those carriers, we get additional revenue as transaction repeatable revenue. In addition, it's a very good thing for our brokerage community. As I said, we signed up over 40 brokers. And every time that we're receiving benefits from BenefitsPlace transactions, our brokers are making money as well. So it's good for them. And of course, consumers are getting better coverage and employers are providing very cost-effective ways to cover their employees and taking care of their stakeholders by ensuring they're doing it at a very good price, at a high value. So BenefitsPlace is really creating the true network effect for us at Benefitfocus, and it's allowing us to really optimize all the different roles on our platform. We're going to talk more about this in our Investor Conference that Jonathon mentioned, which will be in Q4. And we see this as a great opportunity to go over the entire model, really talk about some of the things we're excited about, such as the power of the platform and how the platform is driving both lives for us and ARPU on our model and the impact this could have on our brokers. Yes, that will be in Q4 this year.

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Operator [6]

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The next question comes from the line of Ross MacMillan with RBC Capital Markets.

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Ross Stuart MacMillan, RBC Capital Markets, LLC, Research Division - Co-Head of Software Sector [7]

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Ray or Jonathon, I guess, when we look at the logo adds, up 23% for 2Q and I think up 28% for the first half, those are good numbers, obviously. But I was just curious, I know you don't give us lives at this point, but is there any way for us to think about the average size of the employer adds you've had this year relative to last year, and any way to think about this? Are lives growing even faster than the logo count, for example? And any color on that would be super helpful.

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [8]

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Yes, yes, no, thanks for asking. And as we said, as we look at the metrics going forward, we see lives as a great click down from logos because lives gives us and gives you a great visibility into the size of the customers. And we also need to make sure that as we're looking at ARPU as a key measure, lives gives greater visibility to our ARPU and allows you to have transparency into the impact that could have on our overall business. We're working on exactly the lives measure and how we present it and calculate it. That's one of the things we're going to talk about at our investor conference. But I can tell you that the rate of lives growth this year versus last year is higher than our logo growth, a double-digit percentage increase. So we're pleased with our logo growth, but we're even more pleased with the lives growth that we've seen on the platform.

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Ross Stuart MacMillan, RBC Capital Markets, LLC, Research Division - Co-Head of Software Sector [9]

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That's helpful color, and then maybe just one follow up. On the $2 million benefit to software services in the quarter, Jonathon, was that -- can you just maybe help us understand what came from, maybe, some residual premium income versus timing? Maybe parsing that 2 between the -- $2 million between the 2 factors.

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Jonathon E. Dussault, Benefitfocus, Inc. - CFO & Treasurer [10]

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Yes, sure. Absolutely, Ross. Thanks for the question. So we did have some timing items that came into effect in the quarter. We posted 13% growth rate on our core software revenue. There are really 2 components of that. One component was some off-cycle enrollments that drove some incremental commission in quarter that we weren't expecting in the second quarter. We have had some of that planned in the third quarter. And we did have some favorable treatment associated with some accounting timing on some revenue that pulled revenue into the quarter. Didn't impact the overall value of the contract or what we expected to get, but it just pulled a little bit more into the quarter. But overall, growth rate of 13%, strong quarter, and still feeling good about the trajectory of the core software business.

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Operator [11]

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The next question comes from the line of John DiFucci with Jefferies.

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Joseph Anthony Gallo, Jefferies LLC, Research Division - Equity Associate [12]

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This is Joe on for John. You already touched on it briefly, but I just wanted to dig deeper into brokers. I think you said you signed 40 and new logo adds was 49. How are the early conversations with brokers? Are you seeing an increase in leads from this, and how important is it for 2019?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [13]

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Yes. Hi, Joe. From a broker point of view, we consider them very important to us. As you know, previously, before this year, it wasn't a real big area of focus for us as a company. But as we looked at the model, brokers control a vast majority of the decisions made in the large market which we go after. We started the year, we announced it at One Place, we had over 70 brokers in attendance at One Place conference. So we're real pleased with the early momentum. And now as we're exiting Q2, we're above 40 and have a solid pipeline with the broker community. As a company, we've made a very significant investment of a channel sales team. We've offered our services model to ensure that we serve the brokers well. We hired Ken Haderer. Ken has great experience leading one of the world's largest brokers at Mercer, and he's bringing that experience to us to make sure we truly understand and execute what the brokers need. As we look at broker -- the brokers, we really see this as a 2019 logo driver, a live driver for us as a business. They're just signing up with us now. We're spending a lot of time training with them. We're seeing the number of leads very, very high. We're seeing the amount of engagement from them very high. It's actually taken away some of the headwind or the noise we had from the broker community. So we're real pleased with where we are, and looking forward to next year to really see them contributing to overall sales of our platform.

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Joseph Anthony Gallo, Jefferies LLC, Research Division - Equity Associate [14]

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That's great to hear and it's helpful. And then switching things, on the partner front, it seems that's become more and more important over time. And last quarter, you mentioned that the SAP bookings had increased noticeably in the quarter. I was just hoping for an update there and how you think about the go-to-market split between direct sales and partners.

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [15]

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Yes, thanks for that. As you're pointing, as a company, our sales model is really evolving over the last year. So from a single-dimensional model to a multidimensional model. And what I mean by that is, we have a direct sales force, you see the results they've done in terms of logos, but in addition to that, we've built out a back-to-base team. They've had a very, very strong year, very strong quarter for us. Our state business is very strong. Last quarter, we announced the UTS transaction, which was a very large transaction for us. And we're pleased with the pipeline that we have around the state governments. SAP is growing for us. They've had very significant growth for us this quarter, and the pipeline is robust. We continue to focus on our Mercer relationship and see value in that. And then, of course, our carriers, we're really excited about what our carriers are doing, and our specialty providers, for ARPU expansion on our overall platform. So Rob Dahdah and his team have done a very, very good job diversifying. And right now, they're firing at all fronts. I'm pleased with the effort across the board.

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Operator [16]

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The next question comes from the line of Adam Klauber with William Blair.

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Adam Klauber, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Financial Services and Technology [17]

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A couple of different questions. I think last year, they would give an idea of jumbo wins versus large market wins. Can you provide that? Or are you just putting everything in 1 bucket now?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [18]

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Yes. Hey, Adam. As we look at wins in the market, as I said, we're pivoting to logos, but this year, year-to-date, we have 12 what we call enterprise wins, companies over 10,000. I will say that if you look at lives versus last year, it's up materially. So if you look at it from both different dimensions, one is we're continuing to get large employers. The average is increasing, but the lives count is up measurably. So we're seeing good demand there.

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Adam Klauber, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Financial Services and Technology [19]

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Okay. Okay. And then the carrier business, it looked like your count went up from 53 to 56. That's good news. The revenue in that segment hasn't grown for a while. It -- should '19 -- should we see better growth out of that segment?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [20]

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Yes. Let me unpack the carrier business for you a little bit because there's a few things going on there. So overall, as Jonathon said in his remarks, that from a carrier perspective, we had 1 customer last year who rolled off. That had a negative impact on our overall carrier business. But the important part of our carrier business is we have our traditional business. That is the products that we sell to a carrier, products like eExchange, eBilling, and that business is doing very well. And if it wasn't for that 1 transaction, that would be growing. But the real opportunity for us in the carrier space is BenefitsPlace, where we're working with the carriers and we're basically selling through the carriers where the carriers are on our platform. And we had 6 -- well, now we have 6 carriers who are selling products on our platform, added 2 this quarter, both Allstate and Transnational -- excuse me, Transamerica. And so we expect that revenue to increase and continue to increase significantly as we go into 2019 as that business really picks up. If you look at the revenue profile of BenefitsPlace, what happens with BenefitsPlace is the revenue primarily is booked this year through open enrollment and then recognized next year, throughout the year ratably. So we'll see that revenue hit our books in 2019.

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Adam Klauber, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Financial Services and Technology [21]

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So just to understand, so when you sign up the BenefitsPlace to take in Allstate, will that revenue flow through the carrier side or the employer side?

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Jonathon E. Dussault, Benefitfocus, Inc. - CFO & Treasurer [22]

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A significant portion of it will run through the carrier side, Adam. And the other attribute that I'd like to point out as well is with the carrier business, of course, we have strong margins with the carrier business. And as the BenefitsPlace revenue opportunity kicks in, as we head into 2019, we expect high margin from that transaction-based revenue to further complement the core carrier business and really drive an attractive high-margin repeatable revenue stream that you'll see mostly hit the carrier line.

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Adam Klauber, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Financial Services and Technology [23]

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Okay. Okay. And then how is your operating cash flow in the first half of this year compared to the first half of last year?

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Jonathon E. Dussault, Benefitfocus, Inc. - CFO & Treasurer [24]

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Strong. So we look at it really from a free cash flow perspective. That's our measurement. We improved by about $2 million first half of the year versus first half last year. In total, for the first half, that exceeded our original expectations. So we're tracking well. We have over $50 million of cash on the balance sheet as of the end of the quarter and remain on track for our expectations for the full year.

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Operator [25]

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The next question is from the line of Frank Sparacino with First Analysis.

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Frank Sparacino, First Analysis Securities Corporation, Research Division - SVP [26]

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Ray or Jonathon, I'd just like to dig into the sales performance in a little bit more detail. And yes, curious, Ray, if you could shed a little bit more light in terms of what's really driving the improvement. I guess, the factors that I was interested in were -- I think you have a little bit more sales capacity this year versus last year. So I assume you have the opportunity to be getting a higher number of sales [like those], but also curious about the win rate in those situations. Are there any other factors you think are noteworthy on the sales side of things?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [27]

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Yes, no, thanks. We're really pleased with the level of sales execution. And one thing of note is if we look at the amount of RFPs that we're bringing in, the amount of RFPs versus last year is relatively flat, but we're seeing a very big increase in our win rate. And to me, that points to the quality and capability of sales execution and our sales leadership. And as we've talked about all of last year, we continue to focus on sales process, continue to focus on making sure that we have high accountability for the sales team. But also really maximizing our sales investment. As I said earlier, we really pivoted to a multidimensional approach. Where before most of our investment was on direct sales force, now we're leveraging the channel. That's providing an increase in SAP performance, a significant increase in SAP performance. We also have a team working with the brokerage -- community of brokers. That's the team that signed up over 40 different brokers. The state government, we have a dedicated focus on the state governments for the first time. That contributed to the win at UTS, over 100,000 lives on our platform. We have a robust pipeline from a state perspective, and we have a team that's working to sign up BenefitsPlace carriers as well as a back-to-base team, which is selling a wide variety of solutions back into our installed base. So we're really seeing that by working with the entire community, whether it be the consumers, the employers or brokers, the carriers, the specialty providers, in a clear way in which all of those are working together to better serve the consumer, it's providing us a very clear model and a compelling value proposition, which is at the heart of driving our sales efficiency and effectiveness.

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Operator [28]

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(Operator Instructions) The next question comes from the line of Nina Deka with Piper Jaffray.

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Nina D. Deka, Piper Jaffray Companies, Research Division - Research Analyst [29]

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Can you provide an update on the University of Texas implementation? When do you expect that to be fully live? And in general, how long does it take to implement an account of that size? And do you see that length of time getting shorter over time?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [30]

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Yes, no, thanks. We typically don't comment on the specifics of an implementation. However, I can tell you I was there a couple of weeks ago with Ken Haderer, and we visited the customer. And the project is on time, and we will -- that will be live next year. So it will be a little bit longer than a year, live and in production. We continue to get more efficient as we do these large implementations. Typically how they work is it's a multistage, where we're rolling out a group of universities, in their case, at a time and continuing to expand. We're pleased with our efficiency and effectiveness because working with state governments is something that we've done, working with universities is something that we have a really strong skill set on and a proven experience. So we continue to get more and more efficient and more and more effective. And one of the things, just on UTS, if you look at UTS and you look at the price UTS paid for our platform, we were not the cheapest price for UTS and -- even though they saw the value on our overall platform and saw the value in the deep Benefitfocus experience when it comes to the state governments. And we're seeing that value and that reputation really driving some activity in the states.

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Nina D. Deka, Piper Jaffray Companies, Research Division - Research Analyst [31]

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Okay, great. And then just a follow up about the competitive environment. When you were, I guess, bidding for these new employer customers, are you often the only ones at the table? Or is it a multiple RFP situation?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [32]

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It's typically multiple RFP situations. And depending on the channel partner, it could be a wide variety of customers, a wide variety of competitors that we're working with. The -- as I said earlier, the RFPs that we're seeing is about flat with last year but our win rate is improving, so that means we're doing a better job against the competition. And we really see that as key to our overall growth. The -- as we look at this, a key part for us is really the brokers and having the brokers help us and bringing us into the deals. We're seeing the brokers be a big assist for us. That's coming through in our pipeline, an increase in our overall pipeline. And we're excited to see that pipeline turn into closes at the end of this year and into '19.

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Operator [33]

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The next question is from the line of Steven Wardell with Chardan Capital.

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Steven William Wardell, Chardan Capital Markets, LLC, Research Division - Senior Equity Research Analyst [34]

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Can you give us a little more color on the bigger markets that you sell into? What are the big issues going on in the lives of the buyers in those markets, and how is that translating into demand? And how is demand this year compared to last year?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [35]

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Yes, in the bigger markets that we go into, we're seeing a large investment in state governments, where they're going through modernization. But more importantly, in the large employer segment, we're seeing strong demand. And one of the big things that we're seeing is this overall shift in mentality from, in the past, it was, "I'm an employer and I'm looking for an enrollment platform." Now what they realized, what they're really looking for is they're looking for the opportunity to provide benefits to their employees at an effective rate, effective price for the shareholders, but also providing an attractive set of benefits for their employees to differentiate those -- them from the competition. They want to make sure that employees themselves are getting products that are the highest possible quality. So as we're going into these sales situations, we're seeing that voluntary benefits are a very, very important part of the overall sales cycle. Back -- earlier, it used to just be medical benefits. So the opportunity and the total value proposition that were going to these companies with, where we're providing the industry-leading SaaS platform with over 20 million consumers who are on that platform, almost 1,000 large employers on our platform and the reputable nature of our platform is an important part of the equation. But when that is coupled with the voluntary benefits and the access to voluntary benefits at an affordable price with a very low-friction user interface and the ability to pick multiple products or 18 different products, whether it'd be 6 carrier products or 12 specialty products, it's very, very important to the purchasers of those solutions. In fact, when we went through and reviewed our win data, a recurring theme was access to voluntary benefits in an efficient and effective way was one of the biggest reasons that we're selected. So we're seeing that as a real important part of and a driver for the large market and what they're looking for in their solutions.

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Operator [36]

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Thank you. That concludes our question-and-answer session. I would now like to turn the call over to President and CEO, Ray August, for his concluding remarks.

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [37]

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Great. Thank you, operator. In closing, I want to thank everybody for joining the call today. Benefitfocus had a very solid Q2, and we're pleased with the steady progress and improved execution throughout our entire company. Thank you for joining us. That concludes our call.

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Operator [38]

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Thank you. Today's conference has concluded. You may now disconnect your lines. Thank you for your participation.