Thank you for standing by. This is the conference operator. Welcome to Benefitfocus' Q2 2021 Earnings Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to, Patti Leahy, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Benefitfocus' Second Quarter 2021 Earnings Call. Joining me today are, Matt Levin, President and Chief Executive Officer; and Alpana Wegner, Chief Financial Officer. Matt and Alpana will offer some prepared remarks and then we will open up the call for questions. Before we begin, let me remind you that today's discussion will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those statements, including integration and reliance on key personnel, impacts of COVID-19 and the development of our market and business, including our growth strategy. For more information, please refer to risk factors discussed in our most recent Form 10-K filed with the SEC. During today's call, we will also refer to certain non-GAAP financial measures. You can find important disclosures about those measures in today's earnings press release. With that, I'll now turn the call over to Matt.

Thank you, Patti. It's a pleasure to be with you all today. Benefitfocus had another strong quarter and we're looking forward to sharing our results with you today. Before we do, I thought I'd start by highlighting, why I'm excited about the opportunity to lead this company. I'll also discuss some of the things I've learned since joining and more importantly the actions we're taking to enhance execution and return the company to growth. In short, you'll hear how we're ramping our focus on service excellence. I believe, service excellence is the best path to create value. It's absolutely within our reach. I strongly believe Benefitfocus is well positioned to build on its 21-year history and win in this industry. I've watched and admired the company throughout my entire career. While I was at Hewitt, I helped the business recenter around benefits and grow into natural adjacencies. Later, at Aon, my focus was launching new products and services such as health care exchanges. I think this experience is a very useful proxy for what needs to be done at Benefitfocus. We need to continue fortifying our core business. We need to enhance our customers' experience. And we need to be thoughtful about growth areas. I believe, if we do these three things, we will unlock significant opportunity, create value and return the company to growth. During my first 90 days, my top three priorities have been, first, to meet with customers and partners to understand how we can learn from them and better serve them; second, conducting listening and learning sessions with associates to understand how we can build on our heritage and create an even better organization to work at; and third, to ensure we have the industry depth and experience to unlock this value. I believe all of…

Thanks, Matt. I'll start with an update on our commercial traction this past quarter. Our employer business has made up a lot of ground since the onset of COVID. Our SAP channel had another strong quarter and has been a nice source of strength for us. Key wins during Q2 for employer direct sales team include a large private university in Texas, a large county in Texas, a professional sports team and a global logistics company. We also continue to expand our footprint with existing customers, with the notable addition of services with the state of Nevada, a deal we initially closed in Q4 of last year. We continue to be pleased with our traction in the public sector. Now turning to Q2 results in more detail. Total revenue of $60.9 million was above the high end of our guidance, driven primarily by better-than-expected subscription revenue. Q2 revenue was down 2% compared to last year, driven primarily by lower professional services revenue. Total software services revenue was $50.2 million, up 1% compared to last year. This includes subscription revenue of $44.3 million, which was up 1% year-over-year; and platform revenue of $5.9 million, which was down $200,000 year-over-year, in line with our expectations. We expect platform revenue growth later this year, in line with our seasonal trend. Software services revenue retention improved 300 basis points compared to Q2 of last year. As we look to the second half of the year, because of the lower levels of health plan renewals we've previously shared with you, I expect a downward trend in subscription revenue as well as our software services revenue retention rate. Professional services revenue performed as expected and was down 13% year-over-year, primarily due to lower levels of demand for custom requests from health plan customers. On a GAAP…

We will now begin the question-and-answer session [Operator Instructions] Your first question comes from Jessica Tassan from Piper Sandler. Please go ahead.

Hi. Thank you for taking question. Thanks for taking the questions. So I think you guys referred to aforementioned health plan attrition. Can you just give us some color on that? When did it start? And I guess when are you lapping the headwinds?

Yes. Jessica, this is Alpana. So as far as the health plan lower levels of renewals that we referenced, those are – if you think about the timing and the cycle timing of when those renewals come up, that's really at second half, where we see those revenues that are going to be impacted by those lower levels of renewals. This is pretty consistent with what we shared previously with you. And what I'd say is that the expected risk that we had previously discussed and what we're now seeing we've got better visibility into is performing pretty much as we had expected.

Got it. And I guess just what are customers citing when they're declining to renew? And have you guys sort of figured out a way to mitigate those software renewal rates as you head into what's extensively a selling season it's – correct me, if I'm wrong a selling season in the first half of next year.

Hey, Jessica, it's Matt. Why don't – I can offer a couple of points of view on sort of what's going on in the market and hopefully address your question. So as I mentioned in my prepared remarks, I'm roughly day 90 and I've spent a good chunk of the first 90 days in the market, specifically with our employer customers, as well as health plan customers. The health plan customers that I've been visiting with has been actually quite a bit of fun for me because I'm reconnecting with folks I used to work with largely, when I was at Aon. So the reason I mentioned that is in these discussions, I feel like I'm getting a straight scoop from the market and they're offering sincere reflections on what they're seeing in their priorities. And I'd say, a couple of observations, overall. Number one, we have extremely strong and strategic long-term relationships with this book of business. The majority of the customers, we would label internally as green. They've been in multiyear contracts with us and they really value the people they work with on a day-to-day basis, et cetera. When you talk to them though the primary products that we offer them are around group-based enrollment. And if you look at their priorities and a lot of this is totally understandable, given just what we've all lived through over the past year ranging from COVID to an election to a Supreme Court decision, et cetera, their priorities have shifted a little bit. Not that group base enrollment isn't important it is. But if you look at where they're spending money and where they're prioritizing it's on some of those issues in addition to things like transparency, which is getting a lot of attention and retiring markets with products…

Got it. Thank you. Congrats on the first 90 days.

Thanks. Thank you.

[Operator Instructions] Your next question is from Matt Coss from JPMorgan. Please go ahead.

Hi. Good morning. Thank you for taking my questions. You talked about the trajectory of retention rate to be down for this year. And just looking at 2020 it looks like it was above 90%. 2019 it was above 95%. Where do you think that retention rate ends compared to 2020? And is there perhaps anything that can be done to alter or improve that as the year goes on? Just any peripheral opportunities that may arise we may not be thinking of?

Yes. Matt, I'll maybe start there and then for the second half of your question I'm sure that Matt will have some thoughts in terms of the actions and opportunities we have to mitigate any of that risk. And so from a retention perspective, I'd say the primary driver from our -- from my remarks in terms of giving the outlook of what we expect in the second half of this year, which is a downward trend in that retention rate is primarily driven by the health plan risk that we've called out for those renewals at lower levels. And so we do see that that's going to trend downward. I think it's going to get closer to those in -- just in the second half not necessarily for the full year, but on a second half basis getting closer to the levels that we saw in 2020. Through the first half of this year we have been closer to the levels of 2019 that you quoted. And so our goal and our objective will be to get back to those levels. And in terms of where we see those opportunities, I think, it's really centered around service excellence and the opportunity to continue to deliver really well to our customers. That really does turn into improved revenue retention and that's what I would say is our number one priority. But maybe Matt if you want to add anything there...

Yes. Hi, Matt. The -- it's a great question. And as I mentioned in my prepared remarks being -- my words a safe set of hands in the industry is the number one thing I'm focused on. It's why we brought on Sue and Tim to backfill some roles, and it's my focus every day right now. And service excellence is on a couple of different dimensions and we have a bunch of different metrics. But essentially at the point of use where participants are -- or employees are signing up for their benefits how is that experience handled are they landing in the right plan choice for them? And then when they have questions are we being responsive to them? Equally for benefits managers, service is all about implementing what was sold to them doing it in a collaborative way and above all getting references. So in terms of metrics things like referenceability, we have specific NPS goals et cetera all for our service organization. And right now more than anything and what will impact retention, I would say in the medium-term more than anything is over the next six months having the best open enrollment season that we've ever had, getting the implementations really competitive takeaway implementations at a very referenceable level. And all of that will give us a tailwind going into the selling season next year where both references as well as influencers in the industry such as brokers, vendor, selectors et cetera are reinforcing the message around safe set of hands and service excellence. So, the best way to answer your question we have very specific metrics operationally for it. And we feel pretty good about the work that's been done on a day-to-day basis. I can tell you I'm pretty excited about this open enrollment season and it feels like we're set up well for next year.

Thanks, Matt. I will pan out. Maybe just one more. So if you look at spending on R&D, it was down just very little sequentially and grew year-over-year on a pro forma basis. Is spending on R&D is that sort of stabilized at its current level? And is this sort of indicative of an acceleration of product development?

Yes. Matt, what I'd say is at least for 2021, I think, the current levels of spend are what we're expecting for the remainder of the year. You did see a little bit of a ramp there and that was just because we had some leadership changes and priority changes. We did see some additional incremental investments. And -- but as a percentage of revenue I would say kind of holding steady for the remainder of the year. And then as Matt mentioned in his remarks, we're spending time with the leadership team that we're forming here. We're going to spend a good amount of time on product road maps and be able to give some additional color and guidance as we talk about 2022 when we've got that plan more formalized and ready to share what our outlook looks like for next year.

Okay. Thank you very much.

Thank you. [Operator Instructions] There are no further questions at this time. This does conclude the Q&A session. I would now like to turn the conference back over to, Matt Levin for any closing remarks.

Thanks Rachel and thank you all for your time today and for your thoughtful questions. Just in closing, as I mentioned before, I'm incredibly optimistic about the future of the company. I am proud of the team. I'm proud of the fact that, we've been at this for 21 years with a terrific track record delivering to our customers. And really above all I believe that the addition of the leadership additions that we announced today, working with the team that we already have in place, which has been -- which I find absolutely terrific, I think we're going to make this a stronger company. I think we're going to position ourselves in the industry, in terms of service excellence. And I think we're going to return the business to sustainable growth. This is all within our reach. I've seen it before. And I have total confidence that we're going to get there. And above all, really, it's an honorary part of the story. And we look forward to keeping you updated on our progress. So with that, thanks again. And have a good night.

Thank you. This does conclude today's call. Thank you for participating. You may now disconnect your lines.