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Edited Transcript of BNFT earnings conference call or presentation 26-Feb-19 10:00pm GMT

Q4 2018 Benefitfocus Inc Earnings Call

Charleston Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Benefitfocus Inc earnings conference call or presentation Tuesday, February 26, 2019 at 10:00:00pm 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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* Brian Christopher Peterson

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

* Christopher David Merwin

Goldman Sachs Group Inc., Research Division - Research Analyst

* Frank Sparacino

First Analysis Securities Corporation, Research Division - SVP

* Nandan Girish Amladi

Guggenheim Securities, LLC, Research Division - Senior 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

* Samad Saleem Samana

Jefferies LLC, Research Division - Equity Analyst

* 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. Welcome to the Benefitfocus Q4 2018 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded. I will now turn the conference over to your host, Michael Bauer, Senior Director, Finance and Investor Relations. Mr. Bauer, you may begin.

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

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Thank you, operator.

Good afternoon, and welcome to Benefitfocus' Fourth 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 first quarter and full year 2019 guidance and other predictions, expectations and information that might be considered forward-looking under federal security laws, including statements about our positioning for the future. 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, the immature and volatile market for our products and services, recruitment and retention of key personnel, risks associated with acquisitions, the need to innovate and provide useful products and services, our ability to compete effectively, cybersecurity risk and a changing regulatory environment that could cause actual results to differ materially from expectations. For a further discussion on the material risks and other important factors that could affect our actual results, please refer to our annual report on Form 10-K 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 earnings press release.

Also, we issued a separate press release today announcing our plan to commence a secondary underwritten offering by certain existing shareholders. For more details, please see our press release regarding the secondary offering and our registration statement on Form S-3 we filed with the SEC.

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.

I'll start by sharing the 3 key points I hope you will take away from today's call.

First, we continue to deliver on our commitments. Q4 marks the fifth consecutive quarter of meeting or exceeding our expectations. We significantly strengthened our balance sheet and had significant full year EBITDA of $10.3 million. This also marks the first year that we are free cash flow positive.

Second, we have accelerated our growth trajectory. In 2018, we returned to a growth agenda with revenue growth of 9%. Our organic growth will continue to accelerate in 2019.

And last, we are well positioned for future growth and value creation. Our bookings performance has steadily improved. BenefitsPlace has gone from inception in 2018 to driving significant revenue in 2019.

Now let's dive into the details. 2018 was a highly successful year. Our fourth quarter capped a milestone year of strategic and financial accomplishments. We began executing our new go-to-market strategy; defined and launched our platform pivot in record time; we strengthened our financial and business fundamentals; and we continue to improve key aspects of our business, driving shareholder value on all fronts. Our strong Q4 results exceeded our revenue and profitability guidance, generating nearly $13 million of operating cash flow and over $10 million of free cash flow. We also strengthened our balance sheet by raising net proceeds of over $200 million in convertible senior notes, lowering our cost of capital and providing increased financial flexibility to support our growth.

For the full year of 2018, we accelerated our revenue growth as well as our second half software services growth. We increased non-GAAP gross margin over 470 basis points; increased our operating leverage, raising adjusted EBITDA over 600 basis points; and for the first time in our history as a public company, we achieved positive free cash flow.

Underlying the strong performance is our consumer focus and our diversified growth strategy of adding lives and increasing average revenue per user, or ARPU. Our platform addresses the complexity of the benefits landscape by providing unprecedented simplicity and clarity for the entire benefits ecosystem. This results in more timely and accurate data for all participants, lower cost for benefits sellers, less frustration for benefits buyers and an unmatched consumer benefits experience that includes more choice and better information.

We closed 2018 having executed on 3 strategic priorities: improving sales execution, expanding revenue opportunities and strengthening our core.

Beginning with sales execution. Q4 was another quarter of consistency and improvement, building on our strong momentum throughout 2018. Total net benefit eligible lives increased by 19% when compared to the year-ago period. Driving this growth was the productivity of our sales team, which doubled the addition of net benefit eligible lives in 2018 compared to 2017. Our Q4 growth reflects strong traction with SAP and continued success penetrating larger employers. Over the past year, we greatly improved our go-to-market capabilities and the productivity of our sales organization, resulting in increased demand for our platform. Our seller network, our channel partners and our Premier Brokers are engaged, excited and collaborating. The entire ecosystem is connected. Every platform participant wins. Our BenefitsPlace offering sets the foundation for improved ecosystem alignment. It's the catalyst to further accelerate our growth, which brings us to our second priority, expanding revenue opportunities.

Less than a year ago, we launched BenefitsPlace, connecting buyers and sellers to our multidimensional marketplace. We believe the early success of BenefitsPlace is a direct result of our ability to simplify the complex and make transparent the benefits experience for our entire ecosystem. Our platform increases automation and delivers fast ROI. Our analytics solutions combine historical and projected needs of our consumers, providing powerful data-driven insights into their benefit needs. And it offers valuable products, which protect consumers and their families. We are simplifying the experience for our entire ecosystem. We are empowering consumers by providing greater choice, greater access and greater value. Our strategic shift balanced our business and in doing so, strengthened our alignment with our premier brokers, who can now open access to millions of consumer lives. We delivered enormous value for our entire benefits ecosystem by connecting buyers and sellers and growing the number of consumers on our platform. Together, these factors fuel our platform's network effect and help drive lives growth and ARPU expansion.

In Q4, our strong traction continued, and we further expanded BenefitsPlace by adding our 10th BenefitsPlace carrier, one of the leading writers of group life insurance in the U.S., Securian Financial Group; by adding additional products from current BenefitsPlace carriers, Allstate and The Hartford; by adding 5 more specialty products, bringing our total to 24; and by adding 2 million policies on BenefitsPlace during open enrollment, which generated over $600 million in premiums for our partners.

Our platform sellers network is a market-leading offering, comprised of the industry's marquee brands. By the end of 2018, we have a growing catalog of over 40 certified products on BenefitsPlace. Combined, these provide consumers and their families with leading cost-effective benefits options, options that help them better manage their health, finances and well-being.

Now let's turn to our third priority, strengthening the core of our business. In Q4 and throughout 2018, we executed well against our stated financial commitments. We have strategically focused on high-margin recurring revenue streams, and our diversified model has inherent leverage, enhanced by our automation and data initiatives. In Q4, these investments contributed to improved profitability and our ability to generate cash flow.

We are a stronger company today than we were a year ago. When we launched BenefitsPlace, we knew it would be transformational. As our new business model continued maturing throughout the year, we saw clearly that consumers wanted greater peace of mind day in and day out. In our experience, consumers don't see benefits as "benefits", they see them as elements of security and protection and a means to a brighter future.

We are now entering 2019 with significant momentum and strong fundamentals. We are building on our milestone 2018 year and accelerating our platform strategy.

In 2019, we are focused on 3 complementary priorities: grow our platform, strengthening our core and advancing our market leadership. Our platform growth focus is multifaceted, but simply defined as adding lives and increasing ARPU, both organically and through acquisition. To maintain our strong organic lives growth, in 2019, we are increasing our investment in direct sales and indirect channel capabilities. This includes expanding our channel sales team with quota-carrying sales reps supporting the success of SAP and our Premier Brokers. We are also enabling our inside sales team to sell direct to new customers of all sizes. This should accelerate our bookings in the new year. And we will continue investing heavily to expand our broker channel partnerships and grow our Premier Broker relationships, which, as of today, exceeds 100. That's up from 50 plus at year-end, up from 0 at the start of 2018.

Our increased investment includes expanding our Premier Broker program through a national broker agreement with Mercer, who was a material customer in 2018. Mercer has been a valued partner since they launched their private exchange and became an investor in Benefitfocus 4 years ago. In Q1, we extended our commercial agreement with Mercer to be more in line with both company's goals. The result for Benefitfocus is a measured pivot away from supporting Mercer's private exchange business to an emphasis on selling our platform and a renewed partnership. While the strategic pivot will result in a modest headwind to our 2019 software services revenue, it will also broaden our broker opportunity, remove all prior exclusivity constraints, and Mercer will be a reseller of our platform. That's why we are confident that over the longer term, that this change will be accretive to our growth and profitability of our company. By pivoting in this direction, Benefitfocus provides a level playing field for all brokers across the U.S. This strategy will allow us to work with all brokers without restriction. By being equally attractive to all, this will fuel broker and lives growth in the future.

We exited 2018 with a strong balance sheet and moved quickly to capitalize on an asset purchase during the first quarter 2019. Yesterday, on February 25, we acquired certain assets of Connecture's commercial software solutions business. This acquisition complements our business and will add technology, customers and associates to strengthen our platform and company. Acquiring these assets also provides a tremendous opportunity to enhance the value we deliver to our carrier customers. It is also expected to expand our consumer reach and market opportunity by introducing BenefitsPlace to the individual, small and midmarket medical carrier segments.

As highlighted at our Investor Day, we are extremely pleased with the early success of BenefitsPlace and our ability to expand ARPU. In 2019, we will continue to focus on providing access to BenefitsPlace to all 13-plus million net benefit eligible lives, adding more high-quality BenefitsPlace carrier and supplier products to our platform; increasing placement and adoption of BenefitsPlace products with employers; and driving higher consumer participation.

We continue to strengthen our core. This strategic priority is unchanged from 2018. We remain hyper focused on enhancing operational excellence across every aspect of our business. This includes our shift towards higher margin revenue streams, improved profitability and cash flow through automation and data initiatives as well as executing a strategic capital allocation plan in support of our growth objectives.

And finally, our third priority in 2019 is to advance our market leadership. With a firm foundation upon which to accelerate our growth, we are elevating our consumer focus and driving innovation. Given our significant scale and market influence, we will leverage our platform position to increase our visibility into the consumer markets.

This will start in a few weeks at our premier customer event, One Place. At this year's industry event in our hometown of Charleston, South Carolina, we are hosting the largest insurance companies, leading brokers and some of the most respected companies in the world. The event is sold out with double the broker participation over the last year and will take our market-leading position into the next level.

Looking back on 2018, we are truly proud of what Benefitfocus has accomplished. We delivered strong Q4 and full year 2018 results. We accomplished our goals by remaining focused on our priorities. In 2019, I'm confident our team will do the same. We remain diligent and focused on growing our platform, strengthening our core and advancing our market leadership. With our strong fundamentals, our diverse revenue streams, our balanced business and our tremendous growth opportunities, we have the foundation necessary for continued success and to create even more value in 2019.

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.

Today, I'll be discussing our fourth quarter and full year 2018 financial results and our financial guidance for Q1 and full year 2019, which will be inclusive of the effects of our extended agreement with Mercer and the acquisition of certain commercial software assets from Connecture.

Turning to Q4. It was a strong quarter for Benefitfocus. Total revenue for the fourth quarter was $74.8 million, an increase of 10% compared to the fourth quarter of 2017. This is above our previous guidance range. Fourth quarter revenue growth was driven by the combination of our software subscription and transactional revenue streams and the timing of employer professional service revenue. The revenue in excess of the high end of our prior guidance was primarily driven by BenefitsPlace' outperformance.

Breaking Q4 revenue down further. Employer revenue of $52.1 million was up 11% compared to the prior year period. Carrier revenue was $22.7 million, up 8% compared to the fourth quarter 2017 as BenefitsPlace' strength and continued subscription revenue growth was partially offset by the timing of professional services revenue. Total software services revenue was $59 million, an increase of 10% year-over-year and reflects contributions from both subscription and BenefitsPlace. Employer software services revenue was $39.9 million, an increase of 8% compared to the fourth quarter of 2017. Carrier software services revenue was $19.1 million, an increase of 15% compared to the prior year period. Total professional services revenue was $15.7 million, an increase of 10% over Q4 2017.

GAAP results for the quarter include gross profit of $39.4 million, representing a margin of 53%. Software gross profit of $41.9 million, representing a margin of 71%; and an operating loss of $9.6 million, contributing to a net loss per share of $0.41. This reflects an increase in G&A expenses resulting from first year stocks compliance, convertible note deal costs and implementation of new lease accounting rules.

Non-GAAP gross profit totaled $42.4 million or a 57% non-GAAP gross margin. This compares favorably to the 51% non-GAAP gross margin in Q4 2017. Non-GAAP software gross profit was $43.6 million or 74% non-GAAP gross margin. This is up from the 71% non-GAAP gross margin in Q4 2017. The over 300 basis point improvement in non-GAAP software gross margin and over 590 basis point improvement in consolidated non-GAAP gross margin reflects a combination of our purposeful shift towards high-margin subscription and BenefitsPlace transaction revenue; improved operational efficiencies, driven by our focused data investments and increased automation, which benefits both our software and services line items; and our platform's inherent operational scale. We also continued to drive consistent improvements in our adjusted EBITDA results.

Q4 adjusted EBITDA was $12 million or 16% of revenue. This exceeded our guidance and compares favorably to the 8% of revenue in Q4 2017. Our adjusted EBITDA continues to be positively impacted by our recurring revenue growth, gross margin expansion, increasing operational scale and improved efficiencies throughout our company. Non-GAAP net income was $4.7 million and was at the high end of our prior guidance. For the full year 2018, our total revenue increased 9% to $258.7 million. Our non-GAAP gross margin increased over 470 basis points, and our adjusted EBITDA margin increased over 600 basis points when compared to the full year 2017.

Moving to the balance sheet. As Ray highlighted, at the end of December, we strengthened our cash position by successfully raising convertible senior notes, netting Benefitfocus approximately $201 million. This transaction lowers our cost of capital by over 250 basis points and provides management with the financial flexibility to strategically grow our business. After repaying our prior revolving line of credit of $39.2 million, we ended 2018 with cash of $190.9 million. Total deferred revenue declined $1.7 million sequentially to $45.9 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.

Onto the cash flow statement. We achieved a key milestone in our company's history, generating positive free cash flow in Q4 and full year 2018. Free cash flow, a non-GAAP measure that we define as cash provided by or used in operation plus purchases of property and equipment, was $10.5 million in Q4 and is an improvement from the $7 million of free cash flow generated in Q4 2017. For full year 2018, we generated $700,000 in free cash flow. The nearly $15 million improvement compared to the full year 2017 reflects our shift towards higher-margin revenue streams and our focus on efficiencies throughout the company.

Now let's move to guidance. Our financial guidance is inclusive of the effects of our extended agreement with Mercer and the acquisition of certain commercial software assets from Connecture. These 2 strategic decisions are aimed at bolstering our long-term growth, each will have varying impacts on our full year and first half 2019 outlook.

First, on February 25, we acquired certain commercial software assets of Connecture for $24 million in cash. We currently anticipate this will contribute mid-single-digit points of revenue growth in 2019 and to be slightly dilutive to 2019 profitability. Second, the extended Mercer agreement will partially offset the additional revenue from the asset acquisition as we anticipate a low to mid-single digit headwind to our full year revenue growth rate. With that said, for the first quarter of 2019, we're targeting total revenue of $66.5 million to $68.5 million. We expect adjusted EBITDA of negative $0.5 million to a positive $1.5 million. In addition to the above strategic decisions, our first quarter and first half 2019 growth will be impacted by the second half waiting of enterprise transaction go-lives and timing of certain BenefitsPlace revenue. As we enter 2019, Benefitfocus is positioned for accelerated organic revenue growth and margin expansion. Therefore, we expect total revenue for full year 2019 to be in the range of $301 million to $309 million, which, at the midpoint, represents approximately 18% growth compared to the full year 2018. From a profitability perspective, we expect adjusted EBITDA of $15 million to $20 million.

In closing, our team executed very well in Q4 and 2018. By focusing on our 3 2018 strategic priorities, we have strengthened our business and built momentum. We are confident that by executing on our 3 2019 strategic priorities of growing our platform, strengthening our core and advancing our market leadership, that we can build upon our milestone 2018 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) Our first question comes from the line of Brian Peterson from Raymond James.

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

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So I wanted to start on Mercer. Could you talk about how that relationship has evolved when you signed the agreement a few years back and how you see that going forward? And is there any way to think about framing that in terms of your broader broker initiatives going forward?

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

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Yes. Hey, Brian, thank you. If you think about Mercer and what's going on with them, it's important to state that Mercer continues to be a very important strategic partner for us at Benefitfocus. As we said on the call that we just signed an extension with them that will go for several years, so we're excited about that. But I want to provide a little bit of a frame for you about our Mercer relationship and really unpack a little bit about what's going on. So in 2015, if you go back to 2015, as a company, Mercer was looking for a partner, somebody to work with them with private exchanges. Private exchanges, at that time, was a rage, and Mercer selected Benefitfocus as a partner. So at that time, Benefitfocus had 0 brokers that we were partnered with. Mercer was the only one at that point in time. And another factor was Benefitfocus, at that point, in 2015, was in the need of cash for our overall business. Now to fast forward now to 2019, many things have changed. For example, we went from 0 brokers to well over 100 brokers now just in less than a year that have really signed up and are a key part of Benefitfocus' strategy. They're driving lives on our platform. They're providing us terrific insights. So brokers are a key and important part of our overall strategy. From a cash position, we went out at a point of strength. So we have, as Jonathon said, about $200 million on our balance sheet and plus, we're free cash flow positive. And from an overall product strategy point of view, the private exchange era has largely passed us, companies are looking for marketplaces, and thus, the reason in shift for our relationship. And Mercer has always had the opportunity to use any platform that they want. So we're really excited about this and where it's going -- somebody's gone unmute. We now have the -- thank you, the opportunity to work with any broker in the country. We released exclusivity provision from Mercer, so it's really a great opportunity for us to work with this entire broker ecosystem, and which once was a headwind to us, now we consider a tailwind, and we actually think this will be a very important factor as we look at our revenue growth. Just as a reminder, our growth rate was 0 in 2017, 9% in 2018, and we see it roughly doubling in 2019. So we're really excited about what we're seeing out there. People are really adopting our platform. All members of our platform wins in this model and excited to work more closely with every broker in the country as we go forward.

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

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Maybe just one on the Connecture acquisition. What do you think that brings to the table for you strategically? And how should we think about the pace of M&A going forward?

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

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Yes, so with the convert, we raised about $200 million of capital. We're going to use that capital very wisely. We're going to use it to help expand our platform approach, whether it be the lives on the platform or ARPU, both of those will be areas for us to really look at to grow our overall business. Specific around, we actually acquired certain assets of Connecture with some asset purchase, and it was part of their -- they have a commercial Connecture business, and we were very, very impressed with what they've built as a team over there. They have solutions for individual marketplaces, small group marketplaces, midsize group marketplaces. They give Benefitfocus the ability to quote-to-card processing. They have a very robust broker relationship. So what we'll be doing is over the next 90 days -- we just closed yesterday, so over the next 90 days, we'll have a deep, robust integration plan, and we'll be prepared to talk a lot about what this means to our business going forward at our Q1 earnings call. All Connecture customers will be invited to our One Place Conference March 26 in Charleston, South Carolina. So we're really excited to work with the Connecture associates, who are now part of Benefitfocus, and the Connecture customers in really deploying the terrific intellectual property they've built there and using that across our entire customer base.

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Operator [6]

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Our next question comes from the line of Ross MacMillan from RBC.

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

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I'm at an airport, so I apologize in advance if there's background noise. But let me start just with, Jonathon, on the revenue guidance $301 million, $309 million, can you help us understand what you think software services will be within that number? And then specifically on software services, what's the net impact of the Mercer change and the Connecture asset acquisition?

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

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Yes, thanks, Ross. Appreciate the question. As we think about 2019 guidance, as you know, we don't guide specifically to revenue type, but I would say, think about our model going into 2019 as it's similar mix rate as we had in 2018 between software and professional services. To answer your second question regarding the impact of Mercer. As we think about the outlook for the full year, it really starts with the business having very strong momentum as we head into 2019. We indicated at the end of 2018 that our preliminary outlook was to grow at a mid- to high teens rate, and we are still very much on track for that. The Mercer arrangement does provide some modest headwinds in 2019, which we're estimating to be in the low to mid-single-digits impact on our total growth rate. Of course, that's offset by the mid-single-digit growth rate benefit from the acquisition that we announced, the results of which is our aggregate guidance of $301 million to $309 million, which represents the 16% to 19% growth rate for the full year.

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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. And then my follow-up would be on -- just on lives. '18 was a massive year for net new lives. I think you added 2.1 million net eligible lives versus about 1 million in '17. How are you thinking about lives growth in '19, which will obviously feed into '20? And how should we think about that big comp, if you will, in 2018?

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

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Yes, so Ross, as you know, our focus as a business has been very hyper focused on driving lives and adding ARPU. So when we closed out 2018 with a 19% growth rate year-over-year increase in the number of net benefit eligible lives, we look at that as really instrumental, as a key indicator to our future revenue, and it gives us confidence in our visibility into 2019's revenue. Our focus on adding lives is not going to stop in 2019. Our teams are very much organized around adding lives, so we're investing heavily in our channel relationships and of course, our broker channels to continue to drive lives. And we'll pursue organic and inorganic opportunities to do so. So it'll be a key measure, and I encourage you to track that metric as an indicator of our future revenue growth going forward.

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Operator [11]

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

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Christopher David Merwin, Goldman Sachs Group Inc., Research Division - Research Analyst [12]

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I just wanted to ask about ARPU a bit. So in addition to lives as a driver, you're also saying BenefitsPlace driving high enrollment outcomes. I think somewhere between 2 and 4x is what you mentioned at the Analyst Day. So when we think about growth in BenefitsPlace revenue, how much is from lives, and how much is from higher enrollment as we look into '19? And I had a follow-up as well.

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

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Yes, so as we look at our business, we look at both of those together, lives times ARPU on our platform to drive our overall revenue growth. And while they're dependent, they're also related to one another. So as we look at the network effects, the more lives we add on our platform, the bigger scale it gives us from an ARPU standpoint working with our sellers or brokers or carriers on various aspects. As we continue to increase our volumes from an ARPU perspective, that scale gives us buying synergies and allows us to produce better outcomes for those carriers and brokers. Those brokers then recommend Benefitfocus on their platform, and our lives go up. So we do see those 2 things linked together and driving the overall network effect for us as our overall business. As far as ARPU specifically, one of the things that we're really proud of is that we announced BenefitsPlace in March of last year, and then 9 months later, in the last open enrollment, we saw phenomenal increases. We sold over 2 million policies that were on BenefitsPlace this open enrollment. Those 2 million policies represented approximately $600 million of premium for our carriers who are working with us at Benefitfocus. But what's really important to us is that in every one of those $600 million, the consumers were seeing value because they were getting better products at better pricing than any place else in a low friction way. Employers were seeing products that were enabling them to offer more benefits to everybody on the entire ecosystem. So it was a model in which everybody wins. As we dissect and think about our model, one of the biggest things that we look at is our participation rate. So just to give you some insights, typically, on an online platform, on Benefits Platform, the industry averages show you that about 15% of the time, an employee will participate in that voluntary benefit. As we look at our platform, we have much greater engagement on our platform, and in fact, we grew -- we're at 39% this year, which is an increase of 54% over the previous year. So we're seeing a big growth, a big jump in participation. What that means is consumers are getting value on the platform, and consumers are providing value for their family, and carriers are selling much more products. So we see the participation rates continuing to increase as we go into '19, which will drive better outcomes for everybody on our platform.

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Christopher David Merwin, Goldman Sachs Group Inc., Research Division - Research Analyst [14]

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Okay, great. And then just a follow-up is on '19 EBITDA guidance. I think that came in a little bit below where we were, and you called out investments in sales reps, and there's a few other things as well. So when we think about the long-term revenue guidance of over 20%, how should we think about the multiyear trend of the investments you're going to make in the business to get there, particularly in light of the margin targets you gave as well?

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Jonathon E. Dussault, Benefitfocus, Inc. - CFO & Treasurer [15]

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Yes. Thanks for the question. We remain focused on the same long-term target that we discussed at our Investor Day in December, and they are as follows: From a gross margin perspective, our target is 65% plus, and underpinning that is a 75% plus software gross margin target. We've demonstrated great progress towards that. Notably, in 2018, our consolidated gross margin expanded by 472 basis points year-over-year, and that's on the heels of some very targeted investments in automation and efficiency, which are paying off on a gross margin line. If you combine that with operating scale that we are seeing across our operating structure, and that's inclusive of our technology organization, where some of those efficiencies and automation efforts are paying off, as well as, over time, we will generate G&A efficiencies, while at the same time, continuing to invest in sales and marketing, which is critical in order to position us to capture the market opportunity that we have in front of us. All told, our adjusted EBITDA target as a business is 25%, and we're making good, solid progress towards that and remain confident in our ability to achieve that in time.

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Operator [16]

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Our next question comes from the line of Samad Samana from Jefferies.

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Samad Saleem Samana, Jefferies LLC, Research Division - Equity Analyst [17]

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Maybe one, if I could ask a follow-up on guidance. When the company gave the initial outlook for 2019 following the third quarter, was that already taking into account the revision with Mercer? Or was the change with Mercer a net new item? So I guess, just maybe help us -- walk us from the initial guidance to the current guidance and where you found out about Mercer along the way. And then I have a follow-up question.

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

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Yes, sure. Good question. So consistent with our preliminary outlook that we provided actually a little over a year ago at the end of 2017 to provide early indicators in '18, we did the same thing several months ago to provide early indications of what 2019 was going to look like, and that's when we provided the mid to high teens growth rate. Since that point in time, 2 strategic decisions or events have occurred. One of them was earlier in Q1 of '19, we amended that Mercer relationship, which created the low to mid-single digit headwinds in '19 that I referred to with long-term accretive opportunity, however. And then, of course, the addition of the acquisition added mid-single-digit growth opportunity for us in 2019.

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Samad Saleem Samana, Jefferies LLC, Research Division - Equity Analyst [19]

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Great. That's really helpful. And then maybe just on the investments. Could you help us understand how much of the ramp there is factored into 2019? Or should it impact 2019? Or are the investments that you're making this year really more to help continue the acceleration for growth into 2020?

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Jonathon E. Dussault, Benefitfocus, Inc. - CFO & Treasurer [20]

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Yes, so it's a little bit of both. Our investments are very focused on driving and optimizing execution of our BenefitsPlace strategy here in 2019. And then, of course, we maintain very committed to long-term growth trajectory of 20-plus percent, and therefore, are making investments today and throughout 2019 to position ourselves for continued achievement of that long-term target.

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Operator [21]

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Our next question comes from the line of Nina Deka from Piper Jaffray.

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Nina D. Deka, Piper Jaffray Companies, Research Division - Research Analyst [22]

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Congrats on the quarter and for this acquisition.

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [23]

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Thank you, Nina. Appreciate it.

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Nina D. Deka, Piper Jaffray Companies, Research Division - Research Analyst [24]

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Regarding the acquisition, how many net benefit eligible lives does Connecture bring to the platform?

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

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Yes, when we look at the acquisition, the asset acquisition of Connecture, something that we're really excited about, it's going to bring a lot of value to our current customers and Connecture's customers coming over to us. It actually is one of the things that we're really excited about with Connecture, is they have a very strong presence in the Blues, much like Benefitfocus, and both of us working together to serve the Blues will allow us to really take advantage of that opportunity for the blues and their customers and add a lot of net benefit eligible lives. The acquisition closed yesterday, and we do not have the exact number of net benefit eligible lives. We haven't had the opportunity to go through that in the detail in a manner consistent with ours. So what we'll be doing is we have a 90-day integration plan with the Connecture asset, and we'll be talking about this in our Q1 earnings call, but we see that this is very, very significant and will have a great impact for us, including the number of net benefit eligible lives.

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Nina D. Deka, Piper Jaffray Companies, Research Division - Research Analyst [26]

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Okay. And then do you anticipate that those lives would have access to the BenefitsPlace platform for the next open enrollment season?

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

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Yes, of course. The Connecture acquisition is effective now. They're on our platform, and they'll be moving quickly over to be BenefitsPlace eligible and will be working on the overall strategy. One of the things that you should know is, one of the big things we have done is, during the last open enrollment, BenefitsPlace was only accessible by employer customers. And now as we go into 2019, we're -- we are enabling BenefitsPlace for our carrier customers. So our carrier customers will now have the opportunity to leverage BenefitsPlace, leverage all the goodness of BenefitsPlace, voluntary products for the people on the carrier platforms, which will drive ARPU expansion for us across the company. So we see Connecture as a real important part of that.

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Nina D. Deka, Piper Jaffray Companies, Research Division - Research Analyst [28]

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Okay. And then one more for Jonathon. You mentioned something about the timing of professional services earlier in the call. Are you expecting for what would have been professional services revenue in Q4 to come in later in 2019? Was there something specific that was delayed?

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Jonathon E. Dussault, Benefitfocus, Inc. - CFO & Treasurer [29]

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Yes, no, Nina, there's just some timing between the quarters that impacted Q4 to a degree, and that's the reason why we identified it.

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Operator [30]

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Our next question comes from the line of Nandan Amladi from Guggenheim Partners.

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Nandan Girish Amladi, Guggenheim Securities, LLC, Research Division - Senior Analyst [31]

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So on the metrics, you're providing us the lives metric now. You're also, I guess, giving some commentary along the way on the number of brokers and vendors that participate on the network. Is there a way for us to triangulate those 2 in any way?

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Jonathon E. Dussault, Benefitfocus, Inc. - CFO & Treasurer [32]

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Well, I think the success in our broker channel will come through in the number of net benefit eligible lives that we ultimately add on our platform, Nandan. So I would point you to that net benefit eligible metric as the key indicator of the total success of our entire sales organization through all of our channels.

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Nandan Girish Amladi, Guggenheim Securities, LLC, Research Division - Senior Analyst [33]

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Okay. And a quick follow-up on the CapEx side. As you move to this more transactionally intensive business model, might there be any meaningful impact on the CapEx?

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Jonathon E. Dussault, Benefitfocus, Inc. - CFO & Treasurer [34]

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I wouldn't say anything meaningfully. We'll continue to invest in our technology organization as we have in the past. We believe that we invested high points for our industry. Of course, we'll look at our new acquisition of the assets of Connecture and make targeted investments to ensure that we're optimizing that investment. But otherwise, I would not note anything material.

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Operator [35]

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Our next question comes from the line of Frank Sparacino from First Analysis.

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Frank Sparacino, First Analysis Securities Corporation, Research Division - SVP [36]

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Just one for me, probably for Ray. In terms of the news about Connecture and then also, Ray, you had made a comment with regards to the inside sales team selling not just sort of the back to base, but also to new clients direct. Is there a change in the target market for you now? Are you moving down market? Just maybe some thoughts there.

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

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Yes, thanks very much. We -- as we look at our business and we've evolved to the platform model and really treating every consumer as equal and making sure that for every single consumer, we're increasing the value to that consumer, and that shows up for us as ARPU. If you look at what we're doing with the carrier marketplace and the fact that carriers are a key component of what we're doing with BenefitsPlace, we see customers of all sizes as key and strategic to us, really starting with companies of 2. And if you look at the work we do with the Blues and over 150,000 employers that are on our platform, those customers are ideal for BenefitsPlace. They'll continue to drive ARPU. They have the same need for voluntary benefits that all of our customers do. So we're looking at the entire spectrum from 2 all the way up to our largest customer, which is North Carolina State Health Plan, which's approximately 600,000 lives. So all of them are very important and strategic to us. Of course, they get implemented in different ways. A small carrier -- a small employer gets implemented by a carrier, and the larger -- large employer will get implemented directly by Benefitfocus or one of our channel partners. But all companies, all lives are very attractive to us and very important to us.

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Operator [38]

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Our last question comes from the line of Steven Wardell from Chardan Capital Markets.

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Steven William Wardell, Chardan Capital Markets, LLC, Research Division - Senior Equity Research Analyst [39]

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Hey, guys. I'm hoping -- I'd like to understand a little better what's going on in the minds of your customers now and for the forthcoming year, and so I'm just wondering if you could speak a little bit to the different categories of customers you have, employers, health plans and what are their pain points and what are they talking to you about and what -- which of your offerings are they thinking about most in the coming year?

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

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Yes, thanks, Steven. And that's one of the things that we really put our -- we think a lot about, is making sure to have an outside-in focus, talking to our customers, understanding the problems that they're trying to solve for themselves and their businesses. And as we talk to our employer customers, who are so significant as an employer, everybody from 2 all the way up, they actually have a pretty interesting dilemma right now where unemployment is at historic lows, per country unemployment rate, while at the same time, we're seeing a lot of wage compression, where salaries are not increasing at a rapid rate. They're actually moderating at a very low increase. What that is doing for employers, employers have a situation where given the fact that people are more difficult to keep than ever before given the low unemployment rates, we're seeing a phenomenon where HR administrators have to find ways to attract and retain talent to their company without spending more money. And because the Benefitfocus Marketplace and BenefitsPlace itself provides a vehicle where an employer can add voluntary benefits to their company which has almost no cost to that company, they're adding more benefits to an individual, doing it at less of a cause, and they're using this as a way to drive value through their entire employee base. So an example will be working with Benefitfocus, deploying student loan refinancing, which is a hot topic right now, that an employer can leverage that, offer that to their company and have no incremental cost, which is a win for the employer, it's a win for the employee because they have a great way to consolidate student loans and reduce the amount of interest that they're paying. It's a win for our brokers because our brokers are now producing value to their employers, and they get rewarded by that with transaction revenue, and it's a win for the carriers. So this tension that employers have is real, and it's dramatic, and HR administrators are trying to find ways to drive up more value at less of a price point. And Benefitfocus is very unique in enabling that to happen.

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Operator [41]

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We have reached the end of the question-and-answer session, and I will now turn the call over to Ray August, President and CEO, for closing remarks.

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

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Yes, I want to thank everybody for joining our Q4 and full year 2018 call. In summary, we had a fantastic 2018, and our team is executing extremely well. Our 2019 revenue growth is accelerating, and at the same time, profitability is improving, and we are extremely well positioned for the future. This now concludes our call. Thank you.

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Jonathon E. Dussault, Benefitfocus, Inc. - CFO & Treasurer [43]

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Thank you.

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Operator [44]

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This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.