Benefitfocus' (BNFT) CEO Shawn Jenkins on Q4 2015 Results - Earnings Call Transcript

| About: Benefitfocus, Inc. (BNFT)

Benefitfocus, Inc. (NASDAQ:BNFT)

Q4 2015 Earnings Conference Call

February 23, 2016 05:00 PM ET


Michael Bauer - Head of Investor Relations

Shawn Jenkins - Chief Executive Officer

Milton Alpern - Chief Financial Officer


Stephen Lynch - Wells Fargo

Nandan Amladi - Deutsche Bank

Terry Tillman - Raymond James

John DiFucci - Jefferies

Richard Davis - Canaccord


Good afternoon. I'll be your conference operator today. At this time, I would like to welcome everyone to the Benefitfocus Q4 2015 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]

I would now like to turn the conference over to Michael Bauer. Please go ahead.

Michael Bauer

Thank you. Good afternoon and welcome to Benefitfocus' fourth quarter 2015 earnings call. We will be discussing the operating results announced in our press release issued after the close of market today. Joining me today are Shawn Jenkins, our Chief Executive Officer; and Milt Alpern, our Chief Financial Officer. Shawn and Milt will offer some prepared remarks and then we will open the call up for a Q&A session.

As a reminder, today's discussion will include forward-looking statements, such as first quarter and full year 2016 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 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 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 and our other SEC filings. During the course of today's call, we will also refer to certain non-GAAP financial measures. You can find important disclosures about those measures in our press release.

With that, let me turn the call over to Shawn.

Shawn Jenkins

Thanks Mike. Good afternoon and thanking all for joining us today. The fourth quarter was a tremendous finish to an excellent 2015 for the Benefitfocus team as we continue to see strong demand for both new and existing customers. Our revenue growth for the quarter was 35% and once again our software revenue retention rate exceeded 95%.

The fourth quarter was our tenth consecutive quarter of exceeding the high end of our revenue and profitability guidance. For the quarter, total revenue was $54.3 million and our annualized revenue run rate now exceeds $200 million. This growth was driven by continued acceleration in our employer business which grew 56% during the quarter. We also saw continued expansion in our non-GAAP gross margin.

For 2015, our total revenue was $185.1 million an incredible 35% increase when compared to 2014 and non-GAAP gross margin expanded by approximately 840 basis points. I am proud of these terrific financial results and excited about the enormous opportunity ahead.

Today we have an impressive 723 large employer customers, if that represents only 4% of our addressable market of over 18,000 large employers in the U.S. As our momentum continues to build, we have a gigantic market opportunity in front of us.

The larger employers continue to shift core operational activities to the cloud and Benefits Management is high on their list. As larger employers focus on bending their Benefits cost curve, they are turning to our industry leading enterprise Benefits Management platform to engage employees, provide better information and enable better decisions.

We believe our leadership position is allowing us to innovate faster and attract more partners to our ecosystem.

The fantastic success we had in 2015 has transformed Benefitfocus into a larger more scalable company with multiple ways to drive continued strong growth and profitability. As a result of this success, we now believe we will achieve adjusted EBITDA profitability in the fourth quarter of 2016 compared to our previous expectation of the middle of 2017, while also increasing our 2016 revenue outlook.

During the fourth quarter, we extended our leadership position through strong employer customer adds and continued PEPM expansion from our additional products. On the product front, we continued to make focused investments in new features that provide our clients with the superior user experience, new analytical tools and core platform enhancements to scale the performance during the most critical period of the year open enrolment.

Let me share some quick highlights to put the fourth quarter in perspective. First, we had a strong employer sales quarter that included 20 new large employer customers, a 54% increase from a year ago period. Additionally, we continue our success with jumbo accounts as we added a new employer with over 75,000 employees.

Second, we continue to execute on our land of expanse strategy, we’ve seen impressive adoption across our new solution offerings driving PEPM growth in both new and existing customers. During the quarter, over two thirds of our new employer transactions included more than one product.

Next, the BenefitStore had another strong quarter adding 60 new customers and now exceeds 100 larger employers using the solution up from only eight in 2014. BenefitStore enters 2016 with over 20 partner carriers who are selling volunteer benefits on the platform and was recognized as leading voluntary benefit producer doing open enrolment for both MetLife and AFLAC.

Similarly our Core and Advanced Analytics solution had an impressive 2015 with 51 large employers who took control our data by selecting one or both of our analytic solutions.

And fourth, our partnership channel continues to strengthen and is experiencing excellent momentum. Our partnership with SAP continues to exceed our expectations.

These fantastic results would not have been possible without the hard work and dedication of our Benefitfocus associates. I’d like to give shad out to our entire team; you are doing amazing things in creating an incredible company. Thank you for all that you do to sever our customers and each other.

Taking a closer look at our employer sales performance, win this quarter included leading brands such as Lendlease, Inc., Pacific Life Insurance, PGT Industries, TridentUSA Health Services and Virginia Beach Public Schools.

Let me highlight a few hear. Offering insurance since 1868, Pacific Life provides a wide range of life insurance products accounts more than half of the largest 100 U.S. corporations as its clients. Pacific Life selected Benefitfocus Marketplace, Benefits Service Center, ACA Management & Reporting and Core Analytics over its existing HR system for their 3,000 employees due to our quarterly technology releases, integrated analytics and added value provided by our ecosystem.

Virginia Beach Public Schools employees over 18,000 individuals, the school system includes 55 elementary schools, 15 middle schools, 12 high schools and a number of secondary and postsecondary specialty centers. Virginia Beach Public Schools selected Benefitfocus Marketplace and Core Analytics to support their efforts to improve communications and educate their employees regarding their benefits.

Additionally our ability to integrate employees claims data into our decision support tool and mobile capabilities contributed to their selection of Benefitfocus.

With over 4,000 employees, TridentUSA Health Services is the nation’s leading provider of digital radiography, ultrasound, electrocardiogram and mobile clinic services. TridentUSA selected Benefitfocus Marketplace for their communications package and advance analytics to improve benefits plan management and support a strategic initiative to increase consumer directed health plan participation, while improving the ability to predict, manage and reduce healthcare cost. Additionally with TridentUSA’s highly skilled personal travelling to more than 12,000 facilities throughout the United States, Benefitfocus’ communication tools, modern user experience and mobile capabilities were key contributing factors in their decision.

Turing to the care business, our care team had a very successful 2015 adding an 11 new cares versus three added in 2014. This 55 of the top 100 cares utilizing the Benefitfocus platform, our care team and solution remains the best in the industry and a contributing factor to the success of our accelerating employer business.

I am proud of the success we achieved and the progress we have made towards our long term goals of 2015.

Looking at our plans for 2016, we are focused on the following three priorities. First, we remained focused on growing our large employer install base through our direct sales force and expanding partner channel.

Second, we’ll continue to execute on our land and expanse strategy and increase the number of products per customer.

And third, continue to expand our gross margins and become EBITDA profitable in the fourth quarter of 2016.

Let’s take a few minutes to elaborate on how our recent investments will drive success in 2016 and beyond. We entered 2016 with a season direct sales organization and expanding partner ecosystem that is driving significant growth in our large employer business. Building this direct sales team and channel partnership program has been a key focus for us over the last two years. We are now fully ramped and are experiencing significant productivity gains. These gains will allow us to continue our growth, while only need to add sales reps in targeted geographies. Our growing partner ecosystem will continue to supplement our capacity and extend our market reach with attractive customer acquisition economics.

Relationship with SAP as an excellent example of the potential for indirect sales efforts, Benefitfocus as an SAP solution extension partner and fully integrates with their employee central. This has enabled us leverage the strength of SAP’s direct and indirect sales infrastructure, resulting in an impressive pipeline of business for 2016 and beyond.

In Q4, we extended our partnership ecosystem and joined Ultimate Software’s UltiPro Developer Network, while Benefitfocus will integrate with ultimate suite to unlock a new level of functionality and efficiency for HR leaders. We are still in the early stages the market transition to cloud based benefits managements systems and gaining share through significant new customer additions remains a core priority for the company.

Our second focus is to expand the adoption of our new employer products across both new customers and our existing customer base. Our land and expanse strategy has been a success as we saw impressive adoption of the new products we introduced last year at One Place with the multiproduct and higher PEPM sales extending the leadership position of the Benefitfocus platform. We believe we are well positioned to build upon this initial success of selling multiple solutions to new customers and expanding within our install base.

In the fourth quarter, we created a new inside sales team to focus entirely on selling into our growing employer customer base. We believe this will further drive expanded PEPM revenue while increasing our value customers received from the Benefitfocus platform.

Our third focus is to continue expand gross margins and become EBITDA profitable in the fourth quarter. In 2015, we demonstrated consistent execution of improving our profitability with non-GAAP gross margin improving approximately 840 basis points during the year and we outperformed our 2015 adjusted EBITDA guidance.

Across the company, we are focused on ways to improve our scale and drive strong top line growth. Specific ways we will drive margin expansion to achieve adjusted EBITDA profitability target in Q4 include continued employer business growth. Our employer business has outperformed our expectations and we have reached the necessary sale in this business quicker than we originally anticipated. This has been drive impart by the success of our new employer solutions which are driving materially higher overall PEPM pricing.

The BenefitStore has also outperformed and we anticipate this solution will continue to diver both revenue growth and profitability. Since its inspection, BenefitStore has driven substantially higher than market average volunteer benefit participation rates resulting in profitable commission revenue streams for Benefitfocus.

As mentioned, we anticipated continued steadily improving productive in our direct sales organization. Leveraging the investments we’ve made over the last two years, we had our 2016 with a most tenured sales organization in our history equipped with an expanded portfolio of employer products that should driver higher PEPM pricing and enhance productivity of our direct sales reps.

Additionally, our expanding group of third party system integrated partners has steadily increased its portion of our implementations. In preparation for 2016, we have add an additional delivery partner and remained focused on enabling this channel to significantly grow its share of implementation work. This will help to drive our revenue mix towards higher margins subscription software revenue.

We have some fantastic product capabilities coming in 2016 in a few weeks at One Place, our largest customer community event of the year, you’ll have an opportunity to learn how we are driving innovation and enabling our broad set of certified partners to sell, deliver and build on the Benefitfocus platform.

Finally, I’d like to thank Milt for his inciting partnership over the past four plus years. We’ve been fortunate to have a strong financial leader to help us navigate the IPO process and execute our strategy. I wish Milt a very happy retirement after the quarter and I am pleased that we have him on board as a consultant until April 2017. In terms of our CFO search, we’ve hired an executive search firm and it’s seeing great results so far, we will have to report on the coming months.

I’d also like to Jim Restivo, our new Chief Technology Officer. Jim holds a Master Computer Science degree from MIT and brings more than 25 years of experience in the software industry with expertise in cloud operations, product management, data analytics and information security. Previously Jim was the CTO of Kenexa and was a former IBM Vice President and CTO.

In summary, our strong fourth quarter results capped a terrific year for the company. We are incredibly excited about the opportunities ahead and hope you watch our keynote presentation live from our website on Tuesday, March 8th from Orlando, Florida. We hope you join.

With that let me turn it over to Milt. Milt, take it away.

Milton Alpern

Thanks Shawn for your kind words. Once again we are very pleased with our quarterly results which exceeded our expectations and the high end of our guidance ranges from our revenue and profitability perspective for the tenth consecutive quarter. I’ll begin by reviewing the details of our financial performance and then provide guidance for Q1 and the full year 2016.

Total revenue for the fourth quarter was 54.3 million, an increase of 35% compared to the fourth quarter of 2014 and above the high end of our guidance range of 51.2 million to 52.2 million. Driving the accelerate revenue growth in the quarter was a combination of new customer wins and significant add-on product sales to both new customers and our install base.

Breaking revenue down further, software subscription revenue was 48.3 million representing 85% of total revenue and growing 28% year-over-year. While our professional services revenue was 8.1 million representing 15% of total revenue and up 95% year-over-year.

As a reminder, our professional services revenue is being positively impacted by the change in our customer relationship period from ten to seven years which we established at the beginning of 2015 for both the carrier and employer segments and by the establishment of standalone value at the beginning of the third quarter for certain professional services in the employer segment. As such, professional services revenue growth to begin to normalize in 2016.

Looking at revenue by segment, employer revenue for the quarter was 30.4 million, up 56% compared to the year ago period, while carrier revenue of 24 million was up 16% from the year ago period.

Let me now review the supplemental metrics we report on a quarterly basis. We ended the fourth quarter with 723 large employer customers, an increase of 20 compared to 703 at the end of the third quarter and up from 553 in the fourth quarter of 2014. While the second and third quarters are typically our biggest selling quarters, we saw strong deal activity in the fourth quarter which was driven by the increase demand for our products that we’ve experienced throughout 2015.

Additionally, with the demand for our add-on products from the employer business, we are seeing recurring revenue grow among both new and existing customers. We also ended the quarter with 54 carrier customers, up from 43 in the fourth quarter of 2014. Our software services revenue retention rate once again exceeded 95% in the fourth quarter for both carrier and employer segments which we believe is evidence the significant value our platform generate through our customers.

Moving down to P&L, our non-GAAP gross profit was 24.6 million or a 45% non-GAAP gross margin. The 360 basis point improvement from the year ago period reflects the increase scale in our business with both our direct and indirect customers. Additionally, we are realizing the impact of increased efficiency in our profession services organization and accelerated revenue recognition due to the change to our customer relationship period and the establishment of standalone value with the employer segment.

Non-GAAP software gross margin of 63% was down a 180 basis points year-over-year. Onetime expenses associated with the jumbo employer transaction we announced last quarter negatively impacted non-GAAP software gross margin.

Adjusted EBITDA was negative 4.8 million in the fourth quarter or negative 9% of revenue. This was significantly better than our guidance of an adjusted EBITDA loss of 8.2 million to 7.7 million and compares favorably to negative 8 million in the fourth quarter of 2014. Our adjusted EBITDA was positively impacted by the revenue outperformance in the quarter which widely falls to the bottom line as well as increased efficiencies in our professional services organization.

We are confident in our ability to scale our margins due to the increased use of third party implementation partners and increasing percentage of our sales that we expect to come through partner channels and greater up sell activity with our new employer add-on product such as BenefitStore.

We continue to believe that we can achieve our long term adjusted EBITDA margin of 20% overtime.

Non-GAAP new loss per share was $033 based on 29.1 million weighted average sales outstanding significantly better than our guidance for the loss of $0.47 to $0.46 per share and the year ago period per share loss of $0.45 based on 25.6 million weighted average shares outstanding.

Looking at our GAAP results, gross profit was 23.9 million, our operating loss was 10.6 million and our net loss per share was $0.43.

Cash used in operations was 5.9 million, as we ended the quarter with cash, cash equivalents and marketable securities 88.5 million.

Let me now turn to our outlook for the first quarter and full year 2016. Starting with our full year guidance, we expect revenue of 231 million to 335 million which equates to year-over-year growth of 25% to 37%, an improvement from the preliminary outlook we provided last quarter. We are targeting an adjusted EBITDA loss of 13.5 million to 9.5 million, a non-GAAP net loss of 36 million to 32 million and a non-GAAP net loss per share of a $1.22 to a $1.09 based on 29.4 weighted average shares outstanding.

Most importantly we are planning to achieve adjusted EBITDA profitability in the fourth quarter of 2016. This guidance reflects the continued progress of our strategic shift to recurring revenue streams and increasing contribution from our employer segment.

In 2016, we are targeting free cash flow in the range of negative 37 million to negative 32 million. We define free cash flow is cash from operations plus purchases of property and equipment.

As our employer business continues to represent a growing percentage of our total revenue, and as we move an increasing number of our professional services engagements to our expanding network of third party implementation partners, this shift will cause our differed revenues to drive the use of cash. We anticipate this impact - this impact free cash flow by approximately $11 million in 2016 and will moderate overtime.

We believe our improving profitability, our cash balances and our available credit facility will provide us sufficient liquidity until we become free cash flow positive.

For the first quarter of 2016, we are targeting revenues of 54 million to 54.5 million which represents a year-over-year growth of 27% to 28%. From a profitability perspective, we expect an EBITDA loss of 7 million to 6.5 million, a non-GAAP net loss of 12.3 million through 11.8 million and a non-GAAP net loss per share of $0.42 to $0.40 based on 29.2 million weighted average shares outstanding.

In summary, our fourth quarter results reflect a tremendous finish to an exciting year at Benefitfocus. Driving these results and our increase 2016 outlook continues to be the strong demand from our cloud based solution as users demand a more comprehensive and efficient approach to managing their benefit.

Given our expanded distribution and product portfolio, we are increasingly confident in our ability to continue delivering growth and long term shareholder value. Overall, our business is strong and we will continue to be a leader in our markets with exceptional technology and first class customer support provided by a winning team of Benefitfocus associates.

With that we’re now ready to take your questions. Operator, please begin the Q&A.

Question-and-Answer Session


[Operator Instructions] [Technical Difficulty] This question was withdrawn. Your next question comes from Stephen Lynch with Wells Fargo.

Stephen Lynch

[Technical Difficulty] for the last quarter, I am wondering maybe if you could break it down for us how of this was driven by stronger demand from the newer solutions like BenefitStore or ACA Reporting versus maybe did you see any outside contributions from the North Carolina deal on the quarter or anything like that, if you could just help us kind of figure out what drove the upside, so what you’d guided appropriately that would be great?

Shawn Jenkins

Hey Stephen, it’s Shawn, thanks for the question. There was something funny with the audio there, you mind just redoing the first part of it, I got the second the second half, but initial part of the question.

Stephen Lynch

Yeah, absolutely. Can you hear me better now?

Shawn Jenkins


Stephen Lynch

Okay, yeah, I was just wondering if you could give us a sense for what drove the upside to revenue in Q4 versus what you’d guided for previously, was it strong demand from newer solutions or was there any sort of larger contribution from the North Carolina deal then you expected previously?

Shawn Jenkins

Yes, good question. It’s a combination of things Stephen, as we outlined on the last call, we had a terrific selling quarter in the third quarter with our largest employer deliver and the combination of additional sales of the new products that we’ve introduced last year. So they were firing on all cylinders and our implementation team did a spectacular time getting customers you know live on time or maybe even a little bit ahead of time. So a combination of all those factors really just we headed out the park in the fourth quarter. And both businesses and the additional products were firing on all cylinders so it clearly gets us great momentum and confidence as we go into 2016 as well so building on a great story that we have been talking about and investing in for last couple of years.

Stephen Lynch

Thanks great. And then on some of the new software feature you are adding, you know the number of employers you are adding to the business is very, very healthy, clearly there is strong demand, can you talk about the new features that employers are really latching on to where you are seeing a lot of interest currently, are there any particular feature maybe that came out with the winter software release that you are expecting to drive a lot of excitement, maybe at One Place if you could just talk about that that would be great.

Shawn Jenkins

Sure, excellent. Yeah, just to recapture on the phone, that our strategy with our large employer business has been really a lam strategy with our core offering about the focus marketplace from a rolling and communicating benefits to all the your benefits in one place. In a year ago we really began the expensed part of that strategy where we introduced the series of new products for employers to add-on to the Benefitfocus Marketplace is extending the value and in 2015 it was - really the adoption was fantastic across the board all the solutions that we introduced.

As we went into the fourth quarter, a big winner release for us, one of the major new products that we actually introduced in the third and fourth quarter for sales was what we refer to is ACA Management & Reporting, Affordable Care Act a new set of reporting requirements for the IRS. And that product has really just taken off like crazy. I mean it is just incredible. And the uptick in the fourth quarter was fantastic. It’s going to have a really great story for the next several years for sure.

In addition to you know compliance as a service, the ACA Management & Reporting our BenefitStore has an incredible year. We talked about now having over 100 customers on the BenefitStore up from eight the prior year which was our pilot year in 2014 and we will be sharing results of the BenefitStore participation rates and all of the analysis at our upcoming One Place event which is just a few weeks away in March, it’s kicks off on March 8th, in Orlando, you can watch live stream on our website at Also our Core Analytics offering for employers has a fantastic year, we mentioned in the notes there that we signed 51 new employers - 51 employers to the Core Analytics during the year, so just across the board really fantastic.

I think another thing it’s interesting, when we first rolled out these additional products at the beginning of last year, we said that a third of our new customer adds were buying more than one product. And by the fourth quarter that number had surge to two thirds. So in the fourth quarter the new customer adds two thirds of them were buying two or more products from Benefitfocus which is you now clearly contributing to the revenue growth and margin expansion, the retention rate because of the added value. And as we pointed out, we now expect to achieve adjusted EBITDA profitability in the fourth quarter of 2016 which is a lot sooner than we originally thought which a region we are talking about middle of 2017. So all those factors together really create great value for our customers and the economics are flowing through into the profitability line as well.

Stephen Lynch

That’s really great commentary. Thanks Shawn.

Shawn Jenkins

Sure, thank you.


The next question comes from Nandan Amladi with Deutsche Bank.

Nandan Amladi

Hi, good afternoon, thanks for taking my question. So Shawn in the financial guidance that you’ve provided for this year, if you had a sort of rank order both factors that actually helping lift overall margins obviously the BenefitStore has done well for you, the ACA probably gave us a nice step in PEPM, wherever it changes I think you’d said expected to line down, probably also talk for large sales productivity having increased, if you have the rank order say the top three factors that help with the margin expansion this year?

Shawn Jenkins

Yeah, you know good question Nandan. Thanks. I’ll just want to start with the EBITDA profitability in the fourth quarter because I know there is lot of different ways to look at margin, gross margin. But you just - you think about us being able to pull that forward so substantially in targeting profitability on an adjusted EBITDA in the fourth quarter. I think you really hit on the one where you mentioned that the sales force productivity we went - when Benefitfocus went public in 2013, we were building a big employer enterprise sales force in 2013, ‘14 and ‘15 and that team is awesome now. I mean they are solid, tenured, they continue to exceed our expectations and we add to that team this year but it will be more of an incremental basis, it will be in targeted geographies that we’ve outlined, we’re also expanding into the jumbo account market sort of thoughtfully, so there’ll be a couple of key as there. But the team that we have in place is really showing great productivity.

And when you combine that with our channel partner strategy in the performance best strategy you think about Mercer and Mercer marketplace and the success we have having there adding SAP last year and the SAP sales team is now trained on how to sell the Benefitfocus platform and they sell on their contract and they get added for their customers. And then the system integrators and how that’s kind of reinforcing that message the Benefitfocus has become the enterprise Benefits Management platform of choice but that’s just giving us great scale and leverage.

And then as you look at the operating lines, more and more of implementations are being done by system integrators now which has actually had a great effect on our own ability to implement as we teach other people how to implement the Benefitfocus platform, we improve our tools, we improve our own quality and our efficiency goes up and so that SIs have made us better as well as taking on that work which means that the majority of the software revenue will continue to be higher margin software for revenue.

So the combinations of those factors are really given us a tremendous outlook. And I wouldn’t just add the BenefitStore are new service offering last year is just fantastic, I mean over a 100 customers, tremendous participation in this open enrolment season and great interest from both large employer but also the ecosystem of partners that want to sell products and the benefits that we in. As we look at the fall of this year into the fourth quarter, we think that’s going to be a big contributor as well.

Nandan Amladi

Thank you. And a follow-up on the system integration community build out, I think you graduated your first class you know seven quarters ago. As we look into ‘16 and ‘17 of what percentage of projects do you think they will be able to implement?

Milton Alpern

Hi Nandan, this is Milt. Let me answer that one for you. I think when we look at how we ended 2015, you know I would say that about 10% of the projects that we had in the kind of within 2015, it was actually end of ‘14 when we graduated that first class. About 10% of the projects we done by an SI partner, we look at in the ‘16 and I think we’ve talked about this a little bit, I mean I think you know probably in ‘16, 25% of our employer implementation is probably a good target for us to have. And as I said earlier, as we look further out to the future, I can certainly see you know 50% plus of our implementations eventually being done by a partner, it’ll never be a 100% certainly but can certainly see measurable amounts of implementations of our employer customers being done by third party.

Nandan Amladi

Thanks and that’s helpful.


The next question comes from Terry Tillman with Raymond James.

Terry Tillman

Hey guys, good afternoon. Milt, congrats on this life event for you and Mischa. I guess the first question is for you Milt, in terms of the fourth and first quarter analysis, it looks like while the overall revenue guidance is about where we were as well as for the first quarter so that’s positive, but sequentially it’s about flattish and historically the fourth and first quarter does show sequential growth. Could you help us or isolate any kind of onetime or seasonal items related to some of your revenue streams or each of the businesses that could translate to be potential flattish revenue from 4Q to 1Q?

Milton Alpern

I think you know from your point Terry, you know 1Q is a little bit stronger, a little bit more, I think when we look how we did in the fourth quarter, the fourth quarter being as strong as it was, I mean certainly we had a that large jumbo amount that came online in Q4 ‘15 contributed as an high revenues in the fourth quarter. So I think that’s probably the most significant contributor to what you are calling kind of a flat revenue sequentially. And also I think that you know those standalone value which is well as what kind of drove a little bit more revenue in the fourth quarter as well because we’d just established been on value in the middle of 2015.

Terry Tillman

Okay, and I guess - sorry, go ahead Shawn.

Shawn Jenkins

I would just too that you know I think that some years, actually this year might look more normal to me, so we have a surge of implementing it particularly employers and carriers in the fourth quarter getting life for open enrolment. And then you know the pressure sort of offer quarter two, certainly you know maybe the last couple of years, we’ve had a uptick in quarter one, but to me it doesn’t look uncharacteristic for there to be a big step up in the fourth quarter and then that just sort of rolls across in the Q1 and then we start the implementations for the following year. So I think this actually looks like kind of correct for the way that historical pattern has seemed.

Terry Tillman

Okay. And Shawn, since I’ve got your there, in terms of, as your business is scaled a lot more and you’ve been having these additional points of channel distribution and the sales force has grown. Competitively has there been any change revolution so maybe we could like it out from the standpoint of ERP vendors, obviously SAP is a partner now but whether it’s ERP vendors or service peers or payroll providers or even the HR outsourcers, could you maybe talk about competitive dynamics and the cast of characters that you would normally see, has that changed much? Thank you.

Shawn Jenkins

Sure, thanks. If - what really I think exciting about the benefit the focus story is that the market opportunity that’s in you know the size of benefit spend in the U.S. $1.6 trillion spend by employers, 30% of compensation is goes into benefits, and that cost is rising and they are wrestling with it. All that kind of macro stories still intact in the Affordable Care Act and the back and forth of the you know compliance issues there is driving more and more need for a new solution. So our overall fees is actually gotten strong and stronger since the IPO. But on the foot side, the competitive market is actually kind of come our way a bit, you know two and a half years we went to public, SAP would be have been a competitor and ERP competitor and in terms of the Benefitfocus platform and they are great channel partner for us of course also great consulting and brokerage leading the world and what they do, they’ve selected the Benefitfocus platform to be their private exchange and having tremendous success in that area.

Folks that we would have historically competed with have selected our platform to standardize going forward. And that really helps us even in our direct selling because when we are out you know interacting with the perspective large employer and they realize that we are powering these exchanges, we’re powering very large carrier capabilities, SAP is now using the Benefitfocus platform. Those things have really helped you know significantly in our direct selling. That combine with our size now, so we don’t - we’re the leading independent enterprise Benefits Management platform where the first ones to get over 100 million, now at a $200 million run rate, going public was a big even for us. So in our and actually in our interaction large employers generally who Benefitfocus is and the sales are happening you know I would say even a bit faster than they have been. And we don’t - we haven’t seen new entrance into the market and we haven’t seen the legacy payroll or other ERP vendors make any significant investment in their platform if anything I think they are you know the busy addressing other issues depending on where you ERP, your payroll and benefits is getting harder and harder for them invest in just because the demand, the complexity, the compliance, the consumerization, the need for data that help you make the correct decisions and offering voluntary benefits, all those things are setting a higher bar. So competitive landscape in our mind is like it was when we are public but we would say it’s probably even better for us a couple of years in.

Terry Tillman

Thanks, good to hear.

Shawn Jenkins

Yeah, thank you.


[Operator Instructions] Your next question comes from John DiFucci with Jefferies.

John DiFucci

Thank you. Shawn, you mentioned ACA Affordable Care Act and the product you have, I think you said that’s going to be part of the story for the next several years, I just kind of what to understand that because as far as the way I understand it anyway most large employers would have already had to comply with those regulations and I think some of the smaller employers they think given some relief and I think it’s not until June that they have to reply, but those are small employers. So give that’s something that’s talked about a lot in the investment community and now only affects you but a lot of other, a lot of the payroll people too. So what do you - why do you think it’s going to have a positive effect for some time to come?

Shawn Jenkins

Yeah, just to clarify John. Thanks for the question. So if you think about - you know first off the Affordable Care Act is a massive change in our healthcare system with whole multiple layers of compliance associated with it several ways of that have already happened there, the employer mandate, the employer individual mandate, the requirement to provide coverage. This is really the first season where electronic filing for the IRS is required for employers and large employers and actually all of them got a little bit of a stay, so it’s been moved back a couple of months, so this is actually the first filing season for large employers and they have to remit their filing electronic based on their size. So all of our customers, 100% of our customers have to for the first time file something 1094 and 1095 is with IRS if they filed electronically and then they also have to provide those forms to their workforce to the employees for the first time. So it’s a whole new filing across the board.

It’s a very complicated filing because you have to have this idea of look back and who is eligible, there is depended information that’s required, most payroll systems and HR systems don’t have dependent information captured in those systems, so there is a whole host of new data that isn’t historically captured by payroll or a tax filing apparatus. Many of our employers also operate a multiple businesses, multiple divisions, often times they might not on the same ERP or payroll system and so Benefitfocus represents a collection point because we have all their benefits from all their subsidiaries in one place. So as we introduce that you know the requirements really didn’t become clear until the fall, I mean there were still giving draft requirements last summer, we were one of the first early filers to get certification for electronic submission. And really the details are still being worked out all the way end of the open enrolment season. So it’s brand new capability, 100% of the employers have to comply with it this year for the first year for 2015 and it will be something they will living with for actually for years and years they can and it will you know undoubtedly get added to and clarified and additional information be layered on top of it. So we built a platform to really handle all the aspects of compliance this just being the most recent one which created a surgeon buying for this new produce for us extremely successful. And customers are counting on us to solve this for them.

John DiFucci

But Shawn, you wouldn’t expect this surge to continue beyond now, would you or - I mean it just be sort of?

Shawn Jenkins

I guess your point is, so we sold it to a lot of customers in the last couple of months, that’s going to benefit 2016 certainly we would expect that they stay intact and be part of our PEPM going forward. We would hope to then sell it to our new customer, so where we would think about is it kind of list our overall PEPM, so market is better just in customer base. And then as it gets, attitude are changed I guess there’ll be some opportunity for price increases and extension happen and so forth.

John DiFucci

Okay, great, that’s clear. And Milt, if I could, can you explain the differed revenue, the use of cash this year again, you said a $11 million, I just - we had model at that way and I am just trying to understand again if you just - maybe it’s a simple as repeating what you said but I’d like to understand why that’s going to have that negative effect again?

Milton Alpern

Sure and I think really what we are looking at is that the balance sheet change our revenue balance is going to result in a reduction of that differed revenue balance by $11 million which is obviously a use of cash. The reason for that certainly is that we are taking or taking out of differed revenue and bringing that revenue out with P&L at a much faster rate and are adding to the differed revenue balance. You know some of the factors around there is certainly is just the shifting on to the employer business and that’s the faster growth segment of our business and doesn’t have the kind of the large implementation projects or professional services projects that some of the carrier projects might have added in the past but added significantly differed revenue.

And also the fast that we’ve now also shorten the customer relationship period from ten years to seven years, so we are accelerating the pace, we’ve accelerated the pace that we are taking out of differed revenue because of that change.

And lastly the notion of having a cheap standalone value in 2015 now allows us to recognize revenue from implementation of professional services projects when they are completed as opposed to bleeding them in to the P&L out of differed revenue over that seven year customer relationship period. So all those factors resulted a much faster reduction in differed revenue from those things and that’s what’s driving that $11 million use of cash in 2016.

John DiFucci

Okay, okay, I think that’s helpful. Thank you very much. Thanks guys.

Milton Alpern

Great, thank you.


Your next question comes from Richard Davis with Canaccord.

Richard Davis

Hey, thank you very much. So look 95% dollar retention is really good, when people turn off, why is that happen? And then is there things that you could do to get that dollar retention to breach the 100% level and you know and how would you think about that thing?

Shawn Jenkins

Yeah, good question, thanks Richard. Yeah, so we retain our customers I would say in this industry of high rate of over 95% is the way we put it at. We don’t break it out specifically and give your number every quarter often well over 100% because it would take into account adoption that would roll on and et cetera. When our retention last year was even better than the year before that gives you some flavor for the direction of it, so our ability to keep our customer on.

And I think the primary reason we would see a customer that leave or trade would be of acquisition, so if they are smaller enterprise and they get acquired by larger enterprise and larger enterprise has some other way to handle their benefits then occasionally we will lose them. But say more that’s going in our favor as our account base grows, our customer size has got a lot larger. So I think we mentioned on the last call that we had a jumble account merge into another jumble account and it resulted in a pretty significant win for Benefitfocus even though didn’t add a logo, it added a whole host of 50,000 plus employees to the Benefitfocus platform to that merger. So actually it’s - starting to become a source of growth for the company.

Maybe one of the best things that we have done for expanding this idea of retention is particular dollar retention is the introduction of the new product flash here Richard. We’ve talked about you know BenefitStore that could Core Analytics, the Benefits service center and so forth. So as we sell those back into our base as well as sell to them new customers that getting more value from Benefitfocus from the relationship there is more reason for them to you know buy even additional things from us, certainly increases our overall revenue retention rate because it often increases it beyond that 100% mark as you pointed on. So we are really happy with the direction of it, we think we’ve done a great things to actually improve what I would say was already very industry high retention rate.

Richard Davis

Got it. And just a quick add-on question. So you’ve done a great job with SAP, Ultimate is really good firm, is it logical for us as outsiders to think that you might have other partnerships in the future you know whether that and you kind of touched on that a little bit, but you know a Workday, Kronos, NetSuite, Oracle, I just don’t know, is that something in that’s rational for us you know outsider folks to think is possible? Thanks, that’s it.

Shawn Jenkins

Yeah, well I think as our platform really emerges as in industry leading platform of platform standard and the number carriers that are integrated with Benefitfocus, we’ve actually over 1,500 different exchange connections now. So more and more important is what to be on that platform that has that scale that has all the product associated with it that has the services and ecosystem of SIs. And we would and actually that that would bring more partnerships into view for us. I think a historical pattern that’s kind interesting is in our carrier business. Our first health insurance carrier years ago is a BlueCross BlueShield plan, original blue plan and that - we did a great job for them using the Benefitfocus enrollment billing platform, select a more and more BlueCross BlueShield plan selecting Benefitfocus. And today, we even have the big national public companies; we have life insurance companies and the largest health insurance company.

So it does seem to have an interesting effect in a market where the advantage of having a leading platform are kind of how ways trying to do yourself and doing yourself is become harder and harder to do overtime tipping what’s happening in benefits with compliance in the consumerization of these programs and mobile technologies and big data and data analytics and all of the things you need to be relevant. So we’re say optimistic that you continue to see our partner ecosystem grow.

That said, you know there is nothing immanent where we need to continue to fee additional big partnerships like SAP to keep the model working when we have credible visibility into 2016 and ‘17 in our own sales force and our booked business already into the channel partners that we have like Mercer and SAP are just doing fantastic.

Richard Davis

Got it. Thank you so much.

Shawn Jenkins

Thank you, Richard.


At this time, there are no further questions. I’ll now turn the conference back over to Shawn for any closing remarks.

Shawn Jenkins

Excellent, well thanks everybody, thanks for joining us. It’s just an incredible record year for Benefitfocus, we couldn’t be more proud of the results and again I’ll share out all my Benefitfocus associates, you guys are building this is an incredible company and to see the business grow 35% year-over-year and targeting EBITDA profitability into fourth quarter of 2016 now with over $200 million run rate is just really incredible. So thanks for all of our associates and all we do to make the company great into our fantastic customers for selecting us and allowing us serve you. Folks everybody in Orlando, March 8th, we are online for our One Place keynote. Thank you so much. Have a great night.


Thank you for your participation. This concludes today’s conference call. You may now disconnect.

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