Voya Financial, Inc. (VOYA) Q2 2021 Earnings Report, Transcript and Summary

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 these elements are critical to drive our growth strategy, focus and priorities. Our customers have shared valuable insight with me. They greatly value our commitment to them. They value and respect our people. The Benefitfocus team serves our customers day to day and we strive to be the safest set of hands, with our mission-critical benefits compliance and administrative needs. We've created a superior user experience and our customers tell us how highly they value this for their employees. We've made it easier than ever to help them enroll in and make decisions about their benefits. But we know we're not perfect and frankly having been at this for a while, I can tell you no one is in this industry. Yet, it's our goal to lead the industry with service excellence. I believe service excellence will be the single biggest and most immediate lever that will drive growth for our company. Service excellence is important to all our ecosystem partners, including brokers and vendor selectors. It goes hand in hand with gaining more referenceable customers. Service excellence increases customer retention. It increases our NPS scores and it grows ARR. This will continue to be my greatest area of focus, until we consistently lead the industry. Given the importance of service excellence to our growth strategy, I'm focused on attracting talent to Benefitfocus that has deep industry experience, people who can help the company reach its full potential, leaders who will be a good fit with the incredible team we already have in place. And I can tell you that, while tech and service are key differentiators in the industry, experience, credibility and reputation are as well. As you saw in today's press release, we announced four new members of the management team that, I believe will be instrumental to our growth and execution. Suzanne Leary will serve as our Chief Customer Officer. Sue comes to us from Teladoc, where she was SVP of Global Operations. Previously, she held senior-level customer enablement roles at Best Doctors and Blue Cross Blue Shield of Massachusetts. Sue is well connected into our key market segments health plans and employers, and I expect her to hit the ground running. Tim Sand joins as SVP Customer Operations from ConnectYourCare, where he was Chief Operating Officer. Before that, he held senior level roles at Willis Towers Watson and Hewitt and later at Aon. Tim brings more than 25 years of experience in customer implementation, open enrollment and benefits management. He's been with us about a month, and is already making a favorable impact on new client implementations and preparations for open enrollment. Throughout their careers, Sue and Tim have served hundreds of employer customers, as well as health plans. Their credentials are well known across the industry. Craig Maloney is joining us as Chief Commercial Officer. He comes to us from Maestro Health, where he was Chief Executive Officer. Before that, Craig spent nearly 20 years in senior leadership roles with Hewitt and Aon and Univers Workplace. Craig has a wide network across health plans, voluntary benefits providers, employers and brokers. He has decades of experience. And I would argue, he knows the voluntary benefit space better than anyone in the industry. We also hired our first Chief Strategy Officer, Tina Provancal. Tina has rich product and customer experience. She previously worked at Fidelity, Aon and most recently at Accolade, where she was Senior Vice President of Transformation and Change. I have great confidence in Tina's ability to drive our health plan and employer product strategy I'm excited about the talent and experience these individuals bring to our company. Each of them came from great jobs with great prospects. But they chose to come to Benefitfocus, because they saw an even better opportunity to create value. Before we touch on our quarterly results, I'd like to offer a few thoughts on our outlook, in particular the inflection point to return the business to growth. The single biggest priority for me in our company is to grow sustainably. That's why the Board hired me. We've made great strides, since emerging from the onset of COVID. I feel good about our employer business. It started to turn the corner. This business is trending favorable compared to last year. However, pipeline and decision cycles, exiting Q2 are not yet back to pre-COVID levels, and they're not where we need them to be. Our health plan business continues to see lower levels of demand. This is primarily the result of a shift in near-term IT priorities away from group enrollment. Simply put, health plans are prioritizing regulatory changes and addressing other market dynamics. This is informing our outlook for 2022, along with the risk of lower levels of renewal we've previously discussed, and a more muted recovery of employer demand. We continue to expect a revenue growth inflection point to occur in 2022, but most likely towards the latter part of next year. It's premature to determine, if the company will return to growth for the full year. We plan to provide next year's guidance as we have historically during our fourth quarter earnings call. Let me be clear about the specific actions we're taking to address the near-term organic growth challenges. To start for health plans, I've been in close contact with our key customers. I'm confident that the vast majority of these relationships remain very stable and strategic. We plan to activate lighthouse customers through referenceable solutions such as quote-to-pay, and we plan to further strengthen our health plan road map. For employer, I'm also intensely focused on advancing our broker strategy and partner relationships, which will help expose us to more opportunities. And we're building on the momentum from last year's OE, placing even greater focus on service and implementation. With these actions, and our expectation that COVID subsides, I believe we should see a nice tailwind next year that will allow us to convert more business. The trajectory feels good. In terms of our longer-term outlook, with our new leaders joining, I'll be working with the team to execute our strategy and to set us up for sustainable growth. Once I formulized a plan that reflects the input and commitment of my leadership team, and input and oversight from the Board, I'll share medium-term targets for the company. You can expect us to focus on our product and service capabilities in our core market segments to grow across our base and expand our market reach. In summary, I believe the first step to building a great company is to have a great team. I would put our existing team, combined with the leaders we announced today, up against anyone in the industry. We are focused on delivering service excellence. I expect our focus on service excellence will lead to higher levels of organic growth. It starts with delivering a spectacular open enrollment this year, which sets the stage for upsell opportunities into voluntary benefits and future adjacencies, such as engagement, advocacy and health navigation. We are putting the foundation in place to get this growth flywheel moving. Our team's commitment to customers is impressive. I'm proud of their accomplishments and believe our best days are ahead of us. On a personal note, I'm deeply grateful for how welcoming our associates have been to me in my early days. It's truly an honor to be part of the team. Now let me turn it over to Alpana for a more detailed review of the quarter and outlook.

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 basis, Q2 gross profit was $32.9 million, representing a gross margin of 54%. On a non-GAAP basis, gross profit was $33.8 million, representing a gross margin of 56%, which is up nearly 300 basis points over last year. The improvement in non-GAAP gross margin reflects cost management actions taken in Q2 of last year to streamline our expenses. On a GAAP basis, software gross margins were 64%, up from 62% in Q2 of last year. Our non-GAAP software gross margins were approximately 65%, which is more than 200 basis points higher than last year. This increase is the result of the benefits of the cost management actions taken in Q2 of last year. Professional services GAAP gross margins were 5% as compared to 7% in Q2 of last year. On a non-GAAP basis, PS gross margins were 9% slightly below Q2 of last year, which was 10%. This reflects a recent increase in labor costs for our seasonal hiring, as we ramp up for open enrollment. We expect this trend will continue, resulting in negative PS margins in the second half of the year. Q2 adjusted EBITDA was $9.6 million at the high end of our guidance and up from prior year of $9.3 million. Our Q2 adjusted EBITDA margin was 16% compared to 15% last year. GAAP net loss available to common shareholders was $16.6 million and GAAP net loss per common share was $0.50 compared to GAAP net loss available to common shareholders of $12.3 million and GAAP net loss per share of $0.38 in Q2 of last year. Non-GAAP net loss available to common shareholders was $5.9 million and non-GAAP net loss per common share was $0.18. This compares favorably to non-GAAP net loss available to shareholders of $8.2 million and non-GAAP net loss per common share of $0.26 in Q2 of 2020. Non-GAAP net loss available to common shareholders in Q2 2021, excluding restructuring costs was $3.2 million and non-GAAP net loss per common share, excluding restructuring costs was $0.10 and exceeded our expectations. Now let's move to the balance sheet and free cash flow. We ended the quarter with approximately $193 million in cash and marketable securities. In addition, we have our full $50 million line of credit available to us. As we think about the uses of cash, we are prioritizing accelerating our product road map, fortifying our customers' experience and pursuing select tuck-in acquisitions to accelerate our growth strategy. Moving on to free cash flow. We generated $6.6 million of free cash flow in Q2 compared to $6.2 million in Q2 of last year. Free cash flow is a non-GAAP measure that we define as cash provided or used in operations less purchases of property and equipment and excluding cash paid for restructuring costs. Turning to net benefit eligible lives. Total NBELs were 16.3 million in Q2, in line with our expectations down 1.9 million sequentially from Q1 and down 7% year-over-year. As we shared last quarter, the decline in lives is primarily attributed to the termination of the unprofitable relationship with Shipt, which also represented the majority of the gig consumer lives on the platform. As a reminder, our strategic focus is on ARR from our core platform offering. These gig lives were low-value consumer lives and there was no meaningful impact to revenue as a result of the lives coming off our platform. Shifting to our Q3 outlook. For Q3 we expect total revenue of $58 million to $60 million with expected year-over-year declines in subscription and professional services revenue. Q3 adjusted EBITDA is expected to be between $5 million and $7 million, which is lower than the expectations shared with you last quarter due to unanticipated legal and executive severance costs. We expect non-GAAP net loss available to common shareholders between $10.5 million and $8 million, which represents non-GAAP net loss per share of between $0.31 and $0.24 based on 33.1 million basic shares outstanding. For the full-year we are maintaining our guidance and expect total revenue between $254 million and $260 million. As a reminder, our revenue overperformance in the first half of the year has largely been due to timing of platform revenue accelerating from the second half of the year. We expect adjusted EBITDA between $44 million and $50 million representing 18% EBITDA margin at the midpoint of revenue and adjusted EBITDA. And we expect free cash flow between $20 million and $26 million. In closing, I'm pleased we delivered against our financial commitments. I'm excited about the leadership announcements we made earlier today and the team that we're assembling to execute on a strategy to return the company to growth. With that, Matt and I are happy to take your questions. Operator, over to you.

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 like Medicare Advantage booming. So it's not – we're not hearing feedback that our customers aren't happy with the product or their experience. It's really just they're focused on other priorities. And I'd say the thing that gives me the most optimism sort of addressing the other part of your question, these customers even the ones that had lower level of renewals are very eager to talk to us about our product road map and the things that we have to come. So I made a couple of comments on this in my prepared remarks but we recently launched a product that we call internally called quote-to-pay, which is already referenceable with one customer in the market. We're getting terrific traction with both brokers and health plans with that product. It allows our health plan customers to bundle their medical underwritten product with voluntary benefits and create a bundle, where brokers can offer their customers, the best real-time quote. So there's nothing that I have seen. And again these are folks that I've been working with for the better half of 15 years. I'm not hearing anything around dissatisfaction around service or product or any of that. It's really just reprioritization, given the extraordinary last 18 months that we've had to get through.

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.