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Edited Transcript of BNFT.OQ earnings conference call or presentation 5-Nov-20 10:00pm GMT

·18 min read

Q3 2020 Benefitfocus Inc Earnings Call Charleston Nov 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Benefitfocus Inc earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Alpana Wegner Benefitfocus, Inc. - CFO * Patti Leahy Benefitfocus, Inc. - VP of IR & Innovation * Stephen M. Swad Benefitfocus, Inc. - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Matthew Shea Piper Sandler & Co., Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by. I'm the conference operator. Welcome to the Benefitfocus Third Quarter 2020 Earnings Call. (Operator Instructions) I would now like to turn the conference over to Patti Leahy, please go ahead. -------------------------------------------------------------------------------- Patti Leahy, Benefitfocus, Inc. - VP of IR & Innovation [2] -------------------------------------------------------------------------------- Thank you, operator. Good afternoon, and welcome to Benefitfocus's Third Quarter 2020 Earnings Call. Joining me today are Steve Swad, President and Chief Executive Officer; and Alpana Wegner, Chief Financial Officer. Steve and Alpana will offer some prepared remarks, and then we'll open the call up for questions. Before we begin, let me remind you that today's discussion will include forward-looking statements such as fourth quarter and full year 2020 guidance and other predictions, expectations and information that might be considered forward-looking under federal securities 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 as of any subsequent date. These statements are subject to volatility and uncertainty in the global economy and financial markets in light of the evolving COVID-19 pandemic and uncertainties arising from the recent U.S. election; 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 markets 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 further discussion of the material risks and other important factors that could affect our actual results, please refer to our annual report on Form 10-K and our 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. With that, I'll now turn the call over to Steve. -------------------------------------------------------------------------------- Stephen M. Swad, Benefitfocus, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Patti, and welcome, everyone. I'm now a couple of months into my role as CEO, and I want to share with you key priorities that we believe will position the company to grow and drive shareholder value. After that, we will cover Q3 results. Our key priorities are threefold: first, delivering on promises to our customers; second, increasing our profitability; and third, refining our strategies to accelerate growth. We expect some of this will produce short-term results, others mid and longer term, but all are intended to drive market leadership, deliver superior financial results and increase shareholder value. Let's start with our first priority, delivering on our customer promises. The main reason our customers ask for our help is to solve the complex problem of connecting employees and health plan members with benefits, which involves using our technology platform to seamlessly transfer data between HR, payroll and health plan systems. Our customers value the knowledge and expertise we've accumulated over the past 2 decades. They appreciate that we get the job done and can navigate the complex and confusing benefits landscape on their behalf. The most important commitment we can make to them is to get this right. Our team is 100% focused on doing just that right now by delivering a successful open enrollment. Connected to delivering on our customer promises is an obsession to drive best-in-class customer Net Promoter Score, or NPS. When we delight our customers, they stay with us longer, they provide important references to new prospects and they have a propensity to buy more, all of which generate improve results and create shareholder value. Second, we continue to focus on improving profitability, as measured by gross margins, EBITDA and free cash flow. We are targeting the Rule of 40 over the long-term with annual improvements initially weighted toward profitability. Our goal is to create the most efficient and profitable company in our industry. To that end, we are continuing our automation and process improvement initiatives, both of which contribute to a more efficient and scalable business model. We are also benefiting from the cost reductions we've put in place earlier this year, and we will continue to look for further cost savings and efficiencies as we scale our business. Third, we remain committed to driving growth via a three-pronged investment approach centered on enrollment, engagement and data. To help ensure our success with these 3 areas, we will leverage a standard build, buy or partner approach to manage capital efficiently. I'll briefly cover each of these. First, our enrollment platform solves a critical need for employer and health plans and is the most important area of investment. It represents most of our business, is built on a strong SaaS recurring revenue model and is foundational to other key growth drivers such as voluntary benefits revenue. Through focused investment in execution, a renewed commitment to the enrollment platform alone should return the company to growth, growth through higher bookings, customer retention and expanded gross margins. Now let's turn to engagement. By engagement, we mean increasing the quality and quantity of interactions between the platform and our customers, starting with enrollment and continuing throughout the year as platform participants manage and use their benefits. We will work to increase engagement by creating more personalized product recommendations, more flexible workflows and delivering better insights that leverage our unique health care, claims and benefits data. This is important because greater engagement can lead to higher customer satisfaction, longer customer relationships and higher lifetime values. Our third area of investment is to accelerate our data advantage. Benefitfocus is leading the benefits industry by leveraging data to serve our customers. Data is one of our more important competitive advantages. For instance, we have over 5 petabytes of data on our platform. By comparison, this is twice as much data as the U.S. Census Bureau. Our data is essential in several ways. We use it to help the members of our ecosystem make better benefit decisions. We use in-house claims data to help benefit administrators build better benefit strategies and contain costs, and our data expertise has established industry-leading first-pass yield. This is an important measure of data quality and is a testament to our ability to get data connections right the first time. We will continue to invest in our data asset and drive additional partnerships that expand the connections we have across payroll, HR and health plan systems. Investing in and executing on these 3 areas of focus: enrollment, engagement and data should enable better customer experiences and establish loyal and more valuable customer relationships. Articulating these strategies alone won't make a great company. People make great companies. I've made it a priority to build upon our excellent team of associates and empower them with key hires to drive success. Already, we've announced some great additions to our leadership team. First, we hired Ravi Metta to run our product and engineering groups. Ravi came to us from Intuit, where he was a member of Intuit's core technology executive leadership team. Ravi was successful in delivering their platform strategy and launching customer-centric products that simplified complex financial software. I've observed many interesting parallels between the work he led at Intuit and how he can help Benefitfocus simplify the benefits experience for our customers and end users. Second, we just hired John Thomas for the newly created role of Chief Data Officer. John joins us from Red Ventures, which operates a portfolio of influential digital brands. These digital brands build online journeys that make it easier for people to make important decisions about their lives. While at Red Ventures, John used data science and machine learning to transform that business. He will be an important part of our leadership team as we leverage John's experience to make our products more personalized and provide insights to enable others in the ecosystem to learn from activities on our platform. Third, we hired a new Chief Human Resources Officer, Robin Kirby. Robin joined us from USAA. Before that, she was with Infosys and Symantec. Robin has a deep understanding of business operations, a keen eye for talent and a sophisticated approach to hiring and retaining talent. She also shares my commitment to develop an engaged and inclusive culture that is known for delivering on the company's priorities. In addition to these key new hires, we are fortunate to have a very talented and committed base of associates. We will continue to invest in our people, develop our internal talent and focus on a handful of key customer-centric priorities that we believe will lead to stronger execution and improve financial results. Now turning to Q3 highlights. I am pleased that we exceeded guidance across all key metrics and continue to strengthen our financial foundation. We generated gross margin and EBITDA margin expansion. We saw significant growth in free cash flow, and we are benefiting from the decisive cost reduction actions we implemented in Q2. Our automation and process improvement efforts are also contributing to this performance. As shared in our last call, many prospective customer purchasing decisions were delayed beyond the second quarter. These deals essentially moved from Q2 to Q3, which is understandable considering the shifting of priorities as companies across the board grappled with the impact of the pandemic. I am pleased to share that we have now closed nearly all of those deals. That said, given our low performance in Q2, we expect pressure on 2021 revenue growth. Right now, we are working to close out this year's sales, seeing how open enrollment goes for our benefit catalog business and estimating the impact of current COVID trends as part of our 2021 planning. While we're not in a position to give precise estimates, I am committed to 2021 being better than 2020, particularly as it relates to profitability. We will share more color around 2021 on our Q4 call next year. Before I hand the call to Alpana, I want to conclude by thanking our associates. We are currently entering the heaviest part of open enrollment. Despite our team working entirely remotely, it's going very well because of our extremely dedicated associates. I am confident we will finish this year's open enrollment stronger, more engaged and more strategic for our customers than ever before. To bring this all together, I feel confident that our current focus to deliver on our promises to our customers, expand our profitability and focus on enrollment, engagement and data strategies to drive growth will produce results over the short and long term to create outsized shareholder value. With that, I'll turn it over to Alpana now for a deeper dive into the numbers and our outlook. -------------------------------------------------------------------------------- Alpana Wegner, Benefitfocus, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Steve. It's great to be with everyone today for my first earnings call as CFO, and I look forward to getting to know you all in the months to come. I'll start by covering Q3 financial highlights and then close with our Q4 outlook and full year guidance. From a high-level perspective, our business again performed better in the quarter than our forecast across our key financial metrics. The areas we saw better-than-expected performance included customer health retention. As with our experience last quarter, the anticipated impact of unemployment on our business was better than expected. We retained a higher number of net benefit eligible lives than we anticipated, which contributed to higher-than-expected revenue. Net benefit eligible lives of 18.2 million were higher than expected, primarily from the addition of gig live during the quarter. Our adjusted EBITDA margins grew 12 percentage points over last year's 16%. The pace of cash collections was stronger, resulting in higher-than-expected positive free cash flow. And our ability to implement and close deals and renewals were all done virtually and successfully, including the renewal of our largest public sector customer. Turning to the financial results for the quarter. Total revenue for the quarter was $63.6 million, exceeding the top end of our guidance of $62 million. This outperformance was primarily due to the lower-than-anticipated impact of unemployment, which resulted in higher-than-expected subscription revenue. However, compared to third quarter of 2019, our total revenue was down 11%, mainly driven by lower subscription and professional services revenue. Subscription revenue was down 10% compared to the same period last year, primarily due to the runoff of our legacy agreement with Mercer. Professional services revenue is down as anticipated, 26% year-over-year to $13 million due to the lower bookings and reduction in lower-margin professional services business. Platform revenue grew 36% year-over-year to $5.6 million. While this performance was better than expected, I would note that it was from purchasing decisions that were made in 2019 during OE, which was prior to the pandemic. On a GAAP basis, gross profit was $33.5 million, representing gross margin of 52.6%. On a non-GAAP basis, gross profit was $35.1 million, representing gross margin of 55.2%, which is up from 51.9% last year and up as expected from 52.6% last quarter. The year-over-year improvement in non-GAAP gross margin reflects the cost management actions taken in Q2 to streamline our expenses, redirect resources to increase automation, improve efficiencies and continue innovating. On a GAAP basis, software gross margins were 64.2%, down from 68.1% in Q3 of last year. Our non-GAAP software gross margins came in generally as expected for the third quarter at 66%. That's up from prior quarter, but down from 69.3% in Q3 of last year. This decline is a result of reduced high-margin Mercer revenue. We expect software margins will improve next quarter as we realize the benefit of seasonally higher platform revenue. Professional Services GAAP gross margins were 7.6%, up from negative 4.9% in Q3 of the prior year. On a non-GAAP basis, Professional Services gross margins was 13.1% for the quarter, 3 points better than Q2 and 15 points better than the prior year. We are pleased with the pace of our progress in this area and expect continued gradual improvements as we streamline processes and expand our automation efforts. As a reminder, in Q4, we would expect Professional Services gross margins to be higher than last year, but lower than this quarter, given the seasonal increase in contract call center staffing associated with open enrollment. Q3 adjusted EBITDA was $10.5 million, representing an EBITDA margin of 16.4%. This exceeded the high end of our guidance and compares favorably to $2.9 million, or an EBITDA margin of 4% in Q3 of 2019. Our adjusted EBITDA, when compared to our guidance, was positively impacted by higher-than-expected revenue. GAAP operating income was $202,000 and GAAP net loss per share was $0.19. This compares favorably to the GAAP operating loss of $7.3 million and GAAP net loss per share of $0.38 in Q3 of 2019. Non-GAAP operating income was $4.6 million and non-GAAP net loss per share was $0.08. This compares favorably to the non-GAAP operating loss of $2.3 million and non-GAAP net loss per share of $0.23 in Q3 2019. Now let's move to the balance sheet and cash flow. We ended the quarter with approximately $176 million in cash and marketable securities. In addition, we continue to have our full $50 million line of credit available to us. Our enhanced liquidity allows us to continue to make prudent and disciplined capital allocation decisions. During the quarter, we repurchased $18.8 million in face value of our convertible preferred debt at a cost of $14.6 million, which resulted in a gain of $1.1 million. Moving on to free cash flow. We generated $11.3 million of free cash flow in Q3. Free cash flow is a non-GAAP measure that we define as cash provided or used in operations, less purchases of property and equipment and excluding restructuring costs. Turning to Q4 guidance. We are targeting Q4 2020 total revenue at $68.1 to $78.1 million. This reflects the impact of Mercer, lower employer bookings due to COVID and expected lower corresponding platform revenue compared to prior year. We expected adjusted EBITDA to be in the range of $11.2 million and $16.2 million. We expect non-GAAP net income of between approximately 0 and $5 million, which represents a non-GAAP net loss per share of between $0.05 based on 32.3 million basic shares outstanding and non-GAAP net earnings of $0.08 per share-based on 35 million diluted weighted average common shares outstanding. Our Q4 revenue guidance range reflects the low visibility and continued uncertainties for how our platform revenue will perform this open enrollment in light of COVID. For full year 2020 guidance, we are maintaining total revenue between $260 million and $270 million, adjusted EBITDA between $35 million and $40 million and free cash flow between $10 million and $20 million. Our free cash flow outlook reflects expected cash outflows related to an extra pay period and higher seasonal staffing expense in the fourth quarter tied to OE. In closing, I'm excited about our opportunity to execute on strategic priorities and create a more efficient and more profitable business, which should unlock substantial shareholder value. Thank you. And with that, I will now turn it over to the operator for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And the first question comes from the line of Sean Weiland from Piper Sandler. -------------------------------------------------------------------------------- Matthew Shea, Piper Sandler & Co., Research Division - Research Analyst [2] -------------------------------------------------------------------------------- This is Matt Shea on for Sean. Just curious with the Q4 revenue guide, range is pretty wide. Just wondering what explains the range. Is it furloughs? I'm just curious on assumptions at the top and bottom end. -------------------------------------------------------------------------------- Alpana Wegner, Benefitfocus, Inc. - CFO [3] -------------------------------------------------------------------------------- Yes. Matt, this is Alpana. So thanks for the question. Yes, we -- the business has been performing as we had anticipated when we set our annual guidance, reflecting the expected impacts of COVID. And so as we look ahead to Q4, we continue to see what we expect in terms of impacts for our platform revenue. For the first time, we really haven't seen those in the earlier quarters this year because of the seasonality of that platform transaction that's really high volume in Q4. And so our Q4 guide just contemplates that variability and, really, that level of uncertainty that we continue to have as a result of what the purchasing decisions and behaviors will be as a result of COVID. -------------------------------------------------------------------------------- Matthew Shea, Piper Sandler & Co., Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Okay. Got it. And if I could just ask one follow-up to that. You guys have driven pretty amazing EBITDA margin expansion, kind of absent any revenue growth. Q4 guide kind of implies another 200 basis points of expansion. Just kind of curious on what the ceiling for EBITDA margin absent any revenue growth. And at what point do you need revenue growth to kind of continue to see that margin leverage? -------------------------------------------------------------------------------- Alpana Wegner, Benefitfocus, Inc. - CFO [5] -------------------------------------------------------------------------------- Yes. We are really pleased with the actions that we took earlier this year and the impact they're having on our profitability. And we're not providing guidance right now on 2021. We've got to close out the year, and there's some uncertainty, and we need to see what the performance looks like. But as Steve and I both mentioned in our comments, we really do feel like there's continued opportunity to unlock additional value here from margin expansion. And so that's definitely part of the strategic priorities for 2021. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- (Operator Instructions) There seems to be no further questions on the phone lines. -------------------------------------------------------------------------------- Stephen M. Swad, Benefitfocus, Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- Okay. Thank you, operator. I recognize there's a lot going on in our world right now. I appreciate you joining the call, and I look forward to talking to you all in the coming weeks. Thank you very much. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- That does conclude the conference call for today. We thank you for your participation. Ask that you please disconnect your lines.