LifeLock's (LOCK) CEO Todd Davis on Q4 and Full-Year 2015 Results - Earnings Call Transcript

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LifeLock, Inc. (NYSE:LOCK) Q4 and Full-Year 2015 Earnings Conference Call February 10, 2016 5:00 PM ET


Jamison Manwaring - Vice President of Investor Relations

Richard T. Davis - Chairman and Chief Executive Officer

Hilary A. Schneider - President

Christopher G. Power - Chief Financial Officer


David Hynes - Canaccord Genuity Inc.

Nandan Amladi - Deutsche Bank AG

Scott Zeller - Needham & Company, LLC


Greetings, and welcome to the LifeLock’s Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions].

I’ll now turn the conference over to your host, Jamison Manwaring, Vice President of Investor Relations for LifeLock. Thank you. You may now begin.

Jamison Manwaring

Thank you. Good afternoon and welcome to LifeLock's 2015 fourth quarter and year ending earnings conference call. Joining me are Todd Davis, LifeLock's Chairman and CEO; Hilary Schneider, LifeLock's President and CEO elect; and Chris Power, LifeLock's Chief Financial Officer. The primary purpose of today's call is provide you with information regarding our 2015 fourth quarter and year-end performance, in addition to our financial outlook for our first quarter and full-year 2016.

During our remarks, we will be making Forward-Looking Statements about LifeLock's business, strategies and performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. So please refer to the Risk Factors set forth in our Form 10-K for our fiscal year 2014, as well as our other recent filings with the Securities and Exchange Commission or the SEC for more discussion of factors that could cause actual results to differ.

In addition, we will be discussing financial information that includes non-GAAP financial measures. This financial information excludes those items that affect comparability. For the most directly comparable GAAP financial measures with the reconciliation to the non-GAAP financial measures discussed, please refer to our earnings press release posted to our website.

I encourage you to visit our Investor Relations website at to access our fourth quarter and year-end 2015 earnings press release, periodic SEC filings, a webcast replay of today's call or to learn more about LifeLock.

With that let me turn the call over to Todd.

Richard T. Davis

Good afternoon everyone, and thank you for joining us today. Before I provide an overview on the business and our Q4 results, I wanted to take a moment to discuss two very important items from the past few months. First, as we previously announced I am pleased that effective March 1, Hilary Schneider will become LifeLock’s new CEO and will be joining our Board of Directors. At that time, I will transition to the role of Executive Vice Chairman and Roy Guthrie will become our Chairman of the Board.

Many of you have had the opportunity to meet Hilary on conference calls and at investor conferences and know that she shares my passion for this business. There is no one I truest more than Hilary to build on our success and the momentum we created.

Hilary has significant experience leading dynamic high growth companies, including serving five-years as an Executive Vice President of Yahoo and leadership roles at Knight Ridder where she was Chief Executive Officer of Knight Ridder Digital. She brings to her role a deep technology expertise so essential to LifeLock’s future. And during her three plus years here has demonstrated her skills as a leader and strategist.

By leading our efforts to build out our product and technology organization our infrastructure and strengthen our talent base, which have included the establishment of our Silicon Valley offices to draw upon the technology talent the area attracts. She has earned the respect of our people, management team, partners, investors and the Board, and when the FTC matter coming to a close, now is the right time to make this important transition.

In fact, the timing of our announcement couldn’t have been more apt as it enabled Hilary to present her 2016 strategy and priorities at our all employee meeting at the end of January. Our team is energized by Hilary’s vision for the future. Hilary also had an opportunity to present to our partner summit last week where her vision and plans were equally well received.

Moving on to topic number two. On December 17, the FTC filed with the court a comprehensive settlement agreement, which LifeLock had earlier announced in October. The settlement resolved allegations the FTC made about LifeLock’s compliance with a 2010 settlement with the FTC. The court approved the settlement on December 22.

Pursuant to the settlement, LifeLock deposit $100 million with the court in late December, $68 million of which will be used to settle a related national consumer class action. That class action settlement was also announced in October last year and the court overseeing the class action preliminarily approved the settlement on January 20.

The comprehensive settlement of both the FTC action and the consumer class action is designed to enable LifeLock to move forward with a singular focus of protecting our members from threats to their identity. Our members are our highest priority and we are gratified by their confidence in us, reflected in the performance and continued growth of the business.

In terms of next steps, we expect a notice to be sent to members of the class this month. We expect the objection period including hearing on objections and fairness to be completed in Q2. We then expect final approval of the class settlement over the summer with payments to class members beginning in late Q3 or Q4 of this year.

Despite the challenges we faced, I am very proud of the devotion of our employees and partners and continued support of our members and I believe LifeLock has a bright future ahead. I am extremely proud of what we have built at LifeLock and have enjoyed getting to know our shareholders and appreciate all the support you have shown us. I look forward to continuing to be a part of the LifeLock team as Executive Vice Chairman and as a member of the Board of Directors.

So let me transition back to our Q4 and 2015 highlights and then I’ll turn the call over to Hilary to talk more about her long-term vision for LifeLock and 2016 priorities. We are pleased that we were able to deliver our 43rd consecutive quarter, a sequential growth in both revenue and cumulative [ending] members as we delivered over $156 million in revenue and finished the year with just shy of 4.2 million members.

Our member retention rate declined slightly to 86.5% in the quarter from 86.6% in Q3 and 87.7% in the year ago period. This year-over-year decline was primarily the result of a higher number of cancellations following the announcement of the FTC action, but we are pleased to see that rates stabilize sequentially.

Our quarterly gross new member additions were 296,000, up 18% year-over-year driven by the strength in our employee benefits channel where we had our best quarter ever. We saw continued patterns of strong adoption of our premium offering with 39% of gross new members choosing either LifeLock Advantage, LifeLock Ultimate or LifeLock Ultimate Plus in the quarter.

This was impacted by the strength of our employee benefits channel in the fourth quarter in conjunction with annual employee benefit open enrollment season. The premium products take rate tends to be lower in this channel, particularly when the employer is paying for LifeLock on behalf of the employee.

We continue to be pleased with the trends and for the full-year over 40% of our gross new members selected one of our premium offerings increasing slightly year-over-year. We believe that long-term our partner channel is one of our key growth drivers. Although as we’ve said previously, our growth rates has been slowed by the FTC matter. Outside of employee benefits, our other partner channels saw declines year-over-year as some partners selected to pause our efforts while the FTC matter was being resolved.

We are pleased that activity has picked up since the FTC and judges approval of our settlement in December, including a new partnership with SIAA Partners, a national alliance of independent insurance agents with over 5,500 members and the launch of a co-marketing deal with protective life insurance. We expect that it will be a few quarters before we see the fruit of this increased activity, but we are encouraged by the engagement of current and potential partners.

On the enterprise side of the business, we signed several new customers in the quarter, including a large alternative financing company and went live with a top-tier auto lender. In addition, we expanded our relationship with several existing customers including two of the top-five credit card issuers and top-four wireless provider and a leading marketplace lender. All this activity help drive over 286 million enterprise transactions for the year, up 17% year-over-year.

For 2015, our total revenue grew nearly 24% to $587.5 million powered by 25% growth in our consumer revenue. We added 1.28 million gross new members and our average monthly revenue per member was up 6%. We grew our adjusted EBITDA by 30% underscoring the scalability of our business model. All-in-all, I was pleased with the performance of the business during 2015 especially in light of the adversity we faced.

Now, let me turn the call over to Hilary.

Hilary A. Schneider

Thanks Todd. I'm excited and very fortunate to have been asked to lead this amazing team at this great company. I'm also looking forward to getting out on the road and interacting with investors. As I look to the future of LifeLock, I see tremendous opportunity in front of us. LifeLock’s products and services are more important than ever and they are becoming essential given the radical transformation we are seeing in the concept of identity.

More and more consumers are coming to grip with the incredibly detailed picture that criminals, marketers and others can build from social media activity, shopping and basing habit and the records that doctors, retailers, financial institutions, employer store online. Last week Javelin Strategy & Research revealed its 2016 identity fraud study, which found that the number of fraud victims in the U.S. declined to 13.1 million.

In addition, Javelin found that chip and PIN technologies have pushed criminals away from existing account fraud and into new account fraud. This rose 113% increase in incidents of new account fraud in 2015 which account for 20% of all fraud losses. This increased new account fraud gives LifeLock a distinct competitive advantage. Since the proprietary data from IDM Linux gives us greater near real time visibility into new account opening.

Importantly, we’re positioned to pioneer the next generation of advanced tools that consumers need to not only protect their identities, but also manage them. As we progress towards these goals, we see meaningful opportunity to grow the number of members we service and enhance the services we provide them, becoming an even more important partner.

To fully realize our full potential, we are focusing on enhancing the LifeLock’s position as the most trusted identify theft solution provider. To address pervasive and complex threats, we must have best-in-class policies, practices, products and system and a team that is focused on operating to the higher standards.

Two weeks ago, I gathered 700 leaders from a across organization for a reboot camp. We’re working with data boys, we examine the lessons drawn from our FTC experiences and importantly reaffirmed our dedication to standards that are well above what may be required by regulators or compliance obligation.

This whole day company meeting reflects my absolute focus on operational excellence and compliance. Our continued achievements in this area are getting noticed. In fact, a few months ago, LifeLock was recognized by the Online Trust Alliance for our security and privacy practices and we were named to the 2015 OTA Online Trust Audit Honor Roll.

Conducted annually, the Online Trust Audit is a benchmark audit of a company’s commitment to security, privacy and consumer protection. We have outstanding leadership working with me to guide these efforts, including the Neil Daswani, our Chief Security Officer and Moudy Elbayadi, our Chief Information Officer.

Last month I was proud to announce the promotion of two executives to oversee our new business segment. Mike Dean has been appointed Chief Strategy Officer and he will oversee our partner channel, enterprise products and ID Analytics. Mike brings 10-years in senior position at experience and he demonstrated capacity for innovation in our industry will be invaluable.

We also named Dev Patel as our new Senior Vice President of consumer products and technology. He will lead the company’s consumer product team and we will be drawing on the tremendous experience as CEO of BitYota and Vice President of Engineering at Yahoo.

There were several notable developments in the business during the quarter. We announced a new partnership with Equifax. We will now have a direct relationship with this leading data provider to supplement our unique ID Analytics data and data from other vendors. This will allow us to further differentiate our services and help deliver more innovative products.

We also added our privacy monitor as a standard feature to all of our products, adding yet another layer of value for our members and further differentiating us from credit monitoring based competitors. We know from our research that privacy is a top concern for our members and our prospects.

ID Analytics also recently introduced ID Connect which helps businesses provide an easy, effective and safe way for consumers to complete the digital enrolment or new account application process. This product offering allows businesses to grow safely by increasing conversion rates while verifying the individual's identity and reducing fraud risk. We expect ID Connect to add to our data visibility going forward.

During the quarter, we had a successful rollout of ID Connect with a top-five wireless carrier. We are very pleased that ID connect was recognized by the Fierce Innovation Awards and received top honors in the conditional access digital rights management and authentication category. These are just a few of the innovations we are currently working on and you should expect more from us throughout the year.

As we look into 2016, we plan to make investments to further strengthen our best-in-class customer service team with specific focus on resolution services, personalized product offerings that allow a seamless experience for consumers to manage their identity and expanding the breadth of our data networks to create an even stronger product offering.

You should also expect us to increase our marketing investments, capitalize on both the increase in brand awareness and brand health with four times the purchase consideration of the closest identity theft protection competitor.

In particular, according to NSI International, our unaided brand awareness increased in Q4 despite being a seasonally slower advertising quarter. We are also benefiting from macro trends supporting the increasing desire for consumers to protect their identity. All these findings support our plans to increase marketing in 2016 particularly in the first half of the year.

I'm excited about the futures here at LifeLock and our growth plan, I'm very pleased with how our business has performed despite the FTC related action, which highlights the value our members place on our service. Our industry is still in the early innings and I'm committed to driving new innovation to make sure LifeLock remains the clear industry leader. I could not be more pleased that Todd and the Board have given me this opportunity to become CEO and I look forward to reporting on our progress each quarter.

With that let me turn it over to Chris to talk through the financials.

Christopher G. Power

Thanks Hilary, and congratulations. Q4 total revenue was $156.2 million, above our revised guidance of $155 million to a $156 million and up 20% compared to Q4 of last year. Our consumer business continues to post strong results growing 21% year-over-year to $148.3 million. We added 296,000 gross new members in the quarter compared with 252,000 in Q4 of last year an increase of 18%.

Gross new member strength was driven by a pickup in the consumer channel and very strong employee benefits contribution, as that channel grew by over 90% in 2015 and contributed over 20% of Q4 G&A. This was partially offset by declines in our other partner channels.

We ended the year with 4.2 million members, up 16% from the end of last year. The monthly average revenue per member for the period was $11.97 up 5% compared to the fourth quarter of last year due to the healthy mix of premium products during the quarter, and we finished at $11.76 for the full-year 2015 up 6% year-over-year.

Our retention rate was 86.5% compared to 87.7% in Q4 of last year and 86.6% last quarter. We had expected our retention rate to remain under pressure due to the impacts from the FTC matter and we expect a slightly lower retention rate in 2016 compared to recent norms. In addition, Q1 retention will be impacted by the annual renewal timing of the large number of customers we signed up in Q1 of 2015 post the Anthem breach.

Revenue from the enterprise segment was $7.9 million up 8% sequentially and 13% year-over-year as ID Analytics continues to make progress expanding the breadth and depth of its network, helping to drive enterprise transactions to just over $78 million in the quarter and over a $0.25 billion for the year.

Now before I move down the income statement, I wanted to preface my comments by stating that unless otherwise indicated they will focused on non-GAAP results, which for the quarter exclude a total of $6.9 million of share based compensation expense. $2.9 million of amortization of acquired intangible assets and $3.8 million in costs associated with the FTC. We have also excluded $105.8 million in payments associated with these matters from our free cash flow metric.

Adjusted gross margins improved once again to 79% in the quarter, up from 77% in Q4 of last year as we continue to demonstrate scalability. As a reminder, Q4 is usually our high point for gross margin. Looking towards the first half of the year, we typically see a slight decline in gross margin percentages on a sequential basis due to the normal seasonal decline of our Enterprise business and the credit card processing fees associated with the seasonal patterns of annual renewals on the consumer side of our business.

Adjusted sales and marketing expenses were $62.5 million in the period compared to $46.4 million in fourth quarter of 2014. Our COA in the quarter was $203, up from a $174 in Q4 of last year, but down from $237 in Q. As reflected in our prior guidance, we saw a significant impact to our marketing effectiveness and COA post the announcement of the FTC related litigation in July as the challenges in our typically lower COA partner channel continue to impact the overall number.

With our strong retention rate and the continued market acceptance of our premium products, the lifetime value of our members remains healthy and validates the investment even at these COA levels. As we lookout into 2016 we currently expect the COA to remain at elevated levels early in the year as the partner channel ramps back up. We also plan to spend a higher percentage of the year's marketing expenditures in the first half compared to recent years to further broaden the reach of our marketing and build on the brand awareness gains Hillary referenced.

Adjusted technology and development expenses were $15.2 million in the quarter, up from $11.7 million in the year ago period due to the ongoing investments in talent, product enhancements, security and infrastructure and as we have discussed you should expect us to continue on this path of investment.

Adjusted G&A expenses were $14.5 million in the quarter compared to $12.8 million in the year ago period. Overall, adjusted net income was $30.5 million in the quarter compared to $27.7 million in Q4 of last year. Adjusted net income per diluted share in the fourth quarter was $0.30 based on 100.9 million shares compared to an adjusted net income per diluted share of $0.28 based on 99.6 million shares in the year ago period. This was at the high end of our revised guidance of $0.29 to $0.30.

Adjusted EBITDA was $33 million in the quarter compared to $30.2 million in the year ago period. Adjusted EBITDA was $72.3 million for the full-year, an increase of 30% year-over-year. Cash flow used from operations for the quarter was $79.5 million compared with $37 million in cash flow generated from operations in the fourth quarter of last year. The primary driver of cash flow used in the quarter was the $100 million paid in relation to the litigation and settlement with the FTC and national class of consumers.

Free cash flow was $21.2 million compared with free cash flow of $28.6 million in the fourth quarter of 2014. Free cash flow was impacted by approximately $5 million for higher prepay expenses including $3 million in marketing expenses expected to occur during the first quarter of 2016 and an approximately $4 million increase in accounts receivables of which the large majority has already been collected.

In addition, our CapEx was higher than expected due to investments in our platform. We generated $89.5 million of free cash flow in the trailing 12-months resulting a free cash flow margin of 15%. We ended the quarter with $246.7 million in cash and marketable securities compared to $273.9 million a year ago. The decline was predominantly due to the amounts paid in relation to the litigation and settlement with the FTC and national class of consumers I just mentioned.

Before turning to guidance, I wanted to provide an update on our share repurchase program. In the next few days as part of our previously announced $1 million share repurchase program, we intend to enter into an accelerated share repurchase agreement or ASR to repurchase $50 million worth of our own shares. A large majority of these shares are scheduled to return to us within a few days of entering into ASR agreement. To remind you, our goal is to complete the entire $100 million share repurchase program by the end of calendar year 2016.

Now turning to our guidance, for the full-year 2016, we are initiating guidance as follows: Total revenue is expected to be in the range of $650 million to $670 million. Overall, we expect our direct to consumer channels to continue to perform well along with the ongoing strength in the employee benefits channel.

We anticipate that the recent increase in activity in our other partner channels will positively impact the business as we move through the year, but expect slower revenue growth rates in the first half of the year due to the impacts from the FTC litigation on gross new members and retention. It is also important to remind you that we are up against a particularly difficult comparison in Q1 given a significant spike in gross new member in Q1 of 2015 from the tailwinds from the Anthem breach and associated potential impact on our 2016 retention rate.

Note that our 2016 guidance does not consider another unique event as this. As Todd referenced, we expect class-actions notices to go out this month and settlement checks to go out in the second half of the year, which could have a short-term impact on retention. Our expectation is that as we near the end of 2016, revenue growth will be healthy as the remaining FTC headwinds will be put behind us while our partner channel will have fully reengaged.

Adjusted net income per diluted share is expected to be in the range of $0.71 to $0.76 based on approximately 100 million fully diluted weighted average shares outstanding. This guidance assumes a 3% cash tax rate. Adjusted EBITDA is expected to be in the range of $83 million to $88 million. While profit is typically backend loaded throughout the year, we expect the seasonality to be more pronounced in 2016 as we increase investments in sales and marketing during the first half of the year.

Free cash flow is expected to be in the range of $93 million to $98 million. During 2016, we expect to increase CapEx by $10 million to approximately $24 million. We expect to spend roughly $9 million for the build out of our Mountain View office as we continue to expand our Bay Area talent. Even with these onetime costs, CapEx will remain a low single-digit percent of revenue. In addition, we expect to continue to see mix shift from annual prepay customers to members paying on a monthly basis, impacting deferred revenue.

For the March quarter, we are initiating guidance as follows: Total revenue is expected to be in the range of $156 million to $158 million. Adjusted net loss per share is expected to be in the range of minus $0.07 to minus $0.08 based on approximately 95 million basic weighted average shares outstanding. This compares with an adjusted net loss per basic share of $0.06 during Q1 of 2015. Adjusted EBITDA is expected to be in the range of minus $3 million to minus $4 million. As a reminder, we are planning to spend more on sales and marketing in the first quarter than we have in prior years.

One final note, a few weeks ago, we presented our strategic plan to the entire company at our annual all employees meeting. We are looking forward to hosting an Analyst Day in the next several months to share some of these plans with you. As soon as we finalize the details, we will let you know and look forward to you joining us.

In summary, we are pleased to be putting some of our recent challenges behind us as we move forward with a renewed focus on our business. We look forward to developing our partner relationship and expect to see healthy growth driven by this channel in the second half of 2016. We see a large opportunity ahead of us and believe our strong brand, unique technology and commitment to our loyal members will enhance our position as a leader in identity theft protection solution.

And with that we would like to open the call for questions.

Question-and-Answer Session


Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from David Hynes from Canaccord.

David Hynes

Hey, thanks guts. First Hilary congrats to you on the promotion and Todd you know we will miss having these calls on the road, but it sounds like we will be staying close to sorry yes. Wanted to touch base first on the strength in the employer channel and we've always thought that could be an important and economically attractive customer acquisition channel. So I guess the question, what drove the strength there and then second do you think the strength is seasonal, is it tied to the open enrollment timing or could we expect these dynamics to continue here in the first half of the year?

Richard T. Davis

Well certainly there is a normal seasonality tied to employee benefits as most of us just went through open enrollment season that's the time you go in and make some selections about what you want to do. The investments that we've made previously certainly are paying off as we build up that broker network, the folks that are out there calling on those benefits managers during the year.

Understand that there is also kind of off season enrollment, so there are benefits that can be realized throughout the year in that channel. As you saw, we just also signed up a whole network of additional brokers and the insurance agents base. So those kind of relationships we see is very strong, great foundation and I think something we’ll see contribute to the overall numbers this year, but certainly see those as the strongest in Q4 during open enrolment with that.

David Hynes

Yes, okay that makes sense. And then Chris maybe on the free cash flow guidance, I caught your comments around deferred revenue, but not sure I understood what is behind the shift from annual prepay to monthly. So can you just help me understand what is changing there that would hurt cash flow in 2016?

Christopher G. Power

Sure DJ. I think it's really the success in the employee benefit channel is one of the key drivers there. So what happens in that situation is you take a member who may have previously been prepaying us on an annual basis and those members now have that dollar amount deducted from their paycheck on a monthly basis.

So instead of getting the cash basically a year in advance or at the beginning of the year, we are getting it at the end of the month. So that has an impact on deferred revenue. And just to give you a kind of a high level flavor, if we have couple of percentage point of our overall base move from annual to monthly as a result of the success we are having in the EB channel, you end up with about a $7 million shift in the deferred revenue.

Now one of the reasons we are quite happy with this transition even though it has a short-term impact on reducing free cash flow, it’s actually very beneficial to us, because the member ends up paying and the payment is coming either directly from the employer or in most cases its coming directly out of the paycheck of the individual member.

So we avoid the whole issue of credit cards and trying to collect credit card payment. So while the cash comes in a little later and we anticipate certainly we have a very good visibility and the cash is very reliable and as I say we avoid that whole credit card processing issue.

David Hynes

Yes so I mean in theory we could actually see retention improve overtime?

Christopher G. Power

Again, a lot of variables in here, but we are certainly pleased with what we have seen within this channel, because as we talked about in the past, historically about half of our retention issues are actually related to a billing issue. And so the fact that we are able to eliminate that within the employee benefits channel is certainly a benefit, and there is a small potential impact when a particular industry goes through a difficult time.

For example, we have few partners in the oil and gas industry that are relooking at some of their employee benefits packages. So you could have some of those sort of industry specific impacts issue, but in general you are able to reduce the impact of trying to chase down folks and credit card payments.

David Hynes

Yes okay that makes sense. And then just last one, on the buyback, it’s good to hear your comments there. Just curious why we didn't see any repurchases during the quarter, I assume maybe given some of the announcements and perhaps some management changes you guys were restricted with buyback activity, but any thoughts on how you plan to execute against repurchase going forward?

Richard T. Davis

Yes DJ, I think your comments are right on in there in terms of us being in an open window. We are definitely committed to the buyback and once that FTC settlement amount was determined our Board had clarity around determining the size of that buyback and we continue to be committed to it, we expect to have the whole $100 million completed by the end of calendar year 2016.

And as you saw from the release, we also announced our intent to enter to an ASR or Accelerated Share Repurchase agreement to repurchase 50 million to really give a very serious kick start to that program and to demonstrate our commitment to it.

David Hynes

Okay got it. Okay thanks for the color guys.

Richard T. Davis

Thanks DJ.


Thank you. Our next question comes from Nandan Amladi from Deutsche Bank.

Nandan Amladi

Hi good afternoon, thanks for taking my question. So the first question is on the partner channel, now that the legal issues are behind you what sort of steps are you taking to bring some momentum back to the partner ecosystem?

Hilary A. Schneider

Yes sure, so first of all, just to remind you, we had continued growth in the partner channel and the EB channel in particular has been a highlight. We do have a number of partners who put themselves on pause during that period of time and having the closure we now have has allowed us to reengage in active dialog.

In fact, last week we had a largest partner summit to-date which was hosted both our current partner and partner prospects. And as Chris mentioned in his comments, we really look at Q1 and Q2 as periods during, which we will begin to win back up the non-employee benefit part of that partners channel.

Nandan Amladi

Okay and one other question perhaps best for Hilary again. The demographic segment expansion that you had discussed at the last analyst day. How much progress have you made and can you quantify what progress has been made?

Hilary A. Schneider

Yes. So we won’t get into specifics here, we have continued to see the trends that we’ve talked about in the past, which is reaching gender parity and overall penetrating younger demographics.

Nandan Amladi

So can we hope to see some more detail on this at your Analyst Day, if you are planning to have?

Hilary A. Schneider

We will have a lot to tell you at our Analyst Day. That’s a good way to get you to be there.

Nandan Amladi

Perfect. Thank you.

Richard T. Davis

Thanks Nan.

Christopher G. Power

Thank Nan.


[Operator Instructions] Our next question comes from Scott Zeller from Needham & Company.

Scott Zeller

Hi, good afternoon. So I wanted to just check on the wording you were using earlier regarding the actions with the court. So I think most of us understand that the FTC has accepted a settlement and that that then had to be accepted in turn by the court and signed off. I wasn’t quite sure from the language earlier what you were saying. Could you just clarify whether or not the court has actually accepted the settlement and that it's consider a closed issue?

Richard T. Davis

Thanks for the question Scott. The court will actually still have to open from the class action and for this settlement, they will have to open up for any objector period and a fairness. So for anyone who may think that the deal they could come in and object during that period which is a common step in the process right.

The fact that we have a combined settlement between the class and the FTC certainly is encouraging to us and the fact that they are unified in what we put before the court. So have accepted that offer, after the FTC accepted it’s been accept by the court, but we’ll to wait for this period to be completed for this open period which will be completed more in the summer time frame.

Christopher G. Power

And to clarify it Scott, recall that there is actually two courts that need to approve the two separate entities. The FTC court on the SEC side of the settlement on December 17 is when the Commission approved it. On December 22, the judge in the FTC case basically approved that settlement. And then from the class as Todd mentioned there was a preliminary settlement on January 20, final settlement is subject to a few other events over the next few months.

Scott Zeller

Okay, I'm little confused Chris though you just mentioned a thing, well Todd had mentioned that unified, but yet then you are talking about two different tracks. So could you just go through that again please.

Christopher G. Power

Yes. It's a joint settlement right, but both sides of the entity need to have it approved. So the judge in the FTC side of the settlement needs approve the FTC settlement which he has done and then the judge on the class actions has settled it, has basically approved the settlement on a preliminary basis, but there is still a few steps to roll through on that front.

Scott Zeller

Okay, and then next question would be regarding retention and Chris your comments about how retention although it's stabilized Q-to-Q it may through calendar 2016 be under pressure I think you were saying. What would be the reason for that? Earlier you had mentioned in the prepared remarks as a team that as the classes contacted and paid throughout the year that may have an impact on things. But could you just offer some color on what if anything else might be pressuring retention.

Christopher G. Power

Yes, so as you mentioned as those redressed checks go out to the consumers, there is always a risk of some impact there. Another element that we talked about is with the tremendous number of members we brought on board in Q1 of 2015 as a result of the Anthem breach, we are now cycling around to the one-year anniversary of those folks and those individuals that signed up to an annual billing cycle. And so we know that the first billing event is - we do see a bit of a spike in cancellations associated with that first event.

So that we’re just cycling around to that annual event now and just given the sheer size of the numbers of new members we brought in, in Q1 of 2015 as an opportunity to perhaps increase that slightly. And then as I mentioned within the employee benefits channel, folks within the oil and gas industry have been hit pretty hard and you know we had announced previously that we had some partnerships in that area so you could see a small impact on that as well.

Scott Zeller

Given all those things Chris, are you anticipating that it would stabilize in the latter half of the year or would it be under pressure throughout? It sounds like it will be frontend loaded from what you are saying, but there was a redress checks, does that mean it continues through the year is that why it's continuing and not frontend loaded.

Christopher G. Power

So yes, I think you will see some of those impacts initially, really the last sort of impact that the whole FTC series of events really hits us when those redressed checks go out, right. And that as we anticipated, as we talked about being sort of late Q3, early Q4, so we could have a bit of an impact there, but from our perspective we just feel number one is consumers in general have been very good at sticking with us throughout this process and we’re certainly pleased with the loyalty that those members have shown overtime.

And we feel very comfortable that as we are leaving 2016 and moving into 2017 we have the FTC issues behind us and we've had a significant amount of time in order to build the partnered channel back up and to have that partner channel start to demonstrate and influence the overall performance of the business as we exit 2016.

Scott Zeller

Thank you.


Thank you [Operator Instructions] we appear to have no further questions. I will turn the call back over to Hilary Schneider for closing comments.

Hilary A. Schneider

Well thank you guys very much for joining us for the call today. We will certainly be getting back to you with the details for our upcoming Analyst Day and look forward to seeing you there. And as always, you can look to for any further information that we talked about today and any updates going forward. So thank you very much.


Thank you, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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