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Edited Transcript of BNFT earnings conference call or presentation 6-Nov-19 10:00pm GMT

Q3 2019 Benefitfocus Inc Earnings Call Charleston Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Benefitfocus Inc earnings conference call or presentation Wednesday, November 6, 2019 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Michael Bauer Benefitfocus, Inc. - IR * Raymond Alexander August Benefitfocus, Inc. - CEO, President & Director * Stephen M. Swad Benefitfocus, Inc. - CFO ================================================================================ Conference Call Participants ================================================================================ * Brian Christopher Peterson Raymond James & Associates, Inc., Research Division - Senior Research Associate * Frank Sparacino First Analysis Securities Corporation, Research Division - SVP * James John Stockton Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst * Kevin Kumar Goldman Sachs Group Inc., Research Division - Associate * Matthew James Coss JP Morgan Chase & Co, Research Division - Analyst * Nandan Girish Amladi Guggenheim Securities, LLC, Research Division - Senior Analyst * Robert Edward Simmons RBC Capital Markets, Research Division - Senior Associate * Steven Paul Halper Cantor Fitzgerald & Co., Research Division - Analyst * Strecker Backe Wedbush Securities Inc., Research Division - Associate of Equity Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings. Welcome to the Benefitfocus Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Mike Bauer, Vice President of Finance and Investor Relations. You may begin. -------------------------------------------------------------------------------- Michael Bauer, Benefitfocus, Inc. - IR [2] -------------------------------------------------------------------------------- Thank you, operator. Good afternoon, and welcome to Benefitfocus' Third Quarter 2019 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 Steve Swad, our Chief Financial Officer. Ray and Steve will offer some prepared remarks, and then we'll 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 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 losses and need to achieve GAAP profitability, the fluctuation of our financial results, the immature and volatile market of our products and services, recruitment and retention of key personnel, risk associated with acquisitions, the need to innovate and provide useful products and services, our ability to a compete effectively, cybersecurity risk and a changing regulatory environment that could cause actual results to differ materially from expectations. For a further discussion of 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 press -- in our earnings press release. I'll now turn the call over to Ray. -------------------------------------------------------------------------------- Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Mike. Good afternoon, everyone. Benefitfocus is working to fundamentally transform how benefits are bought and sold in the United States. We continue to make solid progress, and the accomplishments in the third quarter and year-to-date are helping us achieve this goal of transformation. Multiple factors across our business position us to be a market leader, but 3 key differentiators are core and unique to Benefitfocus. First is our AI-powered platform. It is designed to remove friction, improve the consumer experience and increase benefits participation. It helps employees engage with what they want and need year-round, not just during a 2-week open enrollment period. Second is our end-to-end network. We are adding lives at scale to our platform. Our ecosystem is unmatched. It continues to strengthen as we add buyers, employers, employees and freelance workers as well as sellers, carriers, suppliers and brokers. Third is our emerging platform business model. We collect transactional revenue from sellers on our platform and subscription revenue from buyers on our platform. This means our BenefitsPlace suppliers pay us certain fees for benefits purchased, and end users, which consists of carriers and employees, and the employee and consumer lives they represent, pay us software subscriptions for our platforms. The combination of our growing scale and increased participation drives a greater volume of data and future revenue. We have amassed an incredible data asset. Our data allows us to create meaningful connections at scale as well as match a particular carrier's offer with the needs and wants of an employer and individual consumer. In Q3, we added another 300,000 net benefit eligible lives to our platform, bringing this total to 16.8 million. Importantly, our direct sales team and growing partnership channel executed to plan. We remain on track to achieve our full year growth target of net benefit eligible lives. Because of our strong network and the flexibility of our single code base platform, we have multiple opportunities to grow lives. These include medical carriers, public sector, other aggregators and groups of lives and large employers. In Q3, we extended our platform's reach to support the growing gig economy. For example, Shipt, Inc., a leading online, same-day delivery platform, a wholly owned subsidiary of the Target Corporation, signed on to make BenefitsPlace and its robust product offering, available to the entire workforce of freelance workers. Shipt is an example of the powerful network effect of our platform's growing capabilities. They recognize the value of our platform and the importance of offering a robust set of benefits, benefits that attract and retain freelance workers. Currently, tens of millions of Americans consider themselves freelancers and contractors, and that huge group is growing. This is a generational shift. We believe we have the right ingredients and the right platform to be at the forefront of this shift to connect with this workforce to support their lives and to provide the benefits they want. To further our platform efforts, we added over 250 premier brokers during the quarter. This brings our total premier broker count to over 700, up materially from last year when we had less than 50. These brokers recommend the Benefitfocus Platform to their customers. That is an example of the network effect we are creating and the platform capabilities of our business model. We believe this significant growth positions us well to continue growing net benefit eligible lives in 2020 and beyond. While the future broker opportunity is substantial, the influential part of the network continues to make a positive impact today. Brokers have significantly contributed to our 2019 employer lives growth. In addition to net benefit eligible lives being up over 25% compared to last year, the following indicators suggest engagement and participation will be higher this open enrollment and will continue to grow as our platform matures. Compared to the prior year period, active enrollments and the number of lives exposed to BenefitsPlace have increased. BenefitsPlace has nearly doubled the amount of products, including multigenerational benefit options that enhance talent recruiting and retention strategies. InnovationPlace, our startup partner program announced at One Place, successfully launched its first company, Natalist, for our own associate. These products will soon be offered on BenefitsPlace, and a new cohort of innovative suppliers will be joining the program next month. Finally, our artificial intelligence engine is now active, and we have improved our industry-leading platform data analytics capabilities. Early indications are positive, and we're pleased with current OE results. We are seeing instances when our open enrollment recommendations and guidelines are implemented, engagement is higher. In addition to our AI improvements, our technology leadership position continues to expand. At our Carrier Place conference in September, we introduced MarketPlace for Carriers. This includes our platform's transformative quote-to-pay capabilities. We've leveraged the best of Benefitfocus and the assets acquired from Connecture. This means, for next year's open enrollment, MarketPlace for Carriers will automate the entire Benefits value chain. This gives a greater number of consumers easy access to voluntary benefits from the leading brands in BenefitsPlace, all through a smart and intuitive mobile experience. Our pipeline is strong, and this product offering is driving new transformative discussions with existing and new customers. For employers, the initial deployment of our enterprise human capital management API with Ultimate Software has been extremely positive. This product is designed to eliminate integration friction, to automate manual processes, and to create a better, more reliable experience. Employer demand is robust, and we have a healthy pipeline of additional HCM vendors lining up. And in our Q3 autumn software release, we launched self-pay capabilities to provide consumers more choice in using alternate payment options for voluntary benefits. This increased flexibility does more than remove ecosystem friction. It is also expected to support new growth opportunities in the emerging gig economy as well as future consumer participation on our platform. Platform growth, increased engagement and more powerful technology strengthened the core of our business. Another critically important element of our business is our data. Today, we have an unmatched health, wealth, property and lifestyle data asset that is a powerful part of our business. We expect our 8 AI engine future ecosystem growth and continued data-centric investments to drive a more personalized customer experience. Combined with our tailored analytics with the entire benefits ecosystem, we believe we can extend our competitive differentiation and accelerate growth. We are excited about the power of our platform strategy and the value of our data to better support the entire benefits ecosystem. Over the next 45 days, open enrollment activity will hit a fever pitch. We are ready for that. Our data investments have positioned Benefitfocus to provide the best experience in the industry. We are leading the market in data accuracy at 99.9%, a statistic far better than industry performance. We are entering open enrollment with momentum and are excited about our growth opportunities. To build off this year's success, next week, we will host our 2020 sales kickoff conference. At this year's event, we will have expanded the conference to include members of our entire selling ecosystem. This includes our direct sales team, premier brokers and other channel partners, and influencers, who are coming together to collaborate, learn and win. Lastly, I am pleased with our financial performance. Our revenue grew 17%. Non-GAAP gross margins increased 300 basis points over last year. And EBITDA was well above last year and our expectations. This performing -- this performance is confirming that our platform is stronger. For the past 2 years, our team is focused on growing our platform, increasing consumer engagement and advancing our technological leadership. With our diverse revenue streams and strengthening fundamentals, we are well positioned to increase shareholder value. Now, I'd like to turn the call over to Steve to review our financial results. Steve? -------------------------------------------------------------------------------- Stephen M. Swad, Benefitfocus, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Ray. Today, I'll begin with a few of my learnings as CFO since our last call. Then I'll provide a brief recap of the third quarter financial results, and conclude with guidance. Let's start with one of my learnings. It's clear that our company's primary focus is on growing lives and increasing engagement. As lives grow and engagement increases, our software and transaction revenue should grow, and margins should continue to expand. In addition, what became clear to me over the last 90 days is that meaningful value will be created by exposing and engaging our existing base of customers to BenefitsPlace. We are pleased with the success of BenefitsPlace to date and the opportunity in front of us to drive additional participation and engagement. Second, I have a better appreciation for the value of our carrier relationships. These relationships are strategic in that our product enables the carrier to interact with their customers. Because the products are important components to the carriers' offerings, these relationships are very sticky. So it makes sense that we're deploying capital to grow in this area of our business as these customers have large lifetime values and low customer acquisition cost. And third, after talking with and listening to you, we are committed to disclosing more information on our business. At the time of our Q4 call, I will have experienced 2 full quarters and one open enrollment as CFO. At that time, I expect to provide additional disclosures to help you better understand our business. I will also guide the 2020 revenue and EBITDA. Now let's turn to our financials. Overall, it was a solid quarter for Benefitfocus. Ray mentioned we ended the quarter with 16.8 million net benefit eligible lives, and for the first time, exposed BenefitsPlace to gig economy workers. Therefore, to keep pace with our strategy and business activities, we updated our definition of net benefit eligible lives to include this growing part of the workforce. We believe this will drive incremental transaction revenue beginning this open enrollment season. Moving to the P&L. Total revenue for the quarter was $71.7 million, an increase of 17% compared to the third quarter of 2018, and was at the high end of our guidance range. Third quarter revenue was primarily driven by software subscription revenue and BenefitsPlace revenue. As we've discussed in prior quarters, our Q3 revenue growth was partially offset by the renegotiation of the Mercer contract, which allowed us to remove friction with the broker community. Excluding the impacts of Mercer, our third quarter revenue growth was in the low 20% range. Connecture delivered strong results in the quarter by contributing nearly $9 million of revenue. The Connecture performance partially reflects synergies from our combined team's ability to secure business from the acquired customer relationships. This resulted in incremental software and professional services revenue in the quarter and is an indication of future opportunities. We are very pleased with the financial performance and strategic IPs that resulted from the Connecture acquisition, and we are on pace to have this deal fully integrated by the end of the year. Excluding the contributions from Connecture and the impacts of Mercer, total revenue grew in the mid-single digits compared to Q3 2018. The change in the growth rate from Q2 reflects our focus on high-margin software service revenue and less change request work. As previously discussed, we remain confident that the year-on-year growth will accelerate in Q4. Increased interest in our platform is driving total software services revenue, which was $54.2 million in the quarter, an increase of 16% compared to the prior period. The growth reflects an approximate $4 million contribution from customers formerly owned by Connecture and a continued growth in both subscription and BenefitsPlace. Excluding the contributions from Connecture customers and Mercer, total software services grew in the low double digits compared to Q3 2018. Our total Professional Services revenue was $17.5 million. The 23% increase over Q3 2018 reflects the acquisition of Connecture. GAAP gross profit was $36.1 million, representing a margin of 50%. Software gross profit was $36.9 million, representing a margin of 68%. Non-GAAP gross profit was $37.2 million, which represents a 52% non-GAAP gross margin. This favorably compares to a 49% non-GAAP gross margin in Q3 2018. Non-GAAP software gross profit was $37.5 million or a 69% non-GAAP gross margin. This is up from the 66% non-GAAP gross margin in Q3 2018. Similar to prior quarters, the improvement in gross margin reflects a continued organic shift toward high-margin subscription in BenefitsPlace transaction revenue, improved operational efficiency from focused investment in automation and data, and benefits from scale as our platform activity grows at low marginal cost. We also continue to drive improvements in our adjusted EBITDA. Q3 adjusted EBITDA was $2.9 million. This exceeded our guidance and compares favorably to roughly breakeven in Q3 2018. Our adjusted EBITDA was positively impacted by our recurring revenue growth, gross margin expansion and our increasing operational scale. Operating loss was $7.3 million, contributing to a net loss per share of $0.38. The year-over-year increase in operating expenses largely resulted from Connecture-related expenses. A non-GAAP net loss was $7.5 million compared to a $7.2 million net loss in the year-ago period. Now let's move to the balance sheet and cash flow. We ended Q3 with cash and cash equivalents of $130.7 million, down from $138.4 million in the prior quarter. Free cash flow, a non-GAAP measure that we define as cash provided or used in operations plus purchases of property and equipment, was negative $6.3 million in the quarter. We expect single-digit millions of positive free cash flow to be generated next quarter. Moving to guidance. For the full year 2019, we are reiterating our total revenue expectation of $292 million to $300 million. We're increasing our adjusted EBITDA range to $12 million to $17 million, up from $10 million to $15 million. We are also improving our expected non-GAAP net loss to $29 million to $24 million, which represents a non-GAAP net loss per share of $0.89 to $0.74 based on 32.5 million basic and diluted weighted average common shares outstanding. While it is too early to provide 2020 guidance, I'd like to provide some directional color. We are excited about the emerging growth opportunity from BenefitsPlace. We are excited about our new solution, MarketPlace for Carrier, and we are excited about the strategic decision to fully open up the broker channel. Each of these represent significant growth opportunities for our company. As we've shared with you before, the choice to renegotiate our Mercer relationship creates near-term revenue pressure, but importantly, it removes significant friction from a much larger broker opportunity over the long term. With that, we will open it up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question comes from Brian Peterson with Raymond James. -------------------------------------------------------------------------------- Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [2] -------------------------------------------------------------------------------- So Ray, maybe I'll start with you. Just we're going through open enrollment right now. I know you mentioned some stats on engagement. Any insight you can share about what you're seeing in terms of trends or customers that are going through that process? -------------------------------------------------------------------------------- Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Yes. Thank you, Brian. We're in the early days of open enrollment. Q4 is our busiest quarter when it comes to open enrollment, but in the early innings. But what we're seeing so far has been extremely positive as we decompose what happens during open enrollment. It starts with the number of people on our platform, and our lives counts are up about 27% over the previous period. So a lot more people on our platform interacting with us. And then we look at the number of products they have available to buy. We have twice the number of BenefitsPlace products than we had a year ago. And then the third thing is really after you have the people on the platform and the products, is our people making that click and participating in our platform and purchasing those products. And over the last year, we've made a very, very significant investment in artificial intelligence with BenefitSAIGE. And that product allows us to proactively reach out to people on our platform and help them make the right benefit selection for them and their families. In the last month alone, we sent out over 1 million messages to people on our platform to help guide them so they're making the right decision. So when we look at the people on our platform and the number of products they have available to them, the participation that we're seeing, we're very, very pleased with our overall results. Also, our customers are reporting good feedback to us this open enrollment. And one of the things that we're really proud of is, if you look at the investments we've made in data and automation, which you see showing up in our gross margin improvements, but it also speaks to the quality of the data in our system. We have a 99.9% first pass yield rate, which really means that's the number of transactions that are correct and positive in our system. The 0.1% is typically things that -- the data coming over from a payroll system is incorrect. So we believe our first-pass yield measures are, by far, the highest in the industry. As we think about open enrollment, one of the things I love about this industry is you get a new open enrollment every year. Every year, people go through the same process. So last year, we had our first BenefitsPlace open enrollment. We saw very, very good results. This year, our results are much improved over last year. And the learnings that we're going to get from this year are going to make us even stronger in the next year. So really pleased with what we're seeing with open enrollment thus far. -------------------------------------------------------------------------------- Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [4] -------------------------------------------------------------------------------- That's good to hear. And maybe a follow-up for Steve. I appreciate all the color on the Mercer dynamics, and I appreciate you're not giving 2020 guidance at this point. But anything that you can share directionally in terms of Mercer and maybe how we should think about that contribution in 2020? -------------------------------------------------------------------------------- Stephen M. Swad, Benefitfocus, Inc. - CFO [5] -------------------------------------------------------------------------------- Okay. Thanks, Brian. Yes, before I get into 2020, just a quick comment on the quarter. I was pretty pleased with rev growth, pleased with the margin expansion, pleased with the EBITDA growth and pleased with the lives growth. And then as it relates to 2020, I did -- we've still got 6 weeks left in the year. And so I didn't give point estimates. I need to see how the year closes out. But I did share with you some color. I shared color around BenefitsPlace that seems to -- that's performing well and that will be part of our discussion in 2020. We're seeing opportunities in the carrier space, that will be part of our discussion for 2020. The broker channel, the strategy shift we made to open up the broker channel continues to be positive. It's removed friction, and you're seeing positive influences in our selling activity. And as you pointed out, and also, our brokers, our number of brokers are up, I don't know, more than, I think we are at 50 about a year ago, and we're at 700 now, or more than 700 now. And I did highlight though, moving away, shifting away from the legacy Mercer business, we'll see a continued decline in our revenue over time. But the strategy shift, which embraces brokers as part of our ecosystem and removing that friction, will provide tailwinds to the business over the long term. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- The next question comes from Nandan Amladi with Guggenheim Partners. -------------------------------------------------------------------------------- Nandan Girish Amladi, Guggenheim Securities, LLC, Research Division - Senior Analyst [7] -------------------------------------------------------------------------------- So a question about this support for freelancers. Traditionally, your platforms' been very suitable for employer-sponsored benefits. In the context of freelancers, how does this actually work? Are you establishing relationships directly with the freelancers? Or is there still a sort of sponsoring entity? -------------------------------------------------------------------------------- Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [8] -------------------------------------------------------------------------------- Yes, Nandan, thank you. We're really excited about adding the gig economy to the portfolio of products in companies that we offer. As you know, the gig economy has just taken off, and it's really providing not only an increased opportunity for us, but obviously it's increasing our TAM as well. In the case of Shipt, the sponsoring entity is Shipt themselves. They're offering our solution to all their, what they call shoppers, and we've been really excited by the progress. We got them up and implemented in 30 days. And now a Shipt shopper can go out and buy a number of products that are on BenefitsPlace today, products like pet insurance, identity theft and even medical insurance. So we see this as a big and growing opportunity for us now and into the future to really make sure we're providing benefit solutions to all gig workers. Also opens us up to 1099 workers, consultants and others. So love that we're helping this gig economy and also the TAM expansion that it provides to us. -------------------------------------------------------------------------------- Nandan Girish Amladi, Guggenheim Securities, LLC, Research Division - Senior Analyst [9] -------------------------------------------------------------------------------- And a quick follow-up for Steve. As you look ahead to next year, where do you expect your R&D efforts will be focused continuing to build out the network? Adding more brokers and more products to the platform? Or are there still fundamental features in the platform that would draw a lot of R&D funding as well? -------------------------------------------------------------------------------- Stephen M. Swad, Benefitfocus, Inc. - CFO [10] -------------------------------------------------------------------------------- We're -- we'll come back to you with more specifics. But the themes that you're hearing us talk about today are going to continue. Our AI platform is going to be a theme. Our data -- accumulation of data is going to be a theme. MarketPlace for Carrier is going to be a theme. I'm pleased -- serving the ecosystem is the job of the platform, and you're going to hear the themes we're talking about today just continue into next year. And we'll refine that method as we come back to you next call. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- The next question comes from Chris Merwin with Goldman Sachs. -------------------------------------------------------------------------------- Kevin Kumar, Goldman Sachs Group Inc., Research Division - Associate [12] -------------------------------------------------------------------------------- This is Kevin on for Chris. Ray, last quarter, you talked about a higher mix of life and ancillary products on BenefitsPlace versus specialty and having kind of a negative impact on the timing of your revenue. Can you -- as you head into open enrollment, can you maybe talk about an update there and how that mix is evolving? -------------------------------------------------------------------------------- Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [13] -------------------------------------------------------------------------------- Yes. It's operating just as we planned. We're not at the halfway point yet of our open enrollment. We have our biggest 2 weeks ahead of us and 6 weeks left in the quarter of open enrollment activity. But the mix is holding true to what we thought it would be. As I said, the participation is very, very high. We're seeing real good take rates, but our guidance remains the same. -------------------------------------------------------------------------------- Kevin Kumar, Goldman Sachs Group Inc., Research Division - Associate [14] -------------------------------------------------------------------------------- Got it. And then maybe on the progress with the brokers. I think last quarter, you talked about a percentage in terms of the overall broker community and kind of the contribution to lives. Any update there? -------------------------------------------------------------------------------- Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [15] -------------------------------------------------------------------------------- Yes. It was 70% last quarter, in which our brokers had an impact in our lives growth. And we're seeing a very consistent pattern. This quarter, and in fact, we're working very closely with our brokers next week, and I'm sure we'll have what we call our seller place gathering, where we bring together the key sellers on our platform, where there are internal sales peoples, brokers and other partners. And our broker community will be there, planning for next year to make 2020 stronger than ever. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- The next question comes from Frank Sparacino with First Analysis. -------------------------------------------------------------------------------- Frank Sparacino, First Analysis Securities Corporation, Research Division - SVP [17] -------------------------------------------------------------------------------- Can you hear me okay? -------------------------------------------------------------------------------- Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [18] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Frank Sparacino, First Analysis Securities Corporation, Research Division - SVP [19] -------------------------------------------------------------------------------- Maybe just, first, can you -- you talked about changing the definition on the net benefit eligible lives. Can you be more specific there in terms of what changed? And then as it relates to Q4, I would imagine we're not going to see much of a change in the lives growth. So the wide Q4 range, I assume, this is entirely driven by BenefitsPlace, but if you could maybe just talk about some of the assumptions you have, low end versus high end, in that guidance. -------------------------------------------------------------------------------- Stephen M. Swad, Benefitfocus, Inc. - CFO [20] -------------------------------------------------------------------------------- Yes. This is Steve. The definition update was just simple. It didn't consider freelancers, and so we added a sentence that considered freelancers. And kind of stepping up, we're pleased to kind of tap into that opportunity. We think that's a growing opportunity in our platform. We'll serve that group well. As it relates to the guidance for Q4, Ray mentioned, I mentioned, that we still -- we're in the middle of open enrollment. And you rightfully point out, we've got -- I'm taking a close -- or keeping a close eye on BenefitsPlace, and that's part of the reason for the variability. We also have some carrier transactions that I've got my eye on, and the combination of those 2 just caused me to think it was prudent to hold on revenue since you will note that we lifted EBITDA guidance, so. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- The next question comes from Jamie Stockton with Wells Fargo. -------------------------------------------------------------------------------- James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [22] -------------------------------------------------------------------------------- I guess maybe, first, I know there have been some other questions on the premier brokers, but this number that you guys are talking about continues to escalate. Can you help us think about the leads that you're getting from these entities, maybe from a size standpoint? Are they similar to what you would source via kind of a more direct effort? Are these smaller businesses? I appreciate that you guys have said that something in the ballpark of 70% of the lives that you're bringing on have at least in some way been influenced by your broker channel. But I guess I'm trying to think about like a year from now or 2 years from now when some of these newer broker relationships really start to have an impact. Is it going to be that they're giving you leads that are kind of in line with the normal customers that you've been signing up in the last year or 2? -------------------------------------------------------------------------------- Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [23] -------------------------------------------------------------------------------- Yes. Jamie, thanks. We've been really excited about our broker progress and pleasantly surprised with just the ramp up and how they're really engaging with us. They see us as a great way for them to add lives, but also expand their revenue, given the contribution that BenefitsPlace makes with their customers and the fact that their customers will typically buy more when they select BenefitsPlace products than alternative products. The way we look at it is, this last year was a very good year where we moved to the brokers, created a tailwind for our business. It allowed us to have a much more efficient cost of sales, where we actually could deploy resources to other parts of our ecosystem, namely medical carriers, providing solutions to voluntary providers. So it allowed us to really get more value out of our sales force now that we have brokers out there who are generating leads from us. We're excited for next year to the contribution that they'll make. We don't have clear line of sight yet on exactly what that looks like, and we're working with them planning starting next -- basically next week at our sales meeting, which will be able to give us really good insights into the contribution that they'll make to us. But it really remains to be seen how quickly they come online, but I will say, 2019, very pleased with the progress, and in 2020, we'll continue to see an improvement there. But also very important to us is allowing us to scale our sales investment and essentially growing into multiple sales forces with that, a material increase in the percent that we spend on sales. -------------------------------------------------------------------------------- James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [24] -------------------------------------------------------------------------------- But just from a size standpoint, Ray, do the customers that you tend to bring in, that are influenced by the broker relationships, do they tend to be kind of average size customers? -------------------------------------------------------------------------------- Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [25] -------------------------------------------------------------------------------- Yes. It is very consistent with the customers that we've been adding in the past. Every customer needs a broker. -------------------------------------------------------------------------------- James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [26] -------------------------------------------------------------------------------- Sure. And then, I guess my other question is around the Connecture contribution during the quarter. It sounded like it was a pretty healthy one. I think Steve said $9 million. Maybe a couple of questions there. One, should we think about that as a kind of -- as a similar contribution in the fourth quarter? And if not, is the pro services piece, which sounded like it might have been $5 million of that $9 million, is that going to come down maybe because of some work that they do before open enrollment, but that doesn't have happen during open enrollment? -------------------------------------------------------------------------------- Stephen M. Swad, Benefitfocus, Inc. - CFO [27] -------------------------------------------------------------------------------- Yes. This is Steve. To back up, I'm really pleased with the Connecture acquisition. I'm pleased from a financial perspective. This is a business that we paid $20-plus million for, and in one quarter, it does $9 million at the top line. I also mentioned that, that included some synergies. So you saw for the first time like both the Connecture folks and the Benefitfocus folks going at the market together, and I was pleased with the synergies. I think the business did better together than we would have without a part. As it relates to your question on the quarter, Q3 is that business' strongest quarter, and we expect Q4 to revert back to something similar to what we saw in Q2. -------------------------------------------------------------------------------- Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [28] -------------------------------------------------------------------------------- And just to add on that, from a Connecture point of view, there's the economic impact. But actually, most importantly is the strategic impact of their assets and the impact on our business. And I really like this Connecture and Benefitfocus as one business. And what we've done is we've combined the Connecture assets with our assets, and that's really created our MarketPlace for Carrier where we use the Connecture front-end rating, quoting and product catalog with our back-end enrollment and billing solution. And that's one of the drivers that we have for this carrier pipeline, which we're very positive about. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- The next question comes from Dan Ives with Wedbush Securities. -------------------------------------------------------------------------------- Strecker Backe, Wedbush Securities Inc., Research Division - Associate of Equity Research [30] -------------------------------------------------------------------------------- This is Strecker on for Dan. You touched on it a little bit earlier, but can you talk about the 3 different lives -- types of lives and how they performed individually in the quarter? And then, just from a high level, how you're thinking about that trajectory into 2020? And then just anything you'd like to call out or update to BenefitSAIGE will be great. -------------------------------------------------------------------------------- Stephen M. Swad, Benefitfocus, Inc. - CFO [31] -------------------------------------------------------------------------------- Maybe I'll -- we've talked about lives in the aggregate, and we ended the quarter at 16.8 million. We're up 300,000. We feel good about that. That's kind of in line with our expectations. And then your second question was like, how do we look to 2020. I gave a little bit of color at the beginning of the Q&A and also in my comments. And I just want to wait. We'll give much more color after we close these next 6 weeks, and we'll come back out with you with some more detailed descriptions at 2020. -------------------------------------------------------------------------------- Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [32] -------------------------------------------------------------------------------- Yes. And I'll take the BenefitSAIGE question. Yes. And BenefitSAIGE is instrumental to our platform. In fact, the way we think about our platform is an AI-driven platform. And what BenefitSAIGE is allowing us to do, it allows us to analyze this massive data that we have and proactively reach out to people and help inform them of decisions they need to make. So if you look at benefits enrollment in the past, typically, somebody would go through an enrollment site, they then turn their information, there'd be a 2-week period during the year, and then they've come back every year for that 2-week period. With BenefitSAIGE, it allows us to take this data, analyze it, make recommendations to people on our platform, regardless of the time of the year. So we can reach out to someone and say, hey, you've just surpassed the deductible limit on your insurance policy. So now would be a good time to bring on discretionary medical procedures. Or your child has just turned 26 years old, this would be a good time to enroll them in their own medical plan. Or you just got a raise and now this will be a great time to top off your CDH HSA contribution or your 401k contribution. So it really allows us to have this proactive 2-way relationship of everybody in our platform, whether through e-mails or notifications. They're hearing from us with relevant data that has an impact on their lives and their family's lives. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- The next question comes from Steve Halper with Cantor Fitzgerald. -------------------------------------------------------------------------------- Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [34] -------------------------------------------------------------------------------- Could you just walk us through the mechanics around the decline in deferred revenue on the balance sheet? -------------------------------------------------------------------------------- Stephen M. Swad, Benefitfocus, Inc. - CFO [35] -------------------------------------------------------------------------------- Sure. This is Steve. That relates primarily to -- well, let me back up. With many SaaS companies, deferred revenue is a key indicator of what's happening in the future. With our business, because so much of it happens on a quarterly bill basis or a monthly bill basis, that metric is not as significant. And -- but to answer your question explicitly, for our business, most of that relates to professional services for large carrier installs, and we have to match the timing of the recognition of that with the install. So it sits on the balance sheet for a while, and then it comes under the income statement. Secondarily, and the much smaller piece of it, especially as you look year-over-year is, Mercer is treated similar that some of the legacy Mercer business on the balance sheet and then it comes off. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- The next question comes from Mark Murphy with JPMorgan. -------------------------------------------------------------------------------- Matthew James Coss, JP Morgan Chase & Co, Research Division - Analyst [37] -------------------------------------------------------------------------------- This is Matt Coss on behalf of Mark Murphy. Steve, of the 300,000 lives added this quarter, how many do you think came from the expanded definition that now includes gig workers? And then I have one follow-up. -------------------------------------------------------------------------------- Stephen M. Swad, Benefitfocus, Inc. - CFO [38] -------------------------------------------------------------------------------- Matt, we don't give specifics on that. We were excited about the opportunity. We embrace the opportunity. If you think about the focus of the company, it's connecting buyers of benefits with sellers of benefits, and this cohort of lives needs benefits the same way as all the other ones, and we lump them together and serve them each individually on a tailored basis. -------------------------------------------------------------------------------- Matthew James Coss, JP Morgan Chase & Co, Research Division - Analyst [39] -------------------------------------------------------------------------------- Okay. Great. And then I know part of this is sort of the path of acceleration in revenue growth. It certainly includes growth of lives in the platform. But I think part of the other part of the equation is growth in ARPU. I know it's still very early in open enrollment, but have you seen any indicators that would make you excited about ARPU growth? Or at least initially optimistic in sort of the voluntary benefits that people are acquiring? Or just anything on the ARPU side? -------------------------------------------------------------------------------- Stephen M. Swad, Benefitfocus, Inc. - CFO [40] -------------------------------------------------------------------------------- Yes. I'm going to -- you can ask me that in 90 days. I'm going to wait for open enrollment to close. I'm going to have remarks about the quarter. I'm going to have more remarks about 2020 and be happy to talk about that then. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- The next question comes from Matt Hedberg with RBC Capital Markets. -------------------------------------------------------------------------------- Robert Edward Simmons, RBC Capital Markets, Research Division - Senior Associate [42] -------------------------------------------------------------------------------- This is Robert Simmons on for Matt. So 3Q is usually your biggest selling season, and 2Q is much, much larger for you this year. Has something phenomenally changed there? -------------------------------------------------------------------------------- Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [43] -------------------------------------------------------------------------------- No. It's actually the reverse. 2Q is our biggest selling season by far, and 3Q is an add-on selling season. And as you know, we had a very strong Q2 and actually a very strong 3Q as well. So our Q2 is always traditionally our biggest selling season. -------------------------------------------------------------------------------- Robert Edward Simmons, RBC Capital Markets, Research Division - Senior Associate [44] -------------------------------------------------------------------------------- Okay. So last year was kind of an unusual thing with the 0.5 million and then ends at 8.9 million? -------------------------------------------------------------------------------- Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [45] -------------------------------------------------------------------------------- Yes. And last year, if you look, Q2 was very, very -- was much less than this year's Q2. So actually had a lot of deferrals last year in Q2 that slid into Q3. Maybe take the combination of Q2 and Q3 -- in both years, the numbers this year are much, much higher. -------------------------------------------------------------------------------- Robert Edward Simmons, RBC Capital Markets, Research Division - Senior Associate [46] -------------------------------------------------------------------------------- Great. And can you give any updates on the partnership with the SAP proceeding? -------------------------------------------------------------------------------- Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [47] -------------------------------------------------------------------------------- Yes. As we've talked about in our strategy, all parts of partnerships are very, very important to us, whether it be brokers or HCM vendors. We spoke extensively about our relationship with Ultimate on the call. We have several others that we'll be announcing shortly. But of course, SAP is our most important HCM provider, and our relationship continues to perform well. SAP is performing well with their SuccessFactors solution, and we're really pleased to be a partner of theirs. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- We have reached the end of the question-and-answer session. I will turn the call over to Mr. Ray August for closing remarks. -------------------------------------------------------------------------------- Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [49] -------------------------------------------------------------------------------- Thank you for joining our Q3 earnings call. As I reflect on the past 18 months, our platform shift has unlocked many opportunities. Our network is larger and stronger than ever. Artificial intelligence is delivering valuable insights, and our data assets is much more robust. We are very confident that we will achieve our goal of transforming how benefits are bought, sold and used across the country. This ends our call. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.