Castlight Health (CSLT) Giovanni M. Colella on Q2 2016 Results - Earnings Call Transcript

| About: Castlight Health, (CSLT)

Castlight Health, Inc. (NYSE:CSLT)

Q2 2016 Earnings Call

August 08, 2016 5:00 pm ET

Executives

Ann Hickey - Director, Strategic Finance and Investor Relations, Castlight Health, Inc.

Giovanni M. Colella - Co-Founder and CEO

John C. Doyle - President & Chief Operating Officer

Siobhan Nolan Mangini - Chief Financial Officer

Analysts

Brian Peterson - Raymond James & Associates, Inc.

Brad Reback - Stifel, Nicolaus & Co., Inc.

Richard Close - Canaccord Genuity Group, Inc.

Zachary W. Sopcak - Morgan Stanley & Co. LLC

Adam Noble - Goldman Sachs & Co.

Stephen B. Lynch - Wells Fargo Securities LLC

Frank Sparacino - First Analysis Securities Corp.

Charles Rhyee - Cowen and Company, LLC

Operator

Good afternoon, my name is Blair, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Castlight Health's Second Quarter 2016 Earnings Conference 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. Ann Hickey, Director, Strategic Finance and Investor Relations, you may begin.

Ann Hickey - Director, Strategic Finance and Investor Relations, Castlight Health, Inc.

Good afternoon and welcome to Castlight's conference call to discuss our financial results for the second quarter ended June 30, 2016. Joining me today are Giovanni Colella, Castlight's Co-Founder and Chief Executive Officer; John Doyle, our President and Chief Operating Officer, and Siobhan Nolan Mangini, our Chief Financial Officer. Gio, John, and Siobhan will offer their prepared remarks, and then we will open up the call to take your questions.

Our press release was issued after close of market today, and is posted on our website where this call is being simultaneously webcast. We're also providing an accompanying PowerPoint presentation that may be accessed on our website, where it will also be posted after this call, and made available for one week.

This presentation contains forward-looking statements regarding our trends, our strategies, and the anticipated performance of our business, including our guidance for the 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 in the presentation may no longer be current or accurate. We disclaim any obligation to update or revise our 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 associated in the company's filings with the Securities and Exchange Commission for 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 August 8, 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 and CEO

Thank you, Ann, good afternoon, and thank you all for joining us on today's call to review our second quarter 2016 results, which were modestly above expectations and highlighted by the addition of six net new customers and nearly $7 million of signed annual recurring revenue. The progress made during the quarter gives us confidence that we are positioning the business well to drive long-term growth. We saw clear benefits in Q2 from our partnership with Anthem, and our relationships with healthcare consultants and brokers are starting to be helpful as well.

We continue to strongly believe that our decision last year to reallocate significant sales and marketing investments to build our channel infrastructure was a good one. We now have an effective strategic alliances team with deep healthcare domain expertise covering every region in the country. A major focus of this team is making sure we fully leverage the two major strategic relationships we have put in place; Anthem which I just referenced, and more recently, SAP.

The early stages of our go-to-market relationship with Anthem are focused on lead generations and sales executions in the field. We are pleased that Anthem has delivered against our initial lead generation targets for the first half of the year. We are excited to see solid growth in qualified sales opportunities and are focused on converting these leads into bookings.

In parallel with these efforts, our R&D team is working closely with their counterparts at Anthem to power the cost and quality transparency tool that Anthem's affiliated health plans offer through their member website. Together, we're executing against a phased rollout and are on track to deliver these new capabilities to a subset of Anthem members by the year end.

While we still have a lot of work to do to capitalize on the opportunity afforded to us by our partners at Anthem, we are encouraged by the progress we've made together. To further expand our channel strategy, we felt it was important to complement our go-to-market relationship with Anthem by partnering with an established technology vendor that sells broadly into the HR suite with a different, yet complementary value proposition to Castlight.

As a result, in May, we announced a broad multifaceted strategic alliance with SAP. As part of their commitment to the success of our relationship, SAP invested $18 million in Castlight. In the next phase of the alliance, Castlight plans to participate in the newly launched SAP Connected Health platform and to work with SAP SuccessFactors to bring health and wellness to the HR suite.

Castlight offers data assets, ecosystem relationships and products with unique potential to enable highly differentiated healthcare solutions. We are incredibly proud to be working alongside such a strong technology partner and believe that our relationship with SAP will meaningfully contribute to Castlight's long-term innovation and growth.

Overall, we have made great progress so far in 2016 and I remain incredibly excited about the opportunity that lies ahead of us.

With that, I wanted to thank our users, customers, all of our teams, our partners, and our shareholders for being part of this journey with us, and now I will pass it along to John.

John C. Doyle - President & Chief Operating Officer

Thank you, Gio. Good afternoon, everyone and thank you for joining us on today's call. At Castlight our mission is to empower people to make the best choices for their health and to help companies make the most of their health benefits. For us this mission has always meant something more than transparency and that is why we invested heavily in R&D to build out a comprehensive health benefits platform.

Castlight's solutions leverage the combined power of search, data, analytics and personalization to integrate health benefit programs, engage employees and drive real results. There is plenty of innovation ahead as we continue to work to deliver on our ultimate vision, but as we enter the second half of 2016 we are seeing more signs that we're on the right track.

Our second quarter results showed good progress on several fronts. Most importantly, Q2 was our biggest quarter for ARR from new customers since the third quarter of 2014 and more than double the level we saw in the second quarter of 2015. New customers in Q2 again included household names like Caterpillar and Genentech, as well as large regional employers like CSM Bakery Solutions in the Southeast.

The product mix of these sales was also encouraging as we saw nearly all new customers opting to buy our full health benefits platform, which is a fundamental shift from past years when our core transparency solution was the main driver of new sales.

Finally, we've been highly focused on driving greater efficiencies in our business and those efforts have begun to yield clear results too. Compared to last year, our Q2 non-GAAP gross margins expanded by 800 basis points, operating expenses declined by approximately 740 basis points, and at the same time we continued to generate solid growth in our business. This enabled our Q2 net loss to reach its lowest level in more than three years. Overall, we are pleased to see results from our growth initiatives as we also make clear progress on our path to profitability.

As we continue to put the pieces in place to drive sustained, healthy growth at Castlight, our priorities are clear. First, we have deliberately shifted to a blended sales model that relies heavily on lead generation from channel partners. We are seeing good results from this change so far, but as Gio indicated, the primary benefit from our efforts to-date has been expanding the top of the sales funnel with as many high quality leads as possible.

We are now focused on converting these prospects into Castlight customers. There's a positive data point here too, although at this stage it's more anecdotal than it is a trend. During Q2, we had three of our new deals go from qualified lead to closed contracts in less than four months, compared to the one-year sales cycle we have typically seen in our direct deals. In each case, these accelerated timelines were a function of strong support from channel partners, which is a great sign that our blended sales model is beginning to pay dividends.

It will of course take time for our collaborative sales model to achieve this level of efficiency on a broad scale. Our goal is to realize continual improvement through growing experience together, including the broader Anthem field teams seeing the positive benefits that Castlight is delivering to their customers. The good news is, I feel better about how our two teams are working together at this stage of the relationship than any other partnership I've been involved in during my career.

A second priority in addition to the shift in our sales model has been our focus on leveraging our data asset in products like Action and Elevate that use powerful analytics and targeted communications to deliver value to our users and customers. Both new products have been highly effective in their initial deployments and the proof points in terms of increased engagement and benefit program utilization have been a boost in conversations with customers, partners and prospects. We believe that broad adoption of Castlight's health benefits platform will put us in a strong, defensible position as our customers' most important technology partner for managing their healthcare priorities.

And third, it is just the reality that the healthcare benefits business is a slow-moving industry sector. So we have made it a top priority to be financially strong, so we can build the business and drive healthy returns for our shareholders over the long-term. With gross margins fast approaching our long-term targets, it is great to see the financial leverage in our business model playing out as we planned and enabling us to become self-sustaining by the middle of next year, which will be a major milestone for Castlight.

In addition to adding new customers, we've done a good job at managing our existing client relationships and are pleased with the progress we've made on our 2016 renewals. Over 60% of the ARR up for renewal in 2016, including seven of the 10 largest accounts within this year's cohort, have been renewed or committed.

For 2016, we're on track to achieve our 100% net dollar retention goal, which means that we expect cross-sells to customers we had signed before this year to at least offset ARR lost to churn among the same group. We do not expect to see significant ARR growth from cross-sells in 2016 compared to 2015, when cross-sells to some of our largest existing customers resulted in NDR of 116%. As we've said on previous calls, in 2016 we have prioritized driving new logo velocity with broader initial uptake of our platform solution over cross-sells into our existing book of business, and that focus is reflected in our sales incentive strategy.

In summary, we are seeing positive indicators of progress in sales and in the adoption of our health benefits platform that make us excited about the opportunities ahead for Castlight's business. These positive trends will continue to play out over several years, given the time it takes to fully mobilize large partnerships as well as the timelines associated with our sales and implementation cycles.

We have positioned the business to become self-sustaining as we march towards cash flow breakeven during mid-2017, with a meaningful cash balance to support the execution of our long-term growth strategy. When I look at where we stand today compared to a year ago, it is clear that Castlight is in a much stronger position to achieve our long-term goals. The fundamental drivers of value in our business continue to strengthen and we're confident that we've set a good course for future growth.

I will now hand it over to Siobhan, who will walk you through our quarterly financial results and outlook.

Siobhan Nolan Mangini - Chief Financial Officer

Thanks John. Good afternoon everyone, and let me also thank you for joining us on today's call.

Overall, we were pleased with our second quarter results. At the end of Q2 2016, net ARR totaled $117.8 million, which represented 26% year-over-year increase. We completed the quarter with 195 net signed customers and two of our net six new customer wins were Fortune 500 companies, bringing Castlight's Fortune 500 customer count to 56.

Additionally, we saw strong uptake of Castlight Action amongst our new customers, continuing to increase our average deal size and bringing the cumulative Action attach rate across our full book of business to above 10%.

Now let's turn to our second quarter and non-GAAP financials. Total revenue for the second quarter was $23.6 million, which was an increase of 27% compared to the same period in 2015. Subscription revenue represented 93% of total revenue in Q2.

Reported revenue is a function of completed implementations, and in the second quarter we deployed eight new customers and completed 22 cross-sell product implementations, including seven customers launched on our new behavioral health product, Elevate.

The 32% year-over-year increase in services revenue was primarily driven by increased launch activity. Non-GAAP gross margin was 66% in the second quarter, an increase from 58% in the second quarter of 2015 and 63% in the previous quarter.

Notably, a majority of the improvement we've seen over the past year is attributable to efficiency gains associated with investments we made last year which streamlined data acquisition with major payors, simplified launch operations and further automated routine communication services. We expect these changes to be durable and contribute to the attainment of our long-term gross margin target of 70% to 75%.

Non-GAAP sales and marketing expense were $12.9 million in Q2, which was down 17% with Q2 2015. Sales and marketing expense were also 8% lower sequentially, which can be attributed to the reduction in marketing efforts as part of our cost reduction plan.

Looking ahead, we expect to see our increased emphasis on channel partners will allow us to continue to achieve greater efficiencies in sales and marketing without sacrificing growth. Non-GAAP R&D spend was $8.6 million in Q2, which was an increase of 20% over the same quarter last year.

This demonstrates our continued investment and commitment to ongoing innovation and in particular new head count in our product and engineering teams.

Non-GAAP G&A expense of $4.8 million in Q2 decreased 14% on a year-over-year basis. This is the result of the benefit we received from the systems and infrastructure investments we made last year.

G&A expenses were 20% of total revenue in Q2 relative to 30% in Q2 2015 and we remain committed to our long-term target of G&A spend between 8% and 12% of revenue.

Our Q2 non-GAAP net loss was $10.5 million compared to a net loss of $17.5 million in the second quarter of 2015 and $12.9 million in the first quarter of 2016. This improvement reflects the early results of our restructuring and demonstrates the scalability of our business model that John previously spoke to.

We ended Q2 2016 with $125.7 million in cash and marketable securities, inclusive of SAP's $18 million investment. Cash used in operations was $11.9 million in the second quarter, a meaningful improvement compared to the $14 million in the previous quarter and $17.2 million in the same period last year.

Our view remains that we will have a healthy cash balance on hand at the time we expect to turn cash flow breakeven in mid-2017.

With that, let me now turn to our outlook for the full year 2016. Before jumping into the details, I will provide additional context as to how we see the second half of the year playing out.

As we have discussed previously, bookings convert to revenue when customers launch. Additionally, given the size, sophistication and complexity of many of our customers, launch timelines can sometimes move based on factors beyond our control. We are seeing this dynamic play out in the third quarter as some of the customers that we expected to launch early in Q3 are now planning to do so in the latter part of the quarter due to their own timing needs.

Given the fact that we recognize revenue ratably, this impacts the level of revenue we expect to generate from these implementations during the third quarter even though the modest change in launch dates and associated revenue recognition in any one quarter has no impact on the amount of revenue we recognize over the course of the contract.

With that background and based on our current expectations for the second half of 2016 not changing from prior guidance, we are providing additional insight into our fiscal year 2016 guidance as follows. We continue to expect total revenue of $99 million to $102 million for the full year 2016. At this time, we are tracking to the midpoint of that range and would expect the distribution for Q3 and Q4 revenues to be about 45% in the third quarter and about 55% in the fourth quarter. This is consistent with the timing of several large customer deployments we expect in the third quarter that I just referenced.

We are pleased that we expect our full year 2016 non-GAAP operating loss to be at the low-end or below our guidance range of $40 million to $42 million. This assumes sequentially smaller operating losses in each of the third and fourth quarters due to our earlier than expected realization of savings associated with the restructuring effort.

Similarly, for the full year, we expect our previous guidance of non-GAAP net loss per share to be at the low-end or below our guidance range of $0.40 to $0.42 based on 100 million to 101 million weighted average basic and diluted shares outstanding. Finally, we expect cash used in operations to be in the low $40 million range for the full year 2016.

Looking forward to 2017, we are continuing to drive the business towards cash flow breakeven by the middle of next year. In order to achieve this milestone, we expect non-GAAP gross margin to fall within our long-term target range of 70% to 75% next year, and total non-GAAP annual operating expense to come in below $100 million for the full-year 2017.

Overall we believe the building blocks for our future growth are coming together. We are seeing early indications of success but know it will take time for these important initiatives to mature and be reflected in our topline performance. We are confident in the strategy that we are executing against and as we continue to make progress, we are relentlessly focused on driving long-term value for our users, customers, partners, employees, and shareholders.

Thanks. And with that Gio, John and I are happy to take your questions.

Question-and-Answer Session

Operator

The first question comes from the line of Brian Peterson from Raymond James. Your line is open.

Brian Peterson - Raymond James & Associates, Inc.

Hi, thanks for taking the question, and congrats on the progress this quarter. So just wanted to hit on the Anthem partnership a bit. You mentioned that the qualified leads were better than your expectation. Any color on what those leads look like? Are they bringing Fortune 50 opportunities to you? Are they maybe a little bit smaller than your existing customer base? And do you see anything that you can talk to us about that pipeline?

Giovanni M. Colella - Co-Founder and CEO

Yes. Thank you. This is Gio and thank you for the questions. I love to talk about Anthem, SAP or any of our big customers because that's where I'm spending most of my life in these days. So with Anthem, first of all, the relationship is going very well. We've built relationship with the highest level of the organization. We're on calls with them almost on a daily basis, and we see some early traction with really good qualified sales opportunities.

To specifically answer to your question, I need to highlight a little bit how our partnership is working. We keep the close relationship with the customer. Anthem is qualifying the leads for us and helping us once we start working with the customer. So they've been helping us a lot, and the leading indicators are all pointing in the right directions, in helping us qualify the opportunity and then penetrate with our own sales force this opportunity. So they've introduced us to great Fortune 50 companies, but they are supporting us along the whole arc of their self-insured employer business. Again, I want to repeat, we're at the beginning. We started seeing things going very well in Q2, and we're optimistic for what we see in the future here.

Brian Peterson - Raymond James & Associates, Inc.

Got it. Thanks, Gio. And, John, I think you mentioned that the channel, some of those deals actually closed this quarter, and it was a four-month sales cycle versus a year historically. Any help on what channel partners were specifically bringing you guys those deals.

John C. Doyle - President & Chief Operating Officer

Yes, certainly, Anthem's been a factor for us. So in addition to the leads that Gio talked about, which really was the focus of the relationship early in the year, there were a few instances where Anthem was quite helpful in compressing sales cycles. I think that was the highlight in terms of sales in the second quarter. But looking forward, we do expect to continue to see that direct sales cycle dominating timelines and so a year is still the reasonable expectation.

Brian Peterson - Raymond James & Associates, Inc.

Got it. And last one for me, just on the cost savings initiatives you guys put in place. When should we fully expect those to be in the run rate numbers? Is that fourth quarter or first quarter, any help there? Thank you.

Siobhan Nolan Mangini - Chief Financial Officer

Yes. This is Siobhan. Hi, Brian. We're really pleased with the progress that we've made. We executed very well and are very much on plan right now and you should expect to see progress through the rest of the year into Q4.

Brian Peterson - Raymond James & Associates, Inc.

Great. Thanks, guys.

John C. Doyle - President & Chief Operating Officer

Thanks, Brian.

Giovanni M. Colella - Co-Founder and CEO

Thanks, Brian.

Operator

The next question comes from the line of Brad Reback from Stifel. Your line is open.

Brad Reback - Stifel, Nicolaus & Co., Inc.

Great. Thanks very much. Could you maybe give us a sense of when you think the ARR growth rate will bottom?

John C. Doyle - President & Chief Operating Officer

So, Brad, thanks for your question. I think, first of all, after a couple of quarters where we'd seen negative net new logos, we were pleased to see that turn around in the second quarter, and looking ahead the generation of new leads is another trend that we're excited about. We're not forecasting ARR, but we feel good about the direction that we're headed, and we think Q2 was a good start.

Brad Reback - Stifel, Nicolaus & Co., Inc.

Great, thanks.

John C. Doyle - President & Chief Operating Officer

Thanks.

Operator

The next question comes from the line of Richard Close from Canaccord Genuity. Your line is open.

Richard Close - Canaccord Genuity Group, Inc.

Great. Thanks for the questions. I was wondering if you could just walk us through the one year in terms of the sales cycle. I appreciate that some of these have come down to four months, but just what do you think takes so long or what kind of progress can be made on the one year on the sales cycle?

And then, I guess a follow-up question is, with respect to the third quarter delays on some of the customer launches, just if you could update us on any progress that you're making or the conversations you're having with customers that do sign in terms of maybe shortening the launch cycle?

John C. Doyle - President & Chief Operating Officer

Sure. Richard, I'll start with the question about sales cycles and then Siobhan can talk to you about implementations. I think, building a little bit on the second quarter, we were very pleased to see some examples of shortened sales cycles. But, most of all, I think it was continuing to see companies like Genentech and Caterpillar adding to the Castlight customer portfolio, and importantly, not purchasing straightforward transparency but adopting the broad Castlight platform, which puts us in a great position to drive value for those customers over time.

I think that that platform sale is a newer technology sale for many of these customers, and so from a sales cycle perspective that might introduce some additional cycles. I think that the Anthem dynamic that we saw in the second quarter is something we're likely to continue to see. The blend of those two is probably an improvement over time, but I think the direct model is going to continue to dominate, and so the multi-quarter sales cycles trending towards a year is the right assumption for now.

Richard Close - Canaccord Genuity Group, Inc.

Okay.

Siobhan Nolan Mangini - Chief Financial Officer

And in terms of Q3 and the implementations, we've invested heavily in our implementation efforts and feel really good about the progress we've made, both in terms of data acquisition and configuration of our application over the past year. We've seen really steady progress with our Pharmacy launch timelines coming down quarter-over-quarter. We launched seven customers on Elevate this past quarter with an average of six-month timelines, and overall we're tracking very well to our goal of moving to an average of six-month implementation timelines across our book, which is the goal for us at the end of this year.

However, as I was discussing on the call, we are beholden to very large and sophisticated customers who have extremely complex benefit designs, and we're part of that strategy. And there are times where things can shift outside of our control, but we have great visibility into these launches. We have over $10 million of ARR that we'll be launching at the end of Q3, and feel really good about our guidance for the overall year for 2016.

Richard Close - Canaccord Genuity Group, Inc.

Okay. And as I guess one final follow-up, you mentioned shifting the resources, focusing in on new logos versus selling into the existing base. Can you just talk a little bit more about what you did there? And I guess my question is, if these add-on sales like the Elevate and some of these other additional products have a shorter, I guess, launch cycle, shouldn't you also be definitely focusing in on the add-on sales or cross-sells?

Siobhan Nolan Mangini - Chief Financial Officer

So in 2015 that was a big part of our focus. We had some very large renewals and had the opportunity to have some very large cross-sells, and we had 116% net dollar retention in 2015. This year we really have focused our sales efforts on new customer acquisition. We're still so early in with the greenfield opportunity that we feel it's really important to be focused on getting new customers onto our platform. And that really is the focus for our sales and marketing team at this point in time is getting new logos and having them purchase the full Castlight platform, which we started to see this past quarter.

Richard Close - Canaccord Genuity Group, Inc.

Okay. Thank you.

Operator

Your next question comes from the line of Zack Sopcak from Morgan Stanley. Your line is open.

Zachary W. Sopcak - Morgan Stanley & Co. LLC

Hey. Thanks for the question and congrats on the quarter. I wanted to ask first about SAP and if that relationship has had any impact on your sales conversations, not necessarily even leads but just having a partner like that if it's impacted those conversations at all?

Giovanni M. Colella - Co-Founder and CEO

Yes. Well, thank you very much for the question. So let me be very clear. We developed a multifaceted business alliance with SAP and we're just at the beginning of this. Let me dwell for a minute on this. It's two components to it: one is with the Connected Health platform, which is the SAP new healthcare division, which was just launched, and by the way reports into Steve Singh, who was on our board, so understands our product very well; and the other one is working with SAP SuccessFactors to bring health and wellness into the HR suite.

So on both of these opportunities we are making quite a bit of progress. We're working on the details on how to go to market together now. And although it's definitely too early to expect anything on the sales side, we're very bullish on what we're seeing our relationship develop and how this will be working. But you shouldn't expect us to see any meaningful improvement on sales in 2016 from this relationship. We're putting the basis for 2017 and beyond that. So I hope this answers your question.

Zachary W. Sopcak - Morgan Stanley & Co. LLC

Yes, that's helpful. Thank you. And then just one on the – if I remember correctly, typically, we're entering the busier part of your selling season. Is there anything that you know is differently going into it in 2016 than you did in 2015 and 2014 whether how HR organizations are approaching benefits or are they pretty much the same as they've been the last couple of years?

John C. Doyle - President & Chief Operating Officer

Thanks, Zach. This is John. As we've begun to work more closely with channel partners, our timelines I think have shifted a bit, so we're seeing more balanced demand over the last two quarters of the year than we've seen in some previous quarters, just judging pipeline progress and have in flight now. Whether that's a durable pattern that we see over time versus not is something we'll have to judge with the benefit of hindsight, but I think the Q3 trend that you've seen in prior years will be a bit muted this year relative to them.

Zachary W. Sopcak - Morgan Stanley & Co. LLC

Okay. That's helpful. Thank you.

John C. Doyle - President & Chief Operating Officer

Thank you, Zack.

Operator

The next question comes from the line of Robert Jones from Goldman Sachs. Your line is open.

Adam Noble - Goldman Sachs & Co.

Yes. Thanks for the question. This is Adam Noble in for Bob. You mentioned 60% of the business up for renewal this year has been renewed. What portion of the, I guess, remaining 40% is still outstanding versus has been churned or lost? And of the customers that haven't made a decision yet, is that because the renewal isn't due until later in this year, or is it simply just taking longer than you expected to get those customers to sign on the dotted line?

Siobhan Nolan Mangini - Chief Financial Officer

Sure. Adam, this is Siobhan. And just as context, about 20% of our ARR at the end of 2015 was up for renewal this year. And the difference from last year is it's across a wider swath of customers, so we have more renewals and it is back-end weighted, specifically to Q4. And we're really pleased that we have renewed seven of the 10 largest customers. And of the remaining three, we are very focused on getting them renewed and are in deep renewal conversations. To date churn has been very much within our expected range. There's been no surprises there and we're targeting 100% net dollar retention for the year and believe we're on track to achieve that goal. It is just a matter of seasonality and the fact that we have a very large amount of these renewals happening in the fourth quarter of this year.

Adam Noble - Goldman Sachs & Co.

Got you. That's super helpful. And you mentioned in the back-half a little bit more of a focus or dependency on the direct sales force. Could you give us any update on the efficiency or how those sales reps are doing with regards to meeting their quotas? And I know it's been a few quarters already since they've been trained on the system. Any update on how they're progressing.

John C. Doyle - President & Chief Operating Officer

Sure, Adam. This is John. So we're beginning to see a broader contribution from the sales force. And I think what we're excited about is seeing the organic development of pipeline more broadly across the team as well. When we were talking a year ago, we were still in the midst of a transition. I think there were questions about the stability of the sales force, and now we have a group of trained folks who have had time now to build their individual books. And they're looking ahead at growing pipeline, logos coming in in the second quarter, deal sizes going up, the platform being sold broadly, good leverage from channels, and some instances of quicker sales cycles. So I think if you're a sales person at Castlight, you're feeling great about the go-forward opportunity, and obviously that makes us feel good about where we are with the team.

Adam Noble - Goldman Sachs & Co.

Great. Thanks for the questions.

John C. Doyle - President & Chief Operating Officer

Thanks, Adam.

Operator

The next question comes from the line of Stephen Lynch from Wells Fargo. Your line is open.

Stephen B. Lynch - Wells Fargo Securities LLC

Hey, thanks for taking the questions. Siobhan, if you don't mind, I know you gave some of the client numbers at the end of the quarter. Could you run those past just one more time, maybe provide the number of signed clients and the number of implemented at the end of the quarter?

Siobhan Nolan Mangini - Chief Financial Officer

Yes, so we had 195 signed customers at the end of Q2, 56 Fortune 500 and about 170 launched customers at the end of Q2.

Stephen B. Lynch - Wells Fargo Securities LLC

Got you. And did you mention the gross numbers for each of those categories as well?

Siobhan Nolan Mangini - Chief Financial Officer

No.

Stephen B. Lynch - Wells Fargo Securities LLC

Okay. I'm curious – I believe last quarter you mentioned about $2 million or $3 million of legal settlement expenses that you expected to impact cash flow in Q2.

Siobhan Nolan Mangini - Chief Financial Officer

Yep.

Stephen B. Lynch - Wells Fargo Securities LLC

Did that occur in the quarter or should we expect it in the future period?

Siobhan Nolan Mangini - Chief Financial Officer

That's a great question. The legal settlement specifically is going to be in Q3. That just got paid out a couple weeks ago. So, I would expect that happening in Q3 as part of your forecast.

Stephen B. Lynch - Wells Fargo Securities LLC

Okay. Very good. And maybe one for John, given the decision to rely more on channel partners, how should we expect the client base to evolve maybe over the next three to five years in terms of average employer size and the pricing of per employee per month fees, maybe those two metrics and how you see the reliance on channel partners impacting those two?

John C. Doyle - President & Chief Operating Officer

Well, the shift in sales strategy as we've said has been to kind of balance these channel relationships with the direct salesforce, and that balance is beginning to yield results as we hoped. So typically, the partners are providing leads as Gio talked about, and also playing a supportive role in the sales process as an advisor to our customers. And so in particular as we are entering a kind of later stage in the evolution of our market with early majority buyers looking for validation, those channel relationships are helpful from start to finish here. In terms of the impact on customer mix over time, it is absolutely true that certainly with Anthem and the large consultants' customer mix is pretty well matched to Castlight's current focus on large ASO employers. As we begin to have more success over time with the broker community, for example, I would expect to see a larger number of smaller customers as well.

In terms of how that impacts deal size over time and what we expect to see from a pricing standpoint, we have believed all along that one of the very important strategic assets that we are building in the business as trusted technology partners to our customers is the opportunity to solve a wider array of the problems that the HR benefits buyer is facing day-to-day, and they are facing many. And so as we've launched products like Action and Elevate, that has been an opportunity to grow our deal sizes and our strategy continues to be to innovate and solve more customer issues and therefore create more value and drive more business for Castlight. So, the expectation is that economics will improve – unit economics will improve over time.

Stephen B. Lynch - Wells Fargo Securities LLC

That's great. Thanks John.

John C. Doyle - President & Chief Operating Officer

Thanks a lot, Stephen.

Operator

Your next question comes from the line of Frank Sparacino from First Analysis. Your line is open.

Frank Sparacino - First Analysis Securities Corp.

Hi, guys. Maybe just for Siobhan, can you remind me again in terms of how the relationships work from lead gen on a sales commission standpoint in terms of when we would see those flowing through the income statement for Castlight?

Siobhan Nolan Mangini - Chief Financial Officer

Yeah, Frank, this is Siobhan. So the way that the relationship works is very much as Gio was describing it, where we get qualified leads from Anthem and the deal is executed on Castlight paper; pricing is the same and the economics are very much the same as we typically would have for any other customer. I think in terms of any sort of lead gen fee that would be paid, it would be later on in the year and that would be a sales and marketing expense, but it would be nominal, think of it as a lead generation fee.

Frank Sparacino - First Analysis Securities Corp.

Great. And then lastly for me, just on the – so it sounds like in terms of new sales, there's good adoption of multiple products over the entire platform. In terms of renewals, what does that look like in terms of the appetite? And then just curious, obviously these are customers that have been with Castlight for several years and I assume are satisfied with utilization and ROI that they are getting, but just any color you can provide in terms of how that's playing out, and are they being more demanding as they come up for renewal in terms of their expectations and asking you to do more, just any feedback there?

John C. Doyle - President & Chief Operating Officer

Sure. Frank, this is John. It's very important to Castlight to increase penetration of the broader platform and renewals are one of the important opportunities to do that. We are now at 35% of our customer base having three or more Castlight products. One reason that that is critically important, and it's particularly true with our Action product, which leverages data and analytics to drive engagement and program utilization in a very powerful way, one of the reasons that's critically important is because we are in a much better position to drive very strong value in a differentiated way over time for our customers.

And so in our renewals, we have a range of situations where customers have been very effective, driving change in their organizations and leveraging core transparency. Effectively, those customers obviously are great candidates to buy additional products in the Castlight offering and we certainly do that in these renewals. But as well, in situations where transparency hasn't been adopted at the rates that we hoped, it's a very natural conversation then with the customer to talk about why that's been and what we are observing in their population, versus what we've seen in successful customer situations in the portfolio. And so in many instances, those conversations also lead to great opportunities to use Action, for example, to more proactively drive engagement and get results for those customers.

So what we see in the renewal conversations, almost regardless of what the previous experience has been, is a good opportunity for the broader platform discussion, and that's absolutely a key priority in the business. So, thanks for your question.

Operator

The next question comes from line of Charles Rhyee from Cowen. Your line is open.

Charles Rhyee - Cowen and Company, LLC

Yeah. Thanks for taking the question. Hey, I just had a general question. There was another company holding a call tonight talking about some softness in their corporate wellness programs, and just curious, just generally speaking, how do you see the market currently, and the demand for wellness programs in general? Obviously, you guys talked about what you're seeing in your particular business, but any kind of thoughts to the overall market trends that you are seeing currently? Thanks.

John C. Doyle - President & Chief Operating Officer

Yeah. Thanks Charles. We don't currently focus a lot of our conversations with customers on the wellness topic, but I can make some broad comments that might be relevant and helpful. Certainly for our business, the challenges that employers and employees deal with in particular on the cost side, but also in terms of quality of care, those continue to be big issues across the board, certainly no change there. We've also seen adoption of consumer directed health plans continue, not only more large businesses adopting these plans, but also the penetration of these plans within individual employers, meaning more employees signing up for them, and so cost going up, consumerism continuing to play an important role, so all that's really great.

What might be relevant to the question you asked from the wellness perspective is something we see in the marketplace, which is over the last couple of years, there has been a great deal of funding young healthcare technology companies and certainly if you are an HR professional, one of the challenges that you have is sorting through a lot of potential ways to address the issues in your workforce and so this share of voice becomes an issue in that kind of an environment. And so we've been very successful, I think, in particular as a function of these channel relationships, and the amount of time that Castlight has been in the market talking to these customers, breaking through that noise that I could imagine for some other businesses, particularly in that space that could present some challenges.

Charles Rhyee - Cowen and Company, LLC

Maybe the other way then to ask it is, is it that – as we move forward in this kind of market generally speaking, right, single kind of point solutions. If you're an HR manager, it becomes increasingly difficult to manage all these different relationships, and instead, and as we've seen with Castlight as you've been adding on more solutions, it seems to be starting to gain some traction here. Is it right to think that if I am a single product vendor, is there a place in the market here or is the market now evolving past that? Thanks.

John C. Doyle - President & Chief Operating Officer

Yeah, that's a terrific question. We definitely see in the market that these buyers – you know, these are people who are typically, certainly overwhelmed by covering tens of thousands, in some cases hundreds of thousands of employees with very small staff. They do have enormous budgets, but frankly not for discretionary spend on their teams. And so the proliferation of vendors and business models really has presented a tough challenge for these buyers and what we're seeing in our conversations is that the more effective we can be across a range of the issues that these buyers are dealing with, the better our advantage is frankly in any one of those areas.

So whether, when we go in and talk about transparency and talk about analytics and data and the targeting, we can do through Action as well as Elevate and what we can do in behavioral health and the broad platform solutions, there's been a very evident advantage that we've gained. So, as we think about innovation going forward and the way we want to evolve strategically, we do see an opportunity to leverage that trusted relationship we are building with the HR buyer by offering more solutions in a broader set of products. So thanks for your questions.

Charles Rhyee - Cowen and Company, LLC

Great, thank you.

Operator

I'll now turn the call back over to Giovanni Colella, Co-founder and CEO for closing remarks.

Giovanni M. Colella - Co-Founder and CEO

Thank you. Thank you all for your questions. We appreciate your time and attention this afternoon and we look forward to speaking with you over the coming days and weeks including at the Wells Fargo and Morgan Stanley Healthcare Conferences in early September.

I would like to take a moment to thank the entire Castlight team for your hard work and dedication to our mission. In particular, I would also like to congratulate John Doyle, John McCracken and Siobhan Nolan Mangini on the recent promotions to President, Chief Revenue Officer and CFO respectively. We are proud to have such a strong bench of talent and I'm confident that each will thrive in these roles. Thank you all for your time.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!