BENEFITFOCUS, INC. The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this Quarterly Report on
Form 10-Q and with the financial statements, related notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the fiscal year ended
Overview
The
In 2018, we expanded our economic model to include a transaction-oriented, buyer
solution, known as Benefit Catalog (formerly BenefitsPlace), designed to align
brokers, carriers and suppliers around the needs of employers, employees and
consumers. In this model, our seller partners offer their voluntary and
specialty benefit products through a holistic, multidimensional
marketplace. This marketplace is designed to increase the economic value of the
consumer lives on our platform by aligning the product catalog to consumer
needs. In exchange for
We classify our revenue into three streams - subscription, platform, and professional services revenue. Subscription and platform revenue are combined and reported as software services revenue. As a result of adding Benefit Catalog to our economic model in 2018, we now manage platform revenue as a separate stream. Accordingly, platform revenue is reported separately for the current and historical periods.
Subscription revenue primarily consists of monthly subscription fees paid to us
by our employer and insurance carrier customers for access to, and usage of,
cloud-based benefits software solutions for a specified contract term.
Subscription fees are generally charged based on the number of employees or
subscribers with access to the solution. Subscription revenue accounted for
approximately 70% of our total revenue during both of the three-month periods
ended
Platform revenue includes Benefit Catalog transactional revenue, which is
generated from the value of the policies or products enrolled in through our
marketplace. Benefit Catalog revenue from insured produces is generally
recognized over the policy period of the enrolled products. In arrangements
where we sell policies to employees of our customers as the broker, we earn
insurance broker commissions. Revenue from insurance broker commissions and
Benefit Catalog supplier transactions is generally recognized at the time when
open enrollment is complete and the orders for policies are transferred to the
supplier. Platform revenue accounted for approximately 9% and 8% of our total
revenue during the three-month period ended
Our professional services revenue stream is largely derived from the
implementation of our customers onto our platform, which typically includes
discovery, configuration and deployment, integration, testing, and training. We
also provide customer support services and customized media content that
supports our customers' effort to educate and communicate with consumers.
Professional services revenue accounted for approximately 21% and 22% of our
total revenue during the three-month period ended
Expanding our customer base is a key element of our growth strategy. We believe that our continued innovation and new solutions, such as Benefit Catalog, which extend the functionality of our mobile offerings, provide more robust data analytics capabilities, and enhance our ability to quickly respond to evolving market needs with innovative capabilities, will help us attract additional net benefit eligible lives to our platform through new employer customers, partners, and brokers, and increase our revenue from existing customers and relationships.
We believe that there is a substantial market for our services, and we have been investing in growth over the past several years. In particular, we have continued to invest in technology and services to better serve our larger employer customers, which we believe are an important source of growth for our business. We have also substantially increased our marketing and sales efforts. As we have invested in growth, we have had operating losses in each of the last nine years, and expect our operating losses to continue for at least the next year.
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On
While the ultimate impact of the pandemic on our business and financial results remains uncertain, we believe our business will be impacted by the following in the near term:
• New sales. We expect to experience a slowdown in new sales activity
which we expect to negatively impact professional services revenue and
platform revenue from new business.
• Unemployment. We expect the increase in unemployment caused by the
pandemic will negatively impact platform revenue by decreasing the rate
at which our Benefits Catalog voluntary benefits offerings are
purchased. We expect our subscription revenue will be impacted to a
lesser extent depending on the level of contractual minimums in our
contracts and a delay in when unemployed workers leave our platform. In
addition, we expect unemployment to potentially cause a decrease in net
benefit eligible lives on our platform in the near term.
• Participation in Voluntary Benefits. We expect a decrease in the
participation of lives on our platform in purchasing voluntary benefits
as a result of the economic impacts of the pandemic on income levels
across the country.
As a result of the nature of our customer relationships, the stability of our subscription revenue, the cost restructuring actions taken in the second quarter of 2020 and our ongoing investments in automation, we believe we will be able to achieve profitability in the relatively near future. Of course, our ability to achieve profitability will continue to be subject to many factors beyond our control.
Key Financial and Operating Performance Metrics
We regularly monitor a number of financial and operating metrics in order to measure our current performance and project our future performance. These metrics help us develop and refine our growth strategies and make strategic decisions. We discuss revenue, gross margin, and the components of operating loss in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Components of Operating Results". In addition, we utilize other key metrics as described below.
Adjusted EBITDA
Adjusted EBITDA represents our earnings before net interest and other expenses,
taxes, and depreciation and amortization expense, adjusted to eliminate
stock-based compensation and impairment of goodwill and intangible assets,
transaction and acquisition-related costs expensed, restructuring costs and
costs not core to our business. We believe that the exclusion of the expenses
eliminated in calculating adjusted EBITDA can provide a useful measure for
period-to-period comparisons of our core business. Accordingly, we believe that
adjusted EBITDA provides useful information to investors and others in
understanding and evaluating our operating results. However, adjusted EBITDA is
not a measure calculated in accordance with
Beginning in the first quarter of 2020, we revised our definition of adjusted
EBITDA to also exclude restructuring charges. This revision to the definition
had no material impact on our reported adjusted EBITDA for the three months
ended
Our use of adjusted EBITDA as an analytical tool has limitations, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are:
• although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized might have to be replaced in the future,
and adjusted EBITDA does not reflect cash capital expenditure requirements
for such replacements or for new capital expenditure requirements;
• adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
• adjusted EBITDA does not reflect the potentially dilutive impact of
stock-based compensation;
• adjusted EBITDA does not reflect interest or tax payments that would reduce
the cash available to us; and
• other companies, including companies in our industry, might calculate
adjusted EBITDA or a similarly titled measure differently, which reduces
their usefulness as comparative measures.
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Because of these and other limitations, you should consider adjusted EBITDA alongside other GAAP-based financial performance measures, including various cash flow metrics, gross profit, net loss and our other GAAP financial results. The following table presents for each of the periods indicated a reconciliation of adjusted EBITDA to the most directly comparable GAAP financial measure, net loss (in thousands):
Three Months Ended
March 31,
2020 2019
Reconciliation from Net Loss to Adjusted EBITDA:
Net loss $ (11,136 ) $ (14,209 )
Depreciation 3,796 3,967
Amortization of software development costs 1,519 1,178
Amortization of acquired intangible assets 569 190
Interest income (426 ) (660 )
Interest expense 5,891 5,814
Income tax expense 5 6
Stock-based compensation expense 3,677 6,367
Transaction and acquisition-related costs expensed 192 642
Costs not core to our business - 320
Total net adjustments 15,223 17,824
Adjusted EBITDA $ 4,087 $ 3,615
Net Benefit Eligible Lives
We are focused on driving revenue growth from adding lives to our platform and driving incremental transaction revenue. We believe the number of net benefit eligible lives is a key indicator of our market penetration, growth and future revenue. We believe net benefit eligible lives is highly correlated to our subscription revenue and is the foundation of our transaction revenue opportunity. We define a net benefit eligible life as a person with access to a benefits enrollment subscription under standard contracting or a freelancer with access to benefits enrollment, plus their estimated dependents, as of the measurement date. This definition excludes lives from other subscription-related contracts.
As of March 31,
2020 2019
(in millions)
Net benefit eligible lives 17.5 15.5
Software Services Revenue Retention Rate
We believe that our ability to retain our customers and expand the revenue they generate for us over time is an important component of our growth strategy and reflects the long-term value of our customer relationships. We measure our performance on this basis using a metric we refer to as our software services revenue retention rate. We calculate this metric for a particular period by establishing the group of our customers that had active contracts for a given period. We then calculate our software services revenue retention rate by taking the amount of software services revenue we recognized for this group in the subsequent comparable period (for which we are reporting the rate) and dividing it by the software services revenue we recognized for the group in the prior period.
Our software services revenue retention rate was greater than 90% for the three
months ended
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Components of Operating Results
Revenue
We derive the majority of our revenue from monthly subscription fees paid to us by our employer and carrier customers for access to, and usage of, our cloud-based benefits software solutions for a specified contract term. We derive platform revenue from both insurance broker commissions from the sale of voluntary and ancillary benefits policies to employees of our customers and from transaction revenue from life and ancillary insurance carriers and specialty providers. We also derive revenue from professional services fees, which primarily include fees related to the implementation of our customers onto our platform. Our professional services typically include discovery, configuration and deployment, integration, testing, and training.
The following table sets forth a breakdown of our revenue between software services and professional services for the periods indicated (in thousands):
Three Months Ended
March 31,
2020 2019
Subscription $ 45,990 $ 47,869
Platform 6,005 5,143
Total software services $ 51,995 $ 53,012
Professional services 14,159 15,287
Total revenue $ 66,154 $ 68,299 We recognize revenue when control of these services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Taxes collected from customers relating to services and remitted to governmental authorities are excluded from revenues.
We determine revenue recognition through the following steps:
• Identification of each contract with a customer;
• Identification of the performance obligations in the contract;
• Determination of the transaction price;
• Allocation of the transaction price to the performance obligations in
the contract; and
• Recognition of revenue when, or as, performance obligations are satisfied.
Software Services Revenue
Software services revenue consists of subscription and platform revenue.
Subscription Revenue
Subscription revenue primarily consists of monthly subscription fees paid to us by our customers for access to, and usage of, cloud-based benefits software solutions for a specified contract term. Fees are generally charged based on the number of employees or subscribers with access to the solution.
Subscription revenue is generally recognized on a ratable basis over the contract term beginning on the date the subscription services are made available to the customer. Our subscription service contracts are generally three years.
Subscription revenue also includes fees paid for other services, such as event sponsorships and certain data services.
Platform Revenue
Platform revenue is generated from the value of the policies or products enrolled in through our marketplace. Platform revenue from carriers is generally recognized over the policy period of the enrolled products. In arrangements where we sell policies to employees of our customers as the broker, we earn insurance broker commissions. Revenue from insurance broker commissions and Benefit Catalog (formerly BenefitsPlace) supplier transactions is recognized at the point when the orders for the policies are received and transferred to the insurance carrier or supplier, and is reduced by estimates for risk from premium collection, policy cancellation and termination.
Professional Services Revenues
Professional services revenue primarily consists of fees related to the implementation of software products purchased by customers. Professional services typically include discovery, configuration and deployment, integration, testing, and training. Fees from consulting services, support services and training are also included in professional services revenue.
We determined that implementation services for certain of our insurance carrier customers significantly modify or customize the software solution and, as such, do not represent a distinct performance obligation. Accordingly, revenue from such implementation services with these insurance carrier customers are generally recognized over the contract term of the associated software services
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contract, including any extension periods representing a material right. We utilize estimates of hours as a measure of progress to determine revenue for certain types of arrangements.
Revenue from implementation services with employer customers is generally recognized as those services are performed.
Revenue from support and training fees is recognized over the service contract period.
Contracts with Multiple Performance Obligations
Certain of our contracts with customers contain multiple performance obligations. For these contracts, the individual performance obligations are accounted for separately if they are distinct. The transaction price is allocated to the separate performance obligations based on their relative standalone selling prices. We determine the standalone selling prices based on their overall pricing objectives, taking into consideration market conditions and other factors, including the value of their contracts, the software services sold, customer size and complexity, and the number and types of users within the contracts.
Overhead Allocation
Expenses associated with our facilities, security, information technology, and depreciation and amortization, are allocated between cost of revenue and operating expenses based on employee headcount determined by the nature of work performed.
Cost of Revenue
Cost of revenue primarily consists of salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation, for employees, whom we refer to as associates, providing services to our customers and supporting our SaaS platform infrastructure. Additional expenses in cost of revenue include co-location facility costs for our data centers, depreciation expense for computer equipment directly associated with generating revenue, infrastructure maintenance costs, professional fees, amortization expenses associated with acquired intangibles and capitalized software development costs, allocated overhead, and other direct costs.
We expense cost of revenue associated with fulfilling performance obligations as we incur the costs. Costs that relate directly to a customer contract that are not related to satisfying a performance obligation are capitalized and amortized to cost of revenue expense over the estimate period of benefit of the contract asset, which is generally five years.
Subscription and platform revenue are both generated from our platform and result from the same set of assets and activities. As such, we are not able to meaningfully separate and assign costs of revenue to subscription and platform revenue separately.
We plan to continue to expand our capacity to support our growth, which will result in higher cost of revenue in absolute dollars. However, we expect cost of revenue as a percentage of revenue to decline and gross margins to increase primarily from the realization of economies of scale driven by retention of our customer base and increased automation. However, this trend may vary on a quarterly basis.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, and
general and administrative expenses. Salaries and personnel-related costs are
the most significant component of each of these expense categories. We expect to
decrease our operating expenses, as a percentage of revenue, if and as we
achieve economies of scale and as a result of restructuring actions taken in
Sales and marketing expense. Sales and marketing expense consists primarily of
salaries and other personnel-related costs, including benefits, bonuses,
stock-based compensation, and commissions for our sales and marketing
associates. Costs to obtain a contract that are incremental, such as sales
commissions, are capitalized and amortized to expense over the estimated period
of benefit of the asset, which is generally four to five years. Additional
expenses include advertising, lead generation, promotional event programs,
corporate communications, travel, and allocated overhead. For instance, our most
significant promotional event is
Research and development expense. Research and development expense consists primarily of salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation for our research and development associates. Additional expenses include costs related to the development, quality assurance, and testing of new technology, and enhancement of our existing platform technology, consulting, travel, and allocated overhead. We believe continuing to invest in research and development efforts is essential to maintaining our competitive position.
General and administrative expense. General and administrative expense consists
primarily of salaries and other personnel-related costs, including benefits,
bonuses, and stock-based compensation for administrative, finance and
accounting, information systems, legal, and human resource associates.
Additional expenses include consulting and professional fees, insurance and
other corporate expenses, and travel. We expect our general and administrative
expenses to decrease in absolute terms as a result of the restructuring actions
taken in
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Other Income and Expense
Other income and expense consists primarily of interest income and expense and gain (loss) on disposal of property and equipment. Interest income represents interest received on our cash and cash equivalents. Interest expense consists primarily of the interest incurred on outstanding convertible debt and borrowings under our lease arrangements and credit facility.
Income Tax Expense
Income tax expense consists of
On
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