Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

Benefitfocus (NASDAQ:BNFT)
Q4 2017 Earnings Conference Call
March 14, 2018 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Benefitfocus Q4 2017 Earnings Call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Michael Bauer. Please go ahead.

Michael Bauer -- Director of Finance and Investor Relations

Thank you, operator. Good afternoon, and welcome to Benefitfocus' Fourth-Quarter 2017 Earnings Call. We will be discussing the operating results announced in our press release issued after the close of market today. Joining me today are Ray August, our president and chief executive officer, and Jonathon Dussault, our chief financial officer.

Ray and Jonathon will offer some prepared remarks, and then we will open the call up for a Q&A session. Before we begin, let me remind you that today's discussion will include forward-looking statements, such as first-quarter and full-year 2018 guidance and other predictions, expectations, and information that might be considered forward-looking under federal securities laws. These statements reflect our views as of today only and should not be considered as representative of views as of any subsequent date. These statements are subject to a variety of risks and uncertainties, including the fluctuation of our financial results, recruitment and retention of key personnel, the early stage of our market, management of growth, cyber security risk, and a changing regulatory environment that could cause actual results to differ materially from expectations.

For a further discussion of the material risk and other important factors that could affect our actual results, please refer to our annual report on Form 10-K and our other SEC filings. During the course of today's call, we will also refer to certain non-GAAP financial measures. You can find important disclosures about these measures in our press release. With that, let me turn the call over to Ray.

Ray August -- President and Chief Executive Officer

Thanks, Mike. Good afternoon, and thank you for joining us. Today is my first earnings call as CEO of Benefitfocus. I am very excited to discuss our progress and the opportunities we see for the future.

We finished the year as expected and began to experience increasing demand across our business in Q4. For the quarter, total revenue and adjusted EBITDA exceeded the midpoint of our guidance ranges, and we made strategic investments, particularly in sales and marketing, to strengthen our company. We also delivered on a major milestone of becoming free cash flow-positive in the quarter. Overall, the fourth quarter was a successful one that reflects many accomplishments and progress across the organization.

First, execution across all of our distribution channels improved. This resulted in better-than-expected bookings growth. Some specific components of this improved performance include: adding 17 large-employer customers, up from six in the prior-year period; adding two enterprise accounts; and strengthening carrier momentum with the addition of Cigna as our third certified carrier partner. Next, in the quarter, we demonstrated improved operational leverage and strengthened our business fundamentals.

In Q4, gross margin improved nearly 200 basis points, and EBITDA increased over 330 basis points year over year. The strong quarterly performance capped an impressive year of margin expansion and improved efficiencies throughout our company. During the fourth quarter, we also completed open enrollment for the majority of our customers. This is one of the most important performance indicators for both our company and our customers.

I'm excited to report that the results were outstanding, highlighted by our enrollment systems uptime of 99.9% and under half-second average response rate during our busiest time. The many benefits from our focused data investments continued to drive performance enhancements and contributed to positive feedback from customers. Both are proving to be a springboard for our 2018 selling season as well as a contributor for our over-95% revenue retention. In addition, we continue to see increasing interest in our industry-leading mobile enrollment capabilities as the number of downloads doubled during this past open enrollment.

I will now shift to some observations on our business. Since assuming the role of CEO nearly three months ago, I had the opportunity to have focused discussions with many prospects, customers, partners, investors, and Benefitfocus associates. Importantly, our customers, which include employers, medical carriers, life and ancillary carriers, brokers, and TPAs, are all extremely enthusiastic about the value that Benefitfocus platform delivers to their business, their customers, and their employees. We see this value in many ways, including our unmatched ability to provide actionable insights and a data-rich benefits experience for consumers; an extremely fast ROI for employers and cost-effective benefit-solution options for employees; an efficient marketplace for voluntary products, as demonstrated by the success of our Benefitstore offering; a strong Certified Carrier Program momentum, which has received exciting early support from key industry participants like The Hartford, Aflac, and now, Cigna.

The sales pipeline continues to grow. I am encouraged by the progress we have made in growing our sales force, both from a tenure and productivity perspective. Overall, our business fundamentals are sound and are going in the right direction. In addition, our partner-distribution channel is also strengthening, highlighted by our momentum with industry leaders SAP and Mercer.

From a profitability perspective, we will continue to demonstrate steady margin improvement. Q4 marked our first quarter being free cash flow-positive as a public company. Based on these observations and the feedback we are getting in the market, we believe we are in a strong position to continue to expand our product offerings. This expansion will deliver greater value to all participants on our platform and create new growth drivers for Benefitfocus.

Across our business, we are uncovering new opportunities and are encouraged by our improving execution. To ensure continuous improvement and to achieve our potential, we are focused on three priorities in 2018: 1) improving sales execution; 2) expanding revenue opportunities; and 3) strengthening our core. Successfully executing on these three priorities will generate faster recurring-revenue growth, improve profitability, and drive shareholder value. We plan to continue to update you on these priorities in future earnings calls.

I will now provide you more specifics on each of these priorities. Regarding our priority to improve sales execution, in 2017, we made substantial investments in our sales and marketing teams. This resulted in refined processes and, in Q4, drove better execution across our entire company. In 2018, we will continue to accelerate user growth on our platform, as we have better aligned our growing sales team.

For example, we have expanded our focus on key verticals where our existing scale and experience gives us competitive advantage. We have continued to hire more salespeople in select regions. These changes will optimize our sales potential and productivity across regions. In 2018, we are also very focused on investing in our partner-distribution channel organization, both in the depth of our existing Mercer and SAP relationships and with the addition of new partnerships.

We are particularly committed to building better and stronger relationships with brokers. In fact, we have completely reinvented the way we partner with this key channel by improving our collective value proposition. This results in more commissions for brokers and more lives on the Benefitfocus platform. Our improved broker outreach has already produced a key win and pipeline growth.

In the fourth quarter, a top U.S. broker selected our advanced analytics solution to replace its legacy homegrown tool to better help its clients contain cost and improve the quality of care. This is a powerful transaction for Benefitfocus, as it increases the number of users on our platform and provides our sales team a strong opportunity to work with this broker to expand our product footprint within this client base. Next week is our annual One Place Conference in Orlando, Florida.

We are hosting a record-breaking crowd, including exponential increases in our prospect and broker attendance. We will highlight new offerings for both our existing and prospective customers. Our second priority is to expand revenue opportunities. We see incredible upside to drive efficient growth by monetizing our end-to-end platform.

Benefitfocus is positioned as the only provider that serves all channels in the benefits market. We have great experience working alongside these communities to drive continuous innovation, data quality, and expert service for the numerous transactions we support. The Benefitfocus platform is purpose-built to connect consumers with the right products through their employers. We see new revenue streams emerging as we shift from only selling two carriers to now also selling carrier products on our platform.

Overall, we continue to see more of our customers adopt multiple products from our growing catalog of solutions. This validates our engineering investments and indicates our customers' confidence in Benefitfocus as a strategic partner. To capitalize on this opportunity, we have made investments in our inside sales team that sell into our installed base, and we are focused on improving the productivity of that team in 2018. The third priority is to strengthen our core through our focused investments in data, further operational efficiencies, and focused execution of our financial commitments.

To maintain and build off of our consistent profitability improvements, in 2018, we'll continue to invest to strengthen our platform. For example, to increase automation, we are investing in data quality tools and our data exchange frameworks. This will deepen our competitive advantage, increase customer satisfaction, and drive gross margin expansion. To help drive accelerated adjusted EBITDA growth, we are focused on driving profitable revenue growth from both our partner and direct channels and delivering on our efficiency programs, all while allocating ample resources to support our long-term growth objectives.

We are still relatively early in capturing the benefits of our investments in these areas, and we are confident that we can drive meaningful improvements in both gross and adjusted EBITDA margin in 2018 and beyond. I look forward to continuing to update you throughout the year on the progress we are making on these three important priorities. We are confident that by successfully executing on these three strategic priorities -- improving sales execution, expanding revenue opportunities, and strengthening our core -- Benefitfocus is well-positioned to capture market share and expand margins in 2018. It's our goal to end 2018 with the ability to drive significant recurring-revenue growth into 2019.

I want to provide you a final update on the administrative front. After transitioning out of the CEO role and spending several months off with his family, Shawn Jenkins has decided to fully retire after the end of our first quarter. As discussed last quarter, we can't thank Shawn enough for his contribution to the company over the years. He helped to build Benefitfocus into the strong company that we are today and put in place the foundation to drive growth and shareholder value into the future.

When Shawn steps down from the board, concurrent with his retirement, I will assume his board seat for the balance of his term. I look forward to taking on the additional responsibility as we continue to execute against our growth strategy. In conclusion, I am very optimistic about our opportunities for 2018 and beyond. We have an extremely strong leadership team that will enable growth.

Jim Restivo, our CTO, is an experienced technologist; Annmarie Fini, our SVP of customer success, is a proven leader with over 20 years of experience; Robert Dahdah, EVP of sales and marketing, has transformed several sales organizations and has created a strong foundation in both sales and marketing; Jonathon Dussault, our CFO, has done a terrific job in preparing our financial foundation for the future. Now I would like to turn the call over to Jonathon to review our financial results. Jonathon?

Jonathon Dussault -- Chief Financial Officer

Thank you, Ray. I will now review our fourth-quarter financial results according to historical revenue-recognition standard, ASC 605; discuss the impact of the new revenue-recognition standard, ASC 606; and provide our financial guidance for Q1 and full-year 2018 according to ASC 606, which we adopted on January 1 of this year. Turning to Q4, it was a solid quarter of execution for the Benefitfocus team. All metrics were at or above the midpoint of our quarterly guidance ranges, and we delivered on a major milestone of becoming free cash flow-positive.

Total revenue for the fourth quarter was $66.8 million, an increase of 7% compared to the fourth quarter of 2016. This was above the midpoint of our guidance range and reflects sales of products to both new and existing customers and a continuation of our high revenue retention. Breaking revenue down further. Employer revenue for the quarter was $44.4 million, up 21% compared to the year-ago period.

Q4 carrier revenue of $22.4 million was down 14% compared to the same period last year and, as previously highlighted, reflects accelerated professional-services contracts, both in the prior-year period and from the second half of 2017 to the first half of 2017. Removing the impact from the year-ago period, our Q4 2017 carrier revenue growth rate would have been more in line with the prior quarter's performance. For the fourth quarter, total software-services revenue was $55.1 million, representing 82% of total revenue and growing 5% year over year. Employer software-services revenue was $38.2 million, an increase of 10% as compared to the fourth quarter of 2016.

Total professional-services revenue in Q4 was $11.7 million, representing 18% of total revenue and an increase of 15% over Q4 2016. GAAP results for the quarter include gross profit of $33.5 million, representing a margin of 50% and an operating loss of $3.8 million, contributing to a net loss per share of $0.22. Non-GAAP gross profit totaled $34.2 million, or a 51% non-GAAP gross margin, which compares favorably to the 49% non-GAAP gross margin in Q4 2016. The nearly 200-basis-point improvement over the last year reflects revenue growth and the operational benefits of our increasing scale as well as steady improvements in our infrastructure-optimization and cost-management efforts.

Importantly, these improvements are also evident in our software gross margin, which increased by over 90 basis points year over year in the quarter. We also continued to drive consistent and impressive year-over-year improvements in our adjusted EBITDA results. Q4 adjusted EBITDA was $5.3 million, or 8% of revenue, and compares favorably to 5% of revenue in Q4 2016. Our adjusted EBITDA was positively impacted by our revenue growth in the quarter, gross margin expansion, and increasing operational scale.

Net -- non-GAAP net loss per share was $0.06, based on 31.3 million weighted average shares outstanding, and was above the midpoint of our prior guidance for a loss of $0.08 to $0.05 per share and the year-ago period loss of $0.09 per share. Moving to the balance sheet. We ended Q4 with cash, cash-equivalents of $55.3 million. Total deferred revenue declined $5.1 million sequentially to $58.7 million.

As discussed in prior quarters, the decline in deferred revenue reflects the de-emphasis of certain lower-margin carrier professional-services engagements as well as the timing of deliveries and new sales in the carrier business. Now to the cash flow statement. I'm pleased to report, in Q4, we delivered on a major milestone of becoming free cash flow-positive. Q4 2017 cash provided by operations totaled $9.1 million, compared to $1.9 million used in the year-ago period.

Free cash flow, a non-GAAP measure that we define as cash provided by or used in operations, less capital expenditures, was $7 million, compared to a negative $3.8 million in the year-ago period. That concludes our Q4 review under ASC 605. As disclosed in our press release and our presentation, both of which are available on our IR website, we adopted ASC 606 on a full retrospective basis effective January 1, 2018. The benefit of the full retrospective approach is we will recast our full-year 2016 and 2017 as well as our quarterly 2017 results under ASC 606 to enable an apples-to-apples comparison of our 2018 results, beginning in Q1 when we publish our restated historical results.

In aggregate, the adoption of ASC 606 will result in a decrease in deferred revenue and professional-service revenue and a revenue timing change for brokerage commission revenue as well as an increase in our cost of revenue and sales and marketing expense. Let me provide additional color on each line item. As previously mentioned on our Q3 call, we expected deferred revenue to decrease upon adoption of ASC 606 due to the recognition of professional services, primarily in our carrier segment, over the contract term versus the formerly used customer relationship. With contract terms typically shorter than customer relationship periods, the net result will be the loss of deferred revenue, which we expect will negatively impact our professional-services revenue.

ASC 606 also impacts the timing of our insurance brokerage service commission revenue, which is included in software services. Under the new revenue-recognition standard, insurance brokerage commission shifted from over the policy term to when control of the policy transferred to the customer. As a result, we expect revenue from these arrangements will be recognized in earlier periods under the new standard in comparison to ASC 605 and will change the timing and amount of revenue recognized for annual and quarterly periods. With most of our customers completing open enrollment in Q4, under ASC 606, the vast majority of this revenue will be recognized in the fourth quarter versus being ratably recognized under ASC 605.

In conjunction with the retrospective restatement of our revenue, management elected to make certain reallocations between software services and professional services. This is largely related to our recurring benefits service center revenue moving to professional services. This will result in less software-services revenue but also higher software-services gross margin that is reflective of our core software-services subscriptions. As stated on our Q3 call, we also expected the creation of assets at the time of ASC 606 adoption for costs to obtain contracts with customers, mostly comprised of sales commissions, as well as costs to fulfill certain contracts.

Under ASC 605, the majority of the costs were expensed as incurred. Under ASC 606, the costs will be amortized on a systematic basis, which is generally expected to be approximately five years. As such, we anticipate cost of professional-services revenue to increase due to large carrier implementations performed in 2012 and 2013. We also expect selling and marketing expenses to increase under ASC 606, also largely related to certain carrier transactions in 2012 and 2013.

Under ASC 606, we do not expect changes to our operating cash or core software services subscriptions, which will continue to be recognized ratably over the contract term. In summary, Benefitfocus was materially impacted by ASC 606, and we will provide more details on our Q1 call. Now moving to guidance. Our guidance is based on the new ASC 606 revenue-recognition standard that is effective beginning January 1, 2018.

The prior-period comparisons are preliminary, have not been finalized, and are subject to change as we finalize our full retrospective approach. For 2018, we are targeting total revenue of $250 million to $258 million. We believe this will reflect growth of approximately 6% to 10% compared to 2017. We anticipate the vast majority of our 2018 revenue growth to be driven from our software-services line item.

We expect adjusted EBITDA of $5 million to $13 million. As a percentage of revenue, we believe this will represent a 300- to 600-basis-point improvement compared to 2017. We anticipate a non-GAAP net loss of $25 million to $17 million. As a percentage of revenue, we believe this will represent a 300- to 600-basis-point improvement compared to 2017.

We also expect 31.7 million weighted average shares outstanding. Due to the timing of insurance brokerage commission revenue that I mentioned earlier, we anticipate a greater percentage of our revenue to be recognized in the second half of the year. We expect this shift in revenue and the timing of expense items under ASC 606 will result in adjusted EBITDA starting the year negative and expect it to gradually improve throughout the year. Importantly, and as indicated by our adjusted EBITDA guidance, we are confident in our ability to drive margin expansion and the business toward cash flow positive.

For the first quarter 2018, we are targeting revenue in the range of $57.5 million to $59.5 million, which represents low-single-digit growth compared to Q1 2017 and reflects the expected timing impacts of ASC 606. As previously highlighted, in 2018, our ACA revenue will be recognized ratably, compared to being largely recognized upfront in the first quarter of 2017. After normalizing for this impact, the result will be an approximately 500-basis-point additional growth in the quarter. We expect adjusted EBITDA to be negative $6 million to negative $4 million and non-GAAP net loss of $13 million to $11 million.

As a percentage of revenue, we believe both will represent a modest decline compared to the first quarter of 2017 and are impacted by the timing of revenue and expenses under the new accounting standard as well as the ratable recognition of ACA revenue. We also expect 31.3 million weighted average shares outstanding. In closing, we are proud of the strong year-end performance and are confident that by executing on our three strategic priorities of improving sales execution, expanding revenue opportunities, and strengthening our core, we are well-positioned to drive significant shareholder value. With that, we are now ready to take your questions.

Operator, please begin the question-and-answer session at this time.

Questions and Answers:

Operator

[Operator instructions] Our first question is with Brian Peterson with Raymond James. Please proceed with your question.

Brian Peterson -- Raymond James -- Vice President

Hi, gentlemen, and thank you for taking my question. So maybe a high-level one for Ray to start off, and I got a few follow-ups. But Ray, you've been with the company for a while. I know you just stepped into the CEO role recently.

I just want to start by asking some high-level thoughts on how you view the business at this point.

Ray August -- President and Chief Executive Officer

Yes. Well, thank you very much. As I look at the business, I am very, very excited about the opportunities for us as a company. As we look at the fundamentals of our overall business, we have an extremely enthusiastic community of over 20 million consumers that use our platform every single day.

And when you think about that, they have all expressed a willingness and shown a willingness to purchase products on our platform, as evidenced by our Benefitstore success over the last couple of years and now our Certified Carrier Program. The other thing that's truly compelling is our products have an extremely fast return on investment. So when an employer buys our solution, the payback is very, very quick, so they're not only seeing the benefit of the software, they're also seeing economic benefit. The thing about our sales opportunity and our sales force, we're seeing terrific expansion in our channel with both Mercer and SAP, a lot of great success there.

And as you saw in our sales results at Q4, the quality of our sales execution and operation has been improving dramatically under the leadership of Rob Dahdah. The operational improvements have been really significant for us as a business. And when I think of our overall business fundamentals, our business fundamentals are very, very strong. They've improved dramatically, and we're at the strongest point we've ever been as a company.

Q4 was the first quarter that we're free cash flow-positive. We were EBITDA-positive for the entire year, and we've shown steady increases in our overall margin. Our gross margin in 2017 was up 300 basis points, and our adjusted EBITDA was up 800 basis points. And when you're thinking about Benefitfocus, you really need to think about our associates.

Our associates are truly obsessive about serving both our customers and one another, and that really drives a lot of our long-term success. As I think about us going forward and into the future, the way I think about our business is really through a very simple but powerful equation, and that's the number of lives on our platform times our average price per unit, or our ARPU. And if you look at the number of lives on our platform, 20 million lives is where it starts, but we have a tremendous amount of other activities. Our direct-sales force is the largest it's ever been and more and more efficient.

We've spent a lot of time and effort adding lives through our channel with Mercer and SAP. But the other big push for us is really reinventing our broker channel. We really thought very strategically about brokers, how they can add lives to our platform. This last year, just in January, we had brokers to our site in Charleston.

We did a broker advisory council, we did broker focus groups, and we're putting in place programs to really excite brokers for recommending Benefitfocus. And so by doing all those different things, we're very, very enthusiastic about adding lives to our platform. The other side of the equation is ARPU, and it's equally important. And it starts with our back-to-base team.

Our back-to-base team is expanding for the second straight year. And as we build products through our engineering staff, it gives our back-to-base team even more and more things to sell, and we continue to roll out our products. But another real exciting thing for us is actually the ability to have consumers purchase products on our platform. And how our Certified Carrier Program works is companies sign up with Benefitfocus, they put their products on our platform, we make them available to the employers and then, in return for that, we get a percent commission from those carriers.

It's truly a very good relationship for the carriers, where they get access to the world's premier benefits platform, and for our employer customers, they have access to marquee products that are purpose-built just for them, so it really produces a very strong value proposition for all involved. If we look at the reaction we're getting in the marketplace, next week, we have our One Place Conference. By far, without question, the largest attendance we've ever had. We've increased the brokers at the conference exponentially.

The number of prospects is an order of magnitude higher than it's ever been before. In fact, the hotels are sold out. So we're really excited to get everybody together, talk about our strategy and direction for the future, and really take our company to the next level.

Brian Peterson -- Raymond James -- Vice President

Got it. Great, Ray. That's good to hear. So maybe just some context, I don't know if you could share on the 6% to 10% kind of like-for-like growth, excluding 606.

How should we think about anything directionally as it relates to the employer versus the carrier growth?

Jonathon Dussault -- Chief Financial Officer

Brian, it's Jonathon here. Thanks for the question, I appreciate it. So as we look at the business, really indifferent to the revenue standard, we continue to see the revenue mix between our two segments to stay relatively consistent year over year. In 2017, the employer business represented about 65% of our revenue, whereas the carrier represented 35%.

That's a pretty good approximation of what we expect going forward. Of course, we don't guide to segments specifically, but we expect that mix to continue.

Brian Peterson -- Raymond James -- Vice President

Got it. And maybe one more for me. I just wanted to understand the comments on expenses as it relates to 606. So it sounds like expenses may go up as it relates to some of the, I guess, pulling-forward costs that were related to 2012 or 2013 implementations.

But as that -- as those roll off and commissions that were once expensed are now deferred, would there be one year where you're actually -- your run-rate expenses would kind of go down? I'm just trying to make sure I can think through that cadence as we look out maybe to 2020 or 2021 or something like that.

Jonathon Dussault -- Chief Financial Officer

Yes, it's a good question. And at some point, it will normalize itself, and the run rate will look as you would expect it to. But due to the nature and timing of the larger deals that came with large commission expenses and fulfillment expenses back in 2012 and '13, the amortization here in the years that we're living in today, 2018 and ultimately when we show the 2017 restated numbers, will carry some incremental expenses. But over time, it will begin to normalize itself.

Brian Peterson -- Raymond James -- Vice President

Got it. Thanks, Jonathon.

Operator

Our next question is with Ross MacMillan with RBC. Please proceed with your question.

Ross MacMillan -- RBC Capital Markets -- Analyst

Thank you. Jonathon, I wondered if you could at least give us a little bit of a steer on software services in the $250 million to $258 million revenue number for '18. It sounds like you're pulling some of the call center pro services revenue out of that line. So wondered if you might be able to help us with maybe an approximation of kind of what that line will look like.

And related to that, what do you think a decent range on gross margins for that line might look like under the new standard as well?

Jonathon Dussault -- Chief Financial Officer

Yes, thank you for the question, Ross. So let me give you a little bit of, call it, added color on the impacts of 606, and then I'll get directly to your question. So overall, 606 will not have an impact on our cash, and it will not have an impact on our core subscription-services business. So as we think about our revenue composition from a type of revenue between software and professional services, we expect it to maintain at a level consistent with where we were at in 2017.

Specifically on the software side, our revenue growth range of 6% to 10% in 2018 will be driven by acceleration and improvements in our software line. So that high-quality revenue will be the driver to 2018 and ultimately will be the driver to continued acceleration in '19 and beyond. And importantly, as the dust settles on 606, including the reallocation of that benefit service center revenue that I discussed in my prepared remarks, our software gross margin will improve as a result. As we've stated in the past and we've reaffirmed today, our long-term targets from a software gross margin perspective are 70% to 75% and in 2018 we will approach that 70% target range when the dust settles on the year.

So the high-quality software component of our business will not only drive revenue but will see an improvement in the gross margin in 2018.

Ross MacMillan -- RBC Capital Markets -- Analyst

That's helpful. And then when do you think you'll have the retrospective disclosure on '16 and '17? Will that just come with 1Q results? Or do you plan to have a separate filing on that?

Jonathon Dussault -- Chief Financial Officer

No. Yes, we're going to do it in conjunction with our first-quarter earnings call and, of course, in greater detail in the 10-Q.

Ross MacMillan -- RBC Capital Markets -- Analyst

Great. And last one for me. I know you disclosed the '17 employer customer adds. I think you've been mulling maybe an alternative way to think about kind of growth in net new business because customers can vary radically in size.

I'm just curious as to whether you've sort of had any further thoughts on that in terms of how you might think about giving us some sort of leading metric as we go through the selling season, for example.

Jonathon Dussault -- Chief Financial Officer

Yes, we've been thinking long and hard about it, and we look forward to providing some more metrics as the year unfolds. As you might appreciate, as we are wading our way through the 606 implementation, we'd like to get through that, make sure we have our arms around the underlying metrics and drivers, and then look forward to giving some additional color in future calls on metrics that will help guide models.

Ross MacMillan -- RBC Capital Markets -- Analyst

Great. Thank you.

Jonathon Dussault -- Chief Financial Officer

Welcome.

Operator

Our next question is with John DiFucci with Jefferies. Please proceed with your question.

John DiFucci -- Jefferies -- Analyst

Thank you and I have a question for Ray and then a follow-up for Jonathon. And Ray, it has to do with the 6% to 10% guidance. And I realize that's all under 606, and we don't really have anything to compare that to. But when we look at last year's growth, which was comparing 605 to 605, it was 17% in revenue.

And then -- and I guess those aren't exactly comparable, but I think they're probably not that far off, which implies a decline in growth. Even though you spoke about this fourth-quarter momentum reflected and -- what you and Ross were just talking about -- or Jonathon and Ross, on your employee -- employer count, large-employer count going up, that's a real nice number. I guess, is there something here that we're not seeing other than the 606 and 605 stuff? Like, are you anticipating losing, like, a couple of customers? That's happened in the past before where it's reset numbers a little bit. Or perhaps -- I mean, you guys have talked about increasing the revenue per customer going forward and focusing on larger customers, but we really haven't seen that in the numbers yet.

Is that something you're not assuming anymore going forward? I'm just trying to understand this.

Jonathon Dussault -- Chief Financial Officer

Yes. Hey, John, it's Jonathon here. I'm going to take the first shot at this. So first of all, our revenue guidance range of 6% to 10% under 606, we estimate that that would approximate what it would've been under ASC 605 as well, so it's an appropriate proxy under both of the standards.

Although we're not operating -- we will not be keeping our books under 605 in 2018, it does approximate what our expectations were. Specific to your question about deal sizes, etc., our average deal size of closing new deals has continued to grow. We're feeling good about the momentum that we've had. Q4 alone saw two new enterprise deals come in and a new carrier deal in Cigna.

So the strength of our market share and getting those new deals at larger deal values continues to be part of our momentum heading into 2018.

Ray August -- President and Chief Executive Officer

Hey, John.

John DiFucci -- Jefferies -- Analyst

Yes, go ahead, Ray.

Ray August -- President and Chief Executive Officer

Yes, I just wanted to add that if you look at our overall growth rate from year over year, even this quarter, our Q1 growth rate was impacted by one-time ACA reporting, which actually had an impact of about 500 basis points year over year. And so that's not really baked in and doesn't show in that growth. The other thing to say is that, as we look at last year, one of the things we reported was that our sales were not where we hoped them to be. That was impacted by two things.

One was the impact of ACA; the second was sales execution. And as you look at our overall model, we did have a good Q4, though those lives will come online at typically in Q3, and you'll begin to see the impacts of those in Q3 and Q4. So we do have a back-half-loaded plan, and you'll begin to see that kick in then.

John DiFucci -- Jefferies -- Analyst

OK. So I guess I'll take away from it that you -- that the momentum you talked about, you're still pretty confident, and this is the beginning of the year, and I think it's prudent to give guidance that you're comfortable with, I guess. And I guess maybe a follow-up to all this because, Jonathon, you went through a lot with 606 and some of those things, the impacts, and we've been trying to understand all of it, ourselves, and I'm sure everybody on this call has, but it'd be nice if you -- I mean, I know you have a slide deck out there on 606, but it's very, very vague and you went through some specifics. And I don't think you -- like there's not a transcript out there right away for you guys.

So I mean, maybe if we can, I guess -- don't go through it again, we'll figure it out, but maybe another slide on your website might be nice to see with some of those details. But the one thing you pointed out that's constant here is going to be cash flow. So can you help us a little bit on cash flow, at least directionally or even more substantial than that, for next year? Just give us a sense of the momentum of the business.

Jonathon Dussault -- Chief Financial Officer

Yes, no, thank you for that. First of all, I'll start with a comment about how we ended the year from a cash-flow perspective. We're proud of the fact that in the fourth quarter of 2017, we executed on our commitment and target of being free cash flow-positive. That provides good momentum heading into 2018, and it actually created a fair amount of maturity and discipline in the organization from an operational perspective as well as we're starting to benefit from PEPY contracts being more prevalent in our base.

So we have the good foundation from a cash-flow perspective. As we look at 2018, we are committed to being free cash flow-positive for the full year. Seasonality will come into play, though. Given the nature of our revenue seasonality and, ultimately our earnings seasonality, we won't see free cash flow-positive in the first few quarters, but we expect for the full year 2018, we will be free cash flow-positive.

John DiFucci -- Jefferies -- Analyst

OK, great. That's really helpful. And I just want to correct something. I said you grew 17% last year, that was the employer segment.

You grew about 10% total revenue, so sorry about that.

Jonathon Dussault -- Chief Financial Officer

Thank you. That's OK. That's correct, though. Thank you.

Operator

Our next question is with David Hynes with Canaccord. Please proceed with your question.

David Hynes -- Needham & Company -- Analyst

Hey, thanks, guys. So, Ray, I wanted to ask just on the sales front, obviously 2017 was a big investment year. I mean, does it feel like you have the sales alignment correct now? And what's the plan for '18? Are we in a digestion mode? Should we expect sales additions? How are you thinking about scaling that part of the business this year?

Ray August -- President and Chief Executive Officer

Yes. We are very, very focused on growing sales. We were very pleased with the activities in Q4. Rob Dahdah came in, led our sales team, and he had a lot of different focus areas.

One was to make sure we have the right people in the right roles, the other was to make sure that we were organized correctly. And we ended Q4 from a point of strength where it was -- the bookings were higher than we had anticipated. One of the real areas of focus for us has been the channel. And channel activities is now something that we're investing in heavily, have a team focused on channel, have marketing programs focused on channel.

We're really, really proud of our two channel partners, SAP and Mercer. We've seen significant increases in the flow from those customers. So really, really pleased of what the channel is doing. The other thing that we've seen is a dramatic increase in productivity given the improved operational rigor.

We see it at both a total sales point of view and also at an individual point of view. That's both the efficiency and also the growing tenure of our sales team. One of the things that really has me feeling good about where we are with sales is just the people showing up at our One Place Conference. Typically, that's a leading indicator.

And the number of prospects that are coming to our conference is exponentially greater than we've seen at any point in the recent past. So it's just -- that's just a great early sign for us. And so I feel good about Q1, I feel very good about the early pipeline on Q2 and the demand we're seeing in the marketplace.

David Hynes -- Needham & Company -- Analyst

Yes, OK. And it sounds like another successful open-enrollment season from the stats you shared, but that gets me to think about kind of the seasonality of engagement on the platform. And I think in the past, maybe it was at Analyst Day, we had talked about your thinking that a migration to kind of a public cloud infrastructure would make sense just given that seasonality. So where are we in that process adoption of an Infrastructure-as-a-service model? And how could this impact margins longer term?

Ray August -- President and Chief Executive Officer

Yes, no, thank you, and great memory. We -- our focus on getting our application to a public cloud is something that we continue to make progress. And Jim Restivo, our chief technology officer, this is something that he has had experience with in previous companies and has us on our way as well. And we are going through our architecture and preparing ourselves for that.

In fact, we're using some thought components today. So we see that as very important and very significant for us as we go forward. Such a high percentage of our infrastructure usage is during the last three months of the year, and we're making very good progress in that area. And it's something that as it occurs, it will create margin improvement for us.

David Hynes -- Needham & Company -- Analyst

Yes. And I'll sneak one last one in, if I can, for Jonathon. Jonathon, just -- this is the first time you've given full-year guidance for Benefitfocus. Just maybe talk to us a bit about -- your guidance is a lot.

Obviously, we're coming off of a very challenging growth year. I mean, do you feel like you baked any extra cushion into the numbers? I think everyone just wants to be sure that we're not going to have to take down this 6% to 10% growth at any point in '18. So any context you could give around kind of how you think about building the model and the conservatism baked in there?

Jonathon Dussault -- Chief Financial Officer

Yes, David, thanks for the question. I appreciate the background there, too. So our methodology is pretty, pretty detailed, as you might imagine. We also have a high degree of visibility to our revenue, as we should, in a subscription model.

As we head into 2018, our visibility's approximately 90%. We combine that with a much-improved grasp and degree of comfort in our pipeline opportunities and further combined with the good execution on the sales side that we saw in Q4, we feel pretty good about these numbers that we're providing a reasonable range for 2018.

Ray August -- President and Chief Executive Officer

Yes, and I just want to add to that. As we look at our business, we have a lot of focus on looking at our lives growth and looking at our average revenue per unit. And one of the areas that we see as opportunity is, by driving that average revenue per unit for both existing and future customers, that actually results in a -- it gives us very good visibility into future revenue because the customer's already here. We can provide solutions for them.

And that's something that we are highly focused on as a leadership team, making sure we have the solutions that our customers want to buy during the open-enrollment time frame, and that will give us good flexibility and strength around our revenue growth.

David Hynes -- Needham & Company -- Analyst

Yeah, that makes sense. OK, thanks, guys.

Jonathon Dussault -- Chief Financial Officer

Thank you.

Our next question is with Jamie Stockton with Wells Fargo. Please proceed with your question.

Jamie Stockton -- Wells Fargo Securities -- Analyst

Hey, good evening. Thanks for taking my question. I guess maybe the first one is on client churn. Obviously, there's a ton of noise from 606.

And Ray, I know you said that open enrollment went well, and you feel like you guys have been delivering more consistently on the service front. But with the -- with just the face-value gap and where expectations were around revenue and where you've guided, I'm sure that a lot of people are going to wonder if churn has ticked up and maybe that's part of what's going on. So if you could just talk about how it's trending versus historical levels, that'd be great.

Ray August -- President and Chief Executive Officer

Yes. As we've talked in our prepared remarks, our revenue and customer retention is well over 95%. We continue to get excellent feedback from this open enrollment. We've been told by many, many customers it's the best ever we've had as a company.

We see the results of that in increased sales to our installed base. So they're responding with their wallet in a very positive way. If you look at the overall dynamics of our business, the growth in our employer segment is higher than the growth in our carrier segment, and that's really an indication of the success we're seeing on the employer side. As we look at the carrier part of our business, it's important to know that while the revenue growth isn't there that we would like to see -- it is having a negative impact on our overall revenue growth -- the carrier business though is actually something that we're seeing terrific sales activity.

And that entire business is moving to a model where carriers want to sell their products on our platform. By putting them on our platform, it's driving up our incremental revenue. And the great thing about that business is that's much more a professional-services-like than our, what I'll call, our classic carrier business, was really selling solutions to those overall carriers. So if you look at our total overall business, our employer segment is still growing very, very nicely, and we also expect to see the carrier business accelerate as well.

So that's the kind of the overall dynamics of our revenue picture.

Jonathon Dussault -- Chief Financial Officer

And I'd just simply add, too, in terms of the revenue guidance for 2018, the difference between previous estimates and the guidance that we're giving today is the accounting standard. I'll reiterate that our guidance range of 6% to 10% is consistent with what we would've estimated it to be under 605.

Jamie Stockton -- Wells Fargo Securities -- Analyst

OK, that's great. And then maybe one quick one, Jonathon. The sales commission, you said, you're stomaching kind of some amortization of commissions from five, six years ago still. Can you just give us what the amortization period is for commissions? I think you mentioned what it is for pro service cost but not for commissions.

When will we see those fall off essentially?

Jonathon Dussault -- Chief Financial Officer

Yes, it's about five years. It's about five years.

Jamie Stockton -- Wells Fargo Securities -- Analyst

OK. That's great. Thank you.

Jonathon Dussault -- Chief Financial Officer

Yup.

Operator

Our next question is with Frank Sparacino with First Analysis. Please proceed with your question.

Frank Sparacino -- First Analysis -- Senior Vice President

Hi, guys. Jonathon, maybe first for you. In terms of Q4, I guess, the one surprise for me was just on the sales and marketing side of things. I assume the higher figure there was a function of strength in bookings during the quarter, but any thoughts there?

Jonathon Dussault -- Chief Financial Officer

Yes, you got it. We had a strong quarter, as indicated by the logo count and the improvement over the prior year, so we definitely carried a bit more expense there from a commissions perspective. But as important, and in particular, as we look ahead to 2018, in sales and marketing, we did pull forward our annual sales GM conference, which was a huge move in order to position the team for success in 2018. And that would've been a different year-over-year compare as we typically have that in the first quarter of the year, but we pulled it into the fourth quarter

Ray August -- President and Chief Executive Officer

And the other thing to add to that is while it was expected and budgeted, we did increase our investment in our channel operations. We have an entirely new channel team that we've built out. And also around sales operations, as we looked at some of the challenges we had last year, we really wanted to focus on predictability and visibility of our overall sales pipeline. So Rob and his team have really built out our sales operation team to ensure that we have world-class talent leading that group.

Frank Sparacino -- First Analysis -- Senior Vice President

Great. And maybe just to follow up, in terms of the channel, Ray or Jonathon, we obviously have the contribution from Mercer, at least for some part of the year, but can you give us a sense just to what extent SAP is contributing? And then when you look at 2018, what do you expect from the broker channel? And what do you expect from the Certified Carrier Program? Because that one's a little bit hard to sort of determine how much revenue that can spin off for you.

Ray August -- President and Chief Executive Officer

Yes, we're really excited by the results that we're seeing in the SAP channel. We attend all their conferences. They actually come on site very frequently and see that as a very, very important product as part of their portfolio. SAP is investing very heavily in the cloud-based business around their Employee Central product.

And the fact that we are on that price list, we're branded as the SAP benefit solution, makes it an ideal fit for them as they sell to the marketplace. The SAP team, as I've met with some, one of the things that they really focus on is the fact that at SAP, they use our solution. And every SAP salesperson, every SAP employee in the U.S. knows our solution very well because they're users of our solution, and that has made them advocates of our solution.

So we've actually seen an impact of that as it relates to SAP cycle. So investing a lot of money on SAP, making sure that we're driving and maintaining that channel. Rob is very, very committed to the channel and sees that as such a high-leverage growth area for us. Turning our attention to brokers, brokers are something that we put a tremendous amount of focus on.

If you look at the strategic account space, companies of 1,000 or above, more than 50% of deals in that space are recommended by a broker. So what we have done as a company is getting very close to the broker community -- that's not been an area of strength and focus for us in the past. We had them on site in Charleston in January, actually, at two different sessions where we had broker sessions where we interviewed them, saw what they wanted to see from a company they work with, both from a commissions standpoint and a servicing standpoint. We work very closely with our broker advisory council.

We actually, from all those different groups, we came up with new programs, innovative programs, and we're rolling those out next week at our One Place Conference where we have just -- we blew the doors off of the number of brokers compared to previous conferences. So we're really excited about the relationships with the brokers. They're excited about us, and we expect that to be an important part of our contribution into the future.

Operator

Our next question is with Sean Wieland with Piper Jaffray. Please proceed with your question.

Sean Wieland -- Piper Jaffray -- Managing Director

Hi, thanks. Maybe one that hasn't been touched on. It's a little odd to see a founder of a company step away both, first, from an operator role, a management role and then entirely off the board. So just any additional insight or clarity you can provide us as to why Shawn is stepping away.

Ray August -- President and Chief Executive Officer

Yes. In November, we announced that Shawn was stepping down as CEO. It was part of an orderly transition that we had under way for several years where I assume the role of the CEO. At the end of December, Shawn went on vacation with his family, took a rest after basically two decades of working, building Benefitfocus.

Upon coming back from that vacation with his family, he decided that that's really where he wants to spend his time, spend his attention, with staying with his family. So he made the decision to retire from the company, and we wish him well. He's still a major shareholder of the company. But we feel very, very good about the leadership team here at Benefitfocus.

Across the company, whether it'd be sales and marketing, finance, technology leadership, customer leadership, we've been in place now for quite a while and working extremely well. So very, very excited about the team as we go forward.

Sean Wieland -- Piper Jaffray -- Managing Director

OK. And then I think we're all trying to just kind of -- let's put 606 aside for a minute. The guidance really implies a deceleration of growth, at least at the total-revenue line. I know you're unwilling to really break that out between carrier and employer, but is there anything that we should be thinking about from a macro perspective, from a competitive-landscape perspective that would be pressuring your target growth? And should we think about that 6% to 10% growth as the new normal growth rate for Benefitfocus going forward?

Ray August -- President and Chief Executive Officer

Yes, if you look at our growth rate last year, 10%, and this year, 6% to 10% as a range, as we well-chronicled last year, we had a tough selling season, we didn't have the flow that we expected. We made major investments in sales and marketing, sales and marketing leadership. We're seeing that pay off already this year, and we expect this year to be roughly in line with last year. So we feel good about what we're seeing, we feel good about the volumes that we're seeing.

And we're seeing -- as you saw in our logo count in Q4, we're seeing increased demand for our overall solutions.

Jonathon Dussault -- Chief Financial Officer

Yes. The only thing I'd add to that, too, as you can probably correlate to our Q1 guidance range, we expect an acceleration of our revenue growth rate throughout the year. So our exit rate coming out of 2018 will be stronger than what it is coming out of 2017.

Sean Wieland -- Piper Jaffray -- Managing Director

OK, that's helpful. Thank you very much.

Operator

Our final question is with Steven Wardell with Chardan Capital Markets. Please proceed with your question.

Steven Wardell -- Chardan Capital -- Analyst

Hey, thanks for taking my question. I'm just hoping you can summarize how is the effort going to sell to the largest customers. And what are you hearing from the largest customers? What are questions that are going on in their minds and how strong is their interest in Benefitfocus products?

Ray August -- President and Chief Executive Officer

Yes. As we look at the largest customers, our average employee count was -- has continued to increase dramatically year over year. We continue to sign enterprise carriers, which we call companies over 10,000. We had two in Q4.

One of the things we've done this year, because of the demand we're seeing for the larger customers, we actually created an additional sales force focused on the top 50 customers in the country. So we have a team now focused on top 50 customers because the demand we're seeing from those types of customers, we have an enterprise team and a strategic-account team. The other area of focus for us is, we're seeing a lot of demand in different verticals, such as state governments, and we have a sales force focused on state governments, for example. Governments are, by definition, usually a very large number.

We're seeing great demand with those as well. A lot of this is happening because of the -- our system has really gotten very robust over the last several years where we can really meet the needs of those largest employers. And when we think about our business, we think about the number of member lives on our solutions, not just the number of logos. And one of the reasons for that shift in thinking is, by focusing on these large enterprise-type customers, the economic value that they drive is so much greater than traditional customer on 1,000-to-5,000 range.

Steven Wardell -- Chardan Capital -- Analyst

Great. Thank you

Operator

Ladies and gentlemen, this concludes the question-and-answer session, and I would like to turn the call back over to Ray August for closing remarks.

Ray August -- President and Chief Executive Officer

Great. Well, thank you very much, and we appreciate all the terrific questions. In closing, I wanted to thank everybody for joining the call today. We had an extremely strong finish to 2017, and we're very, very focused on executing on our three priorities: 1) improving sales execution, 2) expanding our revenue opportunities, and 3) strengthening our core.

We believe by focusing on these areas, we'll be able to accelerate our recurring revenue growth, expand our margins, and create long-term shareholder value. So thank you very much, and this concludes our call.

Operator

Ladies and gentlemen, our conference has concluded. You may disconnect your lines at this time. Thank you for your participation.

Duration: 65 minutes

Call Participants:

Michael Bauer -- Director of Finance and Investor Relations

Ray August -- President and Chief Executive Officer

Jonathon Dussault -- Chief Financial Officer

Brian Peterson -- Raymond James -- Vice President

Ross MacMillan -- RBC Capital Markets -- Analyst

John DiFucci -- Jefferies -- Analyst

David Hynes -- Needham & Company -- Analyst

Jamie Stockton -- Wells Fargo Securities -- Analyst

Frank Sparacino -- First Analysis -- Senior Vice President

Sean Wieland -- Piper Jaffray -- Managing Director

Steven Wardell -- Chardan Capital -- Analyst

More BNFT analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than Benefitfocus
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Benefitfocus wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of March 5, 2018

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.