Good day, everyone, and welcome to the Progyny, Inc. Second Quarter 2023 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, James Hart. Sir, the floor is yours.

Thank you, Matthew, and good afternoon, everyone. Welcome to our second quarter conference call. With me today are Pete Anevski, CEO of Progyny; Michael Sturmer, our 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 our comments and responses to your questions today reflect management's views as of today only, and will include statements related to our financial outlook for both the third quarter and full year 2023, and the assumptions and drivers underlying such guidance, the demand for our solutions, our expectations for our selling season for 2024 launches, anticipated employment levels of our clients and the industries that we serve, the timing of client decisions, our expected utilization rates and mix, the expected benefits of our pharmacy program partner agreements, including future conversion of adjusted EBITDA to operating cash flow, the potential benefits of our solution, our ability to acquire new clients and retain and upsell existing clients, our market opportunity, and our business strategy, plans, goals and expectations concerning our market position, future operations and other financial and operating information, which are forward-looking statements under the federal securities law. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business as well as other important factors. For a discussion of the material risks, uncertainties, assumptions and other important factors that could impact our actual results, please refer to our SEC filings and today's press release, both of which can be found on our Investor Relations website. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During the call, we will also refer to non-GAAP financial measures such as adjusted EBITDA and adjusted EBITDA margin on incremental revenue. More information about these non-GAAP financial measures, including reconciliations with the most comparable GAAP measures, are available in the press release, which is available at investors.progyny.com. I would now like to turn the call over to Pete.

Thanks, Jamie. Thanks, everyone, for joining us this afternoon. We're pleased to report that Progyny had a very solid second quarter, highlighted by record quarterly revenue of $279 million or 43% growth over the second quarter of 2022. The strength in this quarter's result reflect that member activity continues to be healthy, further affirming not only the essential nature of fertility care but also the strong desire amongst members to pursue the appropriate medical treatments they need in order to realize their family-building goals. In addition to the strong top line performance, our continued focus on operational excellence also produced our highest-ever quarterly adjusted EBITDA and quarterly cash flow as well. In short, we've entered the second half of the year with positive momentum across all the areas we look to when measuring our progress. In addition to our strong financial performance, we continue to deliver to our customers the benefits of value-based care because of our clinical outcomes in member experience. Lastly, based on what we're experiencing in our current selling season to date, we're continuing to see higher employer demand for fertility and family-building solutions. Last month, the CDC released its annual outcomes data on the fertility industry in the US, reflecting treatments completed through the end of '21. For the seventh straight year, Progyny has significantly outperformed the national averages across every relevant benchmark for success. As a reminder, Progyny is the only solution that is doing comprehensive outcomes reporting, reflecting virtually every treatment for every member across all relevant metrics. You will see these results reported in our second quarter 10-Q. Since launching our solution in 2016, we've consistently achieved higher pregnancy rates, higher live birth rates, lower rates of miscarriages and significantly fewer multiple births. Our superior clinical results not only create a better member…

Thank you, Pete, and good afternoon, everyone. I'll begin by taking you through our second quarter results and then provide you with our expectations for both the third quarter and full year. Revenue in the second quarter was $279.4 million, reflecting growth of 43%. The growth versus the prior year was primarily due to an increase in the number of clients and covered lives as compared to the year-ago period. We had 384 clients with at least 1,000 lives as of the end of the second quarter, representing an average of 5.3 million covered lives for the quarter. This compared to 273 clients and an average of 4.3 million covered lives a year ago, reflecting approximately 25% growth in lives over the prior year. As expected, a handful of clients launched during the second quarter. So these were relatively smaller accounts. Several months ago, a number of high-profile companies announced planned reductions to their workforce for late 2022 and 2023. Some, though not all of those companies are Progyny clients. And in most cases, these were relatively modest reductions when compared to their overall sales. While we did see an impact from workforce reductions at some of our clients in the second quarter, the level was consistent with what we had expected, and that impact has continued to be offset by other clients that have been expanding their organizations either through additional hiring or M&A. This dynamic is consistent with the Labor Department data this year, which has continued to show an expansion of jobs across the economy as well as unemployment that has remained steadily below 4%, which is meaningfully better than what many thought it would be as of mid-2023. Following the close of the quarter, several additional clients launched their Progyny benefit. Taking into account the launches…

[Operator Instructions] Your first question is coming from Michael Cherny from Bank of America. Your line is live.

Afternoon. Congratulations on another great quarter. I just want to make sure I heard everything right. Mark, you talked about 2Q performance, and I think you used the term pull forward, but then the guidance talked about seasonality. I just read the outperformance and the timing is nothing but seasonality. I just want to make sure that we understand exactly the dynamics of how you think about what happened in 2Q and the performance relative to what you would typically expect of the seasonality of your business.

Yes. So for Q2, certainly, utilization was healthy. We're sort of pointing out that we believe that there's some slight pull forward potentially utilization for the July-August time frame. It's something that we see typically. So when you're looking at Q3, remember, last year we had a significant number of launches that were early that we're not really seeing in this particular year. So that sort of summer - just the comparison versus Q2 tends to be a little bit more on par as obviously, our guidance is indicating. That was a little bit obfuscated by those launches last year. So - but again, I mean, it's really looking at the full year and what we see in Q4 and beyond. And again, the overall utilization has remained really healthy. We're just making sure that people can be focused on the dynamics of how that third quarter seasonal piece relates to what we're seeing in Q2 and for the balance of the year.

Okay. But nothing abnormal that you would typically see in a normal year which, I know, again, we haven't had in a while in terms of that dynamic between 2Q to 3Q.

Yes. No, Mike, the short answer is you're right. It is normal seasonality. If you look back at '21, you saw this a little bit. So you saw a dip in Q3 versus Q2. But by the end of Q3 and into Q4, it ramps back up, it's normal then. So, you're absolutely right.

Perfect. And then my other question, obviously, the cash flow catch-up is great, cash flow has been building as you go pretty healthy level on the balance sheet, no debt. What are the plans to cash?

The plans continue to be to look for opportunities, whether it's in the space or expanding into adjacencies, haven't identified any yet, but we're going to keep our powder dry relative to the cash we have in the balance sheet. And the good news is, at least, rates are now favorable. And so as the cash sits there it at least earns favorable treasury rates in the interim until we identify opportunities to deploy it.

Perfect. Thanks so much. Congrats again.

Thanks, Mike.

Thank you. Your next question is coming from Scott Schoenhaus from KeyBanc. Your line is live.

Hi, team. Congrats on the record quarter. Pete, thanks for providing those Progyny aggregate retrieval stats versus the national average for - in order to get to a live birth. I think that puts your success in context. So I just wanted to ask about the new wins in pipeline. You noted in the release and in your prepared remarks that the pipeline is up versus last year. And then you mentioned, Pete, that the mix was equal between employers with existing fertility solutions and those without. I think I got that right. Just curious about the competitive market versus this time last year from those that you're converting away from a current fertility provider.

Yes. Just to clarify, when I referred to the greenfield versus brownfield, I was really talking about the last two full sale seasons. This sales season is early in terms of giving that kind of commentary. We'll give that color relative to this sale season when we report in November, the full sale season. So it's one clarification. Overall, the environment is, I would say, about as competitive as it was last year, sort of no more, no less. Bigger opportunities usually have more competition, smaller ones usually have less. We still compete generally across the board when you look across all the accounts, primarily with the carriers, the payers across the country managed care, but certainly, competition in the space continues, and I would say, is relatively comparable to last year.

Great. Thanks, Pete for that color. And then on the gross margin side, you noted you're sort of giving back some to the client. Is that a way for you guys to also ensure that you're being competitive in the market? Just can you kind of walk us through those dynamics? And how we should think about gross margins, I guess, in the near- and longer-term? Thanks.

Yes. So the gross margins, it does give us a competitive differentiator for a couple of reasons. A lot of the other competitors in the space are usually pricing off of pricing at the clinics or x percent off, are usually also doing an overlay of what's renting somebody else's network. And so as a result, dealing with the reality that health care inflation is real. For us, part of what we do in terms of benefit to our clients is the combination of cost containment measures and one of them is to the extent that we can take advantage of our growth and be able to keep costs constant and/or bring unit cost down. We do that really important. The other piece of it, as I highlighted on the call, is making sure that our version of utilization management is the smartest version that creates the best member experience, but delivers real value and real cost containment in the form of really favorable live birth rates per retrieval, as an example, plus all the other clinical outcomes that we talked about. Those are the really important ways to do that as opposed to sort of traditional blunt instrument utilization management techniques. So it all sort of goes into the mix of continuing to differentiate ourselves and deliver value to our existing clients as well as being able to position ourselves well for prospective clients.

Thanks.

Thank you. Your next question is coming from Jailendra Singh from Truist. Your line is live.

Thank you. I actually want to ask about any update on your reimbursement discussion with your clinic partners with all the concerns on health care and general inflation. Have you seen any pressure on case rates from them? And if that happens, how much flexibility do you have in terms of passing on these increases to your employer clients?

So, it's not happening. It's not happening any more than normal. So every year, as you might imagine negotiations, they start one more and we talk about - we use data as we have these direct conversations and talk about how much business we're adding for them, et cetera. And so ultimately, we come out where we've been coming out on a net basis based on our history. So there's nothing more happening relative to that. So - but to answer the second part of your question, to the extent that, that does happen, we do have the ability and flexibility to raise rates with our clients. Unfortunately, we've been successful in not doing that. And we've been keeping unit cost flat to down, and this year is no different. But we do have that flexibility contractually clients to be able to raise rates should we need to.

And my follow-up on - a quick question, which we have got some investors recently is around Progyny Rx. And I know rebates play a crucial role in that business. Just curious with all the noise and scrutiny around rebates for PBMs. I know your PBM is unique and is focused on niche area. Do you see any concerns in that business model if there's more scrutiny around rebate for PBMs in general?

We - I don't have one yet. When I say yet, I mean, we're not experiencing sort of that same type of activity or questions around it. Remember, our model is very different. We don't have a traditional model where we're collecting and giving rebates back. For us, everything is part of the pricing that we do at the point of sale so that the member can also enjoy benefit of it. And that model has been performing for us and continues to perform for us. So it is one of the areas that we've been hearing about for many, many years. We'll see what happens, but we're not concerned.

Alright. Thanks, guys. Congrats on a good quarter.

Thanks.

Thank you. Your next question is coming from David Larsen from BTIG. Your line is live.

Hi. Congratulations on the good quarter. I just want to confirm what I think I heard, you're not seeing any slowdown in the market. I mean are you hearing any clients or any of your salespeople talk about belt-tightening? Or just can you provide any color or thoughts or comments on how clients might view the fertility benefit? Is it potentially - is it a potential area of savings, reducing that benefit for employers in the event of a recession? Just any color there would be helpful.

Yes. I think Michael should - Mike was close to the sales force. He should handle that.

So thanks for the question. At the end of the day, fertility from a value perspective operates the same way that the rest of the health care does. It's about delivering a great member experience, delivering great quality and controlling costs. That's no different today than it has been in the last several years. And to the last sort of line of questioning, we have some good levers that we've been able to pull and keep down from a unit cost perspective. And we'll continue to do that in the market as we go through the selling season and into the retention business with our clients.

Okay. And then can you just comment on the PBM itself, like why would somebody use your pharmacy benefit? Like, couldn't they get the same rates with Medco or CVS or Optum? Or is your pricing better? I just would think that with their scale, they would have very competitive prices on these drugs. Can you just maybe give some color on that, please?

Sure. There's a couple of factors to it, right? One is it's about the whole member experience and it's how we sell it first. It's about having a similar authorization so that cycles are never delayed because cycles are tied closely to women's menstrual cycle. And so that's one big wrinkle that gets avoided. It's also out the fact that we deliver - we're the only company, I know a PBM that services the fertility space that has a waste management program where we are in conjunction with our network of providers are dispensing more than 1 time throughout the treatment cycle so that we're never over-dispensing vis-a-vis dosing instructions versus what happens traditionally, which is you get your day one dosing instruction and then 80% of the time that's going to decline as you go through the cycle. But the prescription is written for the full 10 days at that day one rate, if you will, and it's all dispensed. And so we've been achieving somewhere in the 12% to 14% range of less dispensing with our waste management program. That's huge savings because all these drugs are specialty drugs. The last piece is that we are competitive from a pricing perspective despite the size of the other PBMs because they're bigger in general, obviously, but we're pretty big in this space and continue to grow at a rapid rate. And go to our partners with business cases that gets us competitive pricing so that that's not an issue.

Okay. So it sounds like by using your PBM, there's a higher quality of patient care, higher quality of service, and that obviously leads to better outcomes, more effective birth rates, ultimately lower cost and better clinical care. Okay. And then one last quick one. We've been hearing about like Maven and KindBody. It seems like it's a very competitive space. Just at a high level, what's the key differentiator between Progyny and a handful of your peers, your competitors?

The key differentiator is that we are directly contracted with our entire network. As a result of being directly contracted with our entire network, we get a tremendous amount of data on every one of our patients, including what I just described, which is the ability to manage a waste management program that otherwise without that relationship, you wouldn't be able to do. We get a significant amount of data points on the entire journey and are in a position to monitor and manage adherence to best practices that ultimately drive the clinical outcomes that we get. It's pretty significant where the - and it's also why we're the only benefit provider in this space that reports outcomes on every one of their patients. And they're in our SEC filings as well, and it's also been validated by third-parties in terms of [indiscernible]. And so overall, it's pretty significant, demonstrated at scale, ability to deliver value-based care in this space that's really second to none. And so that's - there's details in the approaches, but that's the high level significant difference.

Okay. Great. Thanks very much. Congrats on a good quarter.

Thank you.

Thank you. [Operator Instructions] Thank you. That concludes our Q&A session. I will now hand the conference back over to James Hart for closing remarks.

Thanks, Matthew. So thank you, everyone, for joining us today. If you do have any follow-up questions, please be sure to reach out to me at any time. Otherwise, we'll look forward to speaking with you again in a few months' time.

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.