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.
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 71% and 70% of our total revenue during the three-month period
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 products 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 6% 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 20% and 24% 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, including artificial intelligence-enabled tools and 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 GAAP operating losses in each of the last nine years, and expect our GAAP operating losses to continue for at least the next year.
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On
As a result of shelter-in-place restrictions that were effective during the second quarter of 2020, we experienced delays in completing selling. We believe the financial impacts from COVID-19 are temporary in nature and do not significantly affect our business model and growth strategy. Therefore, we do not consider COVID-19 to have been a triggering event to accelerate our annual impairments tests.
We evaluated our goodwill and indefinite-lived intangible assets and determined there were no interim triggering events as it was not more likely than not that the fair value of our reporting units would be less than their respective carrying amounts. Additionally, we evaluated our long-lived assets, including our property, plant and equipment, lease right-of-use assets and other intangible assets, noting no indicators of impairment.
The impact that COVID-19 will have on our consolidated financial statements
throughout 2020 remains uncertain and ultimately will be dictated by the length
and severity of the pandemic, which is increasing in many parts of
While the ultimate impact of the pandemic on our business and financial results remains uncertain, we believe our business could be impacted by the following in the near term, among other things:
• New sales. We expect to experience longer sales cycles and 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 increase cash flows from operations and achieve profitability in the relatively near future. Of course, our ability to achieve profitability will continue to be subject to many risks and factors beyond our control like the COVID-19 pandemic.
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.
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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, gain or
loss on extinguishment of debt 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 third quarter of 2020, we revised our definition of adjusted
EBITDA to also exclude the gain or loss on the extinguishment of debt. This
revision to the definition had no impact on our reported adjusted EBITDA for
periods prior to the change and increased our adjusted EBITDA by
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.
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 Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Reconciliation from Net Loss to Adjusted
EBITDA:
Net loss $ (4,396 ) $ (12,577 ) $ (27,394 ) $ (41,724 )
Depreciation 3,774 3,848 11,496 11,505
Amortization of software development
costs 2,032 1,263 5,278 3,760
Amortization of acquired intangible
assets 568 569 1,705 1,364
Interest income (40 ) (673 ) (563 ) (2,095 )
Interest expense 5,771 5,926 17,524 17,577
Income tax expense 6 17 17 26
Stock-based compensation expense 3,859 4,415 10,859 14,501
Transaction and acquisition-related
costs expensed 18 3 425 1,005
Restructuring costs - - 5,616 -
Gain on repurchase of convertible senior
notes (1,138 ) - (1,138 ) -
Costs not core to our business - 63 - 649
Total net adjustments 14,850 15,431 51,219 48,292
Adjusted EBITDA $ 10,454 $ 2,854 $ 23,825 $ 6,568
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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 September 30,
2020 2019
(in millions)
Net benefit eligible lives 18.2 16.8
Freelancers have been primary contributors to recent growth in our net benefit eligible lives. Freelancers generate only platform revenue by purchasing voluntary benefits and other offerings. The participation rate of freelancers on our platform is currently low.
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
and nine months ended
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 Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Subscription $ 44,989 $ 50,087 $ 134,759 $ 145,649
Platform 5,606 4,109 17,739 14,657
Total software services $ 50,595 $ 54,196 $ 152,498 $ 160,306
Professional services 12,988 17,469 39,413 48,237
Total revenue $ 63,583 $ 71,665 $ 191,911 $ 208,543 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
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• 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 constraints for variable consideration associated with collectability, policy cancellation and termination risks.
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 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 estimated 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 expect cost of revenue as a percentage of revenue to decline and gross margins to increase as we realize the full impact of our restructuring activities and increased automation. However, this trend may vary on a quarterly basis.
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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
Restructuring costs. Restructuring costs are comprised of one-time severance
charges, continuation of health benefits and outplacement services. As discussed
above in "Overview," in the quarter ended
Other Income and Expense
Other income and expense consists primarily of interest income and expense, gain on repurchase of senior convertible notes 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. During the third quarter of 2020, we repurchased outstanding senior convertible notes which resulted in a gain.
Income Tax Expense
Income tax expense consists of
On
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