Benefitfocus, Inc (NASDAQ:BNFT)
Q1 2014 Earnings Conference Call
May 5, 2014 17:00 ET
Milt Alpern - CFO
Shawn Jenkins - President & CEO
Greg Dunham - Goldman Sachs
Nandan Amladi - Deutsche Bank
Terry Tillman - Raymond James
Sean Wieland - Piper Jaffray
Adam Klauber - William Blair
Welcome to the Benefitfocus First Quarter 2014 Earnings Call. (Operator Instructions). I would now like to turn the call over to Milt Alpern, Chief Financial Officer. You may begin.
Thank you. Good afternoon everyone and welcome to Benefitfocus' first quarter 2014 earnings call.
We will be discussing the operating results announced on our press release issued after the close of market today. I'm Milt Alpern, CFO of Benefitfocus. And with me on the call today is Shawn Jenkins, our President and CEO.
As a reminder, today's discussion will include forward-looking statements such as second quarter and full year 2014 guidance and other predictions, expectations and information that might be considered forward-looking under federal securities laws. 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 the fluctuation of our financial results, general economic risks, the early stage of our market, management of growth, 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 which was on file with the Secoya and our other SEC filings.
During the course of today's call we will also refer to certain non-GAAP financial measures. You will find important disclosures about those measures in our press release.
With that let me turn the call over Shawn and I will come back at the end of the call to provide details regarding our first quarter results as well as our updated guidance for the second quarter and the full year of 2014.
Thanks Milt. Thanks to all of you for joining us today. Benefitfocus carried a significant business momentum into 2014, a strong first quarter results but exceeded the high end of our guidance range for both a revenue and a profitability perspective. Total revenue for the quarter was $30.7 million an increase of 29% year-over-year that was driven by employee revenue growth of over 54%. In the quarter we saw strong deal activity in both segments of our businesses and continued momentum around the Private Exchange Opportunities. In both business segments employers and carriers are demonstrating higher levels of interest in cloud based benefits management solutions. The urgency is driven by three primary factors, first a generational shift to cloud based technologies which is really a multi-industry trend and it's clearly providing lift to our business.
Second, we’re seeing increased employer interest in migrating to a defined contribution model. They are seeking greater cost certainty which define contribution models per volume and third the Affordable Care Act regulatory mandate is causing many customers to fundamentally rethink their approach to employee benefits. Carriers are seeking direct to consumer solutions where as the individual market is expected to grow significantly in the next 5 to 7 years.
Benefitfocus marketplaces also insurance carriers is a private exchange solution that integrates with the public exchange while also incorporating volunteer benefits. This integration creates a better direct sales channel to our customers. Our solution let’s insurance carriers give consumers the ability to determine what’s the eligibility, compare plan options, estimate cost and apply subsidies to qualified health plans from a single work flow.
These tools pair together offer our customers a marketplace plus administration solution with easy to use tools for employers, employees, brokers and carriers, encompasses administrative support for the first sale, meaning new, renewal and off cycle sales include products as well as employee shopping enrollment management for new hires, life events and open enrollments.
In the carrier business we continue to see strong momentum and we’re thrilled to announce the signing of United Healthcare, a national insurance carrier with over 30 million covered lives. United will be rolling out the Benefitfocus eEnrollment platform nationally across it's mid and large group market segments. This is a terrific customer win for us and it further validates benefit focus as a cloud based platform of choice at the insurance care industry.
We now have 7 of the 10 largest insurance carriers as customers and we see a substantial opportunity to expand our footprint within each of them.
Interest in private exchange is particularly strong amongst Blue Cross Blue Shield plans across the country as well. We were also thrilled to announce the signing of CareFirst, the Blue Cross Blue Shield provider in Maryland, Washington DC as a new private exchange customer. We’re seeing continued momentum for the number of our private exchange customers such as Aetna, Blue Cross Blue Shield of Florida and Mercer is a successfully roll out their marketplaces on the benefit focus platform.
In our large employer segment the development of marketplaces and overall dynamics of our post-ACA world has started the growing need for whole workforce solutions. Addressing this complexity and providing customers with new way forward will be key focus this week at our Annual One Place User Conference, the premier event in the benefits management industry.
We will be hosting 100s of current prospective customers and partners with three days of product announcements, training and seminars and best practices presentations. At one place we will be introducing the new additional HR InTouch marketplace which is specifically designed for the new phenomenon which we refer to as everyone is eligible.
HR InTouch marketplace the whole workforce edition allows employers to provide the decision support tools and enrollment capabilities of our platform for full time employees and for employees enrolling in subsidize qualified health plans through public exchanges.
The new additional will also feature a recommendation engine and guided shopping experience to help employees navigate the increasingly complex enrollment process. In addition the HR InTouch marketplace whole workforce edition will now enable retirees to shop for individual Medicare plans including helping them find the best match plan by filtering eligible plans by physician and pharmaceutical information.
In our employer business we had another strong sales quarter that included 25 new large employer customers. These include Caltech, Jet Propulsion Labs, Boston Scientific, AmeriGas, Southeastern Freight Lines, Janus Capital Group, Stage Stores, Limited Stores and Unifirst.
Employers are in the process of designing their 2014 open enrollment strategies which is leading to strong customer interest at this time. As an example AmeriGas, the nation’s largest retail propane maker choose the HR InTouch platform to support the Benefits administration, enrollment and employee communication. AmeriGas has a wildly dispersed workforce of approximately 9000 employees located in 1200 locations across 50 states.
We HR InTouch marketplace these employees will be able to shop and enroll for the Benefits of many web based device and will be able to utilize more than 300 informative videos in our Plan Shopping app to understand and compare their claim options to make the right Benefits choice for their specific circumstance. And exciting part of this when is that AmeriGas is also deploying a Benefit Informatics, Data Analytics and Reporting Solution. We believe Benefit Informatics is a clear differentiator in the marketplace. Another strong win in the quarter was Southeastern Freight Lines, one of the largest trucking carriers in the country with nearly 7500 employees, half of whom are drivers.
Southeastern is looking for a next generation solution to help them migrate from their existing paper based enrollment process to an active online process that could reach their highly mobile workforce. We’re also looking for solution that would help them deal with their complexity of complying with the Affordable Care Act including required employee communication.
On our last call we shared the three areas we will be making incremental investments in 2014.These are, sales and marketing, a new third party implementation program and the private exchange marketplaces that we have just outlined.
These are areas that will enable Benefitfocus to fully capitalize on the multi-billion market opportunity we’re targeting. I’m pleased to say that we have made significant progress on each front in recent months and are well positioned to start realizing new benefits of these investments later this year and beyond. First in sales organization we had a very strong hiring quarter and in the process of onboarding a number of highly qualified and experienced sales professionals.
We’re on track to meet our hiring objectives for the year and believe this greater market coverage will enable us to more effectively target the 18,000 large employer prospects that we have identified. We also enhanced our sales leadership team with the hire of Rebecca Bernson to lead our channel sales group and to scale our sales operations.
Rebecca Bernson’s tremendous sales leadership stands from her previous roles at both ADP and Xerox. We have also made great strides in building up the Benefitfocus implementation program. This program will offer a collaborative and consultative approach for clients implementing our software through system integrators.
Accenture, Deloitte, ROC, HRrchitect and Aasonn have joined the implementation program and will begin their training at 2014. Benefitfocus selected Accenture, one of the world’s leading organizations providing management consulting, technology and outsourcing services as a preferred integrator of it's private exchange marketplace solution. In this role Accenture will serve carriers Benefit consulting to employers in configuring and deploying the marketplace platform. Benefitfocus selected Deloitte as a preferred integrator for employer implementations as part of this role Deloitte wants it's Benefitfocus with a development of a certification program to employer implementations.
Interest in and willingness to commit material resources, this program has far exceeded our initial expectations and is a powerful validation of potential opportunity in this market. 2014 is all that getting charter members signed which we have done; they have been certified on the platform and trained. Trading will include shadowing a current customer implementations that are underway with the Benefitfocus implementation team. There is an important element of our long term growth strategy and we will begin to see the positive impacts in this program later this year and into 2015.
To summarize the first quarter represented a strong start to 2014 for Benefitfocus. We’re benefiting from strong momentum in both our carrier employer businesses, we have established a clear leadership position in the cloud based Benefits management market. We’re seeing positive results from the investments we’re making to capitalize on this momentum and we believe these actions will help position the company to drive additional revenue growth overtime.
With that let me turn it over to Milt.
Thanks Shawn. We’re pleased to have delivered a strong first quarter with results that were above our expectations for both the revenue and profitability perspective. I will begin by reviewing the details of our financial performance and then I will finish with our updated guidance for the full year 2014 as well as the second quarter. Total revenue for the first quarter was 30.7 million an increase of 29% compared to the first quarter of 2013 and above the high end of our guidance range of 29.6 million to 30.1 million.
Breaking this down further, software subscription revenue was 28.5 million representing 93% of total revenue and growing 28% year-over-year while professional services revenue was 2.2 million representing the remaining 7% of total revenue and up 38% year-over-year. Looking at revenue by segment employer for the quarter was 13.3 million up 54% compared to the year ago period while carrier revenue was 17.4 million up 14% from the year ago period. Our employer business represented 43% of total revenue in the first quarter compared to 36% in the year ago period.
Our revenue mix will continue to shift towards the employer business as we believe the employer market is highly underpenetrated and we’re confident in our ability to continue driving growth in that segment for the foreseeable future. Let me now review the supplemental metrics we report on a quarterly basis.
Our sales team performed in Q1, as we ended the quarter with 418 large employer customers, an increase of 114 compared to 304 in the first quarter of 2013, an up till 393 at the end of the last quarter. We also ended the quarter with 43 carrier customers up from 36 in the first quarter of 2013 and up from 40 from the end of last quarter.
As Shawn mentioned the addition of United Healthcare is an exciting customer win but we believe it will be a positive growth driver for this business in the future and we will continue to sign new carrier customers going forward but with 7 of the 10 insurance carriers already under contract we expect a significant amount of our near term carrier revenue growth will come from deeper penetration of our installed customer base. In addition you continue to see significant interest in our marketplace solutions for many with our carrier customers.
Our software revenue retention rates was once again greater than 95% in the first quarter which we believe is evidenced as a significant value our platform generates through our customers.
Moving on to P&L I will start by discussing gross profit on an adjusted basis which excludes stock based compensation, depreciation and amortization required intangibles and amortization of capitalized software. Adjusted gross profit in the first quarter was 13.7 million resulting in an adjusted gross margin of 44%.
This was down from the 55% adjusted gross margin in the year ago period due to a number of significant, professional services engagements we’re undertaking for some of our customers. As a reminder we recognize expenses to professional services on an upfront basis defer the revenue until our customer is live. Services revenue has been amortized over a 10 year customer relationship period.
The short term negative impact on gross margins reflects the significant demand we’re seeing from our carrier customers and for our marketplace solutions which typically have significant upfront implementation and professional services components. Overtime these engagements should drive incremental subscription revenue as our customers signup lives to these new channels. Additionally we expect our professional services margin should scale on the future as we begin to recognize the revenue from our services engagement and the associated expense wind-down. In addition we expect the creation of a third party implementation eco-system will be a driver of future gross margin expansion.
The near term negative gross margin impact will eventually subside and will lead to significant long term benefit and we’re confident in the scalability of our business model and our ability to reach our long term gross margin target. Turning to operating expenses on a non-GAAP basis excluding stock based compensation and amortization of acquired intangibles sales and marketing expenses were 10.8 million, an increase of 19% compared to the first quarter of 2013. R&D expenses were 8.6 million, an increase of 93% compared to the year ago period and G&A expenses were 3.4 million up 24% compared to the year ago period. The increase in sales and marketing and R&D expenses during the first quarter was largely due to the increased investments we had begun making in our sales capacity as well as ramping of a private exchange marketplace offering and third party implementation partnership programs.
While the increase in our G&A expense reflects increased public company cost, adjusting EBITDA was a negative 8.8 million or negative 29% of revenue. This is better than our guidance of an adjusted EBITDA loss of 10.5 million to 11 million and compares to negative 2.9 million in the first quarter of 2013.
As we mentioned in our last call the reduction in the adjusted EBITDA margin reflects a focused strategy of increasing investments in sales and products we may capitalize on our leadership position in a this multi-billion market opportunity and increase our shareholder value over the long term. With that said as the growth of our employer business moderates that our business achieves greater scale over the time we continue to believe that we can achieve our adjusted EBITDA target of 20%.
Non-GAAP net loss per share was $0.46 based on 24.5 million weighted average shares outstanding, better than our guidance over the loss of $0.53 to $0.55 per share and compares to a per share loss of $0.23 on 21.3 million weighted average shares outstanding in the year ago period.
We have made an adjustment to our non-GAAP net income adjustment to reflect an interest accrual on seek lease [ph] arrangements. As we discussed in our last call we have changed our accounting for reasons associated with our current and future headquarters facilities from an operating lease to a financing obligation. The adjustment made is the interest expense on the financing obligations related to the accounting of two headquarters building.
Looking quickly at our GAAP results, gross profit was 11.5 million, operating loss was 11.8 million, and our net loss per share was $0.51. Turning to the balance sheet, we ended the quarter with cash, cash equivalents and marketable securities of 75 million. This was a decrease from 78.8 million at the end of the fourth quarter. I would now like to finish with our guidance for the second quarter and full year 2014. For the full year we expect revenues of 130.6 million to 134.6 million which equates to year-over-year growth of 25% to 28%. We’re targeting an adjusted EBITDA loss of 49 million to 53 million and a net loss per share of $2.37 to $2.53 based on 24.9 million weighted average shares outstanding. Turning to the second quarter, we’re targeting revenue of between 31 million to 31.5 million which represents year-over-year growth of 27% to 29%.
From a profitability perspective we expect an adjusted EBITDA loss of 15 million to 16.5 million and a non-GAAP net loss per share of $0.70 to $0.72 based on 25.1 million weighted average shares outstanding. In summary we’re very pleased with our first quarter performance in both the financial and operational prospective. We continue to see strong demand for our platform which validates the value we’re able to deliver to our customers and we believe the investments we’re making in our people and products will allow us to capitalize on this multi-billion dollar market opportunity.
With that we’re now ready to take your questions. Operator please begin the Q&A.
(Operator Instructions). Your first question comes from the line of Greg Dunham with Goldman Sachs.
Greg Dunham - Goldman Sachs
First off and I apologize I might have missed this because I was jumping from another calls, the United Healthcare win that is a clear kind of standout kind of piece of news from the press release. Did you provide any context in terms of what specifically they are using you guys for? What kind of scale should we expect and maybe when this would impact kind of the cost of revenue line as well as the overall revenue line?
The United win is a significant win for us at Benefitfocus. We’re very excited to welcome United as a great new customer. They selected Benefitfocus for our eEnrollment platform for both their mid and large employer market segment. It also includes, we did talk about this a little bit on the call. Our Benefit Informatics service, so we will be serving up Benefit Informatics’ data service to power the enrollment experience so that individual members can see their historical information with United and make informed decisions as they select their health plans, they are very exciting combination of those two technologies. As far as the roll out, it's obviously a big customer, big win for us as you know our business Greg it takes a little while to bring the large carriers live to market. We expect to be live with United towards the end of this year in 2014.
Of course we’re doing the implementation services, the project management work and the integration as we speak now and put up for a roll out in the fourth quarter.
Greg Dunham - Goldman Sachs
And maybe one for Milt. I look at the cash flow over the trailing 12 months, it's basically breakeven on an operating basis and then I look at the adjusted EBITDA line and it's negative 25 million, right obviously there is a big shift due to the accounting. Is this the kind of delta that we should expect going forward or would you expect this big disconnect between kind of operating cash flow and adjusted EBITDA to normalize soon?
I think in the short term Greg, I think you will still see the delta keeping in mind that EBITDA really is not reflective of what cash flow is for us based on the fact that we have this professional services projects underway that you know we collect the cash upfront for these things and then recognize the revenue of much longer customer relationship period. So I would assume to continue to expect to see the disconnect between EBITDA and cash flow going forward.
Your next question comes from the line of Nandan Amladi with Deutsche Bank.
Nandan Amladi - Deutsche Bank
So Shawn a question for you, it's kind of a big picture one. You were recently certified as a web based entity. How does that change the nature of your place in the eco-system both in terms of partnerships and competition?
So what we see happening at Benefitfocus in the industry is this idea of, we refer to it as benefits for the whole workforce or everyone is eligible. As a matter of fact it happens to be a big theme of our one place conference that we’re hosting here with all of our great customers and partners and eco-system and in Charleston this week where we have a series of major new product announcements taking place. So one of the main themes is that this idea that with the Affordable Care Act implementation really it's just a sense of everyone is now eligible, it's just a matter of what, so traditionally employers have full time employees covered by their health plans and other benefits and then they might have part time employees which historically they would refer to as ineligible. But now the part time employee might actually be eligible for a government subsidized plan or qualified health plan and we believe through the use of the Benefitfocus technology and our marketplace capability we can actually greet those part time employees inside of Benefitfocus’ HR InTouch marketplace capability and when they come in we can inform that they perhaps might not be eligible for their company plan but we can provide them information about government subsidized plans, perhaps take them to one of the private exchanges that we’re operating for one of our insurance carriers or one of the multi-carrier exchanges we have and the reason we went to the effort to become a web based entity and go through that certification process is we feel like that’s kind of a future capability whereby we’re looking to either directly or through partnerships serve up individual policies and subsided information for these formally ineligible employees.
So you can think of it, it's really kind of a capability that we have acquired and we will be using it and I would say in various formats depending on the marketplace and the context of our customers.
Nandan Amladi - Deutsche Bank
And a quick follow-up if I might, you’re launching a system integrator certification program, how should we think about your targets, you know how big will it be say by the end of this fiscal year? What are the milestones we should look for?
The interest that we have had as we have formulated the curriculum, the training and the certification it's really been outstanding as we think of -- in Benefitfocus we have one platform that serves two markets, our insurance care market and our large employer market. We’re very excited to have system integrators joined the implementation program for both of those markets and so we have selected Accenture and it's the lead integration partner on our insurance carrier program there. They will be helping our customers, they will be sending their consultants through the training and certification so that Accenture would be able to work with our customers on configuring and integrating our private exchange technology for them and then on the employer side we’re super excited to actually have four system integrators led by Deloitte.
Deloitte is helping us commercialize the certification and training for the employer implementation process that we go through the Benefitfocus and then we have Aasonn, HRrchitect and ROC, three great SaaS, cloud based system integrator and project management firms and so I think as you talked about the milestones towards the end of the year the big milestone is equipping lead partners in both of our businesses. Our plan is to fully develop the curriculum, training and certification over the next several months. Each of these firms will be putting some of their consultants through the certification and training process over the summer and our target would be really by the end of the year that you will begin to see certified consultants come through the other side of the training and certification.
There will also be a bit of shadowing that’s taking place with some of our existing customers that are in-flight and so really this is kind of teaming us for the tail end of this year but really more of a 2015 type of full array of system integrator, certified consultants.
The next question comes from the line of Richard Davis with Canaccord Genuity.
Richard Davis - Canaccord Genuity
Two kind of just numbers question, so in my math on the GAAP basis and I know you don’t breakout exactly but this is roughly is just to be helpful explain to investors. With the way you recognize revenues on ProServ because you recognize expenses upfront and the revenues over 10 years or so. Is it fair to say that that side of the business if it were kind of standalone it's probably losing 10 million - 15 million on a GAAP basis, now that the cash flow loss is a lot less and then I had a quick follow-up.
That would depend, Richard. I mean I think certainly I mean as you point in fact that there is a big difference in the way that we recognize revenue and the way the cash flow is you see that all the expenses that’s nudged [ph] upfront in the revenue recognized over this 10 year customer relationship period. So clearly the way it's recognized there is a significant loss right now. I think if you were to recognize the revenue over the course of the implementation period let’s say which if you were able to determine standalone value we should be able to do that but you would be certainly much closer to profitability, there is certainly much less of the loss being recognized if we were able to recognize it over that implementation period but right now we aren’t kind of giving any kind of alternative profitability metrics on a GAAP basis or otherwise to indicate what the profitability numbers would look like if we had a different way of recognizing those types of revenues.
Richard Davis - Canaccord Genuity
And then just kind of math wise as well, where have you kind of bottoming at about 20 million of gross cash and say Q4 of ’15, does that seem roughly correct? I know you’re not doing guidance for ’15 but at some time -- Greg said yes you had on the past basis but it feels like you’re going to be slightly negative on a free cash flow basis this year?
I think that low, I think if we look at -- as we have already pointed out when Greg asked the question is the big difference between what we generate in cash flow versus what the EBITDA number show. I think your number is 20 million (indiscernible) and some starting 2015 it's probably low. I mean I would say it's 2014, we are probably talking about a burn maybe somewhere in the neighborhood of 20 million to 25 million but I don’t see it in ’15 getting down to the levels what you’re talking about.
Your next question comes from the line of Terry Tillman with Raymond James.
Terry Tillman - Raymond James
So Shawn in terms of the employer business it was good to see the number of logos added. Can you remind us again how the seasonality works and you know as we progressed through the year I thought maybe 2Q and 3Q were the high watermark typically in terms of overall new business signings that -- just maybe give me a recap on that and then secondly anything you can say about the quality of the bookings, was there anything different or change in trend around the size of the deals in that employer business?
Yes, the seasonality of our business, the benefits industry in general the context of which the Benefitfocus platform is used to help employers manage all the benefits, most employers particularly large employers have a January 1st effective date for the benefits so they roll out with a menu options to their workforce in the fall generally in October, November timeframe as commonly referred to as open enrollment season and so our employers -- the good thing about that is in a SaaS business you know it provides a really kind of noble schedule when the software needs to go live and helps the project management teams build their schedule and so forth. We back up from an open enrollment target window on the October, November time frame to an implementation average of 4-5 months in our large employer market depending on the size of the employer and what not and so we really see a lot of signings in the second and the third period where employers are deciding to modernize the benefits for the following year so this case they will be looking at their 2015 benefits cycle getting a new cloud based platform in the Benefitfocus platform, the communication strategy. So that’s generally why we see you’re correct Q2, and Q3 the bigger new employer signing quarters and around the qualitative we announced some great logos I don’t if you caught it on the call but -- super company, Boston Scientific, AmeriGas, Southeastern Freight Lines, Janus and some others, Stage Stores, Limited Stores and Unifirst.
Those are all big companies and I would say that I think one of the last several years we have seen the average employer size drifting up a little bit and this quarter would be consistent with that -- I don’t know that it's materially up in anything kind of what we have been seeing but we just continue to see great logos, great customer wins, great momentum in the employer business. So we’re really happy with the quarter on the sales front and we also mentioned to that, we’re increasing our spend in sales and marketing and we’re happy with the sales and marketing professionals that we’re onboarding right now and we did mention new Vice President of Sales and Marketing on our channel sales, Rebecca Bernson who has experience from both ADP and Xerox and that’s a great part of our investment strategy for the year to increase that employer sales team.
Terry Tillman - Raymond James
Shawn, in terms of -- I mean last quarter we did a lot of questions because I think the loss was a little higher in part of that, it was obviously the R&D investment private exchanges and further ramp in sales and marketing but on sales productivity are you seeing anything and I don’t know if you could quantify it we’re at stands but time to productivity or time to quota achievement is there any improvement you’re seeing because either maybe it's becoming a little bit more stream adoption or people are more comfortable with ACA or maybe the carriers are helping create a network effect. Are you seeing any change in how quickly some of these reps are ramping?
Yes, well I think the good news from my standpoint Terry is that it's consistent with what our model, what our plan and what our model is kind of predicted over the last couple of years. So as we thought about the employer business and increased our investment in sales and marketing. Our ability to find the professional on-board them, get them trained and ramped up it's been I don’t know no surprises because we have certainly learned a lot as we have scaled our business taking it public and what not but the good news is we’re very happy with the way we see the predictability I guess of that capability that we have ramped and if anything certainly the more insurance carriers we have, the more logos we have, the more private exchanges that we’re bringing to market on the Benefitfocus platform. Our name is out in the industry better. I think the initial public offering helped with that a bit too so people are more familiar with Benefitfocus, the call like this is great because people are learning about the Benefitfocus platform and the company. I don’t know if there has been a radical change in the time to ramp.
Maybe one last piece Terry is, as we talk with other software as a service platform businesses we see similar patterns on, you find the person you bring them on and train them and then they go out and sell and you implement. So I think the good news is it's kind of a noble thing that we are working on tweaking and dialing in as we keep going.
Terry Tillman - Raymond James
And Milt just a numbers question is on the, anything you can say though about the gross margin because it is volatile and the irony is I guess when you’re seeing the carrier demand or the services work it can even, near term hurt gross margin but is there anything we can hang our hat next year, I mean should we see the gross margin improve next year on a year-over-year basis and then I guess what would be more of a lever for improvement? Is it just the cumulative effect of your starting to recognize revenue or is it potentially the third party ESIs [ph]? What’s one of those two could be more bang for the buck on the gross margin? Thanks.
Answer to your first part of the question what was driving kind of the margins most recently. I mean obviously we have talked about last quarter and again this quarter, we’re making significant investments in a number of areas marketplaces and the product around marketplace offerings, certainly sales and marketing ramping sales capability adding more people and adding more infrastructure around the sales and marketing organization and lastly as we point out to the third party implementation program which we have now gotten off to a great start with the signing of five implementations partners this quarter.
I think in the shorter term the remainder of 2014 I think it's result of these investments and gearing those things up. We will continue to see some margin pressure, we will continue to spend in those areas because obviously spending in those areas we believe will give us the best opportunity to grow at top line, because we really where we see our value proposition at this point. And then as we kind of look out when do we begin to recognize some improvement? I think the things that you mentioned clearly are going to continue to do that. Implementation -- partnership program that we have implemented and once we begin to get these partners up to speed so that they are delivering either on our behalf or delivering directly themselves to our end user customers, implementation services that we were up till today [ph].
I think that will certainly begin to show margin improvement as might -- the change in accounting could result developing a standalone value for those services. Also I think the investments that we’re making not only in the marketplace side but on the growth on our sales organization, our sales and marketing organization we continue to scale and generate revenues and thereby more margin improvement just looking into 2015.
Our next question comes from the line of Sean Wieland with Piper Jaffray.
Sean Wieland - Piper Jaffray
I want to go back to the United deal, does it cover all the lives in the mid and large employer segment in both risk based and fee based businesses? And what are they doing for eEnrollment now?
As you can imagine United is a very large organization and they have a lot of lines of business, lot of market segments that they are in and a lot of capability actually they built up over the years with different products and so forth so. Commenting specifically about how to use the Benefitfocus eEnrollment in certain areas? I prefer to leave it to the customer a little bit on the messaging the market which ones are getting -- I would just say that we’re comfortable saying that they will be using the Benefitfocus eEnrollment for both their mid and large employer market segments and there is nothing to preclude them to use it for either fully insured or self-funded business so they will have the ability to do both and of course they have a go to market strategy and their messaging which is important. We always like to sort of respect the customers as they bring it to market.
Sean Wieland - Piper Jaffray
Okay. Can you help us out thinking about the size of the deal?
Well I mean typically, Sean this is Milt, I mean we don’t give an estimate of what the size of the deal might be. Shawn had kind of just put in context what it's covering, what area United is covering. I mean as we -- we obviously just signed the deal as we moved through implementation, it's probably going to take us through into Q4 of 2014 as we move forward we will be able to get a little bit more better idea of what the size of the deal might be and what the implication was kind of revenue we might see, maybe very, very late 2014 but in 2015 but right now it's a little bit early to kind of begin to speculate on how quickly this deal is going to ramp.
Sean Wieland - Piper Jaffray
Okay, so maybe a broader question then from your perspective is, Shawn, when you think about the evolution of this business and there has been milestones over the course of time since you have founded this company. Where does this contract stack up relative to the big milestones? Is this a big milestone for the company to get a contract this big?
As one of the founders, it's been such an incredible journey to watch Benefitfocus grow and add customers and it may sound a little simplistic but every customer that we win makes me excited, I get passionate about learning about their business and clearly it's undeniable the size of United Healthcare, the scale of their organization, the time and the market with all the change and for me I think it's a pretty big endorsement of this concept of all your benefits at one place, that we talk about lot of Benefitfocus and the Benefitfocus technology’s ability to actually look forth in front of an employer and all of their workforce any type of benefit that you might want to market or sell to them. So I think the size of the customer is a huge milestone, we’re extremely proud of our win there and I think the other way to think about is just the endorsement of the platform, it's ability to scale and this vision that we have had for years of all your benefits in one place and how important that is now in the changing market dynamic.
Your next question comes from the line of Adam Klauber with William Blair.
Adam Klauber - William Blair
One or two follow-ups on the employer market, for all we heard the selling season got off earlier than usual I guess. When is that true? And two, could you give us a sense of are RFPs up a lot this year compared to last year?
I might say a little bit different. I don’t know that -- we got off earlier, we did have a great first quarter and I guess in some sense employers have been thinking about Affordable Care Act and what it means to changing their benefits as they roll into this next year they have had additional year to think about and so perhaps there was a bit of head start but in general so expect Q2 and Q3 to be big quarters, big meaningful quarters for our direct employer business as well as our private exchange really our channel market exceeding [ph] that. As far as the RFPs go there is I don’t know that it's an unusual amount of RFPs, they are always the larger employer the more thoughtful they tend to be as far as evaluating their strategy. One of the things that I’m seeing a lot of personally is this on-premise large employers with a traditional on-prem, HRS system and they are looking at the benefits administration module and they are wondering if it can really handle the communication and the Affordable Care Act and as well as things like voluntary benefits and the other important aspects and that is generating a fair amount of thoughtful insight by those employers and the linkage to our implementation program or our system integrator isn't direct but the indirect I would say implication is that those large employers that have a traditional HRS or ERP or on-premis system they realize that it's time to modernize for the Affordable Care Act and the communication and those system integrators who have helped them implement, maintain those systems, I think you know the fact that we now see our program getting off to a such a great start is probably a further indication that there is lot of thought going on inside of enterprise is about moving to the cloud for benefits management.
Adam Klauber - William Blair
A follow-up on that, with the client switching over again if you want to use the last quarter as a data set. You know ball park I mean how many of those are switching to either an exchange or more complex benefit, maybe they are adding an HSA [ph] or high deductible, just ball park how much are switching over because of that or due to that?
I don’t have a break out for you necessarily in the first quarter as far as private exchange but I would say that that’s a good thoughtful question about the ballpark, 50% or better of our customer kind of the energy or the disruption that opens the door for Benefitfocus has to do with a material change in the benefits. It could be something as simple as an HSA plan but generally there is some event like that not necessarily a massive shift to define contribution is not required, they could still be offering several traditional health plans. Maybe they are introducing just one or two more in addition to savings vehicle. Often times there will be a voluntary benefit or two associated with that strategy to offset some of the gap in there.
It's usually a couple of factors like you’re pointing to that are associated and I would say at least half the deals we win have something like that and that’s consistent with the accelerating momentum we have seen in our employer business as more and more employers realize they need to modernize, they need to update, they need to give visibility into their cost structure and they need to get a better way to communicate to all their employees all their benefits.
Adam Klauber - William Blair
Just one last question, I’m not sure if you disclosed this but the first quarter wins you know again just the ball park, how many came direct and how many came from channel partners?
We announced if we say 25 new employer customers and that majority of those came directly and the channel is still developing for us. We got tremendous opportunities with the marketplace partners that we’re -- they are comprising new channel today, they are in the first quarter and the vast majority of 25 came direct.
And there are currently no further phone questions.
Okay. Thank you operator and thanks everyone for joining us tonight for our first quarter earnings call and we look forward to talking to you again at the end of the second quarter.
Thank you. Thanks everyone.
Again thank you for your participation. This concludes today’s call. You may now disconnect.
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