Good day, ladies and gentlemen, and welcome to the Progyny, Inc. Fourth Quarter 2023 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, James Hart. The floor is yours.

Thank you, John, and good afternoon, everyone. Welcome to our fourth quarter conference call. With me today are Pete 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'll 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 first quarter and full-year 2024 and the assumptions and drivers underlying such guidance, including the impact of our sales season and client launches and our expected utilization rates and mix, our anticipated number of clients and covered lives for 2024, 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, adjusted EBITDA margin, adjusted EBITDA margin on incremental revenue and non-GAAP earnings per diluted share. 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.progeny.com. I would now like to turn the call over to, Pete.

Thank you, Jamie. Thanks, everyone, for joining us this afternoon. 2023 was another exceptional year for Progyny, a year in which we achieved record levels of revenue, which grew 38%, profitability with a 17.2%, adjusted EBITDA margin and operating cash flow generating nearly $190 million or more than twice what we delivered in 2022. As important as those financial measures of success are, we're equally pleased with what we've achieved operationally. I'll touch on just a few of these highlights. Driven by our remarkable levels of member and client satisfaction, we once again maintained our near 100% retention across our client base, while also concluding a selling season that yielded the largest number of new covered lives in our history. We deepened our already highly collaborative relationships with clinical providers while also extending the reach of our vast network through the addition of reproductive urologists with the Progyny network now reaching more than 1,000 of the highest quality REIs and RUs in the country. And we expanded our solution to address both menopause and the treatment of male infertility. Aided by the quality and reach of that network and the ways in which we collaborate with them, we continue to achieve, for the eight straight year, the industry-leading clinical outcomes in fertility care. And in 2023, we helped the largest number of members in our history realize their family building dreams through healthier and faster journeys, while controlling costs. In fact, since launching our solution in 2016, we've cumulatively helped hundreds of thousands of people successfully navigate what would otherwise have been a complex, stressful and overwhelming course of treatment. And we've done so while routinely achieving NPS scores in the 80s, an exceptional achievement for any industry, let alone healthcare. As a mission-driven company, where everything we do is…

Thanks, Pete, and good afternoon, everyone. I'll start with an overview of our results for the fourth quarter the full-year and then provide our expectations for 2024. Revenue in the fourth quarter was $269.9 million reflecting 26% growth. For the full-year, revenue grew 38% to $1.09 billion. With this strong result, we've more than doubled our revenue over the past two years and achieved a tenfold increase over the past five years, which further attest to the substantial size of our market opportunity as well as our success in executing against our go-to-market strategies. Our growth in both the quarter and the year was primarily due to an increase in the number of clients and covered lives as compared to the year ago period. As of December 31, we had 392 clients with at least a 1,000 lives, representing an average of 5.4 million covered lives in the fourth quarter. This compared to 288 clients and an average of 4.6 million covered lives in the fourth quarter a year ago, reflecting approximately 19% growth in lives. For the full-year, average lives increased to approximately 24%. I'll remind you that the fourth quarter 2022 includes the impact of early launches, which had the effect of muting our growth rate this quarter as compared to what you will see in our full-year growth rates. As we told you in November, our recent selling season was more typical with substantially all of our newest clients launching in 2024, which is what we would ordinarily expect to see. Although the majority of our new clients have gone live in the first quarter, we have new clients going live in Q2 and Q3, representing in aggregate approximately 200,000 additional lives, and we have reflected that in the progression of our quarterly expectations for 2024. Turning…

Absolutely. Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] The first question comes from Anne Samuel with JPMorgan. Please proceed.

Hey, guys. Thanks for taking the question. I was hoping you could just provide a little bit more color about what's happening in the first quarter around the treatment mix. Why the headwinds? And then you touched a little bit on it that you've seen the rebound in February, but why do you expect to be able to recover that through the remainder of the year? And then how should we think about that recovery looking, is it going to be kind of even throughout the year? Do you expect it to kind of step up in 2Q? Thanks.

Yes. Hi, Annie. Thanks for the question. So, let me give you some history and that history is what our expectations are based on. Throughout all our years, if you look at our full-year, utilization mix is pretty constant year-over-year. The reason for that is that, incidence and prevalence of treatment types, especially when the population is as large as it is under management that we have, is going to be relatively consistent over a period of time. That said, there have been periods and again, the most pronounced one was summer of ‘21, right, where we had blips or anomalies or aberrations or whatever you want to call them, where treatment mix was a little off for a short period of time, but then reverted back to normal. This is acting similarly to that where we had, from treatments both done and scheduled for Q1 where we haven't received all the claims yet, but materially are receiving a lot of them, where that aberration started, continued into the middle of February in terms of, again scheduled and where we received adjudicated claims on. And, but scheduled for the balance of February and through March, it's already returned to normal. And our expectations because past history says that the years and again, when I say the years are sort of pretty consistent, I'm literally referring to almost every year since we've been in market, right. That the longer periods of time revert back to normal because again, what people are going to need for treatment based on the different treatment pathways and journeys that they're going to do are going to be relatively consistent when the population gets large enough. And that's our expectation, and that's why we expect what we are now seeing as normal distribution of mix to continue beyond our visibility that we have for March.

That's really helpful. Thanks. And then maybe just one other, you added some new benefits for the 2024 selling season. We're just hoping you could discuss what conversations with employers have been like, how receptive are they to adding more than just fertility? Thanks.

Yes. Hey, Annie. This is Michael. Yes, the conversations obviously, we're early in the season, but conversations have been very good. There's a good amount of interest. And again, these are products and services that are logical extensions for us, especially given our, the success on the fertility side as that naturally goes into maternity and postpartum. And so again, conversations are early, but interest is good and the pipeline is good from a client perspective so far.

Thank you.

The next question comes from Michael Cherny with Leerink Partners. Please proceed.

Good afternoon, and thanks for taking the question. Maybe if I can just follow-up on Annie's first question. I know Pete, you've talked about this not being the first time you've had this mix dynamic. Can you just maybe give a little more color beyond what you already said about how you landed on $15 million as the right number that is, transitioning over the course of the year given that the implied guidance you have over the rest of the year, no matter how you spread out, is still pretty solid relative to what your long-term trajectory has been?

Sure. I'll remind you that Q1 has seasonality in it versus Q2, Q3 and Q4. We compared Q1 mix to last year and previous Q1 years, and calculated the impact of the mix change that caused the impact to revenue or the short-term headwind that we described, right. So, it's literally effectively a pro forma calculation is the easiest way to think about it, right. And it takes into account what I'm describing, which is the short-term nature of the mix impact in the first half of the quarter in terms of what we see versus what we haven't see scheduled for the second half of the quarter. And that's how it's calculated. Does that help?

No, it certainly does. And then when you think about, the dynamics of the Pharmacy business in particular, you're getting at high-levels of penetration. How should we think about the growth dynamics, growth opportunity around that business on an, call it, intermediate term basis, Given that there's so much cross penetration that's already been done, are there other areas, other ways that you can help grow that business beyond just natural volume growth on the member ads? Or where should that business be going, within your P&L?

So as you point out, Mike, and by the way, welcome back. But as you point out, the penetration is getting close to 100%, it's 93% this year, in terms of the client base that we have. There is a little bit more to go relative to upsell opportunities, but for the most part, it's getting close. So, it will reflect normal growth rate more consistent with the medical revenue. That said, the only other dynamic that does come into play for Pharmacy is the what's been going on historically, which is annual increases on some of the drugs that are in the formulary and that will continue to contribute to growth from a topline perspective for Pharmacy.

Awesome. Thanks.

The next question comes from Glen Santangelo with Jefferies. Please proceed.

Yes. Pete, I just want to go back and touch on the regulatory climate that you talked about in your prepared remarks. I mean, after the Alabama court ruling came out, did you see any inflection or change in your business? And I know the Alabama AG office has come out and said they have no intent to prosecute any families, and the Texas governor came out. Is this all going to wind up just being like Roe versus Wade a couple of years ago where it didn't really amount to anything as far as your business is concerned? Or is there anything that you're watching or sort of paying attention to?

So, the short answer is I do believe like you're asking, and similar to when Roe v. Wade got overturned, where there was concern that fertility or IVF can inadvertently get caught up in the anti-abortion laws that were coming out, and then that didn't happen. This is the same thing. Alabama, just for clarity, wasn't a legislative change. It was a Supreme Court ruling on a case that then had an impact and concern around clinics in the state practicing when they're do you create a normal practice more than one embryo when they're doing IVF, right. But, I think the thing we're seeing and watching, but seeing is bipartisan comments from everybody, including even the former President. But certainly the legislature in the states that are the most extreme relative to anti-abortion, including Alabama, which just had the Supreme Court ruling, in the State of Alabama, where they're talking about effectively fixing it, if you will, or protecting IVF, realizing the importance of IVF in family building for many, many millions of couples. And so, I agree that I don't believe this will have an impact to the overall industry. I don't believe any other legislation or any other state will have anything relative to moving this direction. And, I also hope that for the State of Alabama, the legislature there will correct, if you will, what in my opinion is a bad rule.

And this is Mark. Just putting a fine point on the first part of your question, is there anything that we're seeing? We don't really get into sort of the breakdowns of our business by state. But, if you look at the publicly available data from SART around Alabama, it makes up less than one-half of 1% of the volume in the U.S. and they are not outsized for us. So, they're very, very small part of our overall business. So, we're not seeing any impact of that.

Okay, that's helpful. Mark, if I can just ask you a quick follow-up question on the guidance. I think you said when all your client wins in 2023 are rolled on, you'll have 6.7 million covered lines. Could you give us what that number was at end of period 12/31? I'm kind of curious as to how many members still have to roll on here post, January 1st. And embedded within that guidance assumption, are you assuming any sort of organic growth within the existing base or any sort of deterioration within that existing base? And, thanks, and I'll stop there.

Yes. So, there's a couple of pieces here to keep in mind and some were part of my prepared comments. So, we expect in Q1 that will be approximately 6.1 million live, in addition and then on top of that, the 300,000 or so lives that we have for GHA, so call it 6.4ish. That together with the 200,000 or so that we'll be launching in Q2 and Q3, you get, you closer, I think the rest is frankly in the rounding, to be honest. As far as organic growth through the year, we're not anticipating I know in earlier years of our existence, we had more significant organic growth that we saw, but we're not planning that. It's not baked into our guidance very, very small. So, that's where our position is for this year, our outlook as of right now.

Okay. Thank you.

Up next is Allen Lutz with Bank of America. Please proceed.

Good afternoon. Thanks for taking the questions. Pete, I want to ask another one on the treatment mix shift here. Digging a little bit deeper here, is it was there more IUI and less IVF in the quarter? I'm trying to understand exactly where is the mix shift occurring within the business, just to give you the confidence that it's going to revert over the next few quarters? Thanks.

Sure. No, it wasn't more IUI versus IVF. It was more types of IVF that had different revenue contributions. And again, so without sort of getting into a lot of detail, if you will, there is variations of treatments, right. We literally have 20 different treatment bundles, right. There are all different forms of IVF, couple of them are IUI, but they're mostly IVF. And there's nuances on all of those and they have different revenue contribution on all of those. And so, it's within the IVF bucket, it's not some shift to IUI.

That's helpful. And then just a quick follow-up on the female utilization was up about 6% in 2023, and that's a pretty big step up in one year. So, just trying to think about how we should think about what's embedded in terms of utilization in the 2024 guide? Thanks.

Sure. For both Q1 and the full-year, we have essentially flat utilization versus 2023.

Thank you.

The next question comes from Scott Schoenhaus with KeyBanc. Please proceed.

Hi, team. Thanks for taking the question. So, I just want to keep drilling into this treatment shift. So, is it a shift in the initial consult services that were probably more pronounced in December into early January, affecting, sort of the push out in egg retrieval medication and the retrieval process, which can be, medications alone could be 10 times more than the initial consult. I just want to kind of put fine point minutiae on this treatment shift on the IVF process.

Yes. It's although it is for consoles contributes to it, it was more, again, a shift within IVF treatments themselves, which due by the way, as you're pointing out, different treatments have different levels of pharmacy contribution to them, different parts of the cycle require different volumes. And, in terms of dosing as well as price points relative to the specialty drugs are involved in IVF. So the combination of it is what's driving the bigger mix impact, not an outsized impact relative to higher initial consult than normal versus moving on the treatment.

And I'd just add to that, making the fine point Pete made it in his comments a little bit earlier. We do normally expect at this time of the year to see a slightly higher proportion of initial comments of consoles because it's the beginning of the year. That's part of actually why you see the step up from Q1 to Q2. It's a contributor there. So all of our comments here around mix are versus what we would expect to see and what we've seen historically. Again, Q1 is a little bit different than other quarters of the year normally.

That's super helpful. So is it fair to say that we should see a re-ramp up in acceleration in medications that the blip that we saw in the first half of the quarter, should that roll really -- should that give you visibility and confidence to see that roll right into the second quarter?

Yes. So I'm not sure that we commented specifically on medications or not, but in general, the blip that we saw in the first half of the quarter, we're seeing in the first half of the quarter that seems to be correcting itself in the second half is going to, however, much it contributes to higher medical revenue and higher Rx revenue. Yes, that's our expectation. Again, based on past history and when I said that before, it wasn't like a one-time past history, it's literally years and years of history around full year utilization mix from a mix perspective is what we are expecting for the reasons that I said in the answer on my first question.

Thank you so much.

Next question comes from Sarah James with Cantor Fitzgerald. Your line is live.

Thank you. So if we kind of ignore the anomaly that's going on in January, and we think about just the underlying revenue per cycle trend, how do you think about that progressing in ‘24 versus ‘23 or maybe how you think about it going forward given the geographic and product mix that you guys have going on? Is that something that would be flat? Is it possible for it to still trend up?

Well, we don't normally sort of comment from a guidance perspective on revenue for Smart Cycle. I would point to our history though. Our history is that in general, it's been coming down a little bit each year for a couple of reasons. One is, I think you referenced one of them and the bigger contributor, which is as we continue to grow the company and more and more of our growth comes from across the country and therefore contributes as a mix, a higher mix versus sort of previous years where there was a higher concentration of East Coast, West Coast, which normally has higher reimbursement rates. That's going to contribute to an average lower medical and overall revenue per cycle. So it's history as a guide. I would continue to expect at some level of that, I couldn't tell you sort of how much and what that might look like, but that would be a normal expectation based on what's been happening over the last seven, eight years.

Now remember though that we'll have a greater proportion of clients in ‘24 that have the Rx benefit than the prior year. So that if you look at it on a full revenue basis, there's a little bit of a step up because of the higher attach rate. But all the comments, are certainly, stand for medical, which is probably the best comparison point for you.

Great. And one more if I could. You guys have been fantastic at generating cash flow. You have a large balance now. How do you think about deploying that capital?

We continue to -- as we sit here now, we continue to look at that capital as optionality relative to opportunities as we continue to explore opportunities out there. To that end, at some point, we will take a harder look at whether or not there is some sort of other use for that capital and we'll share sort of those thoughts in upcoming calls.

Thank you.

Okay. The next question comes from Jailendra Singh with Truist Securities. Please proceed.

Thank you and thanks for taking my questions. And apologies for keep going back to the shift in treatment mix in Q1. Couple of cleanup questions there. First, what is the related EBITDA headwind for this $15 million revenue impact? And how is this $15 million revenue impact split between Medical and Progyny Rx? And the second question for that was that, was this treatment mix shift across the board or was there particular geography or industry you saw this concentrated? The reason I'm asking is because I know, Pete, you're trying to compare this with summer of 2021, but back then you attributed that to possibility of seasonality as people taking summer vacation. But having something like this happening at the beginning of the year, little surprising.

Thanks for the question, Jailendra. So let me give you again some history. When it's happened before, when we weren't public, it wasn't in summer or sort of it was different it could happen in different parts of the year. It's more happenstance than it is cause and effect. When we talked about it in 2021, we surmised what it might be. The reality is we have no idea. The reality is nobody tells us sort of why they're doing what they're doing. They're on a medical journey and they're going to do what they do. And there's points in time that are anomalous, where a concentration of types of treatment that contribute lower revenue are going to happen in a higher concentration, but they're anomalous because they usually are short in duration, right. Relative to I forgot what your other questions were.

The EBITDA sort of --

The EBITDA sort of contribution would be relatively normal drop through is the best way I could describe it. And you could do sort of your own calc if you want that. As it relates to breaking apart sort of the impact between medical and pharmacy, our guidance we don't guide to sort of with medical and pharmacy broken out already. So, I'm not sure how instructed that would be. And so we're not going to break that out.

Okay. And then my follow-up on gross margin, anything you can share in terms of your expectations for 2024? You guys reported a 50 basis point expansion in 2023. Should we think similar year-over-year trends next in ‘24?

I wouldn't sort of exactly peg that number. The reality is a lot of the dollars relative to margin expansion do come from there, right. So you certainly take a look at that, but there's leverage across the business, sales and marketing and G&A as Mark talked about for 2023 in his comments. But since we don't guide margin either, I think it's premature to sort of start commenting on margin expectations. That's why we give sort of the adjusted EBITDA guidance for the full year to give you some frame of reference.

Great. Thanks, guys.

Up next is Stephanie Davis with Barclays. Please proceed.

Hey, guys. Thank you for taking my question. And apologies for those background noise. I am in the airport again. Sorry my kids are here. I wanted to ask a little bit about the pharmacy benefit because we are hearing a lot of concerns because of the election year around what this means for PBM. Are there any protections or carve outs that you would call out that you think would shield your pharmacy benefit from being impacted by any regulation by this? Or how does that factor into your outlook for the year?

Well, I'm not sure exactly what you're referring to of the regulation of the regulatory stuff that's being discussed as far as I'm aware, it's mostly around transparency and not around sort of any change relative to the economics of sort of the PBM world, right. That said, I will point out that our model relative to our clients and the members is different. As it relates to rebates, we don't cut a rebate check if you will and give it to the client. All of it is point of sale relative to the formulary pricing, so that the members themselves individually could also benefit from it. But there's nothing out there that I'm seeing or hearing about as I talk to the attorneys that causes me concern relative to an impact, economically to our model. I think the stuff that's being discussed sounds like it's just furtherance of some of the transparency laws, potentially.

That rebate info is all I need to know. And then I want to touch on your margins a bit because it looks like you're still expanding margins, but it's not the same pace that we've seen for the past few years. How much of that is just the penetration rate that you have reached for this pharmacy benefit versus maybe some conservatism in the outlook?

Well, I would say, again it's early in the year to see where we settle in. I think it's pretty comparable to prior years relative to our guidance versus what we've achieved. And I wouldn't necessarily peg it all to pharmacy or not. It's the overall business and the overall revenue growth contributes to the overall margin expansion. The larger dollars are on the medical side already. But overall, I would say that given all of the continued investment that we planned for the year, as I referred to in some of my prepared remarks, if you think about it right, before 2023, we were effectively a one product company. We've been investing in 2023 and a lot more again in 2024 and becoming a multi-product company, that's all in the P&L. And with that, we're still achieving the margins that we have. So I think, that's a pretty good financial picture given the amount of investment that we are doing to expand our product portfolio.

Awesome. Thanks for the help.

Up next is David Larson with BTIG. Please proceed.

Hi. This is Jenny Shen on for David Larson. Thanks for taking my questions. Just one on competition. So you mentioned that your market share right now is pretty low in the mid-single digits. So, I was just wondering your views on the competitive environment, whether you run into other competitors when you're having discussions with prospective clients, and whether most of your wins right now are from clients who've never offered fertility benefits before or whether they're competitive wins where you're taking business away from competition? Thanks.

Thanks for the question. I'll do the second part first. So in all my comments relate to prior selling season, so it's too early in the year to comment on current activity. But if you sort of take the 2023 selling season, the 2022 selling season, the 2021 selling season, our wins come from almost 50-50 as a percent from brownfield, i.e., clients that had some form of fertility benefit or greenfield, i.e., clients that have never had a benefit. And that's sort of been the recent history in the past reselling seasons. Before that, it was more sort of two-thirds, one-third brownfield versus greenfield. That was the first part of your question. What was the other part of your question?

I think the second part was related to competition during sales. So first off, really each sale and each win, we are competing first and foremost with the health plans benefit. So that's always something that's there, that's always something that's available and obviously something that we've had a lot of success in selling against for a variety of reasons. And then certainly, as the market and the industry has picked up and the interest from the employer side has picked up, we do see and compete against some of the other point solutions. Again, that's not nothing new this year from that front. We've been competing on that front for a while now. And as Pete said, it varies on whether we're competing with a health plan only or whether we're competing with a health plan endpoint solutions on a case by case basis. But again, early in the year so far, but again, we're seeing consistent nothing new, I should say, from the competitive position versus the future.

Got it. That makes sense. And I think you mentioned last quarter and throughout the year some of the not now decisions. Do you think some of those headwinds can become tailwinds in 2024? Thanks.

Yes. I mean, so our not nows are we see not nows every year, first off. And again, these are at times these are strategic decisions that employers are making. And so sometimes they go through a process and it's next year's priority or something along those lines. So we do see them every year. As Pete mentioned in his comments, not now make up usually the majority of our pipeline early in the year like this. And currently, we're at a strong position from not now and an active pipeline perspective. Again, early in the year to make too many predictions around how that will materialize. But they certainly become not now from last year, certainly become opportunities going into the New Year and this year is no different.

Great. Thank you.

There are no further questions in queue. I would now like to turn the floor back to James Hart for closing remarks.

Thank you, John, and thank you, everyone, for joining us this afternoon. As always, please feel free to reach out to me if you have any questions. Otherwise, we look forward to giving you our next update in just a couple of months actually. Thanks much. Have a good afternoon.

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.