BNFT (2019 - Q2)

Greetings. Welcome to Benefitfocus Second Quarter 2019 Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, I will turn the conference over to Michael Bauer. Mr. Bauer, you may begin. Michael

Thank you, operator. Good afternoon and welcome to Benefitfocus’ second quarter 2019 earnings call. We will be discussing the operating results announced in our press release issued after the close of market today. Joining me today are Ray August, our President and Chief Executive Officer; Stephen Swad, our Chief Financial Officer; and Lou Anne Gilmore, our VP of Corporate Development. The team will offer some prepared remarks and then we will open the call for question-and-answer session.Before we begin, let me remind you that today’s discussion will include forward-looking statements, such as third quarter and full year 2019 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 a variety of risks and uncertainties, including our continuing losses and need to achieve GAAP profitability, the fluctuation of our financial market 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 risk 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 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 will now turn the call over to Ray.

Thank you, Mike. Good afternoon, everyone. There are three key takeaways from today’s call, all centered around growth innovation and significant economic value we are creating as a leading AI powered benefits platform. First, the size and scale of our network is growing. We have grown well beyond 25 million consumer lives. In Q2, we added approximately 1 net benefit eligible lives. We signed a major deal in partnership with one of our leading voluntary benefits suppliers. We deepened our relationship with a major Blues partner to deliver voluntary benefits to its members and brokers are making a notable difference in our lives growth and customer acquisition.Second, the value of our technology investments is accelerating. Our network is accessing data that allows us to personalize offers on our platform just like Amazon’s recommendation engine. Our platform structure improves the consumer experience and dramatically changes how benefits are bought and sold. And with the launch of our standardized API framework, we are removing ecosystem friction and automating file-based and manual processes. Third, the power of our data and data models is taking hold. Our intelligence engine is improving user experience helping consumers make better, smarter decisions and providing value to the entire benefits ecosystem. Finally, I want to emphasize the fact that our new platform strategy is starting to payoff. We executed well against our Q2 financial objectives and updated our estimates for the back half of the year revenue growth which still is expected to accelerate at a robust pace.Before I highlight the success of our business, I will discuss our platform. This is fundamental. Our transformation continues to mature. It’s driving how we describe ourselves and how we run our business. We are shifting from a benefits administration solutions provider to a platform company. We are no longer just a benefits administration software company, we are much more. Our multi-sided platform goes well beyond our robust employer network. We have deep understanding of more than 25 million consumers and employers. We are aligned with hundreds of brokers and growing. We have a strong foundation with medical carriers and we are regularly adding new live voluntary auto and renters and specialty providers to expand our benefits by this offering. Benefitfocus connects this vast network in a complex environment. Our focus on network connections is driving technology, innovations, expanding our data assets and ultimately amplifying the economic value we create for the entire network. Every part of our platform is growing.Let’s now turn to our business highlights and discuss growing our platform. We will discuss our three areas of focus growing our platform, advancing our leadership and strengthening our core. We will start by discussing who matters on a platform then how we are driving greater economic value and finally our business results. In Q2, we added approximately 1 million net benefit eligible lives, a new record for the company and foundational to our growth. Live growth across all areas of our business, lives on our platform matter and this is underscored by the value of employers, of brokers, of medical carriers and our network of carriers, sellers and suppliers on our platform. Each market area strengthened and scales our network and drives economic value.To scale our go-to-market approach and accelerate the network effect, we made a purposeful shift to partner with the influential broker channel. This strategy is paying off. In Q2, we added over 160 premier brokers bringing our total to over 450 premier brokers. This is a 10x improvement over last year when we had 43 premier brokers. Brokers are also making a difference in our lives growth in customer acquisition. For the first half and second quarter, brokers influenced over 70% of all new employer lives added on our platform. This is up from prior year periods and confirms our broker partnership approach creates key network connections. This positions us to scale and advance our market leadership.Now, let’s go deeper on how we are driving greater economic value through our platform. The strength of our sales leadership and depth of our sales bench is contributing to lives growth. The success in the quarter reflects both larger deal size and favorable timing of transactions that closed earlier in the selling season than our original expectations. Our strong Q2 performance puts us well on course for our full year target of net benefit eligible lives growth. We added large employers, universities and public sector accounts. A highlight of our continued public sector leadership is the addition of the state of Alaska in conjunction with one of our leading voluntary benefits partners, MetLife. This is a clear indication that our ecosystem partners are accelerating network connections. Our partners are contributing in new ways to our platform growth. We are deepening our relationship with another major Blue Cross Blue Shield plan on our platform. This is a strategic partnership. By using our platform and network connections they are able to deliver voluntary benefits to their large member base, increasing their competitiveness. This helps them grow, innovate and differentiate the network effect in action.Benefitfocus serves a significant percentage of leading medical carriers, including three quarters of the Blues Plan across the nation. We are a market leader in this area and we are accelerating the delivery of an end-to-end solution for medical carriers. By pairing our best-of-breed platform capabilities with our acquired next generation rating and coding assets acquired from Connecture, we are introducing the industry’s first quote-to-bill solution. Market interest in this unmatched illusion is strong and it validates our lives growth strategy.With the large and growing live space and an ever increasing network, we are well positioned to accelerate growth in specialty and voluntary benefit offerings through the medical carrier segment. Our end-to-end offering allows medical carriers to bring innovation to their members, which in turn drives lives growth and the network effect for Benefitfocus. Through larger transactions with medical carriers, large enterprises and public sector employers, we are thoughtfully scaling our business and lives growth. These larger opportunities are the most efficient way for us to grow both the lives on our platform and connect those lives to a network of benefits that generate transactions. These large opportunities position us to capture long range greater economic value.While these larger deals have numerous attributes, they also have staged longer implementation timelines. Go-lives and revenue recognition begin 1 or 2 years later. They are strategic deals and bring long-lasting value. This speaks to our visibility of future revenue and the lag of future subscription and transaction-based revenue from bookings. Our platform is growing significantly and we are strengthening our technology. It is very clear employers and employees need voluntary benefits to complete their overall benefit portfolio. This is driving greater traction and increasing the value of BenefitsPlace. In Q2 BenefitsPlace revenue doubled and during the quarter, we continued to grow our product catalog. We added 4 life and ancillary carriers and another specialty supplier bringing our total BenefitsPlace suppliers to 50. This is nearly triple the number of 18 suppliers in Q2 2018.Earlier this year, we launched a new BenefitsPlace offering for consumer directed health or CBH. In Q2, we signed partnerships with market leaders, WageWorks and PayFlex. CDH availability further expands the BenefitsPlace total addressable market. It also drives demand as a number of employers offering high deductible health plans continue to grow. Our scale requires us to automate and seamlessly integrate technologies. For too long, there have been technology integration limitations between benefits administration, payroll and leading HCM Systems. Absent a well-established single system of record, benefit administrators are frustrated and internal employer technical teams encounter points of friction industry-wide. In Q2, we advanced our platforms technology capabilities with the launch of our enterprise human capital management API. Ultimate Software is our first API integrated partner and will officially announce the details of our partnership in the near future. Our enterprise HCM API capabilities eliminate the integration friction and replace traditional file-based systems with a standardized deeply integrated logic framework. This framework automates manual processes and creates a better and more reliable experience. The end result is reduced administrative burden, improved efficiency, a single system of record experience with near instant data exchange and greater data accuracy.Now, let’s turn to our third priority strengthening the core of our business. Data is core to our business. The number of transactions we are processing is into billions and we can scale them seamlessly as we continue improving interactions across all areas of our ecosystem. Our focus extends beyond products and features. We are advancing our business model innovation to drive network value through data analytics insights and outcomes. Our artificial intelligence engine called BenefitSAIGE and the depth of our platform data analytics are powering platform growth. These allow employers to better understand their workforce and offer the right products at the right time to their employees. They allow brokers to strengthen their role as a trusted advisor for benefits strategy and expand their business through higher benefit enrollment. They allow medical carriers to increase the value they can offer to their employer and member customers and they allow life and ancillary, property and casualty and voluntary suppliers to expand their reach to consumers. Ultimately, employees and consumers will make better, smarter decisions providing value to the entire benefits ecosystem.SAIGE uses data analytics guided by user preferences and machine learning to identify key events in a person’s life, what we call smart moments. This creates our user-friendly Amazon like shopping experience. To help consumers shop for relevant benefits 365 days of the year, we proactively notify an individual about a key event on the horizon, paired with simple product explanations we help educated consumers about benefit options offered by their employer. These interactions result in the network effect driven by data. Every single offer on our platform allows us to become a trusted source for employer offered benefits and strengthen the economic value of our platform. When consumers better understand benefits offered by their employer, they participate in a greater number of relevant benefit offerings. This increases sales for carriers and suppliers and generates more data that enhances insight and key metrics across the ecosystem.Data is core to our business and our business model innovation. Through data analytics and insights, we are driving greater value across our network. The power of our AI and analytics infrastructure is significant. Over 250 terabytes of usable data is our primary source for consumer decision support data products. The result from the growth in our technology, technology leadership and data assets are in Q2, we exceeded our revenue and profitability target. Total revenue grew by 13% and we increased our non-GAAP software gross margin to 71%. To continue achieving these results, we need and are able to attract and retain top talent across all parts of our company.This quarter, we made several key additions and I am very excited to welcome two experienced executives to Benefitfocus. Steve Malme will serve as our Senior Vice President of Platform Strategy. Steve has extensive experience bringing new products to market and has held numerous roles spanning product management, marketing and sales for enterprise software companies like Microsoft and IBM. And Steve Swad started as our Chief Financial Officer on July 22. As many of you are aware, Steve was the member of Board of Directors since our IPO in 2013 and brings more than 35 years of experience leading executive and finance teams. He already has a deep understanding of our company and has held numerous CFO roles and was formerly a public company CEO. I would also like to thank Lou Anne Gilmore for her leadership as our Interim CFO. She will remain a key leader of our company as our VP of Corporate Development.From here, I will turn the call over to our new CFO, Steve Swad for his introductory remarks, then Lou Anne will cover Q2 financial results and I will conclude today’s call with guidance. Steve?

Thanks, Ray and many thanks to the broader Benefitfocus team for the warm welcome. Since joining Benefitfocus as a management team member, roughly two weeks ago, I spent most of my time getting closer to the business and meeting the company’s leaders. Today, I will share with you the reasons I joined at Benefitfocus. For me, the most attractive part of the company is the platform connecting buyers and sellers. While that sounds simple, it involves powerful technology, the connection of key relationships and incredible focus on removing friction across the network. It’s the centerpiece of our strategy and we have all the tools needed to execute on it. Second, our scalable technologies and product offerings are unmatched in the industry, which is resonating well with current and potential customers. Third is data. We are using data and the power of AI to advance insights for businesses and help consumers make better decisions. This is very powerful and we are in the beginning. Fourth is the business model. Our business model is evolving from a pure SaaS model to a platform business model. By this, I mean, the business model is building on its existing SaaS revenue streams and adding new revenue streams from other partners on the platform. This is unique and represents a large opportunity. Finally, I believe my skills and experience complement nicely the leadership team and will help take the company to next level.With that, let me pass it ton to Lou Anne to review the second quarter financials.

Thank you, Steve and welcome to the team. I will review the details of our second quarter financial results starting with a broad view of our software and services outcomes priced to our technology and platform initiatives. I will then go deeper to cover GAAP and non-GAAP results and details of the balance sheet and cash flow.First, the broad view of our quarterly results, Q2 was a solid quarter for Benefitfocus. Total revenue for the quarter was $68.6 million, an increase of 13% compared to the second quarter of 2018 and above our guidance range. Second quarter revenue growth was driven by our organic subscription revenue and BenefitsPlace revenue and a stronger than expected from Connecture, which contributed $5.9 million to revenue in the quarter. As previously discussed, our Q2 revenue was partially offset by the renegotiation of the Mercer contract. Excluding the contributions from Connecture and Mercer, total revenue grew in the low double-digits compared to Q2 of 2018. It was meaningful acceleration from prior periods’ growth.Next, I would like to review key outcomes as a result of our quarterly technology and platform growth initiatives. Total software services revenue continues to be driven by increased traction for our platform and was $53.1 million in the quarter, an increase of 10% compared to the prior year period. The growth reflects a $3 million contribution from Connecture and continued growth in both subscriptions and BenefitsPlace. Excluding the contributions from Connecture and Mercer, total software services grew in the low double-digits compared to Q2 of 2018. This represents a meaningful acceleration of growth from prior year growth rates. Our professional services revenue was $15.5 million, an increase of 26% over Q2 of 2018 and predominantly it reflects our recent acquisition of Connecture.Now, moving to the GAAP results, results for the quarter include overall gross profit of $35.8 million, representing a margin of 52% and in line with expectations; software gross profit of $37.1 million represents a margin of 70%. Our operating loss was $9.8 million contributing to a net loss per share of $0.46. The sequential and year-over-year increase in operating expense largely resulted from Connecture related expenses. Non-GAAP gross profit totaled $36.8 million or 54% non-GAAP gross margin. This favorably compares to the 51% non-GAAP gross margins in Q2 of 2018. Non-GAAP software gross profit was $37.6 million, a 71% non-GAAP margin and is up from 67% non-GAAP gross margin in Q2 of 2018.Similar to prior quarters, the 380 basis point improvement in non-GAAP software gross margins and nearly 280 basis point improvement in consolidated non-GAAP gross margin reflects first, our purposeful organic shift towards higher margin subscriptions and BenefitsPlace transaction revenue; second, our focused data investments and increased automation have improved operational efficiency; and third, our platform’s inherent operational scale. We also continue to drive consistent improvement in our adjusted EBITDA. Q2 adjusted EBITDA was roughly $100,000. This exceeds our guidance. It also compares favorably to the approximate $600,000 loss in Q2 of 2018. Our adjusted EBITDA was positively impacting by a recurring revenue growth gross margin expansion and increasing operational scale. Non-GAAP net loss was $10 million compared to a $7.7 million net loss in the year ago period.Moving on to the balance sheet and cash flow, we ended Q2 with cash and cash equivalents of $138.4 million, which is down from $144.2 million in the prior quarter. Free cash flow, a non-GAAP measure that we define as cash provided or used in operations plus purchases of property and equipment was negative $4.4 million driven by higher working capital and investments in our platforms. Due to our first half usage of cash, higher working capital needs and expected second half investments, we no longer anticipate free cash flow to be positive in 2019. These are exciting times for the company.And with that, I would like to pass this back to Ray August.

Thank you, Lou Anne. Now, let’s move to guidance. We are encouraged by the demand of our platform and the market’s response to our strategy. Our ecosystem is large, thriving and growing. Our SaaS technology is robust and a point of differentiation. Our data and data models create a long-term advantage and are driving valuable business insights and consumer experiences. We are confident this favorable backdrop will drive accelerated second half revenue growth. We have a strong foundation that position us well to capture increased market share contributing to revenue growth profile of 2% longer term.For the third quarter of 2019, we are targeting total revenue of $70 million to $72 million and that the midpoint represents 16% year-over-year growth. We expect adjusted EBITDA of negative $3.5 million to negative $1.5 million, a non-GAAP net loss of $14 million to $12 million and a non-GAAP net loss per share of $0.43 to $0.37 based on 32.7 million basic and diluted weighted average common shares outstanding. For full year 2019, we expect total revenue in the range of $292 million to $300 million and adjusted EBITDA of $10 million to $15 million. At the midpoint, year-over-year revenue growth is accelerating to 14%. We also expect non-GAAP net loss of $31 million to $26 million, which represents a non-GAAP net loss per share of $0.95 to $0.80 based on 32.5 million basic and diluted weighted average common shares outstanding. Our revised 2019 guidance reflects a range of estimates associated with BenefitsPlace and revenue contribution from large transactions that we expect will drive both Q4 and 2020 revenue. These include the placement of BenefitsPlace products into our installed base of carriers and employers, mix of products selected and consumer participation.Let me provide some specifics on our estimates. First, BenefitsPlace placement, in 2018, a limited segment of our installed base had access to BenefitsPlace. This is growing. We anticipate continued expansion leading into open enrollment year-over-year. Second, product levels, to-date, BenefitsPlace product selection by employers and carriers, have been more heavily weighted to life and ancillary products than our original forecast. Consumer purchases of life and ancillary products during open enrollment will not impact Q4 revenue, but will drive ratable revenue to be recognized throughout 2020. The selection of specialty and property and casualty products contributes to revenue immediately upon being purchased by consumer. Our estimates and visibility continued to improve. However, our experience remains limited and is reflected in our outlook. And third, the timing of large deal revenue recognition. Our platform has done a fantastic job opening up large opportunities and our revised outlook includes an increasing influence from larger customers. For example, the majority of our first half lives growth were the result of larger transactions. While these deals were the most efficient way for us to grow our platform as previously highlighted, the timing of bookings to revenue takes longer. We will now open the call for Q&A. Operator?

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Brian Peterson with Raymond James. Please proceed with your questions.

Hi, thanks for taking my questions. So, I don’t know who wants to take this, but just maybe start on the 2019 guidance revision, maybe just help us understand a little bit, Ray, I know you just hit on this in your prepared remarks, but what drove the major context of the revision versus what you saw few quarters ago?

Yes, I appreciate it, Brian. We are really excited about the progress we are making on our platform in particular with BenefitsPlace. If you look at our fundamentals, they are setting as up well which you see in the back half revenue growth that we are seeing in our platform activity. If you go look at the back that we added a million lives this quarter which by the way is the company record. It really shows the demand that we are seeing for our platform and our consumers are really coming to Benefitfocus and seeing the value of that we are delivering to the overall marketplace. Before I talk about the guide, I want to talk a little bit about how we see lives and the value that they deliver to our platform. If you think about it, lives are the single most significant way that we provide value on our platform and there is really four steps that happens with the life, four steps to adding net value. The first step of course is when a customer buys and makes the decision to partner with Benefitfocus. At that point in time, the customer makes a contractual commitment. However, there is very little revenue that’s provided to Benefitfocus. The second step is when a customer begins the implementation. When they begin the implementation, the Benefitfocus receives professional services revenue. While professional services revenue is not a focus of ours is something that we receive to show the consideration that we are delivering to the implementation. Step three is when the customer goes live on our platform. When the customer goes live on our platform and begins to enroll consumers and employees on to our platform, at that point, we receive PEPM. And the fourth step of value creation for us is when a consumer selects a BenefitsPlace products on our platform at that point, we received transaction revenue from our BenefitsPlace partners. So you can see those four steps or how value gets created and they step up every single step of the way. It’s interesting if you look at when we add lives, there is the speed in which we receive revenue or we receive value is determined by the size of complexity of the company. So, if we were to sign up a small employer we bring revenue on to our platform and increase value within 90 days.If we work with a large state government, it could be a year to 2 years before we begin to layer in that value. For example, the state of Texas we saw them over year ago where 25% implemented on track and on time, but it just takes time before they all come into our platform and they layer on them as significant value over the life of that relationship. And in the middle, we have our medical carriers. Our medical carriers are somewhere between a small employer and a large complex state between a year and year and a half – between before they really start to accelerate value on to our platform. So we see different timeframes in which we received revenue from these lives. So, let’s take that and look forward. And what does that mean to our revenue? What does that mean to our revenue guidance? First, we are really excited about the demand for our platform. The million lives really show what we are seeing in the marketplace, but a couple of phenomenons are at play. The first is larger companies and larger institutions are very interested in their platform. That’s why we are getting the significant lives growth that we are receiving. That live growth given those four steps that I talked about is actually going to show up as revenue in periods after this year. So, we will see future significant economic value on our platform.The other thing it relates to BenefitsPlace. And what’s happening on BenefitsPlace, we are seeing a very high level of engagement by the employers and the employees in their company. As you know, about 25% of the enrollments occur – excuse me, 75% of enrollments occurred in Q4 of each year during open enrollment. And what we are seeing in the early stages are occurring is there is two different ways that we recognize revenue when it comes to BenefitsPlace. If it’s a specialty product, take a product like InfoArmor or auto product when the individual selects their product, we recognize all revenue in that period. The other type of product is life and ancillary product. When somebody selects a life and ancillary product, we recognize revenue over the term in which that product delivers to the individual, so in the case of a life and ancillary product that happens in the next year. So, if you think about it we are seeing a very high demand for enrollment in BenefitsPlace. However, we are seeing a much high propensity of life and ancillary products than we originally estimated. Those products are creating revenue recognition in next year not in Q4 of this year. So there is two factors: one, the size of our deals; the second the selection of life and ancillary product are the primary reason for our guide adjustment in Q4. We feel really good about the model. We continue to calibrate and look at the data to make sure that we are really understanding consumer behavior. And if you look at those two attributes that I talked about, the great news is that in both cases, we are still providing significant economic benefit to our shareholders. It’s just that the revenue is going to come a little bit later than we are anticipated. So, we feel really good about our revenue growth that we saw in the first half of the year. We feel very good about the acceleration we are seeing in the second half of the year and that bodes well for us in the future.

Got it. Thanks, Ray. And just maybe on the net eligible lives, the 1 million growth this quarter that was higher than I expected, but any help on what drove that? I know you mentioned the brokers on the employer side and how we should think about the growth trajectory for that metric going forward?

Yes, I know if you think about it million lives, I am really proud of our sales team, the leadership on the team and the fact that they delivered million lives in our busiest quarter. Just to unpack it a little bit, there is really three types of lives that we look at from net benefit eligible lives, employer public sector, medical carrier. From an employer perspective, that’s the traditional market that Benefitfocus has pursued, where we sell direct to large employers. And the really big news in that sector is that brokers are playing a very significant impact. In fact, brokers who were played a role in 70% of our lives additions that quarter, which is much bigger than we have ever seen. But one of the really great things about working with the brokers is they are very active in those sales cycles. So in addition to them having an impact is actually allowing us to have greater efficiency in our selling and our selling expense and going after that employer segment. The next type of lives are public sector lives and clearly, we are the market leader in the public sector, we are making great progress there. We are picking up states just about every period and we added the state of Alaska. State of Alaska is a great story for us, because it really talks about us as a platform company with the state of Alaska. That deal was actually brought to us by one of our partners on our platform, MetLife. They brought state of Alaska to us and that state of Alaska is using our platform for the enrollment and benefits. And to me, that’s a great example of the network effect in action, the more partners we put on the platform, the more lives we add to our platform and the entire community grows as we go forward. We also on the public sector added two more universities. So this is really continuing our focus and our strength in that public sector. The third area of lives growth is our medical carriers. And if you look at our medical carriers, that’s an area where we have a very distinctive confidence in. We have three quarters of the Blue’s Plans as our customers and over time with the medical carriers, we have been a leader with the Benefitfocus enrollment and billing products. Now, we are marrying that with our Connecture next generation products which are quoting and rating. So, having the ability to quote, rate, enroll and bill on our platform is something that nobody else in the industry has and the medical carriers are getting very excited about that simply because they see voluntary benefits as an important way from them to grow in this industry and it’s a very unique proposition we have. So if you take those three types of lives, Brian, employer public sector medical carrier, all those lives now are eligible for BenefitsPlace. So every single life we bring in over time, they are eligible for Benefitsplace, which allows us to deliver value to the consumer which for us delivers us transaction revenue in the future. Looking at it from a lives growth perspective, obviously, we are extremely pleased with the lives growth that we had in the first half of the year. For the full year, we still believe our lives growth organically will be low to mid teens and we are really pleased with these lives. They are really setting in the stage for very unique value creation for Benefitfocus and all the customers as we grow into the future.

Thanks, Ray.

Thank you.

Thank you. The next question is from the line of Chris Merwin with Goldman Sachs. Please proceed with your question.

Hi, this is Kevin on for Chris. Thanks for taking my question. Regarding the University of Texas deal, which I think as 200,000 lives, can you remind us the timing of the revenue contribution, was most of that this quarter, do you expect more of that to flow in Q3?

No, no that’s a great example of the lifecycle we talked about the four steps where customer buys we implement, we go live and then we have BenefitsPlace. Texas, we are right on time, the project is going well and we are 25% of the way we implemented, which means we have turned down about 25% of the PEPM for Texas. So actually the majority of the growth is forward-looking and then after that of course would be layering in the impact of BenefitsPlace.

Got it. That’s helpful. And then follow-up on R&D, it looks like sequentially went up about $2 million this quarter which I don’t think we have seen before anything specifically you can talk about there that kind of drove the increase?

Lou Anne, you want to take that one?

Sure. We continue to invest in not only data, but product enhancements to improve our platform and deliver these large scales to our clients.

Yes. And as you think about it, one of the things that we really focus on is our software gross margin. For the second quarter in a row, our software gross margin is up about 70% and is up 280 basis points over the year ago period. But if you look at that, that’s really being driven by couple of factors. One is our increase in automation that focused on automating every single task we possibly can, we really see our role is to remove friction for every different phase of the user on our platform. And we are seeing the impact which is driving up our gross margin and we will continue to see the investments in R&D paying off both in demand for our platform, but also removing friction and increasing automation.

Great. Thank you.

Our next question is from the line of Mark Murphy with JPMorgan. Please proceed with your question.

Hi, good afternoon. This is Matt Coss on behalf of Mark Murphy. Thank you for taking my question. Ray, you mentioned larger deals mean much later go lives and of course later revenue recognition which makes sense, but can you give you sense of how many deals like these did you close or are currently in your pipeline now versus the year ago and if you could perhaps for the finer points on how much this impacted the guidance versus other factors that may have impacted the guidance?

Yes, thanks for that. And as we think about our business we really think about lives as opposed to deals, because if you think about it every single life drives a discrete PEPM. Every single life drives BenefitsPlace revenue to us as a business. And that’s one of the reasons, a year ago, we had logos count. Now, we focus on lives, because that really gives you a much better indication of our forward-looking revenue, so really excited about our lives growth, year-over-year is up 33% and that really speaks to the demand for our platform and the demand the marketplace is putting on our overall solution. As far as the Q4 and what factors were at play, as I stated, there is really two big factors that contributed to our revising our backend guidance. So, first was the larger deals, the second was BenefitsPlace. And as part of BenefitsPlace was the selection of LNA products that are happening, because the employers are familiar with that versus the specialty products, it’s hard to say which had a bigger impact both of those impacts provided they are material in the take-down and that’s why we talked about them, but the really great thing about both of those is in both cases, those situations are creating revenue for us in future periods that’s not as if we are talking about deals that we are not getting, we are talking about revenue that’s accruing to our platform both in whether it’s more products people are buying through life and ancillary products for larger deals, where people are coming live later than originally modeled. So, we feel really great about the value that’s creating for our platform.

Got it. Thank you. And just to follow-up, I mean do you expect LNA to be a higher percentage of BenefitsPlace in your voluntary product consumption sort of on a permanent basis or do you think there is still sort of more to learn in terms of what sort of voluntary products are going to receive uptake over the next half year or to 18 months?

Yes, we are at this interesting point right now, where it’s August we have about 5 months left in the year and the 5 months for us is a time for us to really be focused on intense value creation in our platform. And when we think about this it’s a time for us to still add significant lives at scale. It’s a time for us to implement our customers bring them live and in production. And most importantly, in Q4 about 75% of our enrollments happen on our platform that’s the point we are going to get very good visibility into LNA versus the specialty products. We know that employers are placing our products at a higher rate. We will see exactly where the consumers are selecting their products. Of course, they are very good analytics, data from last year and models that we are doing for this year to give us insights on what we think is going to happen, but it’s something that we are going to continue to monitor. If you look at L&A versus specialty, the L&A is a very significant driver. And I anticipate for long-term to be the majority piece of the equation, I think about it this way one of the things that’s very unique about our platform versus any others is the selection of high deductible health plans. When an individual selects a high deductible health plan, it creates a savings event both for the company and the individual. So, it’s a good thing for both. One of the things that happens when somebody selects the high deductible house plan is for a middleclass American, the right thing is to purchase this GAP products. GAP products such as accident, hospitalization and cancer and the demand for those products will continue to rise as Americans select high deductible health plans. So we will continue to see a very, very robust market for these GAP products, which by definition our life and ancillary product. So, we see that as being very robust into the future.

Thank you.

Our next question is from the line of Nandan Amladi from Guggenheim Partners. Please proceed with your question.

Yes, thank you for taking my question. So Ray, as we look at the trajectory of lives over the last couple of years, last year once you engaged the broker community, we actually saw meaningful bump up in the third quarter and of course fourth quarter tends to be light, because that’s not the active selling season. As you look ahead, I am just trying to overlay everything you have said about the guidance so far and then also specifically ask about are you expecting more similar trajectory of lives added in the third quarter and will any of those actually contribute to revenue in the fourth quarter, because I expect there will be some disappointment on the guidance revision downward?

Yes, we have factored what we believe to be lives growth through the rest of the year into Q4 and we are really positive about where we are from a revenue growth perspective in the back half of the year. Just a reminder, we accelerated significantly in the first half and that acceleration is going to continue into Q3 and Q4. So the strengthening of our business shows up in our revenue line, but also things like our improving gross margin, improving EBITDA all those different factors for us as the business. So, we feel really good about that.

And on the expense side I know you are seeing lot of demand and Lou Anne mentioned some of the investments you are making are those going to conclude by the end of the year or is this sort of a new normal because you are seeing so much more demand as we head into fiscal ‘20?

Yes. We are going to continue to invest in our technology. We see a great opportunity here to remove friction on our platform. We see a great opportunity to really increase our market lead by adding lives. We are going to continue to invest in things like artificial intelligence to really move up consumers to the next level to helping consumers in this selection if they are making from benefits perspective. As I talked about earlier, we see five solid months of execution that we are really focused on making sure that we deliver the lives growth, making sure we deliver BenefitsPlace revenue that we spoke about. And at the end of that period in Q4, we will guide to our 2020 numbers and at that ppoint, we will be prepared to talk about our expenses.

Okay, thank you.

Our next question is from the line of Frank Sparacino with First Analysis. Please proceed with your question.

Hi, guys. Just come back to the guidance for a moment, Ray I think you had indicated the Connecture performed or outperformed your expectations during the quarter. Is there any change in the guidance in terms of the original forecasted contribution from Connecture and then at the same time is there any change in the expected headwind from Mercer?

Yes, Lou Anne, why don’t you take that?

Yes. For the quarter, Connecture was about $5.6 million and that over-performed our forecast and we foresee that as a fairly good run-rate for the rest of the year. We are very pleased with the performance as I said and do believe that they will continue to perform at this level through the rest of the year.

Yes. And the key from a Connecture perspective is while the short-term revenue is nice and one of the reasons that revenue is coming in is because the former Connecture customers are excited about Benefitfocus, they are excited about the stability that it brings to company. The real value to us in the Connecture acquisition is what I talked about in serving the medical carriers by marrying their next generation rating and quoting solution with our enrollment and billing solution that’s really providing a very unique proposition in the marketplace and we are seeing a very robust pipeline for that solution from the medical carriers particularly the Blues Companies. So we are really excited about what we can do there and the value that, that is showing for our medical carriers.

Great, thanks. And maybe one follow-up Ray, as it relates to the sales organization, obviously you had a change in leadership here, but can you maybe just talk about, has there been any sort of additional turnover, how you feel about the stability or maybe some new people that have on board here in the first half?

Yes, no, results speak for themselves. The record quarter in lives growth and Peter Allen who leads our sales group is doing a great job and he is driving the team, he is working with the team. One of the really important things that we have as an organization is as we move to this platform model, we have this multidimensional model, where we sell both employer wise we talked about that. To do that though, we have made this pivot on focusing on brokers to get 450 brokers, which is up significantly over the first part of the year. It takes the brokered sales team to make that happen and that team is doing a terrific job. We talked about this we are having the medical carriers in the lives growth that is driving. If you look at Benefitsplace and products on Benefitsplace, we have added 4 LNA carriers to Benefitsplace which brings us up to 50. We have had another specialty provider so we are adding more products to that market as well. So very pleased about the production that we are seeing across the board constantly looking at how do we continue to optimize the model with the advent of the brokers and the help on the direct model that’s giving us increased efficiencies, so how do we make sure we are deploying our sales and marketing resources as officially and effectively, but the results are great, leadership is doing a terrific job and that’s really serving as a catalyst for our continued growth acceleration in the back half of the year.

Thank you.

Thank you. We have time for one additional question today which would be coming from the line of Dan Ives from Wedbush Securities. Please proceed with your questions.

Hi, this is Strecker on for Dan. Can you talk about some of the key changes you have made to BenefitsPlace over the last year like CDH and then some of the feedback you have been getting from customers? Thanks.

Yes, BenefitsPlace was rolled out just a year ago and this will be our second open enrollment and in that first open enrollment we saw a very nice increase in our participation rates over the previous year. That increase in participation really showed us that consumers are seeing the value in BenefitsPlace also us moving from we have 50 BenefitsPlace suppliers now on our platform that’s showing us that the sellers are selling value. So if you think about it like Uber where there is drivers and riders for us we have sellers and buyers and the sellers, the carriers their demand is up really high and the buyers are buying much more in our platform. As we entered our second year BenefitsPlace, our focus has been how do we drive consumer adoption, how do we drive consumer purchasing on our platform. We have made some very significant investments in AI. And as part of that is our product recommendation engine in which we proactively make recommendations to the people on our platform telling them what’s the best time for them to buy a solution that will improve their personal success whether it be their health or wealth or their lifestyle and now with auto. So, we are seeing a lot more consumer interaction which we anticipate to see in Q4 and our Q4 results. And we also continue to add different product types to the platform. We rolled out and announced in Q1 our auto solution. We have core of the leading auto providers who are selling their products in our platform. We are really excited about the success we are seeing there. The companies we are putting, auto on their platform for this open enrollment is picking up at a very nice clip. And then we talked about this quarter where we have rolled out our CDH offerings, in which CDH providers are coming out to the platform. And one of the values that they are seeing on the platform is things like our smart recommendation engine, where say for example somebody gets a raise, we can make a recommendation through a notification and e-mail that says, hey, it’s time to – you should consider contributing more for your CDH plan. We actually show them the post tax benefit of doing that. So, it’s really – it helps the consumer make better decisions for their families, helps the employer provide better CDH plans to their employees and for the CDH provider and it enables them to get increased investments into the plan. At the end of the day, we receive transaction revenue. So, really the benefit of this platform is really taking off and the sellers and buyers are both seeing value.

Great. Thank you.

Thank you. At this time, I will turn the call over to Ray August for closing comments.

Great. Thank you. I would like to close our call today reinforcing that we are scaling our platform quickly. We are accelerating the value of our technology initiatives and we are driving greater consumer engagement across the platform leveraging the scale of our data. We are executing well and I look forward to updating you on future calls. This ends our call. Thank you for joining us today.

Thank you. Today’s conference has concluded. You may now disconnect your lines at this time. Thank you for your participation.