Castlight Health (CSLT) Giovanni M. Colella on Q4 2015 Results - Earnings Call Transcript

| About: Castlight Health, (CSLT)

Castlight Health, Inc. (NYSE:CSLT)

Q4 2015 Earnings Call

February 17, 2016 5:00 pm ET

Executives

Charles Butler - Vice President, Investor Relations

Giovanni M. Colella - Co-Founder & Chief Executive Officer

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

Siobhan Nolan Mangini - Vice President-Finance & Business Operations

Nita Sommers - Chief Strategy Officer

Analysts

Adam C. Borg - Stifel, Nicolaus & Co., Inc.

Brian C. Peterson - Raymond James & Associates, Inc.

Robert Patrick Jones - Goldman Sachs & Co.

Stephen B. Lynch - Wells Fargo Securities LLC

Steven Wardell - Leerink Partners LLC

Steven P. Halper - FBR Capital Markets & Co.

Zachary W. Sopcak - Morgan Stanley & Co. LLC

Frank Sparacino - First Analysis Securities Corp.

Gene Mannheimer - Topeka Capital Markets

Richard Close - Canaccord Genuity Group, Inc.

Operator

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Castlight Health Fourth Quarter and Fiscal 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session.

I will now turn the call over to Charles Butler, VP of IR at Castlight Health. You may begin your conference.

Charles Butler - Vice President, Investor Relations

Good afternoon and welcome to Castlight's conference call to discuss our financial results for the fourth quarter and full year ended December 31, 2015. With me on today's call are Giovanni Colella, our Co-Founder and CEO; John Doyle, our COO and CFO. Following their prepared remarks, we will take questions along with Nita Sommers, our Chief Strategy Officer; and Siobhan Nolan Mangini, our VP of Finance.

Our press release was issued after the close of market today and is posted on our website, where this call has been simultaneously webcast. We are also providing a PowerPoint presentation that accompanies this call. You may access it on our website where it will also be posted after this call for 30 days.

This presentation contains forward-looking statements regarding our trends, our strategies and the anticipated performance of our business, including our guidance for the first quarter and full year of 2016. These statements are made as of today and reflect management's current views and expectations and are subject to various risks, uncertainties and assumptions. If this call is replayed or viewed after today, the information of the presentation may no longer be current or accurate. We disclaim any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but we will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum.

Please refer to the press release and the Risk Factors included in the company's filings with the Securities and Exchange Commission for a discussion of important factors that may cause actual events or results to differ materially from those contained in our forward-looking statements.

This presentation also includes certain non-GAAP metrics, such as non-GAAP gross margin, operating expenses, net loss and net loss per share that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics on a historical basis can be found in the earnings release dated February 17, 2016, which is available on our website and as an exhibit to the Form 8-K filed with the SEC just before this call.

Giovanni M. Colella - Co-Founder & Chief Executive Officer

Good afternoon. Thanks, Charles, and thank you all for joining us today to review our fourth quarter and full year 2015 results. As we discussed on our last call, we did not achieve our growth objective for the year, but we did make an important progress on several key initiatives that we believe provide a solid foundation to drive long-term growth.

Before I dive into the details of these initiatives, I thought I would take a moment to reflect on the opportunity that lies ahead of us. First of all, I remain very excited about the market opportunities for Castlight. Employers across the county continue to see health benefits spend as an enormous problem. Enterprises are now spending over $650 billion a year on healthcare with 30% of it considered waste.

Moreover, 70% of employees do not understand their health benefits and continue to struggle with making effective decisions. As a result, employer-sponsored benefit programs are massively underutilized. All of these issues continue to make it challenging for employers to decrease cost, improve health and drive benefit satisfaction.

Now, given these drivers, the opportunity for Castlight remains as robust as ever. Our product offering has evolved from a best-in-class transparency product to a health benefit platform that provides a comprehensive solution to a multitude of healthcare problems for both employers and employees. We provide a simple, personalized and powerful platform for employees to shop for and manage their healthcare. At the same time, we enable our employers to understand their employees' needs and guide them to the right care, the right providers and the right programs at the right time.

The growth and the success of our business in the long term is a function of the value we deliver to our customers and their employees, and we believe we are delivering more value than ever before. In fact, we believe that Castlight health benefits platform should be central to every self-insured employer's benefit strategy.

With that said, let me now turn to specific progress in Q4 and 2015 overall. During Q4, we were pleased to see further sales of our newest products, Castlight Action and Castlight Elevate. And we have now successfully completed our initial customer launches of both products.

As we have described before, Action uses its predictive analytics to segment and target particular sub-populations of employees to engage them selectively and encourage them to take actions that are cost efficient and beneficial to the enterprise and to the employee. This kind of engagement is exactly what benefit leaders need to make their benefit strategy successful. Our initial implementations have gone very well with results that reinforce our belief that Action is a must have capability for all employers looking to engage employees more actively to help them get the most from their benefits.

Building and launching new products was a strategic priority in 2015. As our product portfolio and customer base have grown, our opportunity to cross-sell new products had been increasing as well. In 2015 we successfully completed our largest renewal cohort. This included not only renewing all of our largest customers up for renewal, but also selling additional products to many of our renewing customers.

This success was reflected in net dollar retention of 116% in 2015, which we see as an excellent indicator of customer satisfaction with and commitment to our technology-based approach to health benefits management. While we are pleased with our progress cross-selling new solution to existing customers in 2015, we are committed to striking a healthier balance between growing the new logo count and our relationships with existing customers in 2016.

During Q4 2015, we continued to have success adding large new customers, such as Wells Fargo, Bank of New York, and Chrysler. But overall we saw a net decrease in customer count in the quarter. John will provide more details on this, but the bottom line is that we remain very focused on concrete steps to drive better sales velocity.

A critical component of increasing sales to new customers in 2016 is improving our reach and execution with channel partners. The collaboration we've announced with Anthem on our last call is off to a strong start. And the coordination between our two teams has been excellent.

In fact, our work together contributed to several customer wins in the fourth quarter, including the Wells Fargo win I just mentioned. To build on this momentum we've established an alliance team that is focused on making us a great partner for influencers in the ecosystem, including benefit consultants, brokers, health plans, and other benefit technology companies.

This team's work is already showing results. For example, we were recently selected as a vendor of choice by one of the leading benefit consultants in the country. We look forward to working more closely with other partners to bring value to our mutual customers in the future.

Finally, another important milestone for Castlight in 2015 was establishing processes to allow support of all employers, regardless of which major health plan administers their employees' healthcare coverage. This breakthrough made possible the launch of new Castlight customers who have UnitedHealthcare as a carrier beginning in Q4 2015.

In summary Castlight made solid progress on many fronts in 2015. We believe that we have significantly expanded our value proposition for customers and have taken a number of important steps on our journey to change healthcare.

Now I will turn the call over to John to review our results from 2015 and our outlook for 2016 in more detail.

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

Thanks, Gio, and good afternoon, everyone. The financial metric that we focus on most closely as the measure of our progress growing the business is ARR, or annual recurring revenue under contract. ARR is important to us, because it is the subscription amount our customers have agreed to pay Castlight on an annual basis for our products.

At the end of 2015 ARR totaled $110 million, compared with $78 million at the end of the prior year, representing 41% growth. ARR growth was driven by success on renewals and new product uptake, which drove net dollar retention to a record of 116%, versus our target of 100% NDR.

As a reminder our net dollar retention metric is net of annual churn and measures the growth in ARR under contract with the cohort of customers that we have signed prior to the beginning of the year. In addition to strong retention of our largest customers, our NDR metric is driven by customer expansion. On this point, 29% of our customers have purchased three or more Castlight products by the end of 2015 compared with 17% at the end of the previous year.

Overall, we are pleased with our strong NDR performance as we believe it reflects the value we are delivering and our customers' confidence in Castlight to help them get the most out of their health benefits investments.

In addition to cross-sales to existing customers, the other component of ARR growth is of course sales to new customers. During 2015, sales to new customers were below our plan as we have discussed previously. We took a number of steps in 2015 to improve the productivity of our sales organization. We've seen growth in our pipeline and believe that we have a higher quality pipeline than in the past, but considering the length and seasonality of our sales cycles, we think it will take several quarters for the benefits of our efforts to begin driving the trend in ARR. In addition to ARR, customer counts, total deferred revenue, and backlog also provide context to understand the business.

As Gio mentioned, we continued to add top-notch organizations as customers in Q4, and this was reflected in Q4 ARR growth. However, because most of our customer churn occurs toward the end of the calendar year, we had a net decrease in customer count during Q4, ending the year with 191 signed customers, up from 168 signed customers at the end of 2014.

It is important to point out that the customers we added during the quarter will generate a much higher level of ARR as compared with the customers that we lost during the quarter. As was the case in 2014, the customers that churned in Q4 were approximately half of our typical deal size whereas the customers that we added during the fourth quarter were significantly larger than our historical average. This contributed to over 45% growth in our net new ARR during the fourth quarter, $7 million versus $4.8 million in the previous year.

Total deferred revenue and backlog was $253 million at the end of 2015 compared with $190 million at the end of 2014 or a 33% increase. The weighted average remaining term of the contractual backlog was 31 months at December 31, 2015, an increase compared to 29 months at the end of 2014. Both ARR and the numbers I just shared for backlog relate to future billings and revenue that Castlight can generate by bringing customers live on the products and services that they have agreed to purchase from us.

Specifically, in previous years, it has taken, on average, between three quarters and five quarters for us to reach the annualized subscription revenue run rate that is indicated by our ARR under contract in a given period. The key factors that impact this timeline are the time it takes to launch customers on the Castlight platform as well as customer churn. Launch timelines are the most important lever we have for converting bookings into billings and recognize revenue.

During 2015, we invested significant resources in people, processes and technology to lower implementation costs and improve timeline even as we were also launching new products. These investments led to a flat trend in overall gross margins in 2015, but our efforts led to durable improvements. Already, we are seeing launches of Castlight Pharmacy taking an average of eight months to nine months for new customers compared with more than a year previously.

Importantly, our newest products have been built to incorporate lessons from past product launches as well. However, at our current scale, quarter-to-quarter top line results are still highly sensitive to launch timelines associated with large customers, and we have seen these deployments can sometimes shift for reasons beyond our control. As we look ahead to 2016, we expect to move into production with several large customers already under contract during the second half of the year. Based on the timing of these launches, we expect to see stronger year-over-year revenue growth in the second half of 2016 relative to the first half of the year.

Now, let's turn to our fourth quarter and full year financials. Total revenue for the fourth quarter was $21.3 million, which was up 9% from the third quarter of 2015 and 47% compared to the same period in 2014. Subscription revenue represented 94% of total revenue in Q4 of 2015 compared with 92% in Q4 of 2014. The increase in Q4 revenue was driven primarily by completed implementations which included eight new customer launches and completion of 25 cross-sell product implementations.

Full-year 2015 revenues were $75.3 million, which is a 65% increase compared to 2014. Gross margin was 59% in the fourth quarter which was flat compared to the third quarter due to the ongoing infrastructure investments I spoke about a moment ago. This infrastructure work will continue into the first quarter of 2016. However, we expect to continue our longer term trend of expanding gross margins over the course of the year.

Sales and marketing expenses were $14.8 million in Q4, which did not significantly change compared to Q3 2015. For the year, sales and marketing expenses were $59.7 million, which represented a 12% increase over 2014. We expect to hold sales and marketing expenses flat in 2016 relative to last year.

R&D expense was $7.7 million in Q4, which was flat sequentially. R&D expenses for the full year 2015 were $28.8 million, which was an increase of 40% year-over-year, reflecting our significant investment in product innovation. R&D is the one operating expense we expect to grow on a year-over-year basis in 2016 while we maintain spending in sales and marketing and G&A at 2015 levels.

Consistent with these plans for 2016, G&A expenses of $4.9 million in Q4 declined 4% compared to the prior quarter. For the year, G&A expenses were $20.1 million, which was an increase of 37% year-over-year, driven by investments in infrastructure needed to scale the company.

Our Q4 net loss was $14.8 million (sic) [$14.9 million] (17:13) compared to a net loss of $15.9 million in the third quarter. For the full year 2015, our net loss was $64.2 million. We ended Q4 2015 with $133.8 million in cash, marketable securities and investments. Cash used in operations was $12 million in the fourth quarter of 2015 compared with $14.5 million in the previous quarter and $11.5 million in the same period in 2014.

Turning now to 2016 guidance. For the full year 2016, we are targeting total revenue of $99 million to $102 million, representing growth of 31% to 35% versus 2015. We expect our year-over-year revenue growth rate to be lower in the first half of the year than in the second half. We further expect Q2 to represent the low point with year-over-year growth projected in the mid-20%. We expect stronger growth in the second half of the year as we move into production with some of the large customer deployments that I referenced earlier. For the first quarter of 2016, we project total revenue of $22 million to $22.3 million.

For the full year 2016, we are projecting a non-GAAP operating loss in the range of $47 million to $50 million and a non-GAAP net loss per share in the range of $0.47 to $0.51 based on 98 million to 99 million weighted average basic and diluted shares outstanding. For the first quarter of 2016, we are targeting a non-GAAP operating loss in the range of $14.7 million to $15.7 million and a non-GAAP net loss per share of $0.15 to $0.16 based on 96 million weighted average basic and diluted shares outstanding.

We expect cash used in operations to be in the low-$40 million range for the full year of 2016. We expect the seasonality of our business combined with the timing of the deployments to lead the higher cash burn in the first half of the year than in the second.

Before opening the call to questions, let me finish with the key priorities we are focused on in 2016. The first is improving our sales results, especially the amount of ARR growth that we generate from new customer relationships. The second is to continue innovating health benefits platform to deliver strong differentiated value to our customers and end users. And finally, we are committed to driving the business to cash flow breakeven in early 2017. Ultimately, Castlight empowers people to make the best choices for their health and helps companies make the most of their health benefits.

We believe through a relentless focus on this mission and driving better execution, we will drive enduring value for our customers and users and great success for Castlight.

Thank you and we'd be happy to take your questions.

Question-and-Answer Session

Operator

And your first question is from Adam Borg from Stifel. Your line is open.

Adam C. Borg - Stifel, Nicolaus & Co., Inc.

Great. Thanks so much for taking our questions. John, last quarter you talked about mid-30%s revenue growth and 95% visibility into that number. The low end of the range is calling for about 31%. How much of this is really a function of the churn you talked about versus potentially some of the implementation timelines outside of your control?

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

Hi, Adam. Thanks for the question. Yeah. You're right. And as we said when we provided the forward view after the end of the third quarter, the variables are the ones that you mentioned, the variables that impact revenue growth, given our visibility, our churn and implementation timelines.

And as we referenced in the script, we did see some large customer implementations move out a bit. And that's impacted the guidance somewhat.

But I think more importantly the revenue growth, because it's a function of those implementation timelines, is less the issue right now than progression of ARR and ARR growth over the course of the year. And so what we're very focused on as we also talked about is driving new logo velocity and the build in that ARR number. And revenue growth takes care of itself as we get these customers launched.

Adam C. Borg - Stifel, Nicolaus & Co., Inc.

Got it. Great. And maybe just one follow-up for Gio. Just given the macro backdrop, what are you hearing in your conversations with customers, be it the heads of HR or the C-suite? Thanks so much.

Giovanni M. Colella - Co-Founder & Chief Executive Officer

Yeah. Thank you. This is Gio. Great question. So first of all, as we've said at the beginning of the call, the macro trends for Castlight continue. There's the same tailwind that we had when we started the company, if anything even stronger, because the cost of healthcare is escalating.

I talk to customers pretty much every day now. And the quality of the conversation has improved quite a bit. And there's more and more focus on how a platform like ours will help lower overall cost of healthcare, less focus on just the transparency piece and much better understanding of the broader suite of products that we bring.

Adam C. Borg - Stifel, Nicolaus & Co., Inc.

Got it. Thanks again.

Operator

Your next question comes from Brian Peterson from Raymond James.

Brian C. Peterson - Raymond James & Associates, Inc.

Hi. Thanks for taking the question. Just want to clarify on some of the implementation timelines that you guys referenced. Is that specifically related to new customers? Or is that related to additional products from existing customers? And any color you can give on what's driving that. Is it potentially because of open enrollment season? Any macro concerns? Just trying to understand that development.

Siobhan Nolan Mangini - Vice President-Finance & Business Operations

Sure, Brian. This is Siobhan. And what it's really related to is that we had several large cross-sells of our newest products, Action and Elevate, that we are expected to deploy in the second half of the year. And this is just the initial cohort of customers that we'll be launching on these products in implementation work as well as working with the customer to get them up and launched on Action and Elevate.

The good news is that when we launch this initial cohort of customers, these products have been built to scale. We anticipate that the timelines for Action in particular will be moving to our portfolio average and Elevate shortly thereafter. So that the end of 2016 we're going to have on average implementation timelines across all of our products of around six months.

Brian C. Peterson - Raymond James & Associates, Inc.

Got it. Okay. Understood. And just on the competitive environment, any update there? Anything that you guys are seeing from carriers or potential regional competitors?

Giovanni M. Colella - Co-Founder & Chief Executive Officer

Yeah. Thank you. This is Gio. And as I said, we're seeing the macro trends still completely in our favor. The transparency competition has pretty much remained the same. What we really noticed is with the conversation becoming more and more about platform and overall cost control, no one can compete with the health benefit platforms that we have, the data, the breadth of products that we're offering today. So really a positive change in the conversation about what we can offer.

Brian C. Peterson - Raymond James & Associates, Inc.

Okay. Great. Thank you.

Giovanni M. Colella - Co-Founder & Chief Executive Officer

Thank you.

Operator

Your next question comes from Robert Jones from Goldman Sachs.

Robert Patrick Jones - Goldman Sachs & Co.

Thanks for the questions. Yeah. I just wanted to go back to the commentary around net adds in the quarter. It sounds like net adds was negative, I think, four. But at the same time you mentioned new customer additions like a Wells Fargo.

So I guess could you maybe just isolate what was the number of customer losses, the churn in the quarter? And then I think more importantly any commonalities or themes that you could trace across the rationale for those customers deciding not to renew?

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

Bob, it's John. Thanks for your question. As we saw in 2014, again churn is concentrated in the fourth quarter. And of course we don't like to lose customers. And we take each one of those experiences seriously.

But the dynamic itself in terms of magnitude and nature really isn't an anomaly. What the issue is is signing new logos. And it's important certainly to note that we've been very successful and were successful in the fourth quarter signing great new customers like Wells Fargo, Bank of New York, and Chrysler. These are critical wins and an indication – I think a strong indication that the value prop really resonates with these big customers.

The issue for us is simply velocity and the ability to close these sales cycles more quickly. And we did a number of things in 2015 to get better on that front. And we've talked about them. But just for benefit of folks on the call, the Anthem relationship and more broadly the work we've done on channels I think is critical. Having both new products launched and now getting implemented for customers is critical.

We've got the sales force heading into 2016 before we ramp, which is also super-beneficial from a sales velocity perspective. I think the reality is that these initiatives take some time to play out. And so while we all are working diligently to get those initiatives humming and they're off to a good start, I really think it's going to be later in the year when we see these things driving the new logo trend and so that's what we're totally focused on.

Robert Patrick Jones - Goldman Sachs & Co.

Okay. That kind of relates just to the follow-up. It sounds like, Gio, if I heard you correctly that there's certainly going to be maybe a more balanced approach to both growth from new logos, but also a focus on really expanding current relationships. You're clearly in a much better place with the sales force at this point in the year relative to where you were a year ago. Any perspective you could share on how we should think about the new customer adds or how you're thinking about new customer adds in 2016 relative to what you've maybe achieved in prior years, just so everybody's expectations are aligned?

Giovanni M. Colella - Co-Founder & Chief Executive Officer

Yeah. Well, thank you very much for the question. So the reality here is it took us longer than we expected to ramp our sales force last year. We are, as you said, in a much better position and laser focused – laser focused on both sides of the equation. Current customers, literally I'm in front of them every day – every day. I mean I'm leaving tonight to go to a current customer now and expanding on our portfolio of products and good pipeline. So the key focus for us in 2016 boils down to one thing – execution. We have to execute.

Operator

And your next question is from the line of Stephen Lynch from Wells Fargo.

Stephen B. Lynch - Wells Fargo Securities LLC

Hey guys. Thanks for taking the questions. I was wondering could you possibly give us a number of implemented clients at the end of Q4. I know you said there were eight new client installs, but if you could maybe give us ending net number on the implemented clients there, that would be great.

Siobhan Nolan Mangini - Vice President-Finance & Business Operations

Sure, Stephen. This is Siobhan. We landed the year at about 160 launch customers.

Stephen B. Lynch - Wells Fargo Securities LLC

Okay. Great. Thanks, Siobhan. Also, maybe along the lines of the Anthem partnership, I'm wondering if you could expound, maybe give us a little more color on how things are progressing there. I know it's early, but have you seen any early indications on how the employer pipeline, the sales pipeline could shape up there with all of the new Anthem salespeople sort of at your disposal? And then specifically in that area with the Wells Fargo deal, did an Anthem sales team actually get credit for that sale or was that more of a result of the new partnership in general?

Nita Sommers - Chief Strategy Officer

Great. That's a great question. This is Nita. I'll take this one. So we are very pleased, as Gio mentioned, about how the collaboration has gotten started. There was a lot of work on both sides of the house in Q4 to really train each of the teams mutually. A lot of meet and greets for us to get to know each other. In the near term, what we really saw in the dynamic in Q4 was the ability for the Anthem team to help accelerate our closure of deals. So, many of these deals were already in progress, but what we could see is that they could impact some of the cycle times which I think is really something we're looking for from our channel partners in the upcoming year.

Certainly, as we head into 2016, beyond just that accelerate to existing deals, there certainly is a goal around the ability for that to get us introduced into new accounts and to bring in new referrals. And so that certainly is an area of a lot of discussion around what are good accounts (30:55), where can we really place our traction together in the marketplace. And so it's something that will certainly be a big focus going forward.

Stephen B. Lynch - Wells Fargo Securities LLC

Okay. Thanks.

Operator

Your next question is from Steven Wardell from Leerink Partners.

Steven Wardell - Leerink Partners LLC

Hey, guys. Thanks for the questions. Can you tell us about the status of your sales force? Is the ramp-up completed? Is the sales force entirely trained? When did you reach that milestone? How large is your sales force that you will be growing in 2016?

Giovanni M. Colella - Co-Founder & Chief Executive Officer

Yeah. So, well, thank you. This is Gio. Thank you very much for the question. As we said at the beginning, it took us longer than we expected last year to ramp up the sales force. We believe we have a strong team in place now and we need to execute – we need to execute and demonstrate the results, and this will bring us to see through the – you will see this through the ARR growth which is what we're really laser focused on. That's the most important metric we're looking at.

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

Steven, I think one bit of color I would add is you asked whether the sales force would be growing in 2016. We're actually very pleased with where we are in terms of sales force size at this point. We're in a much better place in terms of proportion of fully ramped reps heading into 2016 than we were at this point last year. And as we noted on the call, we expect to hold sales and marketing investment overall flat during the course of the year.

Steven Wardell - Leerink Partners LLC

Thanks. And can you give us any color on customer churn, why customers might leave? So is it a matter of transparency being a lower priority or engagement not achieved or switching to a lower cost option or what color can you give us on why customers leave?

Giovanni M. Colella - Co-Founder & Chief Executive Officer

Yeah. Thank you. This is Gio. Let me start by putting things a little bit in perspective here, right? We expected because of the seasonality of the business in Q4 to have a higher churn, and the NDR was very strong. It's 116% above what we expected. So there's nothing in the churn that is outside of the norm. We haven't seen a clear pattern. The reasons are the usual one – acquisitions, leadership, budget. The key issue for us is the sales velocity, and we are – again, I am going to keep repeating this because we're laser focused on the execution now. That's all it takes. I mean, execution is going to be key for us.

Steven Wardell - Leerink Partners LLC

Great. Thank you.

Operator

Your next question is from Steven Halper from FBR.

Steven P. Halper - FBR Capital Markets & Co.

Hi. Just as a follow-up, recognizing that you're keeping sales and marketing expense flat in 2016, can you expand on the concept of velocity, right, in terms of sales, and what kind of tools you're providing to those salespeople in order to drive velocity, because at the end of the day, we're looking at a flat sales budget, but you still want to achieve a certain amount of new logos in 2016. So, again, understanding those tools around velocity would be really helpful.

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

Sure, Steven. It's notable to me how many Stevens we've had. It must be a record. I didn't want to let that pass without...

Giovanni M. Colella - Co-Founder & Chief Executive Officer

Not many Giovanni.

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

(34:48) we are marking on it. So good question about how we're driving velocity through the sales force, and I think it's important to acknowledge when you're a business like Castlight, building our company through relationships with very large employers, there is a limit to the amount of influence that we're going to have over the timeline of a Fortune 500 business making a very significant decision about the way they're managing healthcare in their businesses.

These are not trivial things that they're doing, and when they engage with Castlight, they're engaging with us as a long-term technology partner that's going to be helping them innovate and get much more out of their healthcare investment over a long period of time. And so, that reality means that, and maybe this is partially your point, there are limits to how much we're going to be accelerating those processes.

They historically have taken anywhere on the shortest end from six months and the longest end two years plus in some cases. One year is pretty typical. With the sales force, I think very simply put, one of the things that drives velocity is they have a fully ramped sales force that is very clear on the critical business drivers that make Castlight a critical heart of the healthcare offerings that a customer would have. And if you stretch back to the beginning of 2015, we had a significant change in the sales force. And so just the ability of a larger number of people across the country to do a great job on the value proposition with the customers we're engaging, I think, is quite important.

Another very important change is with the launches of Castlight Elevate and Action, we're solving some of the most critical problems that these customers are dealing with. In particular, engagement with the benefit programs that employers are already spending significant amounts of money on is extremely low in most cases. We're talking about single digit. That's a very urgent problem for employers, and Elevate and Action go right to the core of getting more employees engaged with benefits. And so I think our ability to explain that addition to the value proposition more broadly now that both products are fully launched is another thing that we believe will help with sales velocity.

Steven P. Halper - FBR Capital Markets & Co.

Right. And just one point of clarification on the revenue guidance for 2016, back in November you mentioned mid-30% growth and now we're at 31% to 35%. It's a nuance, I guess. But I guess churn and implementation are the two primary reasons just to have that 31% to 35% now, correct?

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

Yeah. And in particular what's really critical here just reflecting on the last few months is that we have had some large cross-sell implementations move out in time. I think the other context, just because it sounds like maybe you weren't on the line a bit earlier, is we do want to make sure folks are focused on ARR, and annual recurring revenue and the growth in that metric, which we believe obviously is the best way to get a bead on the long-term trajectory of the annuity we're building in the business. But you're absolutely right about the drivers on revenue guidance.

Steven P. Halper - FBR Capital Markets & Co.

Great. Thank you.

Operator

Your next question is from Zack Sopcak from Morgan Stanley.

Zachary W. Sopcak - Morgan Stanley & Co. LLC

Hey. Thanks, guys. And my friends call me Steven, so feel free to use that if you'd like. A question first on Elevate. Can you talk at all about the characteristics of customers that are taking on Elevate? Is it newer customers? Or is it maybe more established customers who have multiple products already?

Giovanni M. Colella - Co-Founder & Chief Executive Officer

Thank you, Steve. This is Gio. Elevate – well so we – well we had a group of charter customers at the beginning. And the demand for Elevate was very strong. The characteristics – I talk to customers, again I repeat this, every day now. And the behavioral health issues within the customers that we talk to are omnipresent. And the numbers are staggering. That's why we built Elevate.

So there's nothing that would really profile a customer for having more or less of this. The demand for Elevate is strong. And again we need to execute now and keep selling it to new customers and up-selling it to current customers.

Zachary W. Sopcak - Morgan Stanley & Co. LLC

Okay. Got it. Thank you. And then a question on 2017 since we're only a month into 2016. But as your sales force is more mature, and you talked about the forward view on your ARR, when do you start getting comfortable with 2017? Is it the kind of 3Q timeframe like you were in for this year? Or is it earlier just because things are a little bit more mature?

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

Thanks, Zack. The seasonality in our business is a backdrop here that's important to note. And the second half of the year continues to be the high demand period for our applications. And that is a function of the timing that a lot of customers have in mind in terms of when they're implementing Castlight.

So in terms of getting good clarity on where 2017 is coming out, it is the second half of the year. You'll remember that the first glimpse we gave of 2016 came after the third quarter last year. And I would anticipate that we'll be on a similar glide path this time around.

Zachary W. Sopcak - Morgan Stanley & Co. LLC

Okay. Great. Thank you.

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

Thank you.

Operator

Your next question is from Frank Sparacino from First Analysis.

Frank Sparacino - First Analysis Securities Corp.

Hi, guys. John, just want to go back to the implementation risk. Given the length of the implementation cycles, I would assume most of the customers launching in the back half of the year are sort of in process today. I don't know how much of that is sort of to be set in terms of an implementation day. But I'm just trying to figure out the risk between what's in process and yet to come.

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

Sure. So you're absolutely correct that each one of the implementations we're referring to are already in process. I think a nuance that's important to understand is that the implementation timelines themselves are not exclusively – in fact, only a third of that timeline typically is actual direct effort by Castlight folks preparing and launching the application for the customer. The other parts of the timeline have to do with accessing and ingesting data from the partners and others that we work with to provide our solutions.

And so all of the implementations that we referred to that impacted guidance are already underway. And we have good visibility to when those are supposed to launch and believe we're on track. That question is helpful, because that really is a variable that can impact quarter-to-quarter revenue.

Frank Sparacino - First Analysis Securities Corp.

Thank you, John. That's helpful. And then just one last quick one for me, and I'll jump off. Your comments around a cash burn for 2016 I assume is simply cash flow from operations. Is there anything that's going to change materially from a CapEx standpoint in 2016 versus 2015?

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

We don't anticipate any significant change there.

Frank Sparacino - First Analysis Securities Corp.

Thank you.

Operator

The next question is from Gene Mannheimer from Topeka Capital.

Gene Mannheimer - Topeka Capital Markets

Thanks. Good afternoon. Appreciate the color around the sales force. Can you quantify for us the number of quota-carrying reps as of January 1? And moreover my follow-up question is, did you or can you give the metrics around the numbers of customers that bought Elevate and Action year to date? Thanks.

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

So thanks for the question, Gene. We don't get into the details of sales force size, but as we've talked about before, we are intending to hold the sales and marketing investment flat year-over-year. One nuance, since you asked the question about the composition of that investment, is that we have, as you know, built an alliances team and allocated some of our sales and marketing resource to that initiative. And so the allocation of sales and marketing spend overall has a more balanced mix of direct and indirect effort. And so I hope that that color is helpful.

In terms of the second part of your question, which I'm forgetting at the moment. I'm looking at Siobhan, who remembers, so maybe she can answer that.

Siobhan Nolan Mangini - Vice President-Finance & Business Operations

Sure. So the attach rates for Elevate and Action are in the mid-single digits right now across our book of business.

Gene Mannheimer - Topeka Capital Markets

Mid-single digits as in percentage or absolute numbers?

Siobhan Nolan Mangini - Vice President-Finance & Business Operations

Percentage. So mid-single digits of the 191 customers that we have.

Gene Mannheimer - Topeka Capital Markets

Got you. And which pipeline would you say, if you can get this granular, is more robust right now, Action or Elevate?

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

That actually is more granular than we want to get, but I think the broad comment is that we're seeing strong interest for both products across a very diverse set of customers in terms of industry size, geography, which was really the intent. Action at its core is driving engagement broadly with healthcare benefits. And Elevate, going after behavioral health which as Gio remarked earlier, is a very serious problem that's under-addressed across all of American business. That broad relevance of those products, I think, is playing out in the pipeline.

Gene Mannheimer - Topeka Capital Markets

Very good. Thanks.

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

Thank you.

Operator

The next question is from Richard Close from Canaccord Genuity.

Richard Close - Canaccord Genuity Group, Inc.

Great. Thank you for taking the question. I want to drill down on the implementation a little bit, I guess Frank's question, an extension of that. It sounds as though you're saying your side of that equation is about six months and you're dependent on other people either the customer or other partners. With that being said, what are the processes you have to do that really enable you to shrink down the timeline? Is a bunch of it out of your control?

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

So, thanks for the question. It is a reality in the business and it ties back to something I was talking about in a different context earlier on the call. These large businesses and when we say large, as you know, we're talking in some cases about hundreds of thousands of employees, have their own timelines in mind for launching initiatives that across their entire employee base which is the case with Castlight. And so, indeed, there are cases where a significant customer is preferring a timeline to match its internal benefits calendar. That is a slower timeline than we could otherwise deliver if the entire engagement was a function of Castlight's activity.

So I think it's fair to say that we're sometimes impacted by changes that are beyond our control. That said, we've seen a great deal of progress in implementation timelines. And I think emphasizing what Siobhan was saying earlier, in the case of Castlight Action, that's a product which we believe we can implement significantly faster actually than the broader portfolio average because it leverages the infrastructure that we already put in place for other products. And so that's just to point out that those implementation efforts do create a good context for us to add on products going forward.

Richard Close - Canaccord Genuity Group, Inc.

So as a follow-up to that, I guess the customer losses you talked about that occurred in the quarter, I think you said about – they're about half the size of the deals that you're signing that are much bigger. So if these bigger deals that you're signing potentially have longer implementation times and then you have smaller customers rolling off, doesn't that create sort of a headwind – an increasing headwind on revenue growth potentially as you're waiting to get these guys up and implemented?

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

I understand...

Richard Close - Canaccord Genuity Group, Inc.

Or am I thinking about that wrong?

John C. Doyle - Treasurer, VP, Chief Financial & Operating Officer

Yeah, yeah. No, I certainly understand the basis for your question, and if no other variables were moving, I think that would be a fair way to characterize the situation. But the reality is that in the background of that dynamic, we've been making significant investments now that have gone on for most of 2015 and now into the first part of 2016 to accelerate our work on implementations at Castlight, and that work benefits timelines for these larger customers as well. So I think it is true that larger customers compared head-to-head can take longer to implement than smaller customers. But I wouldn't say that the net of everything happening in implementations in the business is a headwind.

Richard Close - Canaccord Genuity Group, Inc.

Okay. And my final question, and sorry if I'm naïve here on this, but with the compelling ROI that you guys are delivering to customers, I'm just curious why sales cycles potentially don't shorten if there's – I mean, the impact of benefits, people are struggling with the cost and whatnot, why we wouldn't see the sales cycle be shortening?

Giovanni M. Colella - Co-Founder & Chief Executive Officer

Well, so, yes, we are delivering compelling ROI. I want to, again, put things in perspective. We're selling to – up until now, we were selling mostly to very big customers, and so these are complex sales, and it takes – the time it takes to just get all the constituencies aligned. Now, let me put things in perspective here. We are very focused since last year on the alliance channel, and we're seeing good results, and that Anthem is the first big partnership and is also a very good start so we hope that the alliance channel will actually accelerate the sales cycle because it's going to help us target the lower end of the market – smaller end of the market.

Richard Close - Canaccord Genuity Group, Inc.

Okay. Thank you. I appreciate the questions and look forward to following up.

Operator

There are no further questions at this time. I will turn the call back over to Gio Colella for closing comments.

Giovanni M. Colella - Co-Founder & Chief Executive Officer

Great. Thank you. I want to thank all of you for joining us today. At Castlight, we come to work every day to help companies optimize their healthcare benefits investments and empower people to make the best choices for their health. Now, we know that we have undertaken a bold mission. In the upcoming year, we will be relentlessly focused on improving our execution to help make our mission a reality. We look forward to continuing the dialogue with you about our progress.

In the coming weeks, we will be attending the Cowen Healthcare Conference in Boston and SunTrust Healthcare IT Conference in Park City. We look forward to speaking with you shortly. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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