BNFT (2020 - Q4)

Greetings, and welcome to Benefitfocus' Q4 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Patti Leahy, Vice President of Investor Relations. Thank you. You may begin. Patti Le

Thank you, operator. Good afternoon and welcome to Benefitfocus' fourth quarter 2020 earnings call. Joining me today are Steve Swad, President and Chief Executive Officer; and Alpana Wegner, Chief Financial Officer. Steve and Alpana will offer some prepared remarks, and then we will open up the call for questions.

Thank you, Patti, and welcome, everyone. I'm pleased to be with you this afternoon following a fantastic One Place user conference last week, where we brought together over 1,000 members of our ecosystem. One Place truly is one of our industry's hallmark events, where we host an incredible audience of customers, prospects, business partners and thought leaders from our industry. A big thank you to the Benefitfocus team and everyone involved in delivering such an impactful event. Before I get into the priorities of the company and the progress we've made, let me step back briefly and remind you why our customers need us. Benefitfocus makes enrollment and benefits easy. We serve two big markets: health plan and employer. For employer, we make the administration of benefits easier for HR departments, and we provide data and insights to help them take actions to reduce healthcare costs. For health plans, we provide core enrollment, data and billing services to make their back office more efficient. Our flagship product provides quoting to enable a more unified end-to-end offering, which positions the health plans offering in a more relevant way to the broker community. We believe our products are necessary for employers and health plans because they enable employees and members to enroll in and access their benefits. Now let's get into the progress we've made since I became CEO, and let's talk about a handful of key priorities that we are executing on to drive shareholder value. They are: one, engage our associates to increase productivity; two, improve customer service and increase customer engagement to drive higher satisfaction; three, adjust our cost structure to generate sustainable, profitable growth; four, set the strategic direction of the company to return to growth; and finally, strengthen our Board, governance and sustainability practices.

Thank you, Steve. I'll start with the Q4 financial highlights and then cover our 2021 guidance. And last, I'll share with you our midterm financial targets. Let me start with some context for our financials. When the pandemic hit last March, we swiftly adjusted our cost structure, and we've made excellent progress to improve our liquidity, margins and profitability. We continue to feel some pressure from the pandemic on the top line. This is reflected in our 2021 outlook. However, we are pleased that the environment appears to be improving for our employer customers, as evidenced by some key wins in the fourth quarter. These wins include another new state health plan in the western United States, a win at a large national retailer, a win with a technology leader in our partnership with SAP, and a large customer renewal with a Fortune 200 company. Turning to our results for the fourth quarter. Total revenue for the quarter of $76.2 million was above the midpoint of our guidance range and down 13% compared to fourth quarter of 2019. This was driven by lower subscription and professional services revenue. Subscription revenue was down 9% year-over-year, primarily due to the anticipated continued runoff of our legacy agreement with Mercer.

At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

Hi. Good evening, everyone. Thanks for taking the question. So just to kind of start off, I know there were a lot of content there. But just if we think about some of the things that are maybe non-core or lower margin that you're maybe exiting, is there any way to kind of size the revenue or the lives impact of that, just so we can kind of maybe look at our models and say, hey, this isn't as core going forward? So how do we think about what is core, and how do we evaluate that base going forward?

Yes, Brian, this is Steve. We are not in a spot to provide more guidance than we just gave. We are going to - when we come back to you with Q1, we're going to introduce some more measures about lives. And maybe at that time, we'll be able to give you some tighter estimates on lives through that disclosure that's intended to match closer to subscription revenue.

Yes. And Brian…

Okay, understood. Oh, sorry, Alpana. Go ahead. Sorry, go ahead.

Yes, and Brian - so a little bit more, and we did give a lot of content there. And the one area that we did highlight was just the consumer to direct. And those Shipt lives that I mentioned, where we're terminating the contract, it's a non-profitable contract for us right now and not a core area of focus. What I'd say from a modeling perspective and from a revenue is it is not a meaningful contributor to revenue today. So while you'll see those lives coming off, you're not going to see sort of a commensurate revenue indicator.

Understood, understood. And so I thought I heard that some confidence in the employer market potentially coming back in 2021. And obviously, that maybe helps the growth in 2022. Could you maybe give a little color behind what's giving you guys some optimism about the selling season in 2021?

Yes, Brian, a couple of things. We're seeing customer activity up. We're seeing RFPs up. We're seeing customers coming to the table wanting to improve their systems around benefits. And so that's what's giving us some confidence. We're also seeing the close rate of the pipe improve. And so that's driving our confidence. And then as you think about growth drivers to 2022, in addition to that, those - the engagement product and the pharma product, we also believe will contribute to growth in 2022.

Good to hear. Thanks, Steve.

Okay. Thank you.

Our next question comes from the line of Chris Merwin with Goldman Sachs. Please proceed with your question.

Okay, and thanks very much for taking my question. I just wanted to ask a bit about the platform revenue growth in Q4. Can you talk a bit about what impacted that? I think you also talked about a certain number of lives going on the platform. Obviously, I just want to think about the impact in Q4, and how we should think about the direction of lives growth as we move into 2021? Thank you.

Yes. Hey, Chris, this is Alpana. So lives are the biggest driver from a volunteer benefit perspective. And as I noted in my comments, that the timing of that revenue has sort of two elements to it. One relates to the current year's participation in OE and the purchasing that takes place, and the second one has to do with those areas in which we are - or those transactions in which we are a broker of record and have some commissions. And so what I would say is that we're expecting as part of our 2021 outlook that - to see a consistent performance on the platform revenue as what we saw in 2020. And so we do expect from this year's OE and the growth in premiums that we saw, that there would be growth. However, as we continue to shift away from actively seeking to be broker of record as part of our broker strategy and the relationships that we have with the broker community, that will be an offset to that growth.

Okay, understood. Thank you. And then just another question on sales cycles. I know efficiency is a focus, and you can do that by managing head count. But also I mean to the extent that sales cycles come in, that could be a benefit as well, I'm sure. So just curious, anything you can say about as demand comes back, what you're seeing happen with those sales cycles? Thanks.

Yes, one more time? What was that…

How sales cycles have been trending in terms of the length of them…?

Yes. Oh, yes. Thank you. Yes, they hit lows in Q2 of last year and have been building ever since. And Q4 was by far the most activity we've seen since the pandemic. And we're seeing all kinds of green shoes, like the marketing that - the digital marketing that we're using is showing high returns. As I said, customers are engaging with us. Prospects are engaging with us. And so our general feel in that employer market is it's stronger and it's getting stronger.

All right. Thank you.

Our next question comes from the line of Matt Coss with JPMorgan. Please proceed with your question.

Hi, good afternoon, and thank you for taking my questions. So you noted that employer customer demand improved in that healthcare plan because they're exposed to the SMB market and have been more challenging. Have healthcare plans, has the demand there bottomed? Or do you see sort of light at the end of the tunnel? Just kind of where are you with healthcare plans in terms of when you maybe get to a recovery? And then as you do recover and work towards growth beginning next year, where do you see sales and marketing spending going, as it's gotten pretty low as a percentage of revenue?

The health plans, we saw a dip in Q4. And as Alpana mentioned, we're modeling declines as renewals come during 2021. Importantly, the way we - our contracts work is they have floors and not ceilings. And so as those businesses restore to the market and get on our platform, the contract would automatically pick up the bump. But into 2021, we are forecasting declines. And in the quarter, Q4 of 2020, we saw a decline. We're hopeful that as we look into 2022, that stabilizes and improves. But through 2021, we've got it going down. As it relates to sales and marketing, we have made pretty meaningful changes in the efficiency of that business, certainly from 2019 to 2020, and again in 2020 and 2021. And so we are going to invest more in marketing in 2021 than we did in 2020. But that line item as a percent of revenue, we think will tighten a little bit.

Thank you.

Our next question comes from the line of Sean Wieland with Piper Sandler. Please proceed with your question.

It's Jess Tassan on for Sean. I think we were just interested to know if you could talk through kind of the course of a customer contract over that lifetime, what happens to pricing. So just outside of platform revenues, do you have opportunities or levers to drive price? And if so, what are they? And do they require any kind of incremental R&D investment to be able to realize?

Yes. Maybe I'll start, and Alpana, you jump in. Pricing has been flattish in both markets, and where you see improvement is from bundling or upsells. And that's why you're seeing us talk about new product offerings that we can sell into our base, like the pharma offering I mentioned as well as the health advocacy product that we're looking to take to market. But overall, pricing is flattish. The contracts specifically vary. Sometimes they have some marginal CPI increases, sometimes they don't, they're fixed fee. And they're normally multiyear and then they renew. And sometimes they renew multiyear, and sometimes they renew annually. Alpana, anything, yes? Is that helpful?

Yes, it is. And then just as a follow-up, could you remind us what the impact of Mercer was in 2020? And then just what the go-forward impact is anticipated to be?

Yes. We had previously indicated that we were looking for Mercer to be around $8 million in revenue in 2020, and it performed pretty close to what we had anticipated. And so there were no big surprises there. And then as it relates to 2021, we are not anticipating any sort of meaningful headwinds coming from Mercer. We think - I feel like those are behind us, and so we're not specifically guiding. But what I would say is we're not anticipating growth in that business, and we've modeled in normal churn assumptions that would take place in sort of the Mercer's base business that would then carry over to us as those groups come off the platform.

There seems to be no further questions left at this time. And I would like to turn the call back over to management for any closing remarks.

Thank you, everybody, for joining us. I hope you got from today's call that we have a plan, we're executing on that plan, we're driving profitability, and we have a plan for growth. And I look forward to sharing our progress as we go through the year. Thank you very much.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.