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Edited Transcript of TVTY earnings conference call or presentation 5-Nov-18 10:00pm GMT

Q3 2018 Tivity Health Inc Earnings Call

FRANKLIN Jan 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Tivity Health Inc earnings conference call or presentation Monday, November 5, 2018 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam C. Holland

Tivity Health, Inc. - CFO

* Arra G. Yerganian

Tivity Health, Inc. - Chief Brand Officer

* Donato J. Tramuto

Tivity Health, Inc. - CEO & Director

* Steven Janicak

Tivity Health, Inc. - Chief Growth Officer

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Conference Call Participants

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* David Anthony Styblo

Jefferies LLC, Research Division - Equity Analyst

* Michael John Petusky

Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst

* Mohan A. Naidu

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Nicholas Spiekhout

* Sean William Wieland

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon and welcome to the Tivity Health Third Quarter Conference Call. Today's call is being recorded and will be available for replay beginning today and through November 12, 2018 by dialing 855-859-2056. The replay passcode is 4590706. The replay may also be avail, accessed, for the next 12 months on the company Website.

To the extent, any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most direct comparable financial measure calculated according to GAAP in today's news release, which is also posted on the company's Website.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Tivity Health's expected quarterly and annual operating and financial performance for 2018 and beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing the words believed, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others set forth in Tivity Health's filings with the Securities and Exchange Commission and in today's news release. And consequently, actual operating and results may differ materially from the results discussed in any forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

And I will now turn the call over to the company's Chief Executive Officer, Mr. Donato Tramuto. Please go ahead, sir.

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [2]

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Very good, thank you very much. Welcome and thanks to everyone who has joined here today. I am pleased to report our third quarter results demonstrating a continued positive movement in the overall health of our company. Today on the call I have with me Adam Holland, our CFO, Arra Yerganian our Chief Brand Officer, who will provide an update on our recent marketing and branding initiatives and Tommy Lewis who recently joined the Tivity Executive Leadership Team as our Senior Vice President of Investor Relations and Transformation. Welcome Tommy.

Tommy has been working with Chip who recently announced his retirement after 13 years of valuable service. We thank Chip for his many contributions to Healthways and to Tivity. He will be missed. Many of you already know Tommy through his ten years of investor relations experience in the healthcare space as well as numerous other executive roles.

Before I get into the specifics about the quarter, I do want to take this opportunity to acknowledge the hard work and effort -- all of our Tivity colleagues. The performance you are about to hear today is a direct result of their fierce execution of the objectives established at the start of the year. I am proud of every single one of our colleagues.

Five main points I would like to touch upon for the quarter. First, we tallied year-over-year revenue growth of 10%, revenue at $151.5 million. Second, the growth was driven primarily by the strength in our SilverSneakers segment where we continue to see a consistent rebound of visits following the first quarter flu and weather impact. Third, I believe that financial health of Tivity is the best it has been in more than a decade. Since my arrival in October of 2015, we have lowered our debt ratio from 2.8 times EBITDA to approximately 0.4 times. Free cash flow has improved from $0.8 million for the third quarter of 2015 to $30.4 million for the third quarter of 2018 and capex is now less than 2% of revenues.

A clean balance sheet prepares this company for strategic opportunities into 2019 forward. The last quarter has been one where we continue to use the strength of our data analytics to better target our populations to drive enrollment and engagement. We are starting to see success in that about 1% of our year-to-date SilverSneakers revenue is now associated with our targeted efforts around programs that drive more enrolled and engagement members. We expect this percentage to grow in 2019 and finally, offsetting this growth in the third quarter, and in consultation with our partner AARP, we decided to delay the broader launch of flip50 to January of 2019.

This decision was based on expert advice and analysis of the data that's shifting the flip50 launch into the first month of 2019 should maximize the potential impact of our marketing investments to better align with the timing of when, "Getting healthy" is top-of-mind for people at the start of the new year. We know this to be factual given the patterns we have seen historically on both our SilverSneakers and Prime programs.

Additionally, and while year-over-year we have added nearly 42,000 new members to Prime, an increase of nearly 17%, we continue to acquire new information about that business that we believe will drive future growth initiatives. For example, the timing of our promotions is critical and our marketing initiatives must happen sooner and must be more precisely targeted. We believe because of this, we fell slightly short of our internal results that we had anticipated. That said, remember, we have over $40 million eligible members and less than 300,000 are actively enrolled. There is a big opportunity here and while we are testing and analyzing to identify the right venues for increased activations for the years ahead.

Due to our ability to manage expenses; both EBITDA and NPS exceeded expectations. Looking through the remainder of 2018, we expect to deliver on the financial guidance provided in today's release. I will now turn the call over to your Adam, for a detailed review of the quarter. Adam?

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Adam C. Holland, Tivity Health, Inc. - CFO [3]

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Well, thank you, Donato and good afternoon, everyone. I would like to start by recapping some of the key financial metrics for the third quarter. As Donato mentioned earlier, third quarter revenues were $151.5 million, an increase of 10% over last year. Income from continuing operations was $25.4 million, an increase of 27.5% compared to $19.9 million for the third quarter of 2017. Income from continuing operations per diluted share of $0.59 increased 28.3% compared to $0.46 for the third quarter of 2017. EBITDA was $36.6 million, a margin of 24.2% compared to $35.3 million for the third quarter of 2017, a 25.7% margin.

Regarding our revenue profile during the quarter, SilverSneakers revenue comprised approximately of 81% of total revenue with Prime representing approximately 16% and finally our WholeHealth Living business representing the remaining 3%. These percentages are comparable to Q3 of 2017.

SilverSneakers revenue grew $10.2 million or 9.1% over the prior year period. Q3 2018 visits came in at approximately $25.7 million compared to $22.9 million for the third quarter of 2017, and increase of 12.3%. We also experienced a higher number of average visits per member per month, a significant portion of which came from members under a PMPM model. As a reminder, members under a PMPM model do not generate revenue with visits but do create incremental costs which created pressure on gross margin in the third quarter.

We are pleased with the continuing strength in our SilverSneakers business with enrollment at the end of Q3 2018 of $3.58 million compared to $3.45 million in the second quarter of 2018 and $3.26 million in the third quarter of last year.

Moving on to Prime, during Q3 2018 Prime revenue, excluding flip50, grew by $4.2 million or 19.7% over Q3 of 2017. Member pay Prime subscription to the end of Q3 totaled approximately 293,000 compared to 251,000 at the end of Q3 last year. Also, as Donato mentioned, due to our decision to move flip50's primary launch date to Q1 of 2019, flip50 did not contribute to revenue during Q3. Moving on to EBITDA, as mentioned, we experienced some margin pressure due to increased visits. Certain other expenses within cost of services were down as a percentage of revenue compared to last year except for an unfavorable comparison related to a lease settlement benefit that was recognized in Q3 last year for just under $1 million.

Q3 2018 SG&A was relatively flat in dollars and slightly down as a percentage of revenue compared to last year. Combined, this activity led to EBITDA of $36.6 million for Q3 of 2018, 24.2% of revenue. As expected, our Q3 2018 interest expense was approximately $1 million which represented interest costs from our delay draw and revolving credit facility. As announced during our last call, on July 2, 2018, we repaid the $150 million aggregate principal amount of cash convertible notes using a combination of available cash and proceeds from borrowings under the delay draw term loan facility of $100 million. Our year-over-year improvement in earnings per share includes a favorable comparison of approximately $0.06 per dilute share from the improvement in our tax rate and approximately $0.01 in diluted share as a result of our share count decreasing approximately 700,000 shares.

Our effective tax rate came in at 26.3% reflecting the impact of Tax Cuts and Jobs Act as well as a positive benefit of the tax treatment from the exercising of operations and the vesting of restricted shares during Q3. We entered 2018 with approximately $120 million of federal NOL's and credits available for utilization and we expect to pay less than $5 million in federal and state cash taxes during 2018.

Moving on to cash flow; free cash flow for the third quarter was strong as expected and totaled $30.4 million and approximately $68.1 million year-to-date. As a reminder, we defined free cash flow as cash flows from operations less capital expenditures. We ended Q3 2018 with $52.1 million of outstanding debt and $1.6 million of cash on hand. Our ratio of total debt to 12-month trailing EBITDA as calculated under our credit agreement is 0.4 times at the end of Q3 2018.

This compares to 1.2 times at the end of Q3 2017. Now allow me to comment on our outlook for the remainder of 2018. Having completed the third quarter, we have also done a full review of our outlook for the balance of the year. Revenue, our revenue guidance is now in a range of $607 million to $610 million compared to previous range of $607 million to $625 million. This updated range represents a full-year growth rate of approximately 9% at the midpoint. As I previously mentioned, there were several factors that informed this updated range; first, the impact of our postponement of our flip50 launch until 2019, second, the member pay prime lower activations and as discussed on prior calls, the impact of flu and weather during Q1.

Our core SilverSneakers program is expected to remain strong through the end of 2018 and we anticipate to end the year with approximately 3.6 million members enrolled and more than 100 million visits. EBITDA, our EBITDA guidance for 2018 has been narrowed to a range of $139 million to $142 million from the previous $139 million to $144 million. In addition to the updated revenue range, several other factors are expected to influence our Q4 gross margin and EBITDA. First, we expect our mix of SilverSneakers visits will include more visits from our members under a PMPM plan than originally anticipated. Second, as we move into the fourth quarter, we will see some of our normal annual enrollment expenses proceeding the start of a new benefit year on January 1. And third, to help offset some of this impact, we expect to continue to effectively manage expenses in a smart and prudent manner as has been the case for this company under this executive leadership team.

Diluted EPS, our guidance for earnings for dilute shares has been adjusted up to a range of $2.15 to $2.20 from $2.12 to $2.20. This slight upward adjustment is driven primarily by the tax rate. We expect that average dilute share count for the fourth quarter will remain relatively flat compared to the third quarter and finally, our free cash flow generation for the third quarter was strong and our guidance for the full year remains in excess of $100 million. And with that, I'd like to turn the call back over to Donato. Donato?

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [4]

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Thank you, Adam. The summary of what Adam has just shared with you is the following. We continue to execute fiercely on our A-B-C-D strategy and each of our 2018 strategic comparatives are showing continued progress across the board. As stated in our earnings release, our SilverSneakers growth levers are gaining traction. And as you heard from Adam, our SilverSneakers eligible enrolled members and visits increased year-over-year. Here are a few notables around how our focused efforts are now generating results. The integrated multi-touch program in the selected 27 counties produced an enrollment lift equal to twice the amount of the historical mail campaign. On a standalone basis, markets where the 33 territory managers are deployed saw a 12% lift in enrollees per eligible member over markets where territory managers are not present.

Call center pilots involving outbound calls have also proven effective showing results specific to both increased enrollment and engagement. These are just a few of the programs that are working and the secret sauce is not simply the employment of one program and rather the integration of a variety of levers that is now starting to yield results.

Additionally, and as we announced on October 8, we have launched the SilverSneakers Go app and believe there's nothing like it in the market in terms of promoting engagement of SilverSneaker members and the ease of eligibility checks which is, for us, an important metric in determining enrollment. It's now live in the App Store for both Apple and Android and is gaining traction right out of the gate and is now ranked in Apple's top 200 free apps.

This is an excellent segue into a belief that we first identified soon after my 2015 appointment as CEO and that is social connections offered through the SilverSneaker Programs are perhaps as valuable as physical fitness in improving the overall health outcomes of our members. To that point, today we published a study in the Journal of Applied Gerontology regarding the benefits of SilverSneakers in addressing loneliness and social isolation.

The study was conducted by Tivity and the MIT AgeLab. The punch line is that 25% fewer SilverSneaker members suffer from loneliness and 20% experience less social isolation. Social isolation increases the risk of premature death by 29%, more than high cholesterol or obesity according to a study by Julianne Holt-Lunstad, a leading research in this field. An important conclusion was that the SilverSneakers Program provides exponential health benefits beyond the direct health benefits of greater physical activity. We intend to launch early in 2019 a program that would help to identify those who are at greatest risk for this condition and align these SilverSneakers eligible members to programs that will successfully drive them toward meaningful connections including physical activity. We are having discussions with some of our largest health plan partners on this topic so stay tuned.

I believe this could develop into a meaningful revenue stream for Tivity Health. The launch of our social app, different from social, different from SilverSneakers Go, that will connect members to other social activities including SilverSneakers and the call center and our 16,000 partner locations and other initiatives will collectively serve as enrollment and engagement opportunities where we believe we will get paid for adding value for lowering medical costs and improving the health and wellbeing of our members.

Allow me, if I may, highlight a very small example of the benefits SilverSneakers can provide as a conduit for social connections. As has been the case in most of my earnings calls, I like to share a story about our SilverSneakers members. I visited a SilverSneakers class at the Concord Family YMCA in Concord, New Hampshire last month. During that visit I met 2 couples; one in their 70's and the other in their late 80's. The 89-year-old couple shared with me how surprised they were to learn that they had SilverSneakers through their health plan despite the fact that they had been members of this plan for nearly 5 years yet they never knew about the program until last April.

My first point here is how increasing awareness with our SilverSneakers eligible membership is one of the golden growth nuggets for this company. The program has had such a profound benefit on both their physical and social health that the husband, who was a prominent attorney, is now spreading the news about SilverSneakers to their circle of friends. Even better and more interesting, an instructor who overheard our conversation shared with me that when these 2 couples joined the SilverSneakers program last April, they could hardly move. The couple in their 80's was isolated because both the husband and wife were unable to drive.

Today, less than 6 months later, their mobility has improved significantly and they now are attending classes 2 to 3 times a week because they connected to a couple in their 70's who are now able to leave their homes because of the transportation that is being provided by their new SilverSneakers friends. In the instructor’s words, "The couple have now become the social butterflies of the entire class and they all seem happier even though 3 of them have significant vision problems that keep them isolated. Now, SilverSneakers has brought new life to them because they have met many new friends."

I must share with you that I did share this story with the president of their health plan and without hesitation he shared his enthusiasm and commitment to working with Tivity even more to invest more into the awareness programs to increase member enrollment. While this is yet another great story of the significant impact the SilverSneaker program is making on the lives of seniors, we are confirming everyday what we have known for a few years; we have a quintessential opportunity to increase awareness and engagement through the established trust that is inherent in the SilverSneakers brand. As a health plan executive recently admitted to our chief growth officer, "When our members see SilverSneakers on the caller ID, they pick up the phone. That is not the case always with our health plan." So, expect to see in the first quarter 2019 a heightened awareness campaign to increase the SilverSneakers enrollment for 2019.

To that end, let me for a moment, if I may, have Arra, our Chief Brand Officer, share some of the observations and business imperatives gained over his last 6 months tenure. Arra?

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Arra G. Yerganian, Tivity Health, Inc. - Chief Brand Officer [5]

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Thank you, Donato, good afternoon everyone. Traditionally, Tivity's marketing was focused around print. From 2016 to 2018 our focus on digital has generated a whopping 821% increase in Facebook likes, 122% increase in eligibility checks and 367% increase in location checks. We now intend to use television along with digital as indispensable channels to reach more of our eligibles moving them to enrolled and engaged members. Remember, over 12 million eligible members have never enrolled. Our data suggests that more than half of this cohort wants to be physically active.

We have characterized these members into personas where precision analytics will help us to tailor recruitment messages in a way that provides the greatest level of success to get these members to enroll. As Donato mentioned earlier, we intentionally delayed the full marketing launch of flip50. However, we conducted a soft launch with AARP in early October with limited outreach. This has provided us with valuable feedback and will now allow us to fine-tune our approach prior to the broad marketing launch in January.

We intend to launch this product with Dr. Oz as our media partner and the award winning Los Angeles based direct response firm, Quigley Simpson.

Related to SilverSneakers, we are very proud to say that we have over 2.3 million earned emailed contacts, up 107% or more than double from January of 2017. This again proves that our members like hearing from us and enjoy getting exercise and health related tips. Additionally, the digital marketing efforts through Q3 of this year we have achieved a lower cost per acquisition than last year for the same period. As investment in digital has increased, we continue to see a directly attributable positive lift in SilverSneakers enrollment.

Donato, back to you.

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [6]

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Thank you, Arra for the great work. Continuing the narrative on selling opportunities that I shared with you at the last earnings call, we remain optimistic by the number of pipeline opportunities before us, not typically in play this early into the following year's selling season. We expect to be able to offer greater commentary on the progress of these initiatives sometime in the first quarter of 2019. However, I am pleased to share with you today that after a very comprehensive RFP process, Tivity is set to renew an agreement with the top tier health plan as a long-term partner for the Prime product. While we've have the contract for the last 9 years, it was up for renewal in 2020 and went through a very comprehensive RFP process. The fact that the plan has signaled its intensions to renew the agreements so far ahead of schedule, speaks to the power of our new approach to innovation as well as the trust in the current leadership at Tivity and the next generation of procession analytics we are bringing to our customers.

We will provide more details about this new opportunity in mid to late 2019. Thank you to Steve Janicak, our Chief Growth Officer, and his entire sales and product team for the innovative approach they brought to the RFP and we are excited by the prospects of what this relationship will provide to our future revenue growth.

Moving beyond the A-B-C-D strategy, I'd like to share with you a strategic aspiration of this company and that is to become a house of lifestyle brands. With SilverSneakers more than 26-year history as a physical and now a social fitness lifestyle brand, coupled with this unmatched legacy of trust in the senior population, as exemplified by the consistent net promoter score of 81, Tivity has a unique opportunity to provide more value to our health plans and to our members by offering other lifestyle solutions that have the potential to lower medical costs for our plans and improve the health and wellbeing of our members.

Additionally, through flip50, Prime is following suite by taking a more holistic approach to fitness with nutrition and relaxation as added benefits. As a reminder, I have shared with you, from the beginning we are not a product looking for members, and rather, we are a highway of members looking for products. And those products will be lifestyle oriented. Of course we will continue to maintain our long-standing discipline around identifying expansion opportunities that are both strategic as well as financially accretive and CapEx light.

In summary, we believe we are well positioned across our current brands as we move into 2019. Lifestyle brand optimization and expansion, product innovation, entry into new media venues and expanding our digital footprint are the keys to growth in 2019 and beyond.

We have made important strides in our overall business reflective of year-over-year growth in revenue, EBITDA, EPS and enrollment. We now have by design a clean balance sheet and strong cash flow to allow us to take advantage of the next important growth stage for Tivity.

In closing, and in terms of 2019 outlook, we are working with our health plan partners to understand the success of member enrollment into the Medicare Advantage plans during this open enrollment period which began on October 15. This annual enrollment is part of the overall revenue mosaic for SilverSneakers and as shared in our previous earnings call, informs our 2019 plan. We will not have final data until our fourth quarter earnings call. With that said, we have no change to our 2019 preliminary outlook at this time. Operator, we'll take questions now, thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Ryan Daniels from William Blair.

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Nicholas Spiekhout, [2]

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This is Nick Spiekhout in for Ryan. Just to start it off, do you guys have any updated thoughts on United Contract impact or your 2019 growth mosaic or are you guys still comfortable with the growth story you laid out last quarter?

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [3]

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Yes, still comfortable and baked into the guidance, the preliminary guidance we provided to you, Ryan, last August.

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Nicholas Spiekhout, [4]

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Perfect, and then going on that, I know you only bumped down the revenue range about 1% to midpoint and you listed the flip50 and a couple of the other macro effects. I'm just wondering, what's kind of changed quarter-to-quarter there, is most of that 1% just going to be that flip50 because I know like the weather and stuff was mostly Q1 so we knew that last quarter.

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Adam C. Holland, Tivity Health, Inc. - CFO [5]

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Yes Nick, this is Adam. You can think about it, the revenue is certainly Q1 and then you think about flip50 and the member pay Prime as kind of a third, a third, a third; weather, Prime, flip50 with the flip50 and member pay Prime affecting the back half guidance that we last gave in August.

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Nicholas Spiekhout, [6]

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Okay, great. And then I know you mentioned the renewal for the plan for Prime but do you have any other update on renewals for SilverSneakers and how are you guys trending in 2019 so far?

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [7]

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Let me -- I have Steve Janicak, our Chief Growth Officer, and as I stated in my comments, and I'll let Steve now comment, is that I have to tell you, this is my third year as CEO and I've not seen in those 3 years the heightened interest that we are getting from clients in terms of making decisions earlier. I'll let Steve comment on that but that really is a very -- my assessment, very positive indicator.

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Steven Janicak, Tivity Health, Inc. - Chief Growth Officer [8]

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Sure. To follow-up on what Donato was saying, yes, we're having a great season of renewals. We are a little bit ahead of where we traditionally are this time of the year and actually has started some conversations into 2019 early based off of the feedback from our health plan customers.

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [9]

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And I think Ryan (sic) [Nick] -- Go ahead.

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Nicholas Spiekhout, [10]

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Oh sorry, go.

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [11]

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Yes, and I think that's why I'm reasonably comfortable that we would probably have some updates for you in the first quarter. Because as you know, historically they don't happen until the second quarter.

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Operator [12]

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Your next question comes from the line of Dave Styblo from Jefferies.

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David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [13]

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Donato, first question is just on one of the topics that you had unpacked there about the program that you want to roll out next year to address those social engagements and loneliness. Can you give us a little bit more color about what that looks like, why you think it would be a meaningful revenue growth contributor and is that something that would be generally sold to all of the health plans or more exclusive to a few based on sort of each relationship that you have with the different insurers?

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [14]

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Sure. First of all, David, One of the benefits and advantages I think of this initiative is that we've been doing it already. When you look at -- and it's very funny, I have shared this with many of you, one of the biggest complaints we get from our physical locations is how much coffee they serve. And what I mean by that is that it's indicative of the social connections that members are going there to socialize. And so fortunately, this is not developing the next space shuttle. We have a program called SilverSneakers that we have for the longest time pushed the treadmill. We've pushed the free weights, well now we should be pushing that there are social activities happening there. What we need to do, and that's why Precision Analytics will help us is identify that persona who are -- and we have, we've gone through a very comprehensive analysis in the last number of months, we have identified about 5 million of our eligibles we believe are in that category of socially isolated and lonely and so now we'll begin to develop interventions that will connect them not so much to just going to the gym but connect them to the activities that those fitness centers are in fact putting on, whether it be a social hour at the YMCA or whatever it may be, and our plans are saying to us that that is where they want to partner with us because we all know getting them out of the home, getting them to move, getting them to be involved with other people can open, if you will, a whole new world in terms of keeping down costs, i.e., medical costs. So we'll have more details, I'm confident if not at the J.P. Morgan conference, which is my goal, we certainly will have it at the next earnings call.

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David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [15]

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That's helpful, Donato. One question I've still been getting from investors is just concern about the implied revenue growth on the lowered range here. So if I adjust for hurricanes that happen in the back half of the year, the fourth quarter year-over-year revenue growth is going to tick up a couple of points relative to the third quarter growth rate. So curious to understand more of the mechanisms behind what's driving that. Is that primarily Prime or something else that would be going on in there?

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [16]

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Go ahead, Adam.

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Adam C. Holland, Tivity Health, Inc. - CFO [17]

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Yes, yes Dave. If you look at Q3, Q4 last year 2017, we grew about 1.2% and this guidance would imply slightly more than that but generally in the same direction. And you're spot-on, our Prime would contribute to that growth. SilverSneakers would be at about maybe slightly below the growth rate we saw in Q3 year-over-year.

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David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [18]

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Okay. And then as we look out to flip50, you delayed a -- I don't think I quite understood all the rationale for it but what did you -- maybe what did you not know a few months ago versus what you now know that would benefit you guys from delaying the marketing? Is it simply like a focus issue with the target customer in there that once surpassed all of their enrollment for whether it's their employer plan? Because I think this is more geared at a Prime member typically, right, but maybe once they're past their enrollment cycle then they can focus in more on this type of engagement activity?

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [19]

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Let me have Arra comment and then I'll give you my comments.

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Arra G. Yerganian, Tivity Health, Inc. - Chief Brand Officer [20]

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Dave, so you're right, we did delay. After further diligence with a whole bunch of experts we recognized that there would be a better return on the marketing investment by delaying the beginning of Q1. But think importantly, and I noted this in my previous comments, we haven't been sitting in our hands, we've been testing and learning, getting to know what our consumers’ reaction is to the messaging and refining that as we've gone along. So we'll get out of the shoot hopefully with a strong flow in January.

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [21]

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Let me just add to that. Listen, we -- it's not that we couldn't have launched it, it's as Yogi Berra once said, "You don't want to make the wrong mistake." And I think the reality was understanding how we could get the greatest return and so we did talk to Dr. Oz, it was his strong sense that doing this in January, and by the way, one of the things that we defaulted in terms of talking to Dr. Oz how he is focusing his programs on loneliness and felt that after the holidays the loneliness factor goes up, after the holidays people want to lose weight. The last thing that they're thinking about in this quarter, as the turkey and everything else is being brought to the dinner table, is joining us for this program. So that said, I take the responsibility, I felt that the greatest return in terms of the investment dollars that we would make would be to move this in January where we'll start late December, if you will, with the media.

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David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [22]

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Right, okay. That's helpful. The last one just being the Prime, coming back. I think you guys said it was a little bit short of your internal expectations. What would you attribute that too and obviously your guidance does imply an uptick it sounds like, in the fourth quarter. Do you already have visibility on that uptick or what gives you confidence that you're going to have that uptick as you go from the third to the fourth quarter?

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Adam C. Holland, Tivity Health, Inc. - CFO [23]

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Yes Dave, this is Adam. A lot of that has to do with the promotional nature of the member pay Prime which is the largest segment of Prime. As you know, member pay Prime is more of a direct to customer model and we have begun experimenting starting last year with different promotional mechanisms to drive subscriptions at a higher rate than the organic growth rate which is already pretty strong. And what we saw in the third quarter was some learning's regarding the timing of the promotions inside the quarter, the nature of the promotions in terms of the interactions with the end user and we've been able to augment some of that for the fourth quarter as well as some comparisons against last year where we were more promotional at the end of last year and some of these we're not repeating again this year. So there's a lot of moving parts in there that really have to do with promotional calendar which is driving that higher growth rate from Q3 to Q4.

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [24]

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And we're also doing some, Steve maybe you want to comment on this, one of the things that we learned is that while we have these 3 partnerships, or 2 partnerships if you will, that help to generate the eligibles, what you want to do is get to the employers and see if you can comment what's happening in the fourth quarter which is one of our lessons learned.

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Steven Janicak, Tivity Health, Inc. - Chief Growth Officer [25]

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Yes, one of the things that were doing, and we've got a lot of support from our customers and our health plans is to be able -- there's a lot of open enrollment programs that are going on with some large employers throughout the country and now what we're able to do is to be a part of those conversations and be a part of those events that they're doing, so doing some fairly large events, but we'll actually be there, we'll have a booth, we'll have some communication materials, we'll be able to sign people up while we're right there. We haven't done that in the past and next year we'll have more focus on getting directly to that employer and to those employees as well.

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [26]

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And how many are we doing, do you recall?

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Steven Janicak, Tivity Health, Inc. - Chief Growth Officer [27]

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We’re doing 22 events.

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [28]

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So there you have an opportunity right at the open enrollment opportunity to begin to speak about Prime and get people activated and engaged. Remember, the good thing about Prime is that you get them activated and they have to commit to several, what is it, 3 months they have to commit to. So, that's another lesson learned and one that we intend to continue through 2019.

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Operator [29]

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Your next question comes from the line of Sean Wieland from Piper Jaffrey.

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Sean William Wieland, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [30]

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So why do you think some more of the visits are coming in under the PMPM model and tell us a little bit about how you forecast that and also remind us what the current mix is of that business?

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [31]

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Yes, I'll let Adam answer the 2. Quite frankly you can't have it both ways. We are increasing our awareness and while we can point to this increase in revenue in terms of those who are under a hybrid model, the reality is that you can't isolate. So I'll give you that quickly that an awareness campaign reaches everyone. Adam, do you want to comment on the other?

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Adam C. Holland, Tivity Health, Inc. - CFO [32]

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Yes, Sean, in the mix of this, it's generally reflective of our enrollees. As you recall, we started this year with a lot more members under the hybrid model and we've generally seen our visit profile from quarter-to-quarter match off against that. What I'll say is that -- echo what Donato says, while we are smart with our marketing efforts and drawing the lines as best we can to focus on the hybrid members which were paid for visits, it's not a perfect science and there's certainly some small bleed-over affect. That said, the increase is not overly substantial. It's something we've been seeing along the year as we've seen our engagement move. That said, one of the remedies of this and we've telegraphed this in the past is that we do expect next year that our percentage of members on our hybrid plan will increase going into 2019 which will be a natural hedge against some of this pure PMPM visit pressure we've seen over the last quarter.

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Sean William Wieland, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [33]

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And can you tell us what percentage of your members are in the hybrid model?

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Adam C. Holland, Tivity Health, Inc. - CFO [34]

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Yes, it's about 64% of your lives are under a hybrid plan in 2019. That's up from around 57%.

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Sean William Wieland, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [35]

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Okay, and is that -- and so is that -- is that where the market is gravitating toward? Is there a preference to purchase SilverSneakers under the hybrid model today and what do you think is driving them?

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [36]

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I can tell you this Sean that there are several things. Yes, there is an interest because what we're seeing is there's a deep appreciation, as I shared with you in my prepared remarks, there's a deep appreciation from the health plans in terms of what we're doing around awareness and this holistic approach in terms of getting more engaged. And just virtue by the fact that you've seen a 7 point increase this year over last year speaks, if you will, to an aligned path but that's really where we would like to end up and I suspect that the health plans who are recognizing this benefit of getting members engaged are in fact recognizing that same model as the way to go.

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Operator [37]

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Your next question comes from the line of Mohan Naidu from Oppenheimer & Company.

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Mohan A. Naidu, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [38]

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Donato, just following up on the prior question there from Sean. Do you right now differentiate markets when you go and try to do the engagement based on what type of contracts do you have or higher mix of one certain type of contracts?

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [39]

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Well we certainly try and I think that -- listen, we have a number of clients that are still in the PMPM model. We have a responsibility and an obligation to treat those customers in the same way that we treat the others and I think that the way that we're going to get around this is that our job, and Steve's job, is to move more of those health plans in the directional alignment that we have defined. And I think I've been at this now for 3 years, I've been out there with enough CEO's of other health plans. I have to tell you that I don't see anyone pushing back and so that's going to be Steve's job. But I think we have treat a member as a member and the responsibility we have to that member is to get them engaged.

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Mohan A. Naidu, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [40]

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Yes, fair enough. And Donato you also threw out one more metric in there in your comments saying 1% of SilverSneakers revenue year-to-date is coming from the enrollment engaged members. Can you elaborate on that? Are we talking about any specific programs? Are we talking about actual members who got in new that generated this revenue?

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [41]

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Yes, so I was hoping you guys would come back to that because to me that really is, in many respects, what we've been working very hard for the last year and a half; it's been almost 2 years that we introduced the A-B-C-D. So let me put it in this perspective, I don't want to get into the specific programs but the programs that we now have defined as levers, we can point to a north of 35,000 members who have enrolled as a result of us being able to tie the program to that member enrollment and that's how we got to the 1%. So, obviously this is a great movement is what the board has been certainly rightfully so pressuring me on in terms of coming back with, are these investments paying off and I will have to tell you, this is a very, very good indication of our investments. Obviously we want to see that growing and it's like a flywheel, we've been saying that. You get it moving -- you get this 5,000 pound flywheel moving a little bit and then it moves more and it moves more. So yes, the programs that we defined at the Investor Day on June 1, the levers, those levers are now beginning to generate fruits on the labor that we have expended.

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Mohan A. Naidu, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [42]

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That's great. Maybe one last one. On your confidence levels to getting to that 5 million enrollees by 2020, what -- I guess there are multiple drivers here that you're talking about and if you think about -- what gives you the greatest confidence that you're going to get to that 5 million members over the next couple of years? Can you talk a little bit on -- yes.

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [43]

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Yes, as they say, all roads lead to Rome and I will say to you that the same applies here. The fact that we have now tested our territory managers, the fact that we have no put the CollegeSave program out there, the fact that we've integrated multiplicity of programs, i.e., call center, post cards, multiple touch points, the fact that we are now going down the path in terms of loneliness can certainly serve as a great -- or addressing that, can serve as a great conduit to increase enrollment. The TV, first of all, it begins with awareness and the fact that we have these great digital metrics but we can't just rely on digital and so why we brought our end and why we believe now the next -- and you're going to see this, quite frankly you'll start seeing this December 26 and onward, you'll be seeing SilverSneakers on TV. You have to get them enrolled and then once you get them enrolled, we have to kind of come in like a surgeon and make sure we're operating correctly and using the right interventions. All of that is why I feel and still maintain that we're on the road to 5 million members by the end of 2020.

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Operator [44]

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Your next question comes from the line of Mike Petusky from Barrington Research.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [45]

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Donato, since you just mentioned it, what kind of spend are you talking about in terms of television?

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [46]

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Well, I knew you guys were going to ask -- Arra, do you want to --

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Arra G. Yerganian, Tivity Health, Inc. - Chief Brand Officer [47]

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Mike, thanks for the question. So, we're really excited about TV. The objective of this campaign, and we really are talking about an integrated approach to marketing. So what we do through television will be modified by digital and the work we do with our territory managers in the field, the TV will start at the beginning of the year and we're anticipating that we'll be in the position to reach the vast majority of seniors through our efforts. In fact, our goal is to get to about 80% of our target audience, this is 60 and above, with at least 6 views of the spot over that next 4 month period. We don't disclose the dollar amount, as you can imagine, but it's going to be hefty enough to get everybody to definitely know we exist. And the good news is we've done some terrific pretesting already and we've seen a tremendous response and uplift from consumers on their opinion of our brand pre and post them seeing an ad like this. Brand sentiment has gone up. They think that this spot and the work that we do will help them feel healthier and it brings a higher level of awareness as you can imagine to what we do. So, pretty excited about what this is going to come -- what this will bring to fruition.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [48]

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Is it going to be nationwide or targeted towards like places like Florida, Arizona and such or is it going to be nationwide?

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Arra G. Yerganian, Tivity Health, Inc. - Chief Brand Officer [49]

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So we've done a lot of on the media model. We are going to be television nationally and the impact we think is going to be pretty broad based and, again, as we perfect the hybrid model it will help us ensure that we get the right members into the door but it will be a national campaign. It's more cost effective to go that route.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [50]

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Fantastic. A couple more questions, just on the program for folks that are at risk for social isolation, I've been kind of scratching my head here trying to figure out how you would identify 5 million. The one thing I'm coming up with is maybe people that have lost spouses in the last couple of years. I mean, is that a chunk of that 5 million or how do you identify 5 million people that you think are at risk for social isolation?

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [51]

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Yes, there's no social -- it's actually 2 venues. It's actually feeling lonely and actually being isolated. 12 million of our senior population of 55 million are isolated in rural communities. So that certainly is a great cohort to start to -- and it doesn't mean just because you live in rural Maine that you're now automatically lonely. But we're going through a very -- there's a lot of research out there, a lot of tools that we don't even have to develop that provide you with a very clear algorithmic approach to saying Donato has a spouse, Donato lives in Maine, he's not going out -- the only person he's seen every day is the mailman. And so there are measures that you can get to say he's lonely. And the interventions, again, I want to just make sure that nobody is walking away from there thinking that we're investing hundreds of millions of dollars in developing the interventions. We have the interventions, our partners have the interventions. Remember how we get paid on the majority of our members is that we have to get them to swipe their cards. And the argument that I've made to the health plans is what difference does it make if they're swiping their cards to either go on the treadmill or swiping their cards to go into the social community room? So what I would ask is stay tuned. We intend to give you a more comprehensive review of this in the January/February time period.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [52]

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Great and last one real quick for Adam. Adam, obviously stock is still down fairly significantly from where it was about a year ago and I'm just wondering in terms of capital allocation priorities, has share repurchase moved up that list or is it still kind of maybe a distant third or fourth relative to internal program development and possible partnerships and that sort of thing?

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Adam C. Holland, Tivity Health, Inc. - CFO [53]

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Yes, the share repurchase has never been off the table. We talked about it last call and we are continuing to work with our board and evaluate all of our strategic options related to capital allocation and I expect we'll have more to say when there's something to say.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [54]

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Okay, is that essentially nothing's changed or from where it's traditionally been the last year or --

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [55]

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I wouldn't say that at all. I think that there is a significant amount of very healthy dialogue going on with the board. As I shared with you, you've got a very clean balance sheet, there are opportunities. We're investing in the company, as you have heard here today, so I have to tell you, I'm very pleased with the boards interaction and the carefulness to how they are approaching this with this executive team and so Adam's correct, this will certainly unfold in short-order.

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Operator [56]

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There are no further questions at this time. Donato, I turn the call back over to you.

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Donato J. Tramuto, Tivity Health, Inc. - CEO & Director [57]

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Well, thank you very much. I just once again want to thank the entire -- we're reaching the end of the year and I want to thank the colleagues who I continue to be inspired by their dedication and commitment and if we don't speak, a happy holiday to all of you. Thank you very much for joining us here today.

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Operator [58]

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This concludes today's conference call. You may now disconnect.