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Edited Transcript of BNFT earnings conference call or presentation 3-May-18 9:00pm GMT

Q1 2018 Benefitfocus Inc Earnings Call

Charleston May 27, 2018 (Thomson StreetEvents) -- Edited Transcript of Benefitfocus Inc earnings conference call or presentation Thursday, May 3, 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

* John Stephen DiFucci

Jefferies LLC, Research Division - Equity Analyst

* 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 Benefitfocus Q1 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Michael Bauer.

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

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Thank you, operator. Good afternoon, and welcome to Benefitfocus' First 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 Q&A session.

Before we begin, let me remind you that today's discussion will include forward-looking statements such as second 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 financial results, recruitment and retention of key personnel, the early stage of our market, management of growth, 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 other 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'll also refer to certain non-GAAP financial measures. You can find important disclosures about those measures in our press release.

I'll now turn -- now let me turn the call over to Ray.

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

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Great. Thank you, Mike. Good afternoon. We had a solid start to 2018 and we are entering our selling season with positive momentum. As discussed on our Q4 earnings call, we are focused on generating faster recurring revenue growth, improving our profitability and driving long-term shareholder value. I'm pleased with our Q1 results and the steady progress made throughout the company during the quarter. Operationally, we continue our focused data investments to strengthen our company. Today, I'll highlight some achievements in key performance areas.

For the quarter, total revenue and adjusted EBITDA exceeded our guidance, and our booking performance was in line with our expectations. Another highlight was our successful One Place Conference, which we hosted in March. Attendance was the strongest in our history, demonstrating the robustness of our ecosystem and the attractiveness of our solutions. To continue the momentum throughout 2018, we are focused on the following 3 priorities: one, improving sales execution; two, expanding revenue opportunities; and three, strengthening our core. I will now provide you an update on our progress during the quarter on each of these 3 priority areas.

Regarding our priority to improve sales execution, in the quarter, execution across our sales and distribution channels sustained improvement. Our operational alignment, coupled with our continued investments in both direct and indirect go-to-market capabilities, increased the number of users on our platform, which drives recurring subscription and transaction revenue for the company. These focused investments are improving execution through our direct sales and partner channels. We also experienced favorable demand trends for our marketplace, analytics and consumer-directed health care offerings. In Q1, our improved sales execution drove solid user growth, and with the launch of BenefitsPlace, steady progress on expanding our average revenue per unit, or ARPU. Both of these positively impacted our bookings performance. From a logo perspective, we added 28 large employer customers in Q1, up from 20 in the prior-year period, and we increased our carrier count to 55 insurance carrier customers. We are making additional investments in key verticals where Benefitfocus has had notable success and where our scale and experience create a competitive advantage. A great example of this vertical approach is with state governments and public entities. Our long-standing relationship and multi-solution support for the North Carolina State Health Plan demonstrates our understanding of this complex segment as well as our ability to help large government entities achieve their goals.

In Q1, we signed the University of Texas system. I'll refer to this as UTS during this call. Our UTS deal further demonstrated the depth of our expertise in this vertical segment, with 15 university and multicenter campuses across Texas and over 100,000 Benefit-eligible employees, UTS required a technology solution provider who had experience and deep expertise working within state governments and the diverse agencies that they serve. Our technical ability to accommodate complex enrollment, analytics and billing administration across multiple entities set us apart. Other factors such as delivering a friendly, consumer-focused approach and our shared commitment to drive excellence in innovation reinforced our market leadership. We are excited to be a value partner of the UTS and believe this transaction validates our sales strategy.

In the quarter, we also demonstrated improved channel momentum. For example, we saw a measurable increase in our SAP bookings. Our success here reflects our recent investments to drive sales enablement, pipeline coordination and deal management throughout the entire U.S. SAP sales organization. To strengthen this momentum, we are continuing to invest in our partner distribution channel organization and our indirect sales community.

Now let's turn to our second priority, which is to expand revenue opportunities. Along with increasing the number of lives on our platform, our teams are focused on expanding ARPU. At our One Place Conference in March, we launched BenefitsPlace to unify the U.S. benefits industry. BenefitsPlace allows us to better monetize our end-to-end platform. Our former Benefitstore and certified carrier assets are now integrated into a single strategy and platform, and our sales and operation resources are focused on driving success through BenefitsPlace.

BenefitsPlace leverages and builds upon our frictionless environment for the over 20 million consumers on our platform to purchase core, specialty and voluntary benefits. Our optimized shopping experience historically drives employee participation rates for voluntary products that are higher than the industry average. Additionally, BenefitsPlace and our new premier broker program enables us to more closely partner with the influential broker community. We have eliminated potential channel conflict, and with BenefitsPlace, we earn fees and transaction revenue from our BenefitsPlace carriers and suppliers. Now employers, brokers, carriers, suppliers at Benefitfocus are all aligned to best serve the consumer.

Market response to BenefitsPlace has been strong and is accelerating the network effect of our platform. In Q1, we added Genworth as our fourth carrier, joining The Hartford, Aflac and Cigna as our charter BenefitsPlace carriers. In the quarter, we also added 5 key specialty product suppliers that provide various financial services and pharmacy programs. We are adding more insurance carriers and specialty product suppliers to our platform, and anticipate BenefitsPlace will begin contributing incremental revenue starting in 2019.

In addition, during Q1, existing customers continued to adopt multiple products from our growing catalog of solutions. This drove strong year-over-year growth in existing customer bookings. It also demonstrated our value as a strategic benefits partner. As our sales teams successfully execute and add customers to our platform, BenefitsPlace creates a significant opportunity for increased engagement and multiproduct adoption.

Our third priority is to strengthen our core. Through focused investment in data, further operational efficiencies and focused execution of our financial commitments on a year-over-year basis, we materially increase our software, consolidated gross margin as well as our adjusted EBITDA margin. Additionally, we significantly improved our free cash burn during the quarter, and we remain on track to be free cash flow positive for the full year 2018. To sustain our steady profitability and cash flow improvements as well as to extend our strong revenue retention rate above 95%, we are continuing to strengthen our platform. In our Q1 Spring release, we built upon our data accuracy initiative by making additional enhancements in automation for configurations, file extraction and data exchange. We believe these and future investments in data accuracy, data timeliness and automation deepen our competitive advantage, increase customer satisfaction and drive gross margin improvement.

To help drive accelerated adjusted EBITDA growth, we are focused on efficiency improvements throughout the company. For example, last week, we held Open Enrollment Success Week on our campus where our associates spent an entire week collaborating and sharing best practices as we prepare for open enrollment 2019. The learning and focused employee empowerment that occurred enables our teams to build upon previous Open Enrollment Successes and proactively adjust to ensure that open enrollment 2019 will be even a greater success than last year. Our OE Success Week highlighted process improvements as well as world-class data and automation initiatives that should create additional efficiencies throughout our company. We are committed to driving profitable revenue growth and allocate ample resources to support our long-term growth objectives. Overall, we remain early in capturing the benefits of our data investments, and we are confident we can drive meaningful marginal -- margin improvement in 2018 and beyond.

Finally, our customers have told us repeatedly that our associates are one of our -- the key things that sets us apart in the industry. Recently, we announced that we are extending ownership to all Benefitfocus associates through a new stock grant program. We are confident this gesture will continue to strengthen our long-term core business initiatives by aligning around common goals and clear roles.

Overall, we are very pleased with our solid start to 2018. We are encouraged by the trends we see in the market and the strong customer and prospect participation at One Place. We made solid progress against our 3 strategic priorities: improving sales execution by adding lives to our platform; expanding revenue opportunities by ramping our new BenefitsPlace offering; and focused execution on upselling and cross-selling our growing catalog of solutions; and strengthening our core through improved gross margin, adjusted EBITDA growth and cash flow. We are confident that as we deliver on these goals, Benefitfocus is well positioned to drive long-term shareholder value. In conclusion, we are very optimistic about our opportunities for 2018 and beyond.

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 first quarter financial results and then provide guidance for Q2 and fiscal 2018. As a reminder, all figures discussed will be under ASC 606, which we adopted on a full retrospective basis, effective January 1, 2018. Before opening the call for questions, I will conclude with a brief summary on the impact of the new accounting standard.

Turning to Q1. It was a solid quarter for Benefitfocus. Our teams executed well and our financial results exceeded our revenue and profitability targets. Total revenue for the first quarter was $62.4 million, an increase of 8% compared to the first 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, while the revenue in excess of our prior guidance predominantly reflects the timing of professional service revenue under ASC 606.

Breaking revenue down further. Employer revenue for the quarter was $40.3 million, up 12% compared to the year-ago period. Q1 carrier revenue of $22.1 million was up 1% compared to the first quarter 2017 and reflects organic growth from our insurance carrier install base, which offset a carrier customer segment migration that occurred in the third quarter of 2017. For the first quarter, total software services revenue was $48.2 million, an increase of 4% year-over-year, and employer software services revenue was $30.3 million, an increase of 4% as compared to the first quarter of 2017. As discussed last quarter, we are now recognizing more of our ACA compliance and reporting revenue ratably versus recognition that was largely lump sum at the time of delivery. Normalizing for this transition, our total software services year-over-year growth would be 7% and our employer software services year-over-year growth would be 10%. Total professional services revenue in Q1 was $14.2 million, representing an increase of 28% over Q1 2017 and predominantly reflects Benefits Service Center customer go lives in the quarter and the timing of professional services revenue under ASC 606.

GAAP results for the quarter include gross profit of $31 million, representing a margin of 50%; software gross profit of $32.1 million, representing a margin of 67%; and an operating loss of $10.7 million, contributing to a net loss per share of $0.44. Non-GAAP gross profit totaled $31.7 million or a 51% non-GAAP gross margin, which compares favorably to the 45% non-GAAP gross margin in Q1 2017. Non-GAAP software gross profit was $32.6 million or 68% non-GAAP gross margin and is up from the 65% non-GAAP gross margin in Q1 2017.

The over 550 basis point improvement in consolidated non-GAAP gross margin and over 300 basis point improvement in non-GAAP software gross margin over the prior period was driven by the combination of better-than-expected revenue growth and improving operational scale.

We also continue to drive consistent year-over-year improvements in our adjusted EBITDA results. Q1 adjusted EBITDA was negative $1 million or negative 2% of revenue. This exceeded our guidance of negative $6 million to negative $4 million and compares favorably to the negative 7% of revenue in Q1 2017. Our adjusted EBITDA was positively impacted by the combination of revenue growth, gross margin expansion and increasing operational scale. Non-GAAP net loss was $8 million and was above our prior guidance for a loss of $13 million to $11 million.

Moving to the balance sheet. We ended Q1 with cash of $54.8 million. Total deferred revenue declined $2.1 million sequentially to $53 million. The sequential decline reflects the ongoing shift away from our traditional large carrier service contracts.

Now to the cash flow statement. Q1 2018 cash used in operations totaled $3.7 million, an improvement as compared to $7.4 million used in the year-ago period. 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 $5.3 million, an improvement as compared to negative $9.5 million in the year-ago period.

Now let's move to guidance. As a reminder, our adoption of ASC 606 has created a new baseline and has meaningfully changed the seasonality of our model. I encourage you to review the presentation that we published on our website that provides the impact of the accounting change and includes 2017 restated unaudited financial data.

For the second quarter of 2018, we are targeting total revenue of $55.5 million to $57.5 million. This sequential decline in revenue primarily reflects several timing items that occurred in Q1, including professional service engagement revenue under ASC 606 and new commission revenue from off-cycle enrollments. From a profitability perspective, we expect adjusted EBITDA of negative $7 million to negative $5 million, a non-GAAP net loss of $14 million to $12 million, and a non-GAAP net loss per share of negative $0.44 to negative $0.38 based on 31.8 million weighted shares outstanding. The sequential decline in profitability reflects the impact of the timing of revenue previously discussed.

In terms of the mix of revenue between software and professional services revenue, we expect 2018 to be generally consistent with the prior year and reflects the reallocation of revenue between software services and professional services that we discussed on our last earnings call. This primarily relates to moving our recurring Benefits Service Center revenue to our professional services line. Importantly, for the first half of 2018, our revenue and profitability performance is in line with our expectations and our prior commentary. For the full year, we are reiterating our existing 2018 outlook. This includes total revenue in the range of $250 million to $258 million. We expect adjusted EBITDA of $5 million to $13 million, a non-GAAP net loss of $25 million to $17 million, and a non-GAAP net loss per share of negative $0.79 to negative $0.54 based on 31.8 million weighted shares outstanding.

I'll now provide a brief summary on the impact of ASC 606, which we adopted on January 1, 2018. We have elected the full retrospective reporting option which enables an equivalent comparison of our results. In aggregate, the adoption of ASC 606 resulted in a decrease in deferred revenue and professional service revenue and a timing change for brokerage commission revenue as well as an increase in our cost of revenue and sales and marketing expense. Let me provide additional color on each line item.

As we anticipated, year-end 2017 deferred revenue decreased by approximately $4 million upon the adoption of ASC 606 due to the recognition of professional services over a shorter period of time, primarily in our carrier segment. The net result was a shift from deferred revenue to retained earnings and a corresponding approximate $11 million reduction to our professional service revenue for 2017. In conjunction with the retrospective restatement of our revenue, management elected to make certain reclassifications between software services and professional services. This was largely related to our recurring Benefits Service Center revenue moving to professional services. In 2017, the reclassification resulted in approximately $24 million of software services revenue shifting to professional services revenue. ASC 606 impacted the timing of our insurance brokerage commission revenue, which is included in software services. As previously highlighted, our insurance brokerage commissions shifted from over the policy term, which was typically annual, to when orders of the policy transferred to the insurance carrier. With most of our customers completing open enrollment in Q4, under ASC 606, the vast majority of commission revenue will be recognized in the fourth quarter versus under ASC 605 where commissions were recognized ratably over the next 12 months.

In terms of expenses, we created assets for the costs to obtain contracts with customers, mostly comprised of certain sales commissions as well as costs to fulfill certain contracts. Under ASC 605, the majority of these costs were expenses incurred. Under ASC 606, the costs will be amortized on a systematic basis, which is generally expected to be approximately 5 years. For full year 2017, this accounting change and the shifting of our Benefits Service Center contributed to an approximately $25 million increase to GAAP cost of professional services revenue. In 2017, sales and marketing expenses increased by approximately $1 million, largely related to certain transactions in our carrier business in 2012 and 2013.

As previously highlighted, we did not experience a change to our operating cash due to the recasting of results under ASC 606.

Before I conclude, I'd like to highlight that during the second quarter, we will be presenting at the Jefferies Technology Conference, JPMorgan Technology Media and Communications Conference and the Berenberg U.S. Conference.

In closing, we are proud of the solid start of the year and are confident that by executing on our 3 strategic priorities of improving sales execution, expanding revenue opportunities and strengthening our core, we are well positioned to 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) Our first question is with 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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So Ray, you gave a lot of color on the Texas win and with the SAP channel ramping, but this is the second quarter, second quarter in a row, when bookings were above plan. So could you talk a little bit about what's really driven that from a process or maybe a market demand perspective? And what's your confidence level in the sustainability of those dynamics as we head into the heart of the selling season here?

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

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Yes, well, thank you, Brian. We really do appreciate your comments. As we looked at our overall bookings, we were really pleased with the growth we had. If you look at our logo count, we were up from 20 to 28 logos, so really strong improvement as we looked at our overall logos. But as we really think about our business going forward, lives are such a key part of how we think about our go forward revenue. And from a growth point of view, that's something that we're going to be really focused on. It's a much better, cleaner indicator of our overall growth. And I'm very pleased with our logos, pleased with our lives growth. The Texas deal is significant, 100,000 lives for us. And as we think about our business going forward, we have our overall lives and we also think about our average revenue per unit, our ARPU. And our BenefitsPlace announcement that we made just recently is really a key driver of us driving average revenue for each of our units. And we look very positively at the activity that we're seeing there. We talked about 4 carriers as part of our BenefitsPlace. And what happens in that case is that every single consumer on our platform that buys a voluntary benefit contributes to our overall revenue. As we look at what really drove the continued improvement, it's really back to what we talked about. It's making sure that we're focused on our sales execution by adding lives to our platform. We've made significant investments in our sales force. The sales team has a very big focus and precise focus on our channel activities. If you look at the activity we're seeing with SAP, the activities with Mercer and really the broker channel is going to be very, very important for us. So really pleased with that activity.

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

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Well, good to hear. That's a good segue to my next question. But it's clear at BenefitsPlace -- or with BenefitsPlace, that you're really looking to embrace and engage the broker channel. Could you just kind of help us size that opportunity? How big is that today? And how big do you think that could be over time?

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

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Yes, brokers are exciting for us. It has not really been a focus for us, and we are really focused on it now. To think about the opportunity, in a lot of ways, it's like having another sales force for us. Having brokers out in the field, they are the prime recommenders of employers when they're buying new solutions in this marketplace. At our One Place Conference, we had over 70 brokers in attendance at our broker keynote, it was standing-room only, people standing along the wall. And the demand from broker sign-ups has been really outstanding, and we're pleased with the performance we've seen in signing up brokers and their interest on our solution. As we think about brokers, we are committed to the broker channel to not only have the best service offering for brokers but also to drive the most revenue for our brokers. So we're really enthusiastic about what we're seeing with our brokers.

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Operator [6]

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Our next question is with John DiFucci with Jefferies.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [7]

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A question for Jonathon and then maybe a follow up for Ray. Jonathon, you gave second quarter revenue guidance that's for a sequential decline of about $7 million, and I think you said that's mainly due to pro services and broker commission timing. But implied in that guidance, is software subscription growing or declining sequentially?

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Jonathon E. Dussault, Benefitfocus, Inc. - CFO & Treasurer [8]

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Yes, thanks for the question, John. I hope you're well. So our software business in the first quarter, we're pleased with the overall results, both on a sequential basis and a year-over-year basis. We're up about 7% when normalizing for some of the ACA stuff that we talked about. As we look ahead to Q2, we expect a slight increase to our core software from Q1 to Q2, and that's when you take out the brokerage commission revenue. And that's reflective of where we are in our selling season. So the first couple of quarters with the slight increase is about where we would've expected it to be. I'm more optimistic and looking forward to our Q2 selling season and that being the catalyst to our end-of-year ramp up in our software line, and we do expect it as we get to the end of the year and look to '19, that we'll see improvement in that growth rate, and in particular, as you think about our BenefitsPlace offering, that will be a highly weighted software component of our business, and we're excited to add that to our offering.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [9]

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Great. That's helpful. And I guess maybe both of you, but I think maybe more towards Ray, new logos, last 2 quarters in a row growing. And that's after, my count anyway, last 5 out of 6, they actually declined. I guess what's -- I mean, you've been doing a lot, but what's really driving that, especially as you look to sign larger employers, too? It looks -- these things look good, and I know there's a lag between signing new employers and then when you start to recognize revenue, we try to model that. But I guess I don't know, what is -- what's the main driver behind that, that improvement?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [10]

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Yes, thank you for that. As we look at our logo improvement over the last couple of quarters, it really goes back to the fundamentals, making sure that we stay focused on accelerating revenue growth, making sure that we stay focused on articulating our value proposition to our overall customers. And as we look at the way we go to market, we go to market several ways, we go to market with the direct sales force. We have the largest direct sales force in our company's history at the moment, and then -- and really taken advantage of the channel. And focus on SAP and Mercer, the broker market is going to be very, very influential for us. And one of the key things that happens in our industry is we go through an open enrollment. And open enrollment is, in a lot of ways, our Super Bowl, it's when we serve our over 20 million plus consumers on our platform. And we had a very strong open enrollment by all different accounts, and that really helps drive reputation in the market, that really helps drive people's interest in Benefitfocus, and it's something that we believe is also a factor in our improved sales performance.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [11]

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So it sounds like it's just efforts along all those lines, direct sales force, partners, brokers, they're all starting to contribute more than they have, Ray?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [12]

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Yes. And a big part of it also, of course, is, we brought in Rob Dahdah in the last half last year, and just the focus on sales execution, focus on understanding the pipeline, focus on making sure we're going after the right deal at the right time, clearly articulating our value proposition, all that stuff comes together and adds up to improved performance.

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Operator [13]

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Our next question is with Ross MacMillan with RBC Capital Markets.

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Ross Stuart MacMillan, RBC Capital Markets, LLC, Research Division - Co-Head of Software Sector [14]

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Maybe the first question, somewhat similar vein, but obviously, I think net 28 versus 20 logos was up about 40%. I was curious, when you look at it on a lives basis, is the lives growth even better than that given some of these larger wins in the quarter?

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

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Yes, as I said earlier, as we think about our business, lives is actually the most important driver, obviously, because you take lives times average revenue, that becomes your total revenue. We're real pleased with our lives growth. The cornerstone for us is University of Texas, over 100,000 lives this quarter. But when we think about Texas, there's many ways to think about it. One of the big investments we made as we thought about our business and when we thought about focusing our verticals was in state governments. And in the state government business, we have our flagship customers, the state health plan of North Carolina, they have about 600,000 lives on our platform, they've been a terrific company. They are really a example for the entire country in terms of states that are extremely well run. They were instrumental in our pursuit in Texas to start delivering on delivery excellence, and we're encouraged by the opportunities that are happening in state government and the ability of state governments to add lives to our overall platform. So we expect to see that as a key area of focus for us. And of course, the activity with our channel partners is very significant for us, and what brokers can do for us and the fact that we have all these brokers who, in the past, were largely silent about us are out there being part of the Benefitfocus family, recommending us and we expect to see this -- to continue.

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Jonathon E. Dussault, Benefitfocus, Inc. - CFO & Treasurer [16]

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And Ross, it's Jonathon here. In terms of the number of lives in the ARPU, as we continue to improve upon our grasp for the metrics that drive our business, and in particular, react to the shifts in our strategy, i.e., the BenefitsPlace opportunity, we -- we're continuing to be focused on identifying the improved metrics to provide on future calls. We look forward to sharing that with folks going forward.

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Ross Stuart MacMillan, RBC Capital Markets, LLC, Research Division - Co-Head of Software Sector [17]

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Okay, that's great. And then, Jonathon, just for you on cash flow, I'm conscious that we're going to have sort of Q4 high gross margin sort of high watermark this year because of the BenefitsPlace revenue as well as the go lives from this year's selling season. So could we just double click on the cash flow from ops shape for this year? Is it going to be very, very Q4 weighted?

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Jonathon E. Dussault, Benefitfocus, Inc. - CFO & Treasurer [18]

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Yes, good question. So we're definitely going to have some back half weighting from our free cash flow perspective. And that's traditional with our business. As you know, historically, there is some seasonality in our business, a little bit more so now with the commission revenue coming in the back half. With that said, we're off to a really good start here in Q1. We showed almost a 50% improvement in our free cash flow generation Q1 over Q1. We're very pleased with that. There are some working capital fluctuations that occur throughout the quarter. We remain committed to free cash flow positive for the year though, and I believe we're on track for that.

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Operator [19]

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Our next question is with Frank Sparacino with First Analysis.

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Frank Sparacino, First Analysis Securities Corporation, Research Division - SVP [20]

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Sorry about that. Maybe, Ray, just on the UT deal, could you just talk about, I assume it was a outsourcing deal, maybe the incumbent that you replaced and just the competitive dynamics around that sales cycle?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [21]

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Yes, the Texas deal for us was, actually, we're replacing a homegrown system that they've had for over 20 years in production. And one of things that's really exciting for us is, they went out, they did this long search for the most appropriate system. They looked at all the different vendors and possibilities in the industry. And the gentleman who actually wrote the system for them 20-plus years ago was a key member of the team that selected our system, and to us that's an honor. But it was a case of having -- they had a robust system, it was a mainframe base system, but they were looking for innovation and a more robust consumer experience and they chose our platform. We're fortunate because of our experience on state health plan in North Carolina. We've assembled like a killer team of folks who understand more about state governments than we believe anybody in the industry, and we've deployed that team to help us be part of the Texas opportunity, and we're actually seeing many other state opportunities out there that we believe we're well positioned for as we go forward.

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Operator [22]

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(Operator Instructions) Our next question is with Steven Wardell with Chardan Capital Markets.

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Steven William Wardell, Chardan Capital Markets, LLC, Research Division - Senior Equity Research Analyst [23]

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Is there a simple quick reason why it looks like you guys beat your guidance in the first quarter but maintain for the year? Do you see gross revenue shifted forward? Is there just a -- is there a reason that you guys see for that?

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

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Yes, Steve, thanks for the question. So yes, Q1 experienced a little bit of timing benefit, primarily due to professional services. As we finalize the implementation of the new revenue standard, the timing of that revenue came in a little bit sooner than we originally anticipated. So if you go back to a couple of months ago when we provided full year guidance and Q1 guidance, we expected a bit more of that to roll out into Q2 and we were able to recognize more of it here in Q1, which is the primary driver to the outperform. And it's also a big driver in why you're seeing the sequential decline into Q2. So that that's the biggest component there.

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [25]

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And Steve, as we look at the first quarter and the rest of the year, we've been extremely encouraged by the selling activity and the bookings performance in both Q4 and Q1, but we do have our biggest selling season in front of us the next 2 quarters. And while we're very, very optimistic about that, a big part of our revenue will occur in those 2 quarters. So stay tuned.

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Steven William Wardell, Chardan Capital Markets, LLC, Research Division - Senior Equity Research Analyst [26]

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Great. And you guys have had a several quarter project to sell to very large enterprises. Can you just give us a sense of how that's going and your confidence in that? And any updates on that?

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

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Yes, yes, we do focus on selling to larger, larger companies, as I've said. Our focus is more and more on lives and not logos. Because if you look at the overall dynamics of our economics, every life contributes to our overall revenue. So if you have a logo that's 1,000 lives versus a logo that's 100,000 lives. The 100,000 life logo is much more profitable for us from both a revenue and EBITDA perspective. So we're really putting our focus on the total lives on our system. And the -- as far as making progress, it's a very strong quarter for us. We call those accounts over 10,000 enterprise accounts. We were up year-over-year on our enterprise accounts. And as we look at the Texas deal, that's a cornerstone for us, 100,000 lives, and it really shows the progress we're making in that area.

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Operator [28]

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Our next question is with Nina Deka with Piper Jaffray.

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

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So what gives you the confidence in the degree of premium revenue you expect to generate in 2019? I guess I'm trying to understand how you're forecasting for this. Is it that you already have committed volume? Or is it more just qualitative interest that you're hearing from your clients? And then as a follow up to that, how ready is your platforms for whatever demand you see once it all goes live? Let's say you have higher-than-expected level of bookings than you anticipated, to what degree can your platform accommodate that demand?

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

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Yes -- no, thank you. That's a great question, Nina. And as we look at premium on our platform, I believe you're referring to BenefitsPlace and our ability to service the customers that we see on that platform, there's several ways to look at it. Right now already, even though BenefitsPlace is brand new, we have 4 carriers, 4 medical carriers that are part of BenefitsPlace, Aflac, Hartford, Cigna and Genworth. And there's real strong demand from carriers like that. We expect good performance in Q2 of signing up additional carriers. As we think about the premium and how we feel about the premium, one of the things we're very fortunate of is right now, we have over 20 million people on our overall platform itself. And we know what the premium volumes are for over 400 different carriers on our system. So we know exactly what the premium that they've sold in the past are. So that gives us extremely good visibility into the future. And so for each carrier who's part of BenefitsPlace, we know how much they've sold on our platform in the past. So we feel very optimistic about the premium that will be sold going forward on our overall platform. As far as platform readiness and platform volume, we've had 2 just fantastic back-to-back open enrollments where we've had sub-second response time on our system. Each year, we increase our investment to making sure our platform is rock-solid and world-class. We have a terrific engineering team, and our system scales extremely well. 99.9% uptime in the last 2 open enrollments. But the other side of that is making sure we have the services professionals on site to be able to serve those customers. And just this last week, we had something we call OE Success Week. OE Success Week is where we take every single associate in our company, bring them together and talk about the things that we do to make sure that we're supporting our customers through our open enrollment timeframe. And all week we're together in classes, learning about the latest technology, learning about how we can best support our customers as we go through this transition, and it was a very, very positive event for us.

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Operator [31]

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(Operator Instructions) Our next question is with 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 [32]

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How many of the new wins involve the (inaudible) relationship or Mercer relationship?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [33]

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Yes, Adam, we really don't comment on Mercer, per se. We're -- as I said, we're really pleased with the overall platform performance. We're pleased with how the channel performed as a growing part of our overall segment. I'd encourage you to take a listen to the March earnings release. They actually comment on Mercer Marketplace and how it's doing overall, how the sales performance is, but that's not something that we disclose.

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Adam Klauber, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Financial Services and Technology [34]

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Okay. Okay. The Texas win, again, great win. Will that go live in '18? Or does that go live in '19?

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

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That's a -- it goes live in '19. That's when the majority of the financial impact will occur. So this year, we won't see any revenue impact, but it's a '19 activity.

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Jonathon E. Dussault, Benefitfocus, Inc. - CFO & Treasurer [36]

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What that deal does do for us though, it builds some optimism and confidence in our '19 forecast and expectations because it is a nice size deal for us as we talked about with the number of lives that it will bring to our platform.

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Adam Klauber, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Financial Services and Technology [37]

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Right. And very large jumbos like Texas, North Carolina, so the [PPMs] tend to be less than your average 1,000, 2,000 life client?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [38]

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Yes, of course. As we go upmarket, as you would expect, we give our customers some benefit of scale. But I also can say that from a profitability point of view, the larger they get, the more efficient the operations are and we get very positive financial outcomes. So it's a win both for us for the customer. They have a lower cost per unit, but for us, it's a win. Our gross margin's improved, and that's pretty much how we look at our overall pricing.

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Adam Klauber, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Financial Services and Technology [39]

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Okay. And I apologize, you may have said this, but how would you say just the overall market is from an RFP activity this year compared to last year?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [40]

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We'd say it's consistent. We're seeing -- one of the best indicators we have is actually people who come to our One Place Conference, and we had very significant exponential increase in the number of prospects that we had at One Place. We also, on our webinars, we're seeing an uptick in activity. But from a pure RFP basis, I would say it's consistent year-over-year.

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Adam Klauber, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Financial Services and Technology [41]

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Okay. And then I guess the same question on the carrier side, how is that? Is that market coming back? Or is that still a little quiet from an RFP standpoint?

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [42]

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It's interesting to talk about our carrier business. So if you look at our carrier revenue, in the past, our carrier business was really where we sold to our carriers, where we had solutions, eBilling solutions, e-exchange solutions which we would sell and implement with our carriers. But the characteristic of that revenue is changing dramatically. Where we work with our carriers now where they are selling business on our platforms. So if you look at our 4 BenefitsPlace carriers, we are bringing in revenue from them because people are buying their products on our overall platform. And if you look at our carrier revenue now, it's actually a mix of both of those items, kind of traditional software, almost looks like an on-prem business, to selling their solutions on our platform. And the amount of revenue that we're getting from them selling on our platform continues to increase quarter-over-quarter, year-over-year, and we expect to see that trend accelerate as we go into next year.

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Operator [43]

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Ladies and gentlemen, we have reached the end of our question-and-answer session. I'd now like to turn the call back to Ray August for closing remarks.

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [44]

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Great. Thank you, operator. In closing, I'd like to thank everybody for joining the call today. We're off to a solid start in 2018, and we're extremely pleased with the steady progress we've made and our improved execution throughout our company. We really appreciate everybody joining. Thank you, and this concludes our call.

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Operator [45]

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