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Edited Transcript of BNFT.OQ earnings conference call or presentation 6-May-20 9:00pm GMT

Q1 2020 Benefitfocus Inc Earnings Call

Charleston Jun 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Benefitfocus Inc earnings conference call or presentation Wednesday, May 6, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Patti Leahy

Benefitfocus, Inc. - VP of IR & Innovation

* Raymond Alexander August

Benefitfocus, Inc. - CEO, President & Director

* Stephen M. Swad

Benefitfocus, Inc. - CFO

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Conference Call Participants

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* Alexander James Sklar

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

* James John Stockton

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Benefitfocus First Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patti Leahy, Vice President, Investor Relations and Innovation. Thank you. You may begin.

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Patti Leahy, Benefitfocus, Inc. - VP of IR & Innovation [2]

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Thank you, operator. Good afternoon, and welcome to Benefitfocus' First Quarter 2020 Earnings Call.

Joining me today are Ray August, President and Chief Executive Officer; and Steve Swad, Chief Financial Officer. Ray and Steve will offer some prepared remarks, and then we'll open up the call for Q&A.

Before we begin, let me remind you that today's discussion will include forward-looking statements such as our second 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, 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 risks and a changing regulatory environment that could cause actual results to differ materially from expectations.

For a 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.

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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Thank you, Patti, and good afternoon, everyone. First, we hope everyone on the call is safe and sound. Our hearts go out to those impacted by the pandemic, and our gratitude extends to those working to help bring this crisis under control.

I'd also like to thank the Benefitfocus team for their ongoing commitment. Our associates have responded extremely well to these new challenges. They remain fully engaged and committed to strengthening our platform and serving our customers.

I would also like to welcome Patti as our newly appointed VP of IR. And thank Mike Bauer, who is moving on from the company after 5 years of dedicated service. We wish him all the best.

I'll start today's call with 3 key takeaways. First, we believe Benefitfocus is strategically well positioned. Our ability to offer the right benefits to consumers when they need them the most is at the heart of our enduring value proposition. The virus has challenged our healthcare infrastructure. Having proper coverage has never been more important.

Second, we have accelerated our innovation to deliver on the pressing needs of our customers. The world is rapidly changing as the consumer takes a more prominent role in the purchase of their benefits. We've opened new channels to enable them to engage with benefits in a more efficient and automated way. Health plans also need to adapt to this shift by offering more robust individual quoting, enrollment and payment capabilities, which our end-to-end solution enables. And third, we acted quickly to reduce costs and accelerate our focus on automation. A move that will ensure not only we can weather the crisis but emerge more profitably and efficient than ever before.

Our mission is to improve lives with benefits, and it has never been more relevant. The value we deliver to our consumer, employer and health plan customers continues to grow. Robust benefits remain a vital part of how they can help protect and support the well-being of their employees and members. Our ability to help them maximize and automate their investment against the backdrop of increasing unemployment and rising healthcare costs is key.

Individual healthcare is growing to serve an audience that has multiplied overnight. By the end of April, 20% of Americans are reported to be unemployed, and a significant number of them have elected to retire early. We believe that benefits should transcend the employer-employee relationship. They should follow the consumer for life. Therefore, we've accelerated our innovation to realize our philosophy of benefits for life and meet the evolving needs of our customers.

First, we introduced our COVID-19 Resource Center to provide our customers the tools and insights to guide them through the pandemic. We then launched our 4YOU initiative, which includes a colleague for life portal and a community resource center to provide HR leaders the insights necessary to address operational challenges and deliver support for affected employees. A key feature of this offering helps employers stay connected with separated employees from offboarding to potentially rehiring.

Most employers like ourselves hope to bring back separated staff into the workforce as operating conditions improve. Our solution automates the offboarding experience and connects affected individuals to affordable health plan alternatives and voluntary benefit products. It enables HR admins to customize an outreach program with timely and critical resources while connecting separated employees with employment assistance. And finally, it allows employers to quickly reactivate staff when business circumstances improve and easily change eligibility status of employees through various stages of employment from full-time to part-time to furlough and back again.

The increasing need for individual benefit solutions for the consumer has been fueled by rising unemployment, accelerated retirements and growing 1099 workers. To accommodate this growing population, we have introduced our first direct-to-consumer offering, benefitplace.com. With pre-configured communications and no additional administrative effort required, HR leaders can tailor a set of products from our extensive catalog for separated employees. This includes health plan options such as ACA health exchange plans, short or long-term medical coverage, telehealth and a discounted prescription drug program, discounted grocery delivery service, life insurance, auto and home policies and student loan refinancing. This solution is currently available for any employer and is also available for any independent gig or freelance worker, who needs to access affordable and relevant benefit options.

In addition, this week, we are announcing a new initiative: For You SC, which provides unemployed workers in the state of South Carolina with additional benefit options during this economic crisis. For You SC enables workers who have applied for unemployment benefits through the Department of Employment and Workforce to access other affordable benefit options via benefitplace.com. We intend to quickly make this solution available to other state governments seeking additional benefit options for unemployed workers.

Our direct-to-consumer strategy will allow us to scale and address a larger number of lives in addition to the more than 25 million people we serve today via employers and health plans. We believe having more consumers on our platform will enhance its aggregate value, and we are confident that the economics will accelerate over time and create value for Benefitfocus shareholders.

In addition to these areas of innovation, our product offering is uniquely positioned to help our customers address the growing burden of rising healthcare costs. Our health insight solution helps optimize health plan costs and utilization, provide predictive plan modeling and industry benchmarking, provides population health management and offers integrated claims data. This offering is tailored for every key member of our ecosystem and when combined with the power of our AI platform, BenefitSAIGE, is a key differentiator of our platform.

In mid-March, we held our annual conference, One Place, using a fully digital experience. We compressed 3 days of learning sessions into about 6 hours of digital content and we more than doubled our expected attendance. In connection with our One Place conference, we launched our new corporate identity and introduced a simplified go-to-market solution, benefitplace. Benefitplace is the new name of our comprehensive enrollment and voluntary benefits offering and replaces our point solution approach.

Turning to the expense management actions we've taken in response to the pandemic. Current macroeconomic pressure and historic projections of unemployment led us to revise our revenue forecast for the year. In response to our revised expectations, we took swift and proactive steps to improve our profitability and cash flow estimates. We're doing so through aggressive expense reductions and with automation that drives operational efficiency as well as gross margin expansion. In short, we've positioned ourselves to emerge from the pandemic more profitable and more efficient than before. We are also running the normal activities of the business.

Let me now turn to these items for the quarter. Early in Q1, our health plan team closed a 7-figure transaction, which we disclosed in our prior earnings call. We've now closed 3 major health plans since integrating the Connecture acquisition last year. We continue to have favorable traction in our pipeline as health plans view our end-to-end solution as a strategic asset. An asset that helps them grow their revenue while also controlling costs. We expect to continue gaining share and acquiring new clients in this year. Our Employer team has also closed several transactions from a variety of industries, including multiple hospital systems and a specialty chemical employer.

In Q1, we also grew our relationship with the gig economy employer, Shipt, which contributed to net benefit eligible lives increasing to 17.5 million at the end of the quarter. Importantly, one of the key attributes of our SaaS platform is the ability to virtually implement customers. The vast majority of customers remain on their implementation schedules, including our 3 large health plan transactions slated to go live later this year.

We have a well-diversified customer base across business verticals. Our sales team and growing broker channel have done an effective job continuing to build pipeline in this environment in both employer and health plan markets. While we are seeing some slowing of the pace at which deals are moving through the pipeline, we are still seeing deals progress and close.

Looking forward, we remain focused on increasing the value of our platform and improving our profitability. We have the resources, market leadership and technical advantage to exit the COVID-19 storm stronger and better positioned. And we are confident that we are taking the right steps to drive near and long-term shareholder value creation.

Steve will now cover the details of our quarterly results and outlook. I'm pleased to have the depth of his financial leadership, especially during these challenging times. Steve?

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Stephen M. Swad, Benefitfocus, Inc. - CFO [4]

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Thank you, Ray. Let me begin by giving an update on our full year guidance and sharing with you a summary of the process we followed to develop a plan that incorporates the anticipated impact of the pandemic. Then I'll discuss our first quarter results and Q2 guidance.

At a high level, we believe Benefitfocus is fortunate to have a durable business model and a strong cash balance during these challenging times. The majority of our revenue is recurring and generated from a diversified installed base with no meaningful concentration in any industry vertical. For reference, retail and entertainment and travel, which in the current environment, are 2 of our higher risk verticals, represent approximately 7% of our subscription and platform revenue. In addition, most of our Employer and Health Plan contracts have minimums.

As the country began to shut down to stop the spreading of the virus, we launched a bottoms-up evaluation of the potential impact of it on our business. To that end, we sensitized the following areas: sales cycles, close rates, implementation timelines, take rates on certain voluntary benefit offerings and most importantly, the impact of unemployment on subscription and platform revenue.

The result of this process is that 2020 revenue will likely be in the range of $250 million to $270 million as compared to our prior revenue outlook of $310 million to $320 million. The majority of the difference comes from the impact of lower-than-expected new sales on professional services and platform revenue and the impact of higher-than-expected unemployment on platform revenue. We anticipate a lagging and somewhat lesser impact on our 2020 subscription revenue due to a delay in when unemployed workers actually leave the platform and the contractual minimums.

Additionally, we anticipate Mercer revenue, which is now estimated at about $8 million for the year, to perform consistent with our broader revenue base. To offset the lower revenue estimates and enhance the financial sustainability of the company, we took a number of actions on the cost side of the business including a reduction in the size of our workforce by more than 17% across the company, pausing the hiring of new associates, suspending all nonessential costs and reducing executive pay, including both our CEO and our Executive Chairman voluntarily cutting their pay to 0 until the environment improves.

In addition, we began to renegotiate some of our professional services and platform contracts to generate higher returns and higher margins. We expect that some of the less profitable work will stop and other work will be reduced, thereby impacting top line, but also expanding margins. The cumulative result of these actions is expected to save the company $50 million to $60 million this year compared to our original plan, while still enabling continued key R&D investments to drive innovation and increase automation. We expect to take a cash restructuring charge of approximately $5 million in Q2 relating to these activities.

As a result, in 2020, we expect non-GAAP and GAAP software and professional services gross margins to expand over prior year levels as we progress through the year. Adjusted EBITDA to be between $25 million and $35 million, which means at the midpoint of guidance, adjusted EBITDA margins will be approximately 12% of revenue and up 500 basis points from 2019. And we expect to consume between $10 million and $20 million of free cash flow. Because we are expecting unemployment to meaningfully impact our customers, we believe net benefit eligible lives will be down year-over-year. That said, we are working to retain as many of those lives as possible through the new innovative customer offerings Ray discussed.

Now let's turn to our first quarter results. The total revenue for the quarter was $66.2 million, a decrease of 3% compared to the first quarter of 2019. Subscription revenue decreased 4% compared to the same period last year, primarily due to the impact of Mercer, which came in as expected in Q1. Excluding the impacts of Mercer, Q1 subscription revenue increased 5% compared to Q1 2019. This increase was driven principally by the contribution and synergies of the Connecture acquisition.

Platform revenue, which represents revenue from voluntary benefits, grew 17% year-over-year. This growth reflects more lives engaged with our platform offset in part by the timing of revenue share bonuses and a decrease in the rates received on certain benefits products in our catalog. The decrease in rates is the result of a contractual renegotiation where prices were reduced and certain low-margin support services were also eliminated. We expect the lower prices on this contract and higher unemployment levels to negatively affect the growth rate of this portion of our business in the near term.

Total revenue for Q1 was below our original guidance range, principally because of lower-than-expected professional services revenue, as deals came in lower than expected, slipped out of the quarter or were put on hold because of the pandemic.

On a GAAP basis, gross profit was $32.2 million, representing a margin of 49%. On a non-GAAP basis, gross profit was $33.2 million, representing margin of 50%. The year-over-year decline in gross margin as a percent of revenue reflects the combination of a reduction in high-margin Mercer revenue and increased investment in staffing, which our recent cost management actions have addressed.

Q1 adjusted EBITDA was $4.1 million. This exceeded our guidance and compares favorably to $3.6 million in Q1 2019. Our adjusted EBITDA was positively impacted by shifting our annual conference to digital, lower sales costs due to lower-than-expected sales in professional services and tighter expense management in the quarter.

Operating loss was $5.7 million and net loss per share was $0.34. This compares favorably to the operating loss of $9.1 million and net loss per share of $0.44 in Q1 2019.

Now let's move to the balance sheet and cash flow. We have a strong cash balance of approximately $115 million. This reflects our activity in the first quarter, including the drawdown of $10 million from our revolving line of credit and the repurchase of approximately 1 million shares of our common stock at a cost of $9.4 million. We drew on the revolver in the first quarter to increase the strength of our cash balance during this unusual time of economic uncertainty. We have remaining capacity to draw down an additional $40 million from our revolver. We consumed $11 million of free cash flow in the quarter, which was in line with our expectations. Free cash flow is a non-GAAP measure that we define as cash provided or used in operations plus property and equipment.

Looking ahead to Q2 guidance, we are targeting Q2 2020 total revenue of $55 million to $58 million, and adjusted EBITDA between $2 million and $4 million. We expect non-GAAP net loss of $9 million to $7 million, which represents a non-GAAP net loss per share of $0.28 to $0.22 based on 32.1 million basic and diluted weighted average common shares outstanding.

The outlook for Q2 reflects continuing impacts of lower-than-expected new sales on professional services and platform revenue, the decline in Mercer revenue and expected impacts of unemployment on our subscription and platform revenue. We are also expecting non-GAAP gross margins to expand over Q1 2020 levels.

In closing, we have a strong cash position, significantly lower run rate costs and a realistic estimate of revenue for the full year given the current environment. We are more confident than ever in our position and relevance in the marketplace and expect that we will exit this crisis stronger than we were going into it.

With that, I'll open up for questions. Operator?

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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 with Raymond James.

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Alexander James Sklar, Raymond James & Associates, Inc., Research Division - Senior Research Associate [2]

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This is Alex Sklar on for Brian. First question for Ray or Steve, a lot of color on the expense management measures, both today and in the release last week. But I want to dig into some of the investments you're still making in the business, particularly like the launch of the direct-to-consumer product. And how we should think about the growth opportunity for Benefitfocus when we do return to some normalcy?

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

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Yes. Thanks, Alex. As we think about our investors, and we think about what they're focused on, obviously, we're focused on both short-term return and also creating long-term value for all of our shareholders. As we thought about this opportunity and as we analyzed the pandemic situation that we're in, we're really focused on how do we address the uncertainties that are happening in the market today. And as you said, we talked considerably about the expense actions and steps we're taking. But at the same time, we see a tremendous opportunity where we can really elevate our role as a trusted connector between consumers and the benefits that they buy.

And as we went through our planning and our modeling, one of the things we did, even when we look at cost takeout was, how can we make our company stronger than we were after the crisis than before the crisis. So as we went through our expense reductions and our restructuring, one of the things we thought about was how do we put the customers at the center of everything we do, how do we create an environment which makes it -- makes our environment more automated with less friction for everybody on our platform and also how do we make sure that we're funding that by reducing some of our investments in sales and marketing to get those more in line with industry norms so we really can accelerate our progress.

And so as we come out of this situation that as a company will be stronger. So what we've done is actually created an environment where our gross margin is better than before the crisis. Our EBITDA is higher as a percent of sales, and we're using less cash to do so.

All those things are enabling us to invest in what we see as the opportunity. And the opportunity for us is really centered around our mission. And our mission is more needed now than ever. Our mission is to improve lives with benefits. And when you think about improving lives with benefits, it's really how do we enable the consumer to take care of themselves and their family in every step of their journey.

Up until now, the primary way where people came on to our platform was either through an employer or a health plan. What's happening now there are over 30 million Americans, who are unemployed today. Every one of those Americans who are unemployed comes from an employer on ours or somebody else's platform. We focused and we've built an offering, which we call colleague for life, which allows us to enable and help employers offboard people off of our platform in an efficient and effective way. And with the hope of every employer hopes, including us, that we bring those employees back on the platform going forward into the future.

The other thing that has to happen with these 30 million Americans is while they are in any status, whether it's employed or unemployed, they have to purchase and buy benefits for themselves and take care of their family. So what we've done is we accelerated our investment and accelerated bringing it to market our benefitplace.com solution which is a consumer portal, which allows consumers to purchase benefits. The unemployed still need to buy medical insurance and they still need to buy life insurance, they still need to take care of their family, and we see benefitplace.com as where that will happen.

So to sum it up, we really see COVID as an accelerator that really puts the consumer in the spotlight as it relates to the purchasing of benefits. Prior to this, benefits were purchased through an employer. Now we're seeing an increasing activity where the consumer is going to buy benefits on our platform. And for the last 18 months, we've been talking about the consumerization of benefits. Now we're seeing that accelerate due to what's happening with COVID and our mission of improving lives with benefits has never been more relevant, and it presents a lot of long-term opportunity for Benefitfocus.

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Alexander James Sklar, Raymond James & Associates, Inc., Research Division - Senior Research Associate [4]

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Got it, Ray. Helpful color there. And one other for you, Ray. We're right in the middle of your booking -- typical booking season. And so outside of the unemployment impact on lives, can you just give some color on gross booking trends in March and April? And if it's differing at all by channel between the brokers and carriers in your direct sales force?

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

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Yes. As we go to market, we really go to market in serving the consumers, serving the employers and providing solutions for them and working with the health plans and using the brokers and our channel to leverage those activities. The consumer market we talked about, where we have our new benefitplace.com offering in which we provide benefits directly to consumers.

The strongest opportunity for us right now is in our health plan offering. Health plans are very much needed in today's environment by everybody. They're funding and paying for a lot of the activity that we're seeing around COVID. And we're seeing extremely strong demand for our offerings in health plans. As said in the prepared remarks, we signed another customer this quarter. This makes 3 in the last 2 quarters, which is the most the company has ever booked in that period of time. And it's really a result of the combined solution we have by combining the assets of Connecture and Benefitfocus. So we're seeing really strong demand there and we expect that to continue with a robust pipeline.

And the Employer segment, we're seeing the -- as we've talked about earlier, we're seeing really the employers focused on offboarding their employees, which we've created a solution for. The HR teams are really focused on taking care of what everybody is focused on, their employees, make sure their employees are healthy. So that was reflected in our revised guidance. So all in all, seeing strong activity in health plans, seeing a lot of nascent start-up activity in consumer. And the impacts of COVID really are hitting us with the -- in the Employer segment.

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Operator [6]

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Our next question comes from the line of Jamie Stockton with Wells Fargo.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [7]

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So I guess maybe first, appreciate the guidance for Q2. I guess I would love it if you could get a little more granular on what you expect from a pro service standpoint just because it sounds like that's where there's going to be the big step down. And then maybe how durable you think that step down will be on a going-forward basis?

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Stephen M. Swad, Benefitfocus, Inc. - CFO [8]

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Yes, Jamie, this is Steve. The main drivers impacting Q2 are Mercer declines -- continued Mercer declines and then the expectation of a kick-up in unemployment. And unemployment, as I said, hits most immediately with the voluntary benefits. And then on a lagged basis with subscription, subject to those minimums.

The PS, you are right that we do expect softness in the year in PS, and that's largely from revised estimates of new business. And also, I said that we're tightening up our efforts around -- we're being a little -- we're scrutinizing the level of effort, making sure we're getting compensated for the level of effort there. So you might see some decline in what I call like empty calorie revenue. But I'm not going to do too much more as it relates to Q2 on that. There's still a fair amount of business to be had. And I gave you as much color as I have right now, and I'm looking forward to giving you another update in a quarter.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [9]

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Okay. I guess maybe the other 2 things I wanted to touch on the comment about lives this year being down. I mean obviously, the unemployment rate has exploded here. Is there a magnitude of decline that you guys would be willing to say that you're baking into your modeling right now?

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Stephen M. Swad, Benefitfocus, Inc. - CFO [10]

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No. This is Steve again. I think the bigger drivers of that decline are going to be unemployment. And in the modeling, I would say that was one of the bigger assumptions made and so if you look at the guide and the range in the guide, one of the major differences between the high and the low was the level of unemployment. And that is what will drive the majority of that comment. We are seeing -- we are expecting some offset to that. Certainly, as time passes from the activities that Ray mentioned and the innovations that we have that are going to the consumer. But it's too early for me to kind of pin a number on it.

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James John Stockton, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Research Analyst [11]

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Okay. And then maybe just lastly, the gross margin comments. I know you said that it would be up sequentially from Q1 and Q2. And it sounded like you were implying it's going to improve throughout the year. Should we expect the gross margin to be higher for the full year this year than 2019?

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Stephen M. Swad, Benefitfocus, Inc. - CFO [12]

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Yes, Jamie. I don't think it will be linear, but I think we will exit higher. And you're right, I guided Q2 to be above the 50 points in Q1. And then I expect us to get traction as we proceed through the year, and as that automation has the ability to take hold. And I think Q4, we'll see an exit rate that is better than last year.

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Patti Leahy, Benefitfocus, Inc. - VP of IR & Innovation [13]

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Did we lose you, operator?

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Operator [14]

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Can you hear me?

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

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Now we can.

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Operator [16]

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Okay. I'm sorry about that. I was on mute and didn't realize it. (Operator Instructions) There are no further questions in the queue. I will hand it back to Ray August for closing remarks.

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Raymond Alexander August, Benefitfocus, Inc. - CEO, President & Director [17]

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Great. Thank you, operator, and thank all of you for joining us here today. As a company, we remain focused on protecting the safety and well-being of our employees, while at the same time seamlessly serving our customers. We are balancing actions across the company to preserve operating capital while continuing to innovate as a market-leading benefits platform for consumers, employers and health plans. We are confident and focused on coming out of this stronger than ever before. We look forward to updating you on our progress next quarter. Have a good night.

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Operator [18]

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Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.