Benefitfocus, Inc. (NASDAQ:BNFT)
Q2 2014 Earnings Conference Call
August 8, 2014 5:00 PM ET
Milt Alpern – CFO
Shawn Jenkins – President and CEO
Greg Dunham – Goldman Sachs
Nandan Amladi – Deutsche Bank
Terry Tillman – Raymond James
Sean Wieland – Piper Jaffray
Ladies and gentlemen, thank you for standing by. And welcome to the Benefitfocus Second Quarter 2014 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions). Thank you.
I would now like to turn the call over to Milt Alpern, CFO of Benefitfocus. You may begin.
Thank you, operator and good afternoon everyone and welcome to Benefitfocus’ second quarter 2014 earnings call.
Today, we’ll 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 third 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 SEC 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 to Shawn. And then I will come back at the end to provide details regarding our second quarter results as well as our updated guidance for the third quarter and the full year 2014. Shawn?
Thanks Milt. And thanks to all of you for joining us today. Benefitfocus performed at a high level in second quarter with strong financial results that exceeded the high-end of our guidance range from both a revenue and profitability perspective.
The total revenue for the quarter was $32.3 million, a 33% increase year-over-year. Both of our business segments contributed the strong revenue growth in the quarter with Care revenue of up 17% and employer revenue increasing by 59%.
During the quarter, we had strong sales activity in both segments of our businesses, including a record 70 new employer customers added. This is a significant increase compared to the 25 new customers we signed in the first quarter of 2014, and the 44 new customers added in the second quarter of 2013.
Our momentum in the marketplace clearly indicates, customers are focused on transforming the benefit of technology to provide a more comprehensive benefits experience for employees while also helping to bend the cost curve and bring greater cost certainty to one of the employer’s largest expense items.
We are in the early stages of this transformation as our 488 employer customers represent less than 3% of the 18,000 large employers in the U.S.
The move to the cloud is a truly massive in generational platform shift in the IP landscape, and it is having a profound impact on how customers are deploying and managing their software environment.
We’ve seen the impact in the cloud change the game in a number of areas that the Human Resources Department are ready including payroll, travel and expense management, recruit management and performance managements.
We’re seeing the same dynamic incur in the benefits administration market, where customers are embracing a significant improvement in our Cloud based benefits and administration platform provides.
We are uniquely positioned for success in this market, given that our one platform service, both insurance carriers and employers. This marks for the first time that technology has been the disruptive factor in the massive benefits market.
In the past, things like regulatory change or shift in benefit structure like the advent of HMO a generation ago with the driving force for change in the industry. However these changes never fundamentally alter the process of shopping or lowering for benefit, it does not empower the employee to control their benefit experience.
Benefit focus is cloud based platforms, redefining the industry and bringing an entire new paradigm to benefit shopping and management. With our solutions employed they are able to become a true consumer and take control of choosing the benefits package that is right for their specific circumstances.
This can include a much broader way of volunteer benefits than traditional benefit administration tools are providing.
We are also able to a big data benefit informatics product of add employees individualize claim and expense data but they can use to compare many health plans. Having access to this data is also a big benefit to the employer who now has the full lifecycle of data that can be leveraged to drive cost savings through more efficient plan design than administration.
Our platform is highly differentiated because we are not weighted to the traditional structure of the benefits market. With our solution, customers are able to fully embrace change and harness the impact of the cloud and defy contribution models to materially enhance the benefit offerings and cost structure.
We these difference resonating in the market in our direct sales effort and our private exchange marketplaces. Let me for example, the Mercer marketplace, which is built on the Benefitfocus platform. The Mercer marketplace is seeing significant customer momentum. Mercer’s marketplace is unique and that is able to offer plans to both fully insured and self-funded customers which provides greater flexibility and opens the marketplace up to a broader group of customers.
That platform also provides unique flexibility to enable most of your new things, new voluntary benefits only exchange. This lets customers begin the process and moving to an exchange now while continuing to do internal work necessary to prepare for moving core benefits into the exchange of future days.
Another clear benefits advantage of our private exchange marketplace channel is that it expands our ability to bring the Benefitfocus platform to the mid-market for customers with 100 to 1,000 employees.
In this market segment we see a meaningful opportunity that enable employers of this size to provide a fundamentally Benefit shopping and administration experience for the employees.
Reaching these employers through this channel is an attractive selling model that allows us to leverage our partners. The success we are seeing in the mid-market demonstrates that our performance is highly flexible and scalable to serve the mid-market, large market and jumbo market on the same technology platform.
As we mentioned, we had terrific sales activity during the quarter with 70 new employer customers including Brookdale Senior Living, the nation’s largest senior living provider with more than 50,000, Forever21, Hard Rock Café, McGrath Hill Education, Owens Corning and Office Depot among others.
Office Depot is a benchmark customer win, we’ll be using the Benefitfocus interim PowerPoint to provide a benefits communication portal for the more than 60,000 employees. This is an exciting win that demonstrates our ability to effectively compete and win in a jumbo employer market.
We are seeing large customers look to utilize our communication portal as the first step in engaging with Benefitfocus as they adapt our long-term benefit shopping and administration needs. And we believe this positions us well to secure broader scale to these customers in the future.
Another exciting customer win in the quarter was Forever21, a family owned company that is nation’s fifth largest specialty retailer with over 30,000 full-time and part time employees. Retail is of the sector’s most impacted by the changing regulatory environment giving a large number of part-time employees who traditionally have not been benefit eligible, but they now have options available to them for the Affordable Care Act.
By deploying insurance touch, Forever21 will have an elegant benefit administration platform that can provide their highly distributed employee base with engagement tools, accessible cost to web and mobile devices.
In our care business, we’re seeing a lot of great activity, which has helped drive growth to a multi-year high. We are seeing carriers embrace the emerging consumer driven benefits landscape and they are quickly working to upgrade their IT infrastructure to fully capitalize on this opportunity.
We also remain hard at work from a product perspective to bring exciting new functionality to market that will generate additional value for our customers and growth opportunities for Benefitfocus.
During the quarter we hosted our Annual One-Place user conference, a premier event in Benefits’ management industry, which is focused on our concept which we refer to as benefits for the whole workforce.
As the Forever 21 example illustrates, companies today need a benefits shopping and administration platform that can extend to their entire workforce including part-time, flexible accruals and retire lease.
During the quarter we made a number of significant product announcements. I’d like to share four of them with you as they provide a view into our product momentum. First is the new consumer marketplace that enables insurance carriers to provide individual consumers the ability to determine sums of the eligibility, compare plan options, estimate costs and apply subsidies to for qualified health plans inside a single workflow.
The increasing complexity of the benefits’ eligibility under the Affordable Care Act presents new challenges from both consumers and carriers, we had extended our platform to provide a world-class shopping experience to these consumers.
Second, we introduced a major new design of the benefits administration role within our Benefitfocus marketplace solution. This provides administrators with a superior user experience that utilizes data visualization, information and analysis and real-time reporting dashboards.
We designed this user-friendly intuitive experience by listening to our customers and watching our benefits administrators who are using our product. So, we can make sure our new design, while the information mainly is most directly to your fingertips across any device.
Third, a new mobile experience than include significant additional capabilities to our HR and touch mobile app, including the ability to upward benefit related documents from a mobile device and convenient access to employee’s important benefit information. We refer to this is as, all you benefit in your pocket.
And fourth, we announced our enhanced and expanded analytics capabilities that enable companies to take full advantage of their eligibility, enrollment and plan to data. Our new cost year estimator employers to predict the direct cost of making planned design changes in order to more effectively allocate budget and better serve the needs of their whole workforce.
There is a lot of additional functionality we are developing and that we’ll be introducing in the coming quarters. An emerging area into this showing real promise is the continued growth in the number of third party apps available through the Benefitfocus platform.
As we continue to expand there is active and growing group of third party benefit providers including TransAmerica, Pay Flex and Workforce Solutions. We were looking to leverage our reach into the 23 million individuals that we support. We expect to see additional apps become available on our platform in the coming quarters when we see a potential meaningful opportunity that monetizes the expanding ecosystem over time.
As we outlined for you at the beginning of the year, in 2014, we are making incremental investments in three specific areas to better position the company for future growth and profitability. They are increased employer sales capacity and marketing initiatives, private exchange marketplaces and our third party implementation programs.
We made great progress across all three initiatives during the quarter, including the hiring of our first group of implementation trainers and beginning the certification process for our inaugural class of implementers. We are on track to have our first group of certified implementers in the field by the end of the year.
Finally, I’m excited to announce two changes with our senior management team that will position the company to deliver continued growth and improved profitability over time. First, Andy Howell, our current Chief Operating Officer will be undertaking a new role as Benefitfocus’ Chief Commercial Officer.
In this new role, Andy will oversee all of our sales and marketing functions with a focus on driving significant, sustainable long-term growth. Andy has been a valued member of our senior management teams in 2007 and leverages great experience with our customers and partners to generate success in his exciting new role.
Secondly, Ray August has joined Benefitfocus to become our new Chief Operating Officer. In this role, Ray will oversee all of our operational functions, customer support efforts and implementation efforts with a mandate to ensure the organization is efficiently scaling of become a much larger company. Ray has an impressive background including serving as the General Manager for the financial services and insurance division of Computer Scientist Corporation where he led a multi-billion organization an annual with over 10,000 employees around the world.
These two senior management changes will enable Benefitfocus to scale more quickly and allow me to focus more of my time working on our future product roadmap and building out our partner ecosystem.
I feel this focus on new product pipeline will be a powerful advantage to the company as our customer base grows in the coming years. We have an incredible customer community that is active with fantastic ideas from new products we have the best offer designers and engineers in the industry. It is an exciting time to be innovating with our customers and our engineering team.
To summarize, Benefitfocus delivered strong second quarter results and is well positioned to continue that momentum in the back half of the year. We are seeing significant customer demand in both our career and employer businesses and we see a long runway of future opportunities.
We continue to make investments necessary to ensure we are well positioned to further extend our clear leadership position in the multi-billion cloud based benefits manager market.
And before I turn over to Milt, I’d like to congratulate all of my fellow associates at Benefitfocus for once again being recognized as one of the places to work. It’s such an honor to work with all of you, congratulations.
With that, let me turn it over to Milt. Milt?
Thanks Shawn. We’re very pleased with our second quarter performance which exceeded our expectations across all key metrics.
I will begin by reviewing the details of our financial performance and then I’ll finish with our updated guidance for the full year 2014 as well as the third quarter.
Total revenues in the second quarter were $32.3 million, an increase of 33% compared to the second quarter of 2013 and above the high end of our guidance range of $31 million to $31.5 million.
The revenue out-performance in the quarter was driven by the underlying momentum we are seeing across both of our business segments. Breaking revenue down further software subscription revenue was $29.8 million representing 92% of total revenues and up 32% year-over-year, while professional services revenue was $2.5 million representing the remaining 8% of total revenues and up 50% year-over-year.
Looking at revenue by segment, employer revenue for the quarter was $14.3 million, up 59% compared to the year-ago period while carrier revenue was $18 million up 17% from the year-ago period.
Our employer business represented 44% of total revenue in the second quarter, compared to 37% in the year-ago period. We continue to see our revenue mix shift towards our faster growing employer business, which we believe is highly under-penetrated and represent a significant growth opportunity.
Let me now review the supplemental metrics we report on a quarterly basis. We ended the quarter with 488 large employer customers, an increase of 114 compared to 348 in the second quarter of 2013, and an up from 418 at the end of the last quarter. As a reminder, the second and third quarters are typically our largest selling quarters as customers look ahead for the upcoming open enrollment season.
We also ended the quarter with 43 carrier customers consistent with the end of Q1. Throughout the second quarter we saw strong sales activity within our installed base and we continued making progress with implementations at six new carrier customers we won in the recent quarters.
Our software revenue retention rates was once again greater than 95% in the second quarter which we believe reflects the significant value our platform generates through our customers.
Moving on to P&L I’ll start by discussing gross profit on an adjusted basis which excluded stock based compensation, depreciation and amortization required intangibles and amortization of capitalized software.
Adjusted gross profit in the second quarter was $13.7 million for an adjusted gross margin of 42% down from 49% adjusted gross margin in a year ago period. As a reminder we recognize expenses to professional services as incurred but the further revenue until our customer is live in the Benefitfocus plus point.
Professional services revenue has been amortized over a 10-year customer relationship period. Now if we had recognized professional services revenue as delivered during the second quarter, instead of the customer relationship period, our adjusted gross margins would have been approximately 8.5.
We believe that this disclosure gives investors better insight into the profitability of the business by aligning professional services revenue and expenses in the period in which they are incurred. And we intend to provide this view of gross margins on a go-forward basis.
A decline in adjusted gross margins reflects a significant demand we are seeing from our solutions and the growing number of implementations we are undertaking.
In addition to professional services impact made it above, in the second quarter we also made meaningful investments in our customer services organizations. To scale that group of successfully service our growing number of employer customers and prepare for the upcoming open enrollment season.
Professional taxes impacted software margins by several hundred basis points in the quarter, but we will begin to see these margins expand as we continue to leverage these investments.
Over time, we expect these engagements will drive incremental subscription revenues as more like a burn on to the platforms. We also expect the creation of our third party implementation ecosystem would be a driver of future gross margin expansion.
We’re confident in the scalability of our business model and our ability to achieve and 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 $13.7 million, an increase of 30% compared to the second quarter of 2013.
R&D expenses were $10 million, an increase of 76% compared to the year ago period and G&A expenses were $3.4 million up 31% compared to the year ago period.
Please note that non-GAAP G&A expenses excludes 424,000 of one-time deal cost associated with our recent secondary operating.
Adjusting EBITDA with a loss of $3.5 million or negative 42% of revenue. This is better than our guidance with an adjusted EBITDA loss of $15 million to $15.5 million and compares to an EBITDA loss of $6.8 million in the second quarter of last year.
As we’ve mentioned in the past, our EBITDA margin reflects the increasing investments, we are making on our sales organization and products. In order to capitalize on our leadership position in this multi-billion market, we believe these investments will position the company for continued significant long-term growth and will drive increased shareholder value.
As the growth of our employer business moderate over time and our business achieved greater scale, we continue to believe that we can achieve our adjusted EBITDA target of 20%.
Non-GAAP net loss per share was $0.63 based on $25.2 million weighted average shares outstanding, better than our guidance of loss of $0.70 to $0.73 per share and compares to a per share loss of $0.41 on 21.3 million pro forma weighted average shares outstanding in the year ago period.
Looking quickly at our GAAP results, gross profit was $11.3 million, an operating loss of $17.4 million, and our net loss per share was $0.72.
Turning to the balance sheet, we ended the quarter with cash, cash equivalents and marketable securities of $71.7 million. This was a decrease from $75 million at the end of the first quarter.
I would now like to finish with our guidance for the third quarter and full year 2014. For the full year we are increasing our revenues forecast to $133.6 million to $135.6 million which equates to year-over-year growth of 28% to 29%. We’re targeting an adjusted EBITDA loss of $49 million to $51 million and a net loss per share of $2.35 to $2.42 based on $25.3 million weighted average shares outstanding.
Turning to the third quarter, we’re targeting revenue of between $33 million to $34 million which represents year-over-year growth of 27% to 29%.
From a profitability perspective, we expect that adjusted EBITDA loss of $14.8 million to $15.3 million and a non-GAAP loss this year at $0.70 to $0.73 based on $25.4 million weighted average shares outstanding.
In summary as we’ve said we’re very pleased with our performance in the second quarter and the strong continued demand we are seeing in both of our business segments. We believe the investments we’re making will position Benefitfocus to be long-term winner and they dynamic multi-billion dollar market opportunity, we are in the early stage of the target.
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
Hi, thanks for taking my question. I guess, I want to start off on the net customer number of 70. Obviously that’s very strong up like 59% year-over-year and on my math. And a clue to what you’ve done over the prior three quarter.
Were there any anomalies in that meaning was the average revenue per employer customer down or any different than it’s been historically?
Yes, Greg, great question. Obviously we’re super proud of the 70 post it demonstrates the continued momentum we’re seeing in the employer business. There is no real anomaly in that I mean obviously I think people are getting the handle on the benefit focus store.
We tend to have very strong sales cycle in the employer business in the middle of the year, second or third quarter as employers prepare to modernize their benefit for open enrollment season which tends to happen in late third quarter, fourth quarter of the year for a January effective date of their benefits.
So, the idea that second quarter being particularly strong is consistent with our business and the model that we’re seeing. But we’re just – I’m just tremendously proud of our sales team and watching their efforts grow. But no anomalies on the size, if anything you’ve seen us announce several jumbo employers in there with Brookdale and Office Depot, 250,000 plus employers.
So we’re really starting to see some great penetration, early penetration in the jumbo market. I would say just top the bottom and incredibly exciting quarter for the business.
Greg Dunham – Goldman Sachs
Okay. And then quickly on the changes, promoting Andy to Chief Commercial Officer and bringing in Ray as the COO. Could you remind us what the sales or structure was previously and kind of what the different reporting lines are going to be now versus before? Because clearly from the net customer add number in the quarter, you’re not having sales issues?
Well, as you’re familiar with our story, where we see accelerating growth with these tailwinds of Affordable Care Act, moving to the cloud, for benefits administration, providing a new and elegant way to provide benefits and the defined contribution and private exchange in marketplace stores. So it’s just really a bunch of cylinders firing for our business in this exciting market opportunity.
My commitment as CEO of the company and one of the founders, is the continue to put the people in place and make the decisions to allow the company to grow and express itself and be a really fantastic company, from the culture, best places to work which we’re so proud of being elected again.
And as we think about strategically, of course we’re thinking about the scale right, we’ve got to deliver for all these customers, we’ve got a rapid software lease cadence with the software lease every 90 days, four times a year
And one of the key things that happened with the public offering and the visibility of our companies were really attracting some incredible talent in the sales organization and in the operations, implementation organization.
So with – and with Andy, and he’s been with me seven, eight years. He’s run the organization, run the operations, he’s very intimate with the customers, understands our partners and our ecosystem dynamic. And he’s the close trusted friend.
So, as we looked at the sales organization historically we have an employer sales team and carrier sales team, and operations and channel organization and a marketing team and then our ecosystem.
Andy is going to take that whole Group-on, that group has expanded significantly in the last three or four years. And they’re adding great talent in there. So who will have that whole organization, it will give a clear leadership, trusted leadership and a very familiar leadership to all of our customers and partners and Andy has my incredible trust.
With Ray August, Ray in an accomplished operator, he’s run multi-billion businesses before with over 10,000 employees, global footprint. He’s had some extremely large customers and tremendous references. And just – he’s just an all-around great person. He’s going to join the team and take that operational role on with the mandate to scale the business to keep our 95% plus customer retention rate high and make sure that our customers are getting our brand of anticipatory service while we continue to deliver on the technology the roadmap.
And this really, frees me up to focus the bulk of my time on our product roadmap and our product pipeline. We have a huge product pipeline, some exciting ideas of how we can improve the benefit’s experience using this analytics and big data that we have Benefit informatics, our mobile technologies are really surging, our marketplace and administration is really functioning.
And so, I’m excited to be able to work with Don Taylor, Chief Technology Officer even more with this new structure. So I think it’s’ just fantastic shell of existing management as well as the kind of count that we’re attracting to the company.
Greg Dunham – Goldman Sachs
Okay, perfect. On last one, real quick one for Milt. Historically you’ve generated working capital has been a tailwind to cash flow from operations roughly 18% to mid-to-high teens over the last three years. Is there any reason to think that that tailwind is any different in ‘14, ‘15, going forward?
Thanks Greg. I mean, I don’t think so. I mean, I think that we’re still, we are making investments as you know, okay. And I think that you can with the investments that we’ve made and have talked about since late last year and the beginning of this year, the beginning of the tail opening $70 new license for our customers in second quarter is quite an accomplishment.
I still think we’re going to – we’ve continuing to make investments in the area we’ve talked about. And we have also made investments in areas now we were being able to making investment. So we need to support the growth of the customer base as well as our ability to service that growing customer base and the implementations around them.
Also I think when you look at the growth in deferred revenue, I think our deferred revenues now at the end of the second quarter are almost approaching $90 million and I think that’s another indication of what you’re seeing in working capital change as well.
Greg Dunham – Goldman Sachs
Great. Thanks guys.
Your next question comes from the line of Nandan Amladi with Deutsche Bank.
Nandan Amladi – Deutsche Bank
Hi, good afternoon. Thanks for taking my questions, first question for you Shawn 70 new employer, customers very impressive. You’re also building out in parallel to your system integration certification program. What are your expectations for the share of budgets that might be able to complete for you looking out a year ago, because if you keep adding employers on this space without the capacity to deliver, that may show up in the revenue line perhaps like growing at the same pace as customer ads?
Yes, a great question. It taps on a couple of things that we’ve been really investing in. First of all, this idea, the benefit focus university of formal way to train and certify third parties to be able to implement the benefit focus platform, we think that’s kind of a coming of age for our company and our platform.
And we were really excited to announce on the last call, Accenture and Deloitte were the two lead ones, Rock, Aasonn and HRrchitect being that are three rounding that out. That’s all going extremely well. The university is functioning, the training curriculum is being prepared and we have our first group of folks go into that process.
We expect the first certified implementers to come out the other end of that pipe by the end of the year. As we talked about, this is an investment year for us on the system integrator program. And so, as we do that we’ll be providing implementation service with benefit focus resource in 2014, we expect it to be really our benefit focus resource.
However the third parties are beginning to shadow, some of our really key projects and there is a lot of them as you can see. And so they’re coming up to speed, they’re learning.
And what really led to the whole concept of doing this was just an observation that we wanted to make sure we scaled. But I heard personally from some of our larger employer customers and carriers that they have these system integrators already in their building, they might be working on an SAP or an oracle or another type of project. And they like their existing consultants to know more about our technology so they could do some of the product – project management.
I think this is just a natural fit, the customers really enjoy it. And I believe that customers themselves will really shape and drive if you will the percentage mix between Benefitfocus resource and third party resource. But I don’t have an estimate for you as far as the target on split. I just know that people log our implementation and our implementation teams and we’re hearing extremely good things from the SIs that we’re working with.
That said, we’re making the executive management team additions and organizational structure with Andy taking over as Chief Commercial Officer and Ray August coming in. Ray has got great experience in scaling, implementations, running big data centers, big technology projects.
I don’t think we announced in the press release but he was the CTO, Great Plains software back in the 90s, and so he’s just got great technical experience but also customer delivery. And his clear mandate is to just onboard the staff. Use the benefit focus university training and certification for on-folks. And I think we’ve got a really good plan to scale both of those groups.
Nandan Amladi – Deutsche Bank
And a quick follow-up, at the beginning of the year, you raised your OpEx profile to invest more in R&D and sales and marketing to take advantage in the exchange opportunity. How are you tracking half way perhaps at the point of the year? And has there been any meaningful change in either of the competitive environment or regulatory environment that would require you to change course somewhat?
Yes, great question. I think we’re really on track. We outlined three areas of investment, one is sales and marketing and in that we’re just retracting I think world-class sales team and really incredible management. And also our accounted reps are around the country. So we’re very happy with the performance in our scaling there.
The second piece was around private exchange marketplace technology, that’s really the bigger R&D item that we talked about. As you can see, just from the performance of the company, we’re having a lot of success in that area. And we’re seeing our partners really begin to surge with the success they’re having with the private exchanges and the marketplaces they’re deploying on the Benefitfocus platform.
Our product Cadence in that area is right on track I would say, and we had a big release each quarter, so our second quarter software release was delivered on time and our third quarter release is coming up in our fourth quarter, so it has a tremendous amount of really awesome front-end marketplace consumer technology but also the administrative strength and building capabilities that you need on the back and support the marketplace.
And on the regulatory front, we don’t see anything new changing the dynamic of the product or the sales cycle. On the competitive front, I think it continues to be the same themes that we talked about consistently for I guess coming up on a year now which is really, this is the cloud replacing old technology.
And an old way of doing things is the primary driver of – and just getting these tailwinds from implementation of the Affordable Care Act and moving to defined contributions. So, I would say those themes are all still intact and accelerating if anything.
Nandan Amladi – Deutsche Bank
Okay, thank you.
Your next question comes from the line of Terry Tillman with Raymond James.
Terry Tillman – Raymond James
Hi guys good afternoon. Can you all hear me okay?
We can Terry, how you’re doing.
Terry Tillman – Raymond James
I’m doing well. Earning season are going on but I’m making it.
Oh hang in there.
Terry Tillman – Raymond James
I guess, thank you. I guess the first question Shawn, just for like to very intriguing to hear about a couple of these Jumbo employer wins. I’d like some educational lease for myself in terms of – does that sound to be more like a carrier sales cycle or is it like the large employer sales cycle, not much difference there. And who do you compete against, is it more like ERP providers there?
Yes, good question. actually I think the cycle is probably a little bit in between, I mean the jumbo accounts have more moving parts, they might be doing acquisitions or the bigger dynamic stuff have international workforce. So they have a lot to consider. They also have the staff to do it, so they have people that maybe specialize full-time in the aspects that we deal around benefits enrollment administration and what not.
It’s not a lot slower than the – which we consider to be our typical employer Cadence so, they’re not double as long or take next year or like that. What we’re really finding is as the public offering raise the awareness of benefit focus and what people know about our company and our momentum, we’re getting into these conversations more and more with all size employers, particularly the Jumbo market.
And they tend to have multi-year engagements maybe with an outsourcing firm or big ERP deployments. And so if anything, we’re just now getting into the natural cycle of them learning about the company and them planning whether it’s this year or next year, the year after to move. They have the same pressure and some cases even more pressure with some of the dynamics of the Affordable Care Act.
So I think they’re probably moving faster than maybe they would have five years ago, just moving to the cloud. So it’s fun to see our sales team learn that market, have those introductions have those conversations.
And because we’re in the carrier market and our customers are huge, I mean, they are enormous corporations, the deals are very complex they’re very long term. Our sales team gets the benefit of the company understanding how to make those sales, how to talk about scale of our cloud, and our infrastructure and the size of our engineering team and all those themes that work well for our carrier strength tend to really show extremely well when you get to the jumbo markets, I think that’s one platform seen in both markets is working well.
Terry Tillman – Raymond James
And on the jumbo employer side, I mean, I’m assuming you haven’t been at going after the jumbo employers for that long maybe it’s a nearer kind of carve out sales force that folks can start to become complacent and they expect more of the same every quarter.
With a couple of large jumbo deals in the second quarter I mean, is this still an immature part of the business so we shouldn’t become complacent and I assume you’re going to find out many or even ramp the number of jumbo employer deals per quarter over the near to intermediate term?
Yes, it’s certainly not a, in any, in no way is it a major strategy shift or anything like that. I’ve always felt like it was just a natural process, these larger accounts like I said have – they are big installations of some legacy platform and contract.
And in dealings with the jumbo market they are extremely excited about seeing the Benefitfocus platform, understanding the communication of capability, being able to use media and videos to explain complex concepts across tens of thousands of employees so they are like extremely excited about the promise of the cloud. They’re using it in other areas and Benefitfocus clearly emerges as a leader.
I think that like the carrier business though, each quarter probably barriers a little bit more just because the timing of these things is more dependent on their cycle, whereas when you have, I think it’s a wonderful design to also have this really fantastic flywheel what you would consider to be more medium size, 5,000 employees, 8,000 to 10,000 employees, 10,000 to 12,000 employees those are starting to become some pretty big companies.
And the fact that our software can handle the largest of the large and also the medium size is really a unique differentiator. So it gives us the luxury of work on that jumbo market long-term and think extremely long-term about those engagements.
Terry Tillman – Raymond James
Okay, got it. And I guess, Milt, just a quick question for you. In terms of, have you thought about, I guess you and Shawn, have you thought about kind of philosophically what’s the right cash balance and what’s the minimum cash balance do you think the business could operate assuming that your carriers and large employers will want to know about financial health.
And is there any kind of level around cash balance where you see as a minimum? And then anything you could say where my trough from a duration standpoint in terms of the cash burn? Thank you.
I think with regards to cash balances, I don’t have a minimum balance in mind. I mean, I think we ended the quarter with over $71 million in cash. Remember that we are able to generate cash through a lot of upfront payments that we get from some of our largest customers relative to implementations that we’re doing for them in those projects. I think we’ve done a good job of collecting cash balances and so forth and generating cash through normal operations to help fund the business.
We’re investing, I mean, that’s obviously no surprise we’ve talked about that a lot. We’re going to continue to invest. But as we talked about in the last call, I mean, we understand how to run the business, we went public in order to raise the necessary capital to make the investments that we’re making today.
And I think as we look out into 2015 and look at what we’ve had to do there, we certainly are monitoring our cash and understanding where we need to be, there is not a minimum balance that we can achieve where something automatically then changes. I mean, we’re going to run the business on a day-to-day basis and do what we need to do to generate the cash flow we need to make the investments that we have to make.
Terry Tillman – Raymond James
All right, great guys, thanks.
Your next question comes from the line of Richard Davis with Canaccord.
Hi, thanks guys, it’s actually (inaudible) on for Richard. So, maybe Shawn first, kind of on a same store sales front, the office people for example, it was interesting, help me think about or try and quantify kind of if a customer were to move from kind of only using a benefits communication portal to full benefits shopping and administration platform, what does that do to perm play per month pricing, I mean, is that double or triple, how should we think about something like that?
Yes, good question, I appreciate that. And I think it kind of goes along with theme that we’ve been sharing here on a couple of these questions. Any or larger enterprises, any kind of company whether it’s an employer in our binocular or insurance carrier, we’re finding ways to make them a customer, creative ways because they desire the benefit focus technology.
And as we’ve learned through our user experience in the very large insurance carrier business we can actually land and get the customer on with one of our products maybe in one of their market segments and then we have a very good track record of expanding, adding more products.
In this case, what we’re finding in a jumbo employer market is employers that might be already down the path of starting up enrollment maybe the old way, the old fashioned way with some internet or some home build systems or some – to outsourcing contract. And they want to modernize.
And so, in this particular case, we’ve been able to find a way to take the benefit of this communication platform the way you login, the way you see all the content and weave it into an agreement with the Jumbo account. This gives us great flexibility in the future to begin to use other things, whether it’s our Benefits Informatics data analytics service or full-enrollment capability, possibly private exchange or volunteer benefit capabilities in the future.
So, I think it really is following a pattern of our carrier business. As far as dialing in on a PEPM or how the contracts work, we don’t go specifically there on a customer basis but I would just more point to the fact that it is a pattern that we have developed over the years to be able to get in and make someone a really happy customer and meet them sort of on their terms and then expand as we go forward.
Okay. And then maybe on the competitive front, is that way to access required, Conexus last week, I don’t know much about their businesses, it seemed, it looks like a little bit more serious in terms. Did you guys see them, does that change your competitive landscape at all if they kind of move a little bit more towards what you guys are doing, any color on that front I guess would be helpful?
Yes, that’s us as a competitor. I don’t know that we’ve competed with Conexus in the past, we didn’t observe that as anything other than them patting complimentary services to what they do. Wager works is great partner of ours and they have a lot of joint customers. And so, there hadn’t been anything in the last quarter I would say certainly that there is a material change in the competitive landscape.
I just keep continue as someone is living in this environment because just be amazed at the generational shift that this cloud technology, the cloud platform is bringing. And more and more in other areas not just in Benefits but in particular our area Benefits administration.
Enterprises are learning that the efficiency of being in the cloud, of being deliver apps rapidly, partners in the data exchange network effect that we’ve got is really, it’s hard to compete with. I mean, if you’re an older company with older technology without the engineering staff, it’s not even a compare.
So, we don’t really see anything different there, if anything acceleration that moves the cloud, which is the theme you guys are seeing, I mean, we’re seeing your restructuring across the space. So it’s…
Yes that’s really great. And then maybe one last quick one, can I, I think in your prepared remarks you kind of said all six of the carrier implementations are going one. Maybe you could speak specifically United I know that’s obviously a big one. Just kind of what’s going on there where we are in the implementation process and then remind us kind of when we should expect any revenue contribution from that relationship?
Sure, sure. Our, really the beautiful thing I think about the carrier business is we’ve really become so expert at it. I mean, they all have a nuance, they’ll have a flavor they’ll have a sort of a strategy from the customer.
The care implementations tend to take 9-12 months, in this case we’re talking about a customer that we picked up in the first quarter. And we planned to deal with them by the end of the year and we feel like we’re on track with that. It was it from the way our accounting works and our revenue works, that will be kind of a fourth quarter or first quarter beginning of the monthly recurring revenue and then maybe deferred revenue that went into the balance sheet begins to come on to the P&L commensurate with those monthly fees.
So, you’ll see that and the other big carriers that we announced at the end of last year, in the first part of this year, those six carriers, they’re all kind of fourth quarter just the beginning and then they’ve built into 2015 and 2016. And the larger the insurance – the larger the carrier, the longer that build takes just because it’s a big business for them to move. But we feel like we’re on track with each of those implementations and it’s exciting to see them all come through.
Got it. Okay, that’s great. Thanks guys.
Your next question comes from the line of Sean Wieland with Piper Jaffray.
Sean Wieland – Piper Jaffray
Hi, thank you. So, Forever21, interesting that they’re doing this for part-time employees, is there a price differential for the part-time employees and what’s the prospect of expanding your platform into other part-time workers within the existing space?
Sure, thanks Sean. Yes, it’s really exciting, I mean, at our one place event, we introduced this concept of the benefits for the whole workforce and we expanded the benefit focus marketplace technology to really have some powerful new capabilities for part-time what we would refer to as variable, flexible people that move kind of back and forth between part-time and full-time.
And with the new rules and regulations with the Affordable Care Act, it’s incumbent upon the implored and which bucket they ran and keep up with all that and then the retirees as well.
So, the adoption of that strategy or framework, a way of thinking about the technology to serve those folks is a great case study in the Forever21 example. And we think we’ll see a lot more of that.
We are thinking in terms of our ability to show qualified health plans or even government subsidized plans to these individuals who aren’t covered by their employer, not necessarily with Forever21 but just in general. And we think that that’s a way to monetize that through some partnerships and we announced a web-based entity status at the end of last year.
So there is, we’re putting the pieces together to really interact with these part-time and flex workers and provide them a product. And I think the way we might monetize that in the future is possibly participating, the revenue share and what not. So at this particular time, we’re in the early stages of designing that economic model working with partners and what not. I think with the Forever21 example shows this is the appetite of our customers is there to use the platform for all of their entire workforce or their whole workforce.
So it is an early stage of putting those pieces together and we’re beginning to see customers come through and adopt that technology. I think over time we’ll work on ways to articulate to you guys how those part-timers might a little bit different than the traditional full-time eligible but right now it’s just – probably a couple of quarters away from really flushing that out for you.
Sean Wieland – Piper Jaffray
Okay. My second question is, how do you think about expanding the scope of marketplace to become a true health engagement platform going beyond benefits so integrating price transparency or health monitoring solutions?
Well, it’s a passion of mind I mean, the founding idea of Benefitfocus was to provide a better way for an individual and their family to understand their benefits but then also to apply them so when you need them, how do you use them, and so you throw all your benefits in your pocket for example on a mobile app.
We want you to be able to pull your phone out and you can’t on the Benefitfocus platform to see all your benefits and your policy information you can see what you bought, what you declined, you can affect change in a growing set of circumstances.
With our benefit informatics service, our data analytics or big data capability we are bringing in claims, drug, lab and even self-reported data for those customers that are using that service. That’s a foundational tool that really begins to teach the individual how they’re utilizing this services.
And then, I think overtime I really see that app partnership are ecosystem other great companies that are working on all sorts of innovation around health and wellness and indemnification and transparency.
I think bringing them in through a partnership arrangement to unlock their capabilities, well, I know it is a key part of our strategy so that we can stay focused on really providing the underpinning of the foundation of the platform itself that development environment and doing the scale of work that we’re doing in our core business over time as we certainly have a pipeline of additional things that we’d like to develop.
But I really there is a kind of pent-up demand of app partners that want to integrate with the platform in that particular area, it’s very exciting.
Sean Wieland – Piper Jaffray
That’s great. Thanks so much.
Yes, thank you.
Thank you. That concludes the Q&A session for today’s call. I’d like to turn it back over to Milt Alpern for any closing remarks.
Okay, well thanks everyone. It was pleasure talking to you for our second quarter call. We look forward to talking to you again at the end of our third quarter. And we will see you then.
Again, thank you for your participation. This concludes today’s call. You may now disconnect.
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