BNFT (2021 - Q1)

Greetings, and welcome to the Benefitfocus First Quarter 2021 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patti Leahy. Thank you, Patti. You may begin. Patti Le

Thank you, operator. Good afternoon and welcome to Benefitfocus's first quarter 2021 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. Before we begin, let me remind you that today's discussion will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those statements, including impacts of COVID-19, reliance on key personnel, and development of our market and business. For more information, please refer to risk factors discussed in our most recent Form 10-K filed with the SEC. 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 today's earnings press release.

Thank you, Patti. I'm looking forward to sharing the great start we had to the year. But before we do that, I'd like to begin with a leadership announcement we released this morning. On behalf of the entire Board, I could not be more excited to share that Matt Levin will be joining Benefitfocus as the company's President and Chief Executive Officer effective next week. Let me share why the Board and I believe Matt is the right person to lead the company going forward and why we believe now is the right time to make this change. Matt brings over two decades of deep industry experience centered on driving growth and value creation in the Ben Admin, health insurance and health care technology industries. He also has well established executive relationships across our industry, with employers, health plans, consultants and brokers. Most importantly, he shares my conviction and the conviction of our Board that there is tremendous opportunity to unlock and create value at Benefitfocus. Matt comes to us from ADP, where he most recently led strategic planning, corporate development and their venture portfolio. Prior to ADP, Matt was Head of Global Strategy at Aon, where he largely focused on its health care businesses. One of his largest contributions there was growing its Benefits Administration business through the launch of Aon's health care exchanges, which remain amongst the largest and most successful in the country. Before that, Matt was part of the turnaround of Hewitt Associates, where he helped recenter the business around Benefits Administration and adjacent capabilities. He was also part of the core team that led the merger between Hewitt and Aon. The common thread woven throughout mass experience is customer centricity and his ability to identify strategies, partnerships and adjacencies to drive innovation and fuel revenue growth. Now let's shift to why we believe it's the right time to make this change. As I've previously shared with you a key area of focus for me has been to attract more top talent to this company. We came across Matt as part of our broader search to continue to strengthen the leadership team. We knew he was capable of filling a variety of roles, and after getting to know him, it became clear that he was ideally suited to lead the company in its next phase of growth. A few years ago, I stepped off the Board to serve as CFO and now CEO. And we've made real progress. It's a good time for me to return to the Board and hand the reins to Matt, since we are executing well on our plans to return the company to growth. To that end, I'm pleased to report that we've reestablished our SaaS enrollment business as the most important priority. We've reengaged our associates and reoriented the company to put the customer at the center of everything we do.

Thanks, Steve. I'm pleased to share the results of our quarter and give an update on the progress we're making executing against our strategies. First, we continue to see the employer market gaining traction as evidenced by a few notable wins, including a global software company and national convenience store retailer, both leaders in their space. Also, as Steve commented, our SAP channel had another strong quarter. And I'm encouraged by some key competitive wins for which our quality and service were the deciding factors. As we focus our employer solutions more upmarket, in the quarter we saw ARR of our new wins increased 60% on average per customer compared to Q1 of last year. Second, we are seeing indications that our focus on customer service and customer engagement is improving our performance. For example, our Q1 software revenue retention was above 95%, up meaningfully from above 90% in Q1 of last year. We also experienced a significant reduction in performance credits, which are typically seasonally high in Q1 following OE, reflecting our improving service levels. And third, in terms of operational excellence, we're making progress, automating data and improving the end-to-end customer experience. We've mobilized a dedicated team to improve our automation and data quality with the goal of extending our lead in the industry for data transfer. We are streamlining data exchange, strengthening our core data validation framework and investing in platform enhancements such as real time data processing through API. Operational excellence will be an ongoing area of focus as we target increasing customer NPS and expanding our operating leverage. Now turning to Q1 results in more detail. Total revenue at $65.1 million was above the high-end of our guidance, driven primarily by two factors. First, an acceleration of the timing of platform revenue from second half into Q1. And second, subscription revenue performed better-than-expected due to lower service credits as a result of improved customer service. Q1 revenue was down 2% compared to last year, driven primarily by lower professional services revenue. Year-over-year subscription revenue was down 1%, primarily due to the anticipated continued run off of our legacy agreement with Mercer. Professional services revenue performed as expected and was down 17% year-over-year, primarily due to lower levels of customer requests from health plan customers.

Thank you. Our first question comes from Sean Wieland with Piper Jaffray. Please proceed with your question.

Hi, thanks. It's Piper Sandler now, but all good. Congrats on all the developments here today. My first question is on the new leadership, realizing Matt isn't here yet to speak for himself, but really what are the changes that you're trying to signal in terms of strategy or priorities with the appointment of Matt, specifically, you mentioned reprioritizing the SaaS enrollment platform. Maybe you can expand on that a little bit.

Yes, thanks. Thanks, Sean. Nice to hear you. I think you've got it. I want to start out by Matt and I have spent a fair amount of time together. And top of mind, for Matt as he sees a ton of opportunity at Benefitfocus, and the Board and I think his experience and his skills and his industry knowledge, industry contacts are just excellent -- an excellent fit to drive this company forward and take it to the next level. With respect to specifics around strategy, the guy hasn't started, I'm certainly not going to speak for him. But I -- we spent a lot of time together and what's clear to me is his view is that the company should continue its primary focus around its core SaaS business, its core enrollment business. And so much like the focus that I've had over the last year or so, he is going to continue that, and that is a natural start for him. And then second to that, again, with equal conviction is his perspective that we have to deliver on our commitments to customers, I've been calling that operational excellence. And so I think you'll see him continue in that vein as well. And then from that, he and I also share the view that when you have a growing healthy customer base, you can bring to that base additional adjacencies and to help accelerate the growth. And so, I think we got to give him a couple days to get in and get his feet on the ground. He is very knowledgeable of our company, he is very knowledge of those space. I don't think it's going to take him long. And I think you're going to see him hold tight to the core and then build around it with adjacencies.

That sounds good. Thank you. And then question on the service revenues. You called out some things going on among health plans. Expand on that a little bit and why are they under pressure? And when does that pressure begin to ease?

Yes, I'll start and then maybe Alpana you jump in. You might recall, Sean, that our contracts with health plans have minimums in them. I'm sorry …

I think, Sean, just to clarify your question, was your question around the professional services because we had some …

Oh, I see.

… around professional services decline as a result of health plans. Is that -- just to clarify your question?

It was, but always interested on where Steve has taken us to.

I'll do both, Sean. I will do both, and thank you Sean. On the subscription revenue, which Alpana appropriately points out, our contracts have minimums in them and as Alpana pointed out, we're seeing the lives in that SMB part of the business decline and we're expecting and we have planned for a reduction in that subscription revenue in the back half the year. That's one thing that we called out. And the second thing that we called out is that there have been just fewer change order requests, which come in -- which results in lower professional services revenue. Those are the two points. And, Alpana, I don't know if we've got anything else to add.

No, I think that covers it.

Okay.

Okay. Thanks so much. I appreciate it.

Our next question comes from Matt Coss with JP Morgan. Please proceed with your question.

Hi, good afternoon. Thank you for taking my questions. Just a question on why did some of that transactional activity that was expected to occur in the second half come into Q1? I guess if you expect to occur in the second half, that's a pretty big pull forward. So any more color on that would be helpful.

Yes, Matt. This is Alpana. Thanks for the question. We, as you know, open enrollment in Q4 is a big volume driver for us in the transaction revenue or the platform revenue. And we estimate items such as performance bonuses, and some true-ups on enrollment. In the past, historically, we've seen those true-ups and those bonuses come in the second half of the year. And this year, for reasons that are sort of outside of our control and driven more by our partners, we saw some of those come in earlier in the year. And so that's really what was driving the pull forward there.

Okay. So sort of how to do with things not totally under your control, it sounds like, okay. And then I guess when we look at the outperformance this quarter and is that -- and then there's no sort of update to the full year revenue guidance. And so are you expecting incrementally more challenging parts of the business in the second half than you were, say, a quarter ago when you guided?

Yes, other than the benefit that we see in Q1 from that platform timing, really that the remainder of our expectations from a full year perspective are holding. And so what I would say is that we're seeing similar to what we guided to last quarter, kind of Q2, Q3 low point in the year, return in seasonal revenue in Q4. And the assumptions that we had that were driven both around employer and finishing out this selling season, that's critical for us in Q2 as well as some of the -- what Steve commented on just a few minutes ago, some of the risks that we modeled into our plans to the second half on health plans, those are all still holding for us. And so we're maintaining our guide for the full year at this point.

Okay. Thank you very much.

There are no further questions at this time. I would like to turn the call back over to Stephen Swad for any closing comments.

Thank you all for joining us tonight. It's been an honor to lead this company. And I'm excited to turn the reins over now to Matt. We're executing well against our plan in bringing in great talent into the organizations. I feel better today than I have at any point in my tenure here. And I'm optimistic that the company is heading in the right direction. Thank you so much.