Progyny, Inc. (NASDAQ:PGNY) Q4 2023 Earnings Call Transcript
Progyny, Inc. (NASDAQ:PGNY) Q4 2023 Earnings Call Transcript February 27, 2024
Progyny, Inc. beats earnings expectations. Reported EPS is $0.32, expectations were $0.11. Progyny, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen, and welcome to the Progyny, Inc. Fourth Quarter 2023 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, James Hart. The floor is yours.
James Hart: Thank you, John, and good afternoon, everyone. Welcome to our fourth quarter conference call. With me today are Pete Anevski, CEO of Progyny; Michael Sturmer, President; and Mark Livingston, CFO. We will begin with some prepared remarks before we open the call for your questions. Before we begin, I'll remind you that our comments and responses to your questions today reflect management's views as of today only and will include statements related to our financial outlook for both the first quarter and full-year 2024 and the assumptions and drivers underlying such guidance, including the impact of our sales season and client launches and our expected utilization rates and mix, our anticipated number of clients and covered lives for 2024, the potential benefits of our solution, our ability to acquire new clients and retain and upsell existing clients, our market opportunity and our business strategy, plans, goals and expectations concerning our market position, future operations and other financial and operating information, which are forward-looking statements under the federal securities law.
Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business as well as other important factors. For a discussion of the material risks, uncertainties, assumptions and other important factors that could impact our actual results, please refer to our SEC filings and today's press release, both of which can be found on our Investor Relations website. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During the call, we will also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITDA margin on incremental revenue and non-GAAP earnings per diluted share.
More information about these non-GAAP financial measures, including reconciliations with the most comparable GAAP measures are available in the press release, which is available at investors.progeny.com. I would now like to turn the call over to, Pete.
Peter Anevski: Thank you, Jamie. Thanks, everyone, for joining us this afternoon. 2023 was another exceptional year for Progyny, a year in which we achieved record levels of revenue, which grew 38%, profitability with a 17.2%, adjusted EBITDA margin and operating cash flow generating nearly $190 million or more than twice what we delivered in 2022. As important as those financial measures of success are, we're equally pleased with what we've achieved operationally. I'll touch on just a few of these highlights. Driven by our remarkable levels of member and client satisfaction, we once again maintained our near 100% retention across our client base, while also concluding a selling season that yielded the largest number of new covered lives in our history.
We deepened our already highly collaborative relationships with clinical providers while also extending the reach of our vast network through the addition of reproductive urologists with the Progyny network now reaching more than 1,000 of the highest quality REIs and RUs in the country. And we expanded our solution to address both menopause and the treatment of male infertility. Aided by the quality and reach of that network and the ways in which we collaborate with them, we continue to achieve, for the eight straight year, the industry-leading clinical outcomes in fertility care. And in 2023, we helped the largest number of members in our history realize their family building dreams through healthier and faster journeys, while controlling costs.
In fact, since launching our solution in 2016, we've cumulatively helped hundreds of thousands of people successfully navigate what would otherwise have been a complex, stressful and overwhelming course of treatment. And we've done so while routinely achieving NPS scores in the 80s, an exceptional achievement for any industry, let alone healthcare. As a mission-driven company, where everything we do is about empowering people to successfully meet the milestones in their lives through evidence-based solutions, we're perhaps proudest of our sustained clinical success, because we understand how those outcomes aren't just numbers on a page, but tangible life changing results for people every day. To put it simply, there are tens of thousands of babies in the world today who were born after their parents turned to Progyny for support typically after having been unable to conceive on their own or unable to carry a child to term.
It's helpful to remind ourselves of these successes, particularly when the news cycles over the past week have focused on a potential barrier in the state of Alabama with respect to access to care. And we're fully committed to ensuring that access to IVF will continue for all of those in need, including our members, regardless of where they live. Just as we saw two years ago following the Dobbs decision, a number of state legislatures and governors including Alabama's have indicated their intent to take action to ensure the continued availability of these services. And while this is encouraging, it isn't surprising to us given how life-affirming these services are to the millions of individuals who've already used it successfully and the reality that an even greater number of people will need it to turn to it in the future.
It's likely many of these legislators know someone personally who has needed access to fertility care in order for some people to realize their family building dreams. As we've said previously, one of the macro trends driving the demand for care is the increasing prevalence of infertility, which has gone from one in eight just a handful of years ago to one in five today according to the CDC. You've seen that reflected in the strong member engagement metrics that we've reported to you in 2023. Continuing the pattern that we've seen all year, utilization in the fourth quarter was up versus the comparable period in 2022. And although our Q4 guidance reflected the typical decline in member activity due to the holidays and clinic closures for routine cleaning and maintenance, the actual decline in December was slightly more than what we had anticipated, which is why revenue ended up closer to the midpoint of our Q4 range.
As 2024 began, utilization returned to levels that are more consistent with what we would expect to see early in the year, demonstrating that the benefit is being used by both new and existing members. And while overall utilization levels are in-line with last year, as at this point in the quarter, there was a brief shift in treatment mix at the start of the year, which we estimate resulted in an approximately $15 million headwind on revenue in the quarter from what we normally would expect and which we've reflected in our guidance for the first quarter. While this phenomenon doesn't happen often and has only occurred once since we've been a public company back in the summer of 2021, when it has happened, it's always been short lasting and has reverted thereafter to the more typical distribution of treatments.
To that end, we've already seen treatment mix return to more customary levels over the second half of the quarter with February activity closest to normal than in January and the visibility we have into March that indicates it's trending to typical expected distribution, giving us confidence that this aberration was like all previous ones short lived and now behind us. While Mark, will walk you through our guidance for the first quarter, given what we are seeing now, we're expecting that the activity in Q2 and over the balance of the year will be much more consistent with the historical trajectory, which is reflected in our full-year guidance. That trajectory reflects a continuation of the macro trends that have been fueling our growth, namely the need for fertility benefits is higher than ever with an increasing number of people affected by infertility as a medical condition.
People are continuing to wait until later in life to start their families and in doing so are more likely to meet fertility care and family building is still a priority. In fact, these macro factors continue to create a number of tailwinds that we expect will continue to grow our longer term success. First, demand for fertility benefits is stronger than ever, particularly among the millennials who are in the prime of their family building years. Second, family building and women's health benefits have never been more relevant or more timely with employers, particularly as they look to modernize the coverage they're providing in order to better support their employees' needs. Employers increasingly realize that in doing so, they're not only enhancing the efficiency of their recruitment and retention efforts, they're also meaningfully improving workforce productivity.
Third, employers are continuing to demonstrate their commitment to family building and women's health services and they're doing this by adding coverage when they don't already have it or by expanding their coverage to provide even greater access to care, by broadening the scope to include other pathways such as adoption and surrogacy and by including other services into their programs such as preconception, parenting and menopause. And lastly, by leveraging our proven strengths in patient education and support, evidence-based care pathways, network management and outcomes measurement, Progyny continues to successfully differentiate itself in the market by raising the bar for what employers should expect from their benefit providers. This experience ideally positions us for success as we enter 2024 with a more comprehensive set of services.
2024 selling season is in its very earliest stage. And while it's too soon to offer any quantitative commentary, the early activity that we're seeing thus far is very positive. Our active pipeline, which at this early point in the season consists primarily of the opportunities that were carried over from last year, is the largest it has ever been at this time of year. And the pipeline will expand as additional opportunities are created through our channel partner relationships, our own demand generation activities, participation at key conferences, introductions facilitated by the benefit consultants, RFPs and all other activity. We've also had a number of early wins, including well-known brands in apparel, healthcare and media, just to highlight a few.
In short, we've entered 2024 with considerable momentum, which comes on the heels of our last three selling seasons, which were the most productive in our history. And despite that rapid growth over such a short period of time, we continue to be at a very early stage of penetrating our market opportunities, just a mid-single digit percent of either our targeted clients or covered lives. Though we've expanded our addressable market in recent years by first adding labor and then adding federal government populations, we have opportunities to expand our TAM even further with other types of employers. Because of our proven history of delivering real and sustained value in family building services, we enjoy a sizable advantage as our clients will often proactively share with us the gaps they're looking to address across other areas of healthcare, particularly with respect to patient access, member experience and cost efficiency.
In fact, because the Progyny member experience is so unique and what we deliver is so special, we've had clients tell us about the letdown once a member has concluded their Progyny journey and has to return to the health plan or some other solution for further support. That's why Progyny is so uniquely positioned to expand our already industry-leading platform into other areas that further support life's other key milestones. We've made investments in our product organization and we'll continue to expand that team in 2024 to enable us to quickly add new features to existing services or expand into new areas in ways that make sense for us and our clients. These include areas like preconception support where we can help address conditions that often negatively impact the ability to conceive such as PCOS or endometriosis or maternity, where we can help expectant mothers navigate the pregnancy journey, postpartum as the new parents look for support as they adjust to the new addition to their family and think about their eventual return to the workforce.
These services are being included in our 2024 selling season for both new clients as well as upsell activity amongst existing clients for contribution beginning in 2025. And in conclusion, the early selling season activity gives us confidence that the macro trends driving the high demand for family building benefits combined with our position as the leader in the space position us well to sustain our growth trajectory. And given the caliber of the companies that we're both partnering with and seeing in our active pipeline, it's become even more evident that Progyny is the provider of choice for fertility solutions amongst the best known and most successful companies in the world. Let me now turn the call over to Mark, to walk you through the results in more detail.
Mark?
Mark Livingston: Thanks, Pete, and good afternoon, everyone. I'll start with an overview of our results for the fourth quarter the full-year and then provide our expectations for 2024. Revenue in the fourth quarter was $269.9 million reflecting 26% growth. For the full-year, revenue grew 38% to $1.09 billion. With this strong result, we've more than doubled our revenue over the past two years and achieved a tenfold increase over the past five years, which further attest to the substantial size of our market opportunity as well as our success in executing against our go-to-market strategies. Our growth in both the quarter and the year was primarily due to an increase in the number of clients and covered lives as compared to the year ago period.
As of December 31, we had 392 clients with at least a 1,000 lives, representing an average of 5.4 million covered lives in the fourth quarter. This compared to 288 clients and an average of 4.6 million covered lives in the fourth quarter a year ago, reflecting approximately 19% growth in lives. For the full-year, average lives increased to approximately 24%. I'll remind you that the fourth quarter 2022 includes the impact of early launches, which had the effect of muting our growth rate this quarter as compared to what you will see in our full-year growth rates. As we told you in November, our recent selling season was more typical with substantially all of our newest clients launching in 2024, which is what we would ordinarily expect to see.
Although the majority of our new clients have gone live in the first quarter, we have new clients going live in Q2 and Q3, representing in aggregate approximately 200,000 additional lives, and we have reflected that in the progression of our quarterly expectations for 2024. Turning to the components of the topline. Medical revenue increased 20% in the fourth quarter to $171 million and grew 33% in the year to $676 million. Our growth in both the quarter and the year was driven by higher number of clients in covered lives. Pharmacy revenue increased 39% in the fourth quarter to $98.6 million and grew 49% over the full-year to $412 million. The growth in both periods was primarily driven by an increase in the number of clients with Progyny Rx. We continue to see the progression in the adoption of our Pharmacy solution.
In 2022, 85% of our clients had pharmacy. That increased to approximately 90% in 2023. And with nearly every one of our newest clients choosing Rx in the most recent selling season, along with our upsell activity from the existing base, we anticipate that approximately 93% of our clients will have the integrated solution in 2024. While that still leaves approximately 7% of the base for future upsells, as the penetration continues to climb, we would expect to see the difference in growth rates between Medical and Pharmacy continue to narrow. Turning now to our member engagement metrics. More than 15,000 ART cycles were performed during the fourth quarter. This is our highest quarterly total ever and a 24% increase from the fourth quarter of 2022.
For the full-year, ART cycles grew more than 36%, reflecting the continued high rate of demand that we see for fertility care. The female utilization rate, which most closely corresponds to our financial results as it captures the more extensive treatments in the fertility journey, was 0.48% in the quarter. This was an increase from the 0.46% that we reported in the fourth quarter a year ago. For the full-year, the female utilization rate was 1.09%, which was higher than the 1.03% we reported a year ago as utilization in every quarter of 2023 exceeded the comparable period in 2022. Although utilization can vary from quarter-to-quarter for many reasons, including the timing of new client launches in the time of the year, we believe the overall upward trajectory for the year reflects both the increasing prevalence of infertility as a medical condition as well as our members' continued desire to pursue family building.
Turning now to our margins and operating expenses. Gross profit increased 28% in the fourth quarter to $56.9 million. This yielded a 21.1% gross margin, which was a 30 basis point increase from the fourth quarter of 2022. For the full year, gross profit increased 43% to $239 million. The 21.9% gross margin in 2023 was a 60 basis point increase over the prior year, reflecting the ongoing efficiencies that we've realized in the delivery of our care management services, which were only partially offset by the impact of our previously disclosed cost containment efforts that were shared with our clients. Sales and marketing expense was 5.5% of revenue in both the quarter and the full-year, reflecting a modest improvement from the corresponding periods in 2022.
The investments we've made to meaningfully expand our channel partner relationships and go-to-market resources, including the build out of newer areas like labor, continue to be offset by the leverage we gain through our client acquisition and retention success. G&A was 10.4% of revenue this quarter as compared to 13.2% in the fourth quarter a year ago. For the full year, G&A was 10.8% of revenue, which compared to 12.5% in 2022. The improvement in both the quarter and the year is primarily due to efficiencies that we continue to realize in our back office operations even as we rapidly expand the business. With our strong topline growth and the operating efficiencies that we realized, adjusted EBITDA, both in dollars as well as in margin, increased significantly in both the quarter and the year.
In the fourth quarter, adjusted EBITDA increased 31% to $43.2 million, yielding a margin of 16%. For the full-year, adjusted EBITDA increased 49% to $187 million, yielding a margin of 17.2%, which is a 120 basis point expansion from 2022. Adjusted EBITDA margin on incremental revenue, which most clearly highlights our rate of margin capture as we grow and has proven to be useful as a forward indicator of where the overall business is moving, was 20.3% in 2023, further demonstrating the leverage that we've continued to achieve on the most recent cohort of revenue. Net income in the fourth quarter was $13.5 million, or $0.13 per diluted share. This compared to net income of $3.4 million, or $0.03 per share in the fourth quarter of 2022. On a full-year basis, net income was $62 million or $0.62 per diluted share, which compared to $30.4 million, or $0.30 per share in 2022.
The increase in both the quarter and the year was due primarily to higher profitability and higher investment income, which more than offset a higher provision for income taxes in the current periods. In response to feedback we've received from investors, we're also now reporting adjusted earnings per diluted share, which is earnings excluding the impact of stock-based compensation taking into account any associated tax impacts. We believe this measure enhances the comparability of our results to other companies who report non-GAAP earnings. We'll continue to report and issue guidance just as we did previously, and we'll add this measure going forward. Adjusted earnings per diluted share was $0.32 in the quarter, which compares to $0.22 in the year ago period.
For the year, adjusted EPS was $1.40 for the full-year as compared to $0.89 in 2022. The press release we issued today includes a reconciliation for adjusted EPS over the last eight quarters. Turning now to our cash flow and balance sheet. Operating cash flow in the fourth quarter was $37.7 million which compared to $51.5 million generated in the year ago period. The decrease was primarily due to timing on certain working capital items. Our full-year operating cash flow was our highest ever at $189 million more than double the $80 million that was generated in 2022 and reflects our higher profitability as well as the previously disclosed impact from an amended agreement with a pharmacy partner, which took effect midway through the year. As a result, our days of sales outstanding improved at year-end by approximately 20 days from where we concluded 2022.
Looking forward, we expect a mid-70% conversion of full-year adjusted EBITDA to operating cash flow, excluding the impact of any cash taxes. As of December 31, we had total working capital of approximately $454 million reflecting $371 million of cash, cash equivalents and marketable securities and no debt. Finally, turning now to our expectations for the first quarter and the full-year 2024. For revenue, we are projecting between $285 million to $292 million in the first quarter, which contemplates the $15 million headwind in treatment mix shift that, Pete, described to you a little bit earlier. With the visibility that we have into more recent activity, we can see that mix is trending more consistent to what we'd expect, and we've reflected that in our guidance over the balance of the year.
For 2024, we project revenue of between $1.285 billion to $1.315 billion reflecting growth of between 18% and 21%. Turning to profitability. We expect between $49 million to $51 million in adjusted EBITDA in the first quarter along with net income of between $12.4 million to $13.7 million. This equates to $0.12 and $0.13 earnings per diluted share or $0.33 and $0.35 of adjusted EPS based, on the basis of approximately 102 million fully diluted shares. I'll remind you, our guidance does not contemplate any discrete income tax items, including the income tax benefit related to equity compensation activity. To the extent that related activity occurs, we will continue to benefit from those discrete items throughout 2024. For the full-year, we expect adjusted EBITDA between $224 million to $232 million and for net income of between $68.1 million to $73.6 million.
This equates to $0.66 and $0.71 earnings per diluted share and $1.54 and $1.59 of adjusted earnings per diluted share on the basis of approximately 103 million fully diluted shares for the full-year 2024. At the midpoints of this guidance, we are expecting to see the continued expansion of our margins in 2024, with adjusted EBITDA margin incremental revenue of 19.4%. These ranges reflect how 2024 will be another year of both strong topline growth and continued margin expansion. With the momentum we continue to see for family building services generally and the energy behind our more comprehensive end-to-end solution, we are excited for the year ahead. With that, we'd now like to open the call for questions. Operator, can you please provide the instructions?
Operator: Absolutely. Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] The first question comes from Anne Samuel with JPMorgan. Please proceed.
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