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

Thank you, Paul, and good afternoon, everyone. Welcome to our third 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 fourth 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/or mix, our anticipated number of clients and covered lives for 2025, 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.

Thank you, Jamie, and thank you, everyone for joining us this afternoon. In the third quarter, we continued to execute against strategic objectives that we outlined for you at our recent Investor Day, laying the foundation that will enable us to accelerate growth, while meeting the needs of our clients and members and creating long-term value for shareholders. I'll expand on those areas shortly, but I want to begin with third quarter member activity, which continued to unfold differently from historical patterns with respect to how members progressed through treatment. Consequently, our third quarter results are below the ranges we set in August. I understand this is disappointing. To help you better understand what we're seeing, what we're doing in response and how we think about the business moving forward, we're going to walk you through several areas. First, what's been different and unexpected with respect to the member activity in 2024. Second, how we're reflecting this variability in our guidance. Third, while despite how the year has unfolded differently than expected, we firmly believe the business is not only fundamentally strong but also uniquely positioned to expand upon our leadership role in a large and growing market. I'll begin with member activity, which is actually two separate though related components. The first is the overall utilization rate which captures the percentage of our 6.4 million members who have taken action to pursue care out of fertility clinics, which includes initial consultations during the given period. The second is the measure of consumption, which reflects the volume and types of services that the utilizing members have done also during the period. With respect to the utilization rate, we continue to see that members are pursuing care at levels that are consistent with historical patterns and that has continued in 2024.…

Thank you, Pete, and good afternoon, everyone. I'll begin with our third quarter results and then provide our expectations for the remainder of the year. Third quarter revenue grew 2% over the prior year to $286.6 million. The growth was primarily due to the increase in clients in covered lives as compared to a year ago, which was then offset by the lesser rate of consumption overall that Pete described earlier. So let me take a moment to walk you through this dynamic in greater detail. Female utilization was 0.47% in the third quarter. This was a modest decrease, as we had told you to expect, from the near record 0.49% that we reported in the third quarter a year ago, but flat on a sequential basis from the 0.47% that we reported in August. While utilization can vary modestly from period to period, it continues to be highly consistent with what we've seen for many years, reinforcing our belief that we aren't seeing some underlying change in either medical need, member demographics or the desire for people to pursue family building. The different pattern of consumption in Q3 that Pete was describing earlier is reflected in reported ART cycles. Approximately 14,900 ART cycles were performed in the quarter, reflecting a decline of just under 1% from the year ago period. So while the rate of people pursuing care is consistent, the pattern of consumption is different, creating the challenge with respect to our forecast and guidance. Today's press release includes a table on the last page to help you see how ART cycles per unique female utilizer during the quarter diverged from past patterns. We've historically seen an increase in ART cycles per unique utilizer over the course of any given year. However, this year, in a complete divergence…

Thanks, Mark. I hope today's call has helped you understand how the business remains fundamentally strong and uniquely positioned to take advantage of our large and growing market opportunities despite the awards that impacted our recent results. As we look forward into 2025, consistent with our past practice, we expect to provide our financial guidance when we report year-end results in February and we'll have insight into the clients launching on January 1. At this point even with the loss of the one large client, we expect to continue generating strong profitability and meaningful cash flow in 2025, which is a testament to the diversity of our business and the strength of our business model. With that, we'll open up the call for your questions. Operator?

[Operator Instructions] And the first question today is coming from Anne Samuel from JPMorgan.

I was hoping maybe you could speak a little bit to how you get visibility or understanding into what's going on with your utilization and consumption? Are the PCAs perhaps able to offer any insight on trends from recurring conversations that they're having around what may be causing some of this disruption?

So relative to understanding our utilization and consumption to date, which is, I think, the first part of your question, Anne, we look at contextualized data. So same point in the quarter in Q3 versus now and we look at both overall unique utilizers i.e., utilization rate as compared to that time period. And then we look at the ART cycles per utilizer that are at that point scheduled versus what was scheduled in Q3, right? Relative to the PCAs, as I mentioned, it's -- their conversations are primarily around the members' needs, the journey to going on, helping them answer their questions, helping them schedule appointments, et cetera. They're not talking to them about any other type of activity relative to timing or anything else. As you might imagine, there's roughly 30,000 unique utilizers in a given quarter, aggregating those conversations even if they were happening is not something that is realistic, but they don't occur that way. The way I said it in the prepared remarks, they're just helping them get through and fulfilling their needs relative to what their current needs are.

That's helpful. And just wondering maybe is the kind of the national conversation and the recent election, maybe would you attribute some of the disruption you've seen to that? Some of your competitors recently launched a faith based fertility program. Are your members asking for anything like this? Do you think that's factoring at all?

Well, I haven't heard a request around the second part of your question in terms of your faith-based programming or anything else like that from our members or PCA is hearing that. I'm sorry, what was your second question? It's hard to say whether or not the election had any impact on utilization or not. As you rightly point out, the election cycle did have fertility as part of the overall conversation. But as we said earlier in the year, the good news is that on both sides of the aisle, they talked about protecting facility. And so that's positive. So it's hard to know. We haven't heard of that or haven't heard anything around that in terms of it impacting it. So I'd be guessing if I comment it further.

Great. And if I could just squeeze in one more. But just curious -- now that you have a more kind of fulsome total women's health benefit, we've been hearing a lot from employers that they are looking for a really comprehensive benefit spinning all of women's health. Did that catalyze any of your conversations this year, maybe for the uptick of the core fertility benefit? And did that enable you to get maybe more employers than you were anticipating?

I will I will let Michael comment and then I'll add some comments if needed.

Yes. So thanks for the question. So it definitely saw good strong interest in our new products, certainly help contribute to a successful sales season this year. That goes from both a new logo prospect -- perspective as well as our existing book of business and adoption rates there. I'll turn it back to Pete for some additional color.

Yes. So the other color I would give is that if you look at -- simply if you've got RFP activity, there was a greater percent of RFPs that were looking for a full suite -- a fuller suite of solutions even if they didn't buy them all than there was in the prior year. But I think the most positive data point is that 40% of the new clients bought the additional products in addition to the fertility benefit. So I think overall, it's supportive of the demand that you're talking about relative to more and more clients looking for a more fulsome solution.

The next question will be from Allen Lutz from Bank of America.

Mark, one for you. The gross margin was under a little bit of pressure this quarter, and you called out care management services or investments in care management services. Can you talk about what exactly is driving the gross margin compression as it relates to those care management investments. And then as we shift to 2025, can you provide just high-level commentary on what's going to drive the gross margin next year? I know you're dealing with the client loss, you have new offerings. There's these investments in care management that you're talking about. But how should we think about whether or not you can increase the gross margin into 2025?

Yes. So as it relates to this quarter, we do and we have in each year, begin to build our staff in anticipation of the launches in the prior year. And so -- and we did that. So that's part of what's showing a decline just sequentially in gross margin. The other is obviously the impact of the unexpected level of contribution from ART cycle revenue, which was not planned for. So -- and then as it relates to balance of the year, we're obviously looking at moderating and it was in my prepared comments, we're moderating the hiring in and around gross margins and the care management services teams that support them, although we will be growing next year. So at least our -- from our prepared comments, our membership will be growing next year. A little bit early, I think, to comment on exactly what we'll do in 2025, we typically give guidance for the year in February. We're in the middle of our budgeting processes right now. And as always, we'll be looking at all of our costs with a pretty close eye and planning for next year, given we now understand where our selling seasons turned out and how our retention season has also turned out.

And then one housekeeping question. 6.4 million members today, adding 1.1 million that gets you to about 7.5 million, minus the disclosed client loss gets us to about, call it, 6.3 million. That's a little bit of a delta versus the 6.7 million that you called out. Is there any other -- is there anything else to mention there? Any other churn going on? Or is it just sort of rounding?

Yes. There's about 100,000 or so that actually went live this year. So they're already part of the 6.4 million from the current selling season. So that's your -- that's pretty much what your delta is.

The next question will be from Sarah James from Cantor Fitzgerald.

I'll continue on the lines of just checking these numbers. So if I had 80 clients to the current book, I get [548] not [530], there's an 18 account delta there. Are any of those account losses? And if so, is there any commonality?

Yes. There's roughly -- and again, as they talked about, the roughly 100,000 lives that went live already there's roughly 10, 12 new clients. And then, overall, in terms of losses. I think we had five losses overall.

Okay. Are you seeing demand in the market for plans that can offer a more moderated utilization trend? And do you anticipate having an offering that can serve that type of client?

I'm not sure if you could be more specific on what you're referring to relative to a moderated utilization trend. If you talk about a skinnier benefit or sort of more pull back benefit or the ones that are out there already, which are dollar maximum benefits, which effectively achieve that. They're out there, but we don't believe in those, in particular because when a dollar maximum benefit, you run out of your money in the middle of treatment literally. It's not a good experience and members then operating world where they're operating with economic scarcity in their mind and try and preserve dollars. And therefore, forego portions of treatments to have their probability of success from a birth rate. So it's not something we believe in as a good member experience. But if you can clarify if I'm thinking about something else, then I'm happy to answer the question.

I would think not just an employer that maybe wants to offer less cycles but one that maybe wants to make those cycles harder to access, so technically offering, but not really having global utilization that you're used to.

I'm not sure sort of what type of benefit that is. Again, we wouldn't support that. Either you believe your employees need to benefit and you believe your network and your network management and the physician new network are making decisions for appropriate treatment. But to restrict access sort of arbitrarily I don't believe in. We don't believe it. We believe in the doctors in the network, making the medical decisions necessary for appropriate treatment.

The next question will be from Michael Cherny from Leering Partners.

Maybe if I can dive into a little bit of the maternity and menopause services you talked about for '25 again, not trying to get to guidance in any way, shape or form at this point in time. But as you think about the materiality of those businesses for next year against your '28 targets, which I recall, we're about for $200 million of run rate revenue is on. How is the sell-through on the new products that you expected tracking? And is there any way we should think about qualitatively how they should ramp at the start and then over the course of the year?

The sell-through, I think, was positive relative to our first year-end market expectation. Having now launching -- being live with the 1.5 million lives across the number of clients that we talked about, both new and existing. I think is really positive. It's the utilization patterns of those benefits. The take rate, if you will, where that we create across those members that are at those employers will be -- what will be -- the progress that we'll see over not just the next year but over the next couple of years.

And I know the international acquisition you made was a small deal, but how do we see that flowing through into the model? Is there anything else you can give us financially on that in terms of are their lives covered that are part of your recent adds? Is there anything -- I know it was tiny, but how are you thinking about the growth characteristics and the potential for contribution on that business?

Yes, it's more of an opportunity for us relative to employers that are multinational employers that are looking to do something with their global employees in addition to doing something with their U.S. employees. It's a recent investment, as you said and a continued investment relative to having an offering not just in the fertility and family building space, but beyond that, even for global. But at this point, there were -- I don't think or lives we did not attribute lives to global populations in the reported numbers. And given this recent -- the recent timing of the acquisition, it's probably more of an opportunity for us for the 2025 selling season.

The next question will be from Glen Santangelo from Jefferies.

Pete, just a few quick ones for you. I was wondering if you could just give us some sort of qualitative commentary on the selling season in terms of what you're seeing across the competitive landscape. Because it certainly seems like your competitors Maven and Carrot certainly starting to get more aggressive. And we've started to get questions around additional renewals you may have coming up because you obviously signed a lot of those clients back several years ago when maybe the competitive landscape was less intense. And so I'm just kind of -- any sort of qualitative commentary in terms of what you're seeing out there would be helpful. And then I just had a quick financial follow-up.

Yes. I'll take the second part first and then I'll have Michael comment on the selling season and competitive environment. As it relates renewals, as you might imagine, right, our base of clients have been growing over years. So every year, we have a significant amount of renewals coming up each and every year, right? There are three year -- generally three year terms. And as I mentioned in the previous question, we only lost five clients notwithstanding the large one that we announced this past renewal season. So from a renewal perspective, we still maintain 99% of our client base.

Yes. So just overall, we've been operating in that comp environment as you referenced for -- so for at least a couple of years from sort of the BC privately held companies. And then, of course, we've operated from a health plan perspective, we really compete with them on each and every sale. Sort of from both perspectives, particularly when you look at our new sales this year, we saw consistent win rates against those competitors, especially -- or I should say, including those jumbo clients that Pete referenced earlier, where, as you would imagine, those are some of the most competitive bids. And we fared well there and feel really good about our position there. And then as it relates to the health plans, again, that's an area that we've been competing for a number of years. And as we referenced earlier, starting to add on some of those health plans sort of shifting them from competitors to partners also, we view as a positive competitive side.

Maybe if I can just quickly follow-up on the membership question. I mean, Pete, it looks like your membership is going to be up 3.5%, 4% on a sequential basis going into 2025. And I appreciate you don't want to give any guidance around fiscal '25 at this point. But like given where utilization rates trended in fiscal '24, it's hard to imagine maybe to get much worse. So is it reasonable for us to at least be thinking about the company generating revenue growth in fiscal '25. Is that a fair assessment?

It's a fair assessment. Certainly, we've always talked about looking at lives relative to directional growth for the company. That said, given, a, the variability we've seen this year, plus having no visibility into the new clients and what their utilization might be including what we talked about already relative to what we're seeing for Q4, but didn't guide to, I think it's prudent for us to withhold any sort of definitive comments for '25 at this point.

The next question will be from Jailendra Singh from Truist Securities.

I want to go back to the issue of less consumption in Q3. First, I want to confirm this is the same issue you guys called out for missed and guidance cut on Q2 call? Or are there any differences in trends or behaviors you're seeing or just the same trend getting worn in Q3? And related to that the recovery you're seeing in consumption in Q4 thus far, are you able to somehow figure out this is a pickup from members you started engaging in Q2 or Q3? Or these are new members who are driving faster consumption? Just trying to understand if there is any structural change driving the timing lag between utilization and consumption?

Yes. So first part of your question, the -- what we saw in Q2, if you recall, was the increase in utilization, ART cycles per utilizer that you would normally see sequentially from Q1 to Q2, we didn't see as big of an increase. The difference in Q3 is now have seen a decline, which we've never seen before. So that's the most stark difference relative to Q3 and what we saw there versus what we saw in Q2 was just a slower rate of growth. As it relates to the members in Q4 so far, they're across the board new end and those that have already begun their journey. And as we have commented for Q3, what impact the ART cycle utilizers that journey getting slightly elongated. And so by definition, it's going to get elongated into Q4 as opposed to having ended up in Q3 for a portion of those members.

And then my follow-up given all the volatility you have seen in results in 2024 around utilization and consumption, Pete, what are your thoughts on business models where you have exposure to member utilization like today versus having a model which is much lighter and demonstrative in nature while still adding value to clients through member engagement services. Are you open to having such arrangements with employers given the recent developments?

The short answer is yes. But beyond thinking about it, there's not anything that we do with clients at this point, but we are thinking about different ways to mitigate utilization variability, but not much more to talk about at this point.

The next question will be from Stephanie Davis from Barclays.

We have seen just such a prolonged period of a typical mix in utilization and consumption. I kind of want to pull on the same thread that Jailendra was. Have you talked to any of your clinic partners to see if this is reflective of the broader trends such as new tech or higher incidence of PTT testing that's improving the efficacy of transfers? Or potentially GLP-1 having some impact like PCOS and driving improved fertility? This is -- I mean it's too early to call a trend, but it's been a few quarters?

So thanks for the question, Stephanie. Regarding the last two points, we haven't heard anything from the clinics related to GLP-1s or higher PGTA testing, which would result in more favorable clinical outcomes, which I think we are alluding to. As it relates to trends in consulted treatment timing, a few of the clinics have observed especially on the West Coast and also have observed lighter utilization of egg freezing benefits and we're also seeing some of that. But again in Q4, we're seeing a reversal of that, if you will, at least the beginning of a reversal versus what was Q3, which is why in my remarks, I talked about it's too early to call it a trend and it's more of a short-term phenomenon, I'll call it, which right now, we're not guiding differently to, but we are seeing the beginning of a reversal, if you will, relative to overall ART cycles per utilizer and within that related to my comment now within that on the egg pleasing side, particularly.

Now I have a follow-up for Mark and you're kind of going to hate question. So I just want to keep that in mind. But given some of the lessons learned from guidance this past year, are you thinking that maybe taking a more conservative approach to guidance as you look at '25? Or how are you changing the philosophy?

Well, look, I think we certainly learned lessons throughout 2024, but really about the variability that's happening within the business itself. And so what we're doing here this quarter is incorporating a greater emphasis on variability that we're seeing and a little bit less reliance on the most current data point to drive where we think those ranges should be set. And so that's our -- that's the philosophy that we're going with right now.

The next question will be from Scott Schoenhaus from KeyBanc.

I just want to kind of dig into the selling season more. The 6.7 million lives that you've stated for next year, the 1.1 million you added this year. I just want to make sure the 300,000 federal that were added this past year. Those are still consulting only. They're not full ART cycles. And then I wanted to ask about the 1.1 million lives added for next year. Can you give us any color on where the distribution, what kind of industry is it broad-based? Or is it more in the middle of the country? Like you kind of referenced last selling season, you were doing -- making more progress towards the middle of the country? Sort of any more color there on the cohort of this new clients added?

Sure. I'll comment and then Michael will add anything. Regarding your first question, yes, the 300,000 lives are still don't include the full benefit. The same as what they were this year is the easiest way to describe it. As it relates to the distribution on the new sales, there across -- regarding the industry question first. They're across a couple of dozen industries. I listed out a bunch of them in the prepared remarks. And they're also, from a size distribution perspective, they almost reflect our existing book of business in terms of distribution, small to big relative to size distribution, if that's what you're referring to in terms of distribution.

Yes. I mean very similar makeup to prior years from a demographic and distribution of industry perspective as well as Pete said, from a size perspective. As was referenced in the comments, we did have a nice season with jumbos this year. And outside of that, again, nothing different necessarily from a makeup of the sales season.

And the next question will be from Richard Close from Canaccord Genuity.

Congratulations on the selling season. Just on the losses that you talked about and then there's the large client as well. Is there anything -- any similarities or commonalities in those losses that you've gleaned in looking back at those?

The short answer is no. There -- again, there were only five and including the large one that we announced and there's sort of no commonalities. There are different reasons. Sometimes their losses relative to the parent company being acquired then being acquired, which was one of them. So they're not always dissatisfaction or anything else like that relative to the benefit, but with five of them, the answer is no, there weren't really any commonalities.

That's good to hear. And then with respect to the health plans and the success there, obviously, that's relatively new beginning, I guess, what last -- second half of last year and then now in national and other regional. As you think about how bringing those customers on, is there any difference versus employers in terms of maybe utilization or consumption in those populations? Or is it just too early to tell?

Yes. So, just to clarify the sort of difference in eating partnerships there. So we talk about the health plans. It really -- they really function more as partners as we go to market versus sort of a utilization the way we would think about clients. Then within those partnerships from the health plan side, again, similar to other partners that we have today, we'll bring employers on sort of through that partnership. And then we've seen the utilization of those employers, again, function similarly to how -- whether an employer comes on direct or through a partner, the utilization of those, we haven't seen differences in depending on how they contract with us.

Yes. There's no impact a different way, there's no impact whether or not to direct sale or through a partner on utilizing. There's nothing structural there that would impact it in any way. And then we had made a comment that some of them trusted us with their employees as well as a client a house account that's just normal utilization, normal onboarding for employees, no different than any other client.

The next question will be from David Larsen from BTIG.

When I was at the health conference recently, I heard from a couple of your competitors, Kindbody, Maven and also Carrot, a couple of the things broadly speaking, that I was hearing were things like maybe a company wants a $10,000 or $20,000 or a $30,000 max sort of benefit which I think maybe you would describe as being low. I think the way you described it, Pete was $1 max benefit or something like that. I mean, do you have a product or a program that can accommodate something like that? And then maybe how you want to describe it, upsell them or grow the product over time? Just any thoughts there would be helpful because the mix, it seems to me like you're winning more blue collar accounts, so they have less money to spend, so they'll buy fewer IVF cycles, which is basically explains your consumption challenge. Just any thoughts there would be very helpful.

Yes. Let me clarify that. So I'm not sure we referred in terms of blue collar accounts the clients we're winning are adopting the benefit, the same that they've been adopting it, two cycle, three cycle benefit. They are full treatment bundles. They're full cycles. They're not limited by an arbitrary dollar constraint. So when I refer to a dollar maximum benefit regardless of the amount you pick. You're limited -- the person is limited in their lifetime with their employer as to how much actual dollars they can spend against the benefit. So when a company and a vendor offers a $10,000 maximum benefit, they're not even offering enough money for one actual medical treatment for IVF, not in close, right? Whether they offer a $20,000 maximum benefit, they're not offering enough statistically to have a baby for most people because national live birth rates are below 50% and a cycle with the drugs is going to be in the $20,000 plus range. So mathematically, you're not going to get there, right? And so the clients that are buying our benefit understand that an arbitrary dollar maximum benefit is an inequitable benefit. And because around the country, especially if your national employer, reimbursements rates vary dramatically. And so certain people in the middle of the company where reimbursement rates are lower are going to have more attempts under a dollar maximum benefit than employees that you might have on the East and West Coast, where reimbursement rates on average are higher. But either way, $ 1 maximum benefit drives, as I said before, different behavior by the patient in the doctor's office as they're making decisions for treatment and those decisions are made from a position of economic scarcity, where they're trying to preserve dollars and, therefore, select things that otherwise would help them achieve success. And so sort of the upsell concept is a good one but we have an offering and the offering is, if you want to do a one side benefit, you could do it, but having $1 maximum, we believe is not the right way to do.

That does conclude today's Q&A. I will now hand the call back to James Hart for closing remarks.

Thanks, Paul, and thanks, everyone, for joining us this afternoon. We hope you found the formative but feel free to reach out to me at any time for any follow-up. And otherwise, we look forward to speaking to you at the start of the year.

Thank you. This does conclude today's conference call. You may disconnect your lines at this time. Have a wonderful day. Thank you for your participation.