Good afternoon, ladies and gentlemen, and welcome to today's Progyny Inc. Second Quarter 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Vice President of Investor Relations, James Hart. Sir, the floor is yours.

Thank you, Tom, and good afternoon, everyone. Welcome to our second quarter conference call. With me today are Peter Anevski, CEO of Progyny; Michael Sturmer, President; and Mark Livingston, CFO. We will begin with some prepared remarks before we open the call for your questions. Before we begin, I'd like to remind you that today's call contains forward-looking statements including, but not limited to, statements about our financial outlook for both the third quarter and full-year 2022, including our expected utilization rates and mix; the impact of COVID-19, including variance on our business, clients, member activity and industry operations; our ability to acquire new clients and retain and upsell existing clients, our market opportunity, size and expectation of long-term growth; our plans for the expansion of our business, including expansion into other markets and of services offered; our business performance, industry outlook, strategy, future investments, plans and objectives and other nonhistorical statements as further described in our press release that was issued this afternoon. These forward-looking statements are subject to certain risks, uncertainties, assumptions and other important factors, including those related to Progyny's growth, market opportunities, general economic and business conditions and the impact of laws and regulations, including laws and regulations, restricting reproductive rights. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Although we believe these expectations are reasonable, we undertake no obligation to revise any statement to reflect changes that occur after this call. Descriptions of these risks and other important factors that could cause actual results to differ materially from these forward-looking statements are discussed in our periodic and current reports filed with the SEC, including in the section entitled Risk Factors in our most recent 10-K and 10-Q. During the call, we will also refer to non-GAAP financial measures, such as adjusted EBITDA, adjusted EBITDA margin, gross margin, excluding stock-based compensation and operating expenses, excluding stock-based compensation. Reconciliations with the most comparable GAAP measures are also available in the press release, which is available at investors.progyny.com. I'd now like to turn the call over to Pete.

Thanks, Jamie. Thanks, everyone, for joining us today. We're pleased to report that Progyny had a very solid second quarter with record quarterly revenue of $195 million, reflecting 52% growth over the second quarter of 2021. Over that same period, we also grew adjusted EBITDA by 78% to $32.9 million, while expanding our adjusted EBITDA margin to its highest level -- highest ever level of 16.9%. The strength in this quarter results reflect that member activity continues to be healthy and at the levels we would expect to see further affirming both the essential need for fertility treatment as well as the strong desire our members have in pursuing the care necessary to realize their family-building goals. I'll pause for a moment to underscore why we believe the essential nature of fertility is a critical point. There is historical data demonstrating that the utilization of fertility services endures even during periods of economic uncertainty. The significant reason is that treatment is time-sensitive for many patients or even a short delay can become a factor in whether or not they have a successful outcome. Another reason is that people looking to add a child to their family have a very strong sense as to when it's the right time for them to do so, which often overcomes any financial concerns they may have over the short term. We've seen this durability take place over the past two years when the vast majority of people who have needed fertility treatment continue to pursue care even against the backdrop of a global pandemic. This trend was also consistent with what happened during the great recession a decade ago when overall volumes remained healthy even though the significant majority of the market at that time was cash pay and presumably much more economically sensitive…

Thank you, Pete, and good afternoon, everyone. I'll start by taking you through our second quarter results before providing you with our expectations for the third quarter and the full-year. Revenue in the second quarter grew 52% over the prior-year to $195 million. Our growth in the quarter was primarily due to an increase in the number of clients in covered lives as compared to a year-ago, including the launch of a number of new clients in the quarter. Looking at the components of the top line, Medical revenue increased 37% over the second quarter last year to $126.8 million, which again was due to the growth in our clients in covered lives, while pharmacy revenue increased 87% in the quarter to $68.2 million. The growth in our pharmacy revenue was primarily driven by an increase in the number of clients with the integrated solution. Approximately 84% of our clients now have Progyny Rx, which is approximately 11 percentage points higher than it was at this time last year. As of June 30, we had 273 clients, representing an average of 4.3 million covered lives during the quarter. This compared to 182 clients and an average of 2.8 million covered lives in the second quarter last year, reflecting growth of approximately 53% in lives over the past year. As we discussed with you last quarter, our client count for June 30 reflects the final group of companies that we won in the 2021 selling season who had scheduled the launch of the benefit in the second quarter. It also includes a handful of accounts that were won in the current selling season. While we always expect that the vast majority of our new clients will go live with their benefit on January 1 as that's the start of the health…

Thanks, Mark. Before I close, I wanted to touch on a concern we heard in the past around whether or not fertility treatment will become an unintended consequence of the overturning of Roe v. Wade. We've not seen or heard of any clinics across the U.S. changing their practices or have seen any legal analysis, which suggests access to IVF will be negatively impacted. Now to conclude, we're pleased with our results in the quarter and first half of the year, as well as the progress that we've made in our selling season for 2023 book of business. While there are economic headwinds on the top of investors' minds and certainly, this is impacting some industries, we're not experiencing the same level of impact given that the overall macro trends that have been fueling our growth continue to be strong. Those trends include the growing need for fertility as people increasingly defer family building later in life and access to care is growing, as employers are increasingly realizing the need to offer fertility benefits to their employees. With that, I'd like to open up the call for your questions. Operator?

Thank you. The floor is now open for your questions. [Operator Instructions] And the first question today is coming from Anne Samuel from JPMorgan. Anne, your line is live. Please go ahead.

Thanks, congrats on some great results today. You said in your prepared remarks that you're starting to see some clients expanding with new services. I was wondering if you could just talk about what those expansions look like and what's catalyzing those conversations?

Sure. Thank you, by the way. There -- the upsell services that we generally have sold in the past, so there -- whether or not they're reviewing their benefit and understanding, do they have enough smart cycles purchased or do they want to expand the number of smart cycles that they're offering each employee or each eligible member, whether or not they're going to add Rx they didn't have it already, whether or not they're going to add certain populations that may not be today covered or maybe they acquired a company that they now want to put under the benefit. Those types of things in terms of expanding their benefits.

That's helpful. Thanks and then just your adjusted gross margins expanded quite a bit in the quarter. I was just wondering what drove that? And are you seeing maybe some better pricing that might flow through going forward? Thanks.

Yes, so certainly sequentially, we were expecting gross margins to go up. And I think we highlighted this last quarter. So the company was really built this year for the level of revenues that we have and we launched all of those new clients that we referenced last quarter here in the second quarter. So that incremental revenue was expected. And so we naturally expected gross margins to go up in Q2. So it's really sort of our expectations. As far as pricing goes, yes, there's nothing that I would call out in terms of pricing impacts going forward.

Great and maybe if I could just sneak in one more. Your commentary around the selling season has been really positive so far. I was just wondering if you might be willing to share how you're thinking about next year and how we should be modeling?

Well, I can't -- not that I can. We think it's early, and I want to go back to a normal cadence of talking about from a dollar expectation perspective for the November call overall sales activity. I think the commentary -- and I'll remind you, as I remind everybody, the majority of commitments do still happen middle of August through early October. But the activity so far is really strong relative to commitments to date relative to overall remaining active pipeline, et cetera. And so that's really the commentary, I think that we can provide at this point before we start quantifying 2023.

That's great. Thanks guys.

Thank you. The next question is coming from Michael Cherny from Bank of America. Michael, your line is live. Please go ahead.

Hi, this is [indiscernible] on for Mike. Thanks for taking my questions. Just looking at the results in the quarter, you reported pretty strong revenue growth, but it also looks like you're seeing some pretty significant growth in your accounts receivable and days sales outstanding. Could you just break down what's driving that growth?

Yes, so part of what's in there, and I tried to highlight it in my prepared remarks, in the first two quarters of the year, we'll see an increase in our receivables associated with our rebates based on the payment terms that we agreed, and again, it was a strong deal from an economics perspective. And given that we have plenty of cash in the books, we were okay with allowing that. But essentially, we collect -- we're earning rebates and getting -- in this quarter and getting paid for the rebates that were a couple of quarters back. So it's really referencing what we had earned. We're getting paid now for what we earned last year. So -- and then -- and really, it's all centered around the growth in pharmacy. So when you see from last year to this year, you'll see that growth, and that's what's really driving it.

You should start to see it correcting itself in the third quarter.

Got it. That's helpful. And then just a second question. Can you talk a little bit about utilization trends that you're seeing on newer cohorts? Thanks.

Yes, so the utilization is as we expect. There is a different -- each cohort will be different because the demographic makeup of each client group is different. So for example, we launched some customers here in the second quarter, including a larger one that was a retail customer. Now we would expect again, given the demographics of that company, that their utilization rate would be lower than what our overall average book of business is. And so again, they begin in their first quarter and then we'll typically see them rise a little bit as people begin to get into their treatment journeys, but otherwise, these cohorts and the past cohorts are effectively normal -- acting normally.

Great, thank you.

Thank you. The next question is coming from Sarah James from Barclays. Sarah, your line is live. Please go ahead.

Thank you. I just had a follow-up on the utilization front. So if you look at your more mature book, not the guys that started in 2Q, but earlier are they back to pre-COVID levels at this point?

Yes, if you look at it by client and those clients within the industries that they're in, they're back to normal pre-COVID levels, what Mark was referring to is the impact of newer clients and the demographics of the industries that they're in, and it would impact the averages. But overall, our pre-COVID -- or sorry, our clients that were around pre-COVID are back to normal.

Great, and then you mentioned earlier that your pharmacy sell-through is now kind of low to mid-80s. Where do you think that caps out your client base?

I wouldn't -- look, we try to sell every one of them. I'm not sure I would say it caps out, I would say that there's -- it's a matter of time in terms of whether or not they'll all buy upfront or whether or not there will be upsell opportunities in the future. Our success around upsell activity whether it's Rx or anything else in terms of their original plan design when they first come on board and then what they ultimately do is an indication of that, that continues. So I wouldn't sort of begin to guess where it caps out. We're in the high 80s already -- or sorry, the low 80s already. And I think that will continue to improve. Just the question is to where. But I think it's a matter of time that they come on versus whether or not they'll ever come on.

And just to be clear, the 84% is the cumulative take rate since effectively beginning of time. It has -- the take rate in our '21 selling season, out of that group was in the low 90s. So we continue to improve on that.

Great, and then one more clarification on your AR comment. When you said it's going to start to normalize in 3Q, does that mean normalize going forward? Or we're always going to see the seasonality where it's elevated in first half and then goes down in the second half? Because I don't think looking at past years, you guys have had that seasonality.

We had -- it was just one quarter, not two. So the payment terms got extended. So every year, as you have a step up in growth, you're going to have that same cash flow impact that will correct itself in the back half of the year. So it's a function of the growth and as a result of those payment terms that are on a 180-day payment term that's going to impact two quarters versus one in terms of as you have step-up in growth.

And just to be clear on what normal means. So in those first two quarters that we saw this year and in the second quarter of last year, it's an investment in working capital associated with the growth. So we don't -- again, to the extent that Rx begin -- continues to grow, there will be a smaller increase in working capital. But you won't see that up firstly. But to be clear, it doesn't mean that it comes back down or somehow reverses itself in the back half of the year. It's just -- we'll no longer be making as sizeable -- we don't expect to be making a sizable investment in working cap.

Helpful, thank you.

Thank you. And the next question is coming from Stephanie Davis from SVB Securities. Stephanie, your line is live. Please go ahead.

Hi guys, thanks for the question. Congrats on the solid quarter. I was looking at your stock-based comp figure and I was hoping to hear a little bit more about your hiring and labor philosophy. Just wondering if that's shifted at all, given the push/pull of the macro backdrop with the growing number of sizable RFPs in the market and this is reflective of anything to call out?

The stock comp activity is more a function of a grant that we did late last year that's impacting the year on a full-year basis, including this quarter. There is no change in philosophy. We haven't sort of adopted a change in the level of stock comp that we award to new employees. We've been operating under a matrix and continue to do so relative to the portion of compensation that ties the stock comp versus the portion of compensation that's cash comp. So no change in our approach nor the proportions of compensation, the increase in stock comp ties back to the grant we did late last year.

Okay. Understood, then on the -- just a subject to some of those large RFPs and some of that pipeline activity, could you just tell us where you've been competing in each head-to-head and maybe where are you seeing either greater traction or the Progyny store will stick [indiscernible]?

I'm not sure -- I mean I'll let Michael answer that.

Yes, I think in general, we continue to see -- first of all, we continue to see the health plan as sort of a constant from a competitive perspective, they own the benefits already. And again, in every case, we'll certainly come up against the health plan from that decision point. While there has been an increase in RFP activity, we've not seen that impact any of our key metrics to date, whether that be pipeline, as referenced in the opening comments, ahead on closes this year. And we're seeing consistency and comparability in our close rates. So again, there -- although there's slightly more noise in the marketplace, we're not seeing negative impacts from our new logo sales.

Right. And then in terms of where we're seeing it, there's no specific segment or industry or benefits or anything like that, that's outweighed relative to RFPs. It's sprickled across industries and consultants relatively equally.

Okay, great. Thank you guys.

Thank you. And the next question is coming from Dev Weerasuriya from Berenberg. Dev, your line is live. Please go ahead.

Hi, there. Thanks for taking my question and pardon me if I'm repeating something that's been asked, I'm kind of hopping through the call here. I wanted to just talk around a couple of things. One is just capacity for providers. The number of ART cycles have just growing at about a 10% clip over the last five years or so. But from what we understand, the capacity of the provider base hasn't dramatically increased. And given kind of where the fertility market is, expecting that to continue to grow. I guess what are you guys' thoughts on how that capacity and volume will reconcile with kind of the supply of the provider base, what bridges that gap?

The easiest way I could describe it is the conversations we have with our provider network. There is significant variability in what I'll call productivity per doc across the industry. And they all manage their businesses differently, but they manage them in a way that they don't -- aren't hitting limitations, as I understand it relative to being able to service all their patients, including their Progyny members. So we're not hearing, when I say we're not hearing, we're not having a challenge in getting our members scheduled with docs and getting them treatment. We're not feeling an impact relative to a capacity limitation of any kind to speak of. And so -- and the docs are adding docs every year relative to the fellowships that they have across the country, and they're opening up de novo clinics as part of their group network. So although the numbers that you're suggesting might indicate some limitation, it's not what we're experiencing or hearing in any way.

Okay. Great, that's probably something I'll want to double-click on later, but let me just move on maybe just revenue. It's typically been back half weighted aside from last year. And this year's guidance kind of points to that trend coming back a little bit with the H2 waiting reemerging all the way to a lesser extent. Could you provide some color around what lens to that historically and why that may be reemerging now?

Sure, the biggest thing that's going to impact back half versus first half revenue is the number of larger usually not this many and not this size clients that have started in Q2 and some of which started within -- during the quarter, not literally on April 1, but that started in Q2 and their impact in Q3 and Q4 is going to impact the full-year where they weren't -- they didn't exist in Q1, right? So the step-up in revenue from Q1 to Q2 is driven primarily by those new clients that have launched, right? The other things that do impact it, though, naturally for the entire base is every year is front-loaded relative to eligible members utilizing the benefit from a consultation standpoint more so as a mix, more so than the back half as a mix that they're going on to treatment. And so the combination of those two factors is going to drive the back half of the year versus the first half of the year.

All right, thank you so much.

No problem.

Thank you. And there are no further questions in queue at this time, and this does conclude today's Q&A session. I would now like to turn the floor back to James Hart for closing remarks.

Thank you, and thank you everyone, for joining us this afternoon. We know that there are certainly lots of companies that are announcing. So we'll wrap this up quick and let you get back to that. Thank you so much. If you have any questions, please reach out. Otherwise, we'll look forward to speaking with you in the Fall.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.