Castlight Health Inc  (NYSE:CSLT)

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Q4 2018 Earnings Conference Call
Feb. 28, 2019, 5:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon, my name is Jesse, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Castlight Q4 2018 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Gary Fuges, Head of Investor Relations, you may begin your conference.

Gary J. Fuges -- Head of Investor Relations

Good afternoon, and welcome to the Castlight Health Fourth Quarter and Full Year 2018 Conference Call. Joining me on the call today are John Doyle, Chief Executive Officer; and Siobhan Nolan Mangini, Chief Financial Officer. John and Siobhan will offer their prepared remarks and then we will open the call to take your questions. Our press release, webcast and slide presentation are available on our website.

This call contains forward-looking statements regarding our trends, our strategies and the anticipated performance of our business, including our guidance for the full year of 2019, expected ARR growth, timing of platform migrations, timing of cash flow and non-GAAP operating breakeven, cost saving efforts, impact of non-renewals, direct and channel sales momentum, our ability to add additional channel partners, future churn risk and future cash position.

These statements were made as of February 28, 2019, and reflect management's views and expectations at that time and are subject to various risks, uncertainties and assumptions. If this call is replayed after February 28, 2019, the information in the call may no longer be current or accurate. We disclaim any obligation to update or revise any forward-looking statements. We provide guidance on this call, but we will not provide any further guidance or updates on our performance during the quarter unless unless we do so in a public forum.

Please refer to today's press release and the risk factors included in the Company's filings with the Securities and Exchange Commission for a discussion of important factors that may cause actual events or results to differ materially from those contained in our forward-looking statements. Finally, today's presentation also includes certain non-GAAP metrics such as non-GAAP gross margin, operating expenses, operating loss, operating income, profitability, earnings per share and net loss per diluted share that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics on a historical basis can be found in the appendix section of our earnings release filed before today's call.

With that, I'll turn the call over to John Doyle, Chief Executive Officer of Castlight. John?

John Doyle -- Chief Executive Officer

Thank you for joining us on the call today. 2018 capped the four-year evolution of Castlight from our history as a transparency solution provider for innovative buyers to our leadership position in digital health navigation, the technology in place today that serves nearly 20 million users. Our thesis for focusing on health navigation is simple. By offering a comprehensive platform that guides users to the right resource at the right time, we can address the large market opportunity associated with employers' rising healthcare costs and users' related inability to navigate their benefits effectively.

Executing on this opportunity has been complex requiring multi-year investments in R&D and go-to-market partnerships against the backdrop of customer retention issues associated with legacy products. In 2018, we performed extremely well against our mission-critical product milestones and channel sales objectives. Further, we fully proved at our business model, delivering full-year revenue and bottom-line performance that exceeded our guidance ranges, and generating $7.5 million in cash flow from operations in Q4, our first cash flow positive quarter in Castlight's history.

Based on these accomplishments, we've crossed a major threshold in the transformation of our business and believe we are in a strong position as the clear leader in digital health navigation. As a result of our new product offerings, in 2019, we are on track to reaccelerate ARR growth through new sales and improved customer retention, deliver positive cash flows from operations and further extend our lead in the market with increased investments in product innovation.

On the call today, I will review highlights from 2018 and our plans for 2019, then after Siobhan covers our Q4 financial performance and 2019 financial outlook, we'll take your questions.

We ended 2018 with annualized recurring revenue of $150.5 million and annual net dollar retention of 82%. Adjusting for the loss of a major customer in July, ARR was essentially flat year-over-year. While these metrics did not meet the growth goals we set for ourselves in 2018, the tough sales headwinds we faced last year are behind us with the highly successful launch of Castlight Complete in Q4. The impact has been clear. Our bookings forecast in Q1 is on track to be our best first quarter since the Jiff acquisition. On top of this, churn is sharply down as well with less than half the level we've seen by this time last year. The bottom line is that although year-end ARR was below our goal, Castlight has begun 2019 with a stronger foundation for growth than we've ever had.

It took a tremendous amount of work to get here. At the beginning of last year, we told you about four key objectives for 2018; accelerating growth and channel sales; achieving our financial sustainability goals; launching our flagship product Castlight Complete; and driving increased logo velocity in direct to employer sales. We delivered on the first three in spades. Siobhan will discuss the financial sustainability goal, so I'll focus on our performance against the sales and product goals, starting with the channel.

In 2018, we delivered outstanding results from the channel initiative we began more than two years ago, doubling new channel sales and adding more than 16 new logos. It is now clear that by bundling our first health navigation offering, Engage, into employers health plan relationships, we dramatically accelerated our penetration of the early majority buyer segment in our market. Some of the most encouraging results we've seen in this part of our business are consistently shorter sales cycles and higher conversion rates, which further validate the idea that many customers prefer to buy health navigation in an integrated package. Most importantly, for the long run, Engage is proving that a deeply personalized user experience that combines care guidance and wellbeing capabilities in an integrated solution drives large gains and engagement and value for both users and employers that neither capability achieves alone.

This was the core idea behind our decision to acquire Jiff in 2017, and the evidence is clear. Users are delighted. We've seen a meaningful uptick in monthly active users, which has translated into improvement in key metrics such as a 30% increase in gaps in care closure rates. While channel sales were strong in 2018, direct to employers sales were well below our goals for the year. We have discussed the challenges we faced with legacy products at length on previous calls. These challenges caused many prospects and benefit consultants to adopt a wait-and-see perspective on Castlight Complete before it went live successfully and became available for hands-on testing.

Since its launch, we have been thrilled to see strong improvements in user engagement and satisfaction across all the key metrics we track. With mobile user NPS north of 70 and MAU above 40%, Complete is the most powerful platform for ROI and behavior change that we have ever launched. Of course, the best proof that we're turning the corner on growth is ultimately closed deals. Although our core selling season is Q2 and Q3, we're excited by the momentum we've seen already in Q1. The keys to achieving our sales goals this year are continued good execution on our channel business and stronger conversion rates on our direct pipeline. We are pleased to be seeing evidence of both already this year.

We are continuing to make great progress as well on the initiative we kicked off last summer to add a new channel partnership that would begin contributing to new sales next year. We are in late-stage discussions on that front and hope to share more information with you soon. Importantly, we plan to leverage the platform investments we've made over the last two years to stand up the new channel relationship. This means the timeline and start-up costs will be readily manageable within existing R&D spend.

As I mentioned, we are also seeing much lower churn so far this year than we did during the same period in each of the last two years. We are pleased as we anticipated the improving trend and we expect it to continue. There are several reasons for this; fewer ARR dollars are up for renewal versus 2018, the positive buyer and user response to our new platform offerings and improved health of our book of business. Specifically, 89% of total ARR is from customers either signed up for the platform offerings or committed to migrate to them this year, and we've already begun the migration process at most accounts. The remaining 11% of ARR is from transparency only customers down from over 20% at the end of 2017. And these customers have all renewed at current market prices.

As part of our continued focus on improving the user and customer experience, we've hired a Vice President of Customer Support with more than 25 years of experience optimizing customer support teams' performance at leading telecom companies. Based on this mix and the value proposition of our platform products and our increased investment in customer support, we believe the book is the healthiest it has been in the Company's history and that elevated churn headwinds are behind us.

In terms of product innovation, we are poised to accelerate our pace significantly in the second half of this year as we complete all but a small handful of customer migrations and support of our legacy products. This will free up an additional 20% of R&D capacity beginning after June 30th to focus on extending our product lead in the health navigation market.

To sum up, 2018 was a pivotal year for our business. The rapid growth of our Engage channel relationship, the successful launch of Castlight Complete and reaching profitability have created a new dawn for the Company. As the leader in health navigation, we have an enormous opportunity ahead of us to make it simpler than ever before for tens of millions of users to find the right care at the right time. This is the goal that motivates us every day at Castlight. I am deeply grateful that every one of my colleagues at the Company for their dedication they've shown to improving our business every day.

I'll now turn the call over to Siobhan.

Siobhan Mangini -- Chief Financial Officer

Thanks, John. Good afternoon, everyone, and let me also thank all of you for joining us on today's call. I'll review our Q4 results in 2019 outlook. After that, we'll take your questions. Q4 is built on our execution trends in Q3 and included solid revenue generation and our second consecutive quarter of non-GAAP operating profitability. Additionally, in the fourth quarter, we delivered on our goal of generating cash flow from operations in the quarter. We ended the quarter with net annualized recurring revenue or ARR of $150.5 million. As John mentioned, ARR was essentially flat year-over-year adjusting for Walmart. We are proud to be at the end of a transformation of our business as compared to where we stood four years ago, and today, nearly 90% of our book is either on or committed to our platform.

In particular, our newest products are delighting and engaging our end-users and price to deliver meaningful value to our buyer. The successful launches of both Complete, our direct to employer product, and Engage, our channel platform offering, in 2018, has provided to us referenceable accounts and users to love our product. This has translated into 20% growth in ARR from customers with our combined care guidance and wellbeing platform products. As John mentioned above, as a result of this industrial grade innovation, we expect to see an acceleration of new business as well as significant improvements in customer retention. Total revenue in the fourth quarter was $42.1 million, which increased 13% year-over-year. Subscription revenue was 94% of total revenue and increased 17% year-over-year. Q4 included approximately $1.5 million of non-recurring revenue related to the end of customer contracts and performance guarantees.

As you may recall, we had a similar dynamic last year as well with $0.5 million in non-recurring revenue in Q4 2017. Excluding the non-recurring amounts subscription revenue grew 14% in Q4 2018 compared with the year-ago period. Revenues are a function of completed implementations and our successful launch activity in the second half of the year drove subscription revenue growth. Professional services revenue declined 23% year-over-year, primarily due to the ending of one-time professional services fees associated with the development of the Anthem local product.

Now, let's turn to our fourth quarter non-GAAP financials. Q4 non-GAAP gross margin was 68% consistent to levels in Q3 and the year-ago period. Gross margin was in line with our expectations and we continue to expect to hit our long-term gross margin range of 70% to 75% in the second half of this year, as most legacy wellbeing customers will be successfully migrated to the platform offering by mid-2019.

Total non-GAAP operating expenses in the fourth quarter was $27.1 million, down 9% year-over-year compared to revenue growth of 13% during the period. We saw continued solid execution against our operating model with all three operating expense lines improving sequentially and year-over-year as a percentage of revenue. In the fourth quarter, the sales and marketing and G&A were within the respective long-term target ranges of 20% to 24% and 8% to 12% of revenues, while we continue to invest in R&D above our 20% to 24% target range to support platform innovation and future growth.

Based on the revenue performance and expense discipline, we delivered our second consecutive quarter of non-GAAP operating profitability in Q4, generating income of approximately $1.6 million compared to a loss of $4.4 million in the year-ago period.

For the full year 2018 revenue, non-GAAP operating loss and non-GAAP EPS, all beat the high end of their respective guidance ranges. We ended the year with $77.3 million of cash, cash equivalents and marketable securities. Cash used in operations was $18.6 million in 2018, which beat our mid $20 million target. This is highlighted by $7.5 million of cash flow from operations in Q4. This performance speaks to the improved levels of operating execution across Castlight. The team performed admirably and maintained their focus throughout the year.

And with that, I'll turn to our 2019 outlook. We currently expect 2019 revenue in the range of $153 million to $158 million. In terms of seasonality, we expect the first half contribution to full year 2019 revenue to be in the mid 40% range, with the remainder in the second half of the year. Similar to 2017 and 2018, we expect Q1 2019 revenue to decline due to the impact of Q4 one-time revenue and 2018 notified churn becoming effective at year-end, all while first quarter customer launches ramp their revenue contribution.

As a result, we expect Q1 2019 revenue to decline by almost $7 million sequentially. Later in 2019, due to customers we have under contract as well as the improved implementation timelines, we've already seen that both Engage and Complete, we expect to see year-over-year revenue growth in the second half of 2019 (ph). 2018 was a critical year to prove we can deliver scalable products including the on schedule launches of Castlight Complete and Anthem Engage. We expect 2019 non-GAAP operating income to be in the range of breakeven to positive $5 million and non-GAAP earnings per share to be in the range of $0.00 to $0.03 based on 145 million to 146 million shares.

Drilling down further, we expect a sequential dip in Q1 gross margins as we invest to support a record number of launches in the first quarter, with gross margin starting to improve over the course of the year in Q2. We expect to hit our long-term gross margin target of 70% to 75% in the second half of 2019 as we complete the majority of migrations after the legacy wellbeing infrastructure. For the full year 2019, we expect the sales and marketing and G&A to be within our long-term target ranges. Given our conviction around the market opportunity in the uptake of our recent new product introductions, we plan to continue to over invest in R&D relative to its long-term target range again in 2019.

Finally, we expect 2019 cash flow from operations to be between $3 million and $8 million with cash usage occurring in the first and third quarters, due to the timing of certain payments. We expect to have more than $80 million of cash on hand by year-end.

In summary, we ended the year on a strong note, highlighted by record revenue in our first cash flow from operations quarter in the Company's history. The product launches in 2018 position us well to accelerate sales growth and improve retention in 2019 and the financial model to generate cash from operations on an annual basis going forward, all while we continue to invest in our platform.

Thank you, operator. And we'll now take your questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Jeff Garro with William Blair & Co. Your line is open.

Jeff Garro -- William Blair & Co -- Analyst

Yes, good afternoon. Thanks for taking the question. I want to ask about renewals and building the pipeline in the context of the single platform. You guys have done a nice job detailing the many benefits of the single platform and if I understand it correctly there, there are still different configurations of that one platform and clients can choose some options there. And so, wanted to ask if there are any meaningful theme so far and how clients are selecting and deploying the single platform?

John Doyle -- Chief Executive Officer

Thank you, Jeff. Yes. So, first, I want to touch on pipeline because the beginning of the year is an important period every year in the pipeline build and one of the really important differences this year versus last year and the year before, is we're going to be out on the conference circuit with all of the customers who launched Castlight Complete in the fall, talking about their experiences and the successes that we've had with those launches and so the pipeline build during this prime period should be the strongest we've seen in years and that's off to a great start. So, we're excited about that.

In terms of the themes among prospects, I would say that the focus of every one of the conversations we have in the market is about the power of combining care guidance and wellbeing together in a single platform, and in particular, the benefits you get in terms of utilization engagement and then ultimately ROI by doing that. And so while we have some customers who might choose to start with one of the configured packages in either wellbeing or care guidance, I would say, in virtually every case, a key reason we've been selected and the trajectory of that relationship over time is headed toward a full deployment of Castlight Complete. And that is the dominant selection that our employer customers are making today. So in most cases, we are actually selling the full platform.

Siobhan Mangini -- Chief Financial Officer

And Jeff, maybe just to put some some numbers against that, this is Siobhan. So, 54% of the ARR we have under contract now is in some form or fashion the combined suite, so -- as offering both wellbeing and care guidance functionality in a single application. So, in terms of renewals, we do have opportunities, obviously, then to be able to bring people over to that combined suite for the other 46% of the ARR. And I think just another piece to put a fine point on it, John mentioned this on the script, is renewals are smaller this year than what we saw in 2018. It's about 20% less on an absolute dollar basis for ARR and it's just a different composition as well. We don't have necessarily the eight digit renewals like we did across a couple of customers in 2018. And so, I think we're in a really strong position with the customers that are up for renewal. We've obviously worked through the migrations that we talked about and we're in a really exciting spot now that we've got this single-stack architecture to be able to get folks renewed on and migrated over to.

Jeff Garro -- William Blair & Co -- Analyst

Got it. That helps a lot. To follow up, I'll ask about the scheduled migrations that you have for Castlight Complete. I was wondering if there is any update on the remaining top four customers that have planned to migrate. And then maybe more broadly, any material moves up or back in the implementation schedule since the last call broadly for the customer base and I guess just should we think of those implementations as firmly schedule and highly visible at this point.

John Doyle -- Chief Executive Officer

Yes. So, we've had great progress and the headline is very much on track. So, in some cases, this question actually has overlapped with your first question. We've had a couple of customers who are migrating wellbeing business actually taking that opportunity to add care guidance to the overall relationship and actually migrate from a legacy wellbeing experience to a full Castlight Complete experienced post migration.

In terms of the progress that we've made, we've now completed three migrations successfully. And when I say successfully means on time with a full migration of user data from the previous experience into the new experience and capture of all of the previous engagement very successfully in the registration on the new product. And so, we're very excited about the progress there, continue to be on track to have all but a handful of the migration is completed by the middle of the year and I think as you're well aware, at that point, we free up about 20% of R&D capacity as I said in the prepared remarks. And that's -- it's a really exciting time for the Company to be to be making that transition.

Siobhan Mangini -- Chief Financial Officer

And maybe just to follow up in terms of how that played through the P&L, we are obviously very focused on these migrations. It's a high degree of visibility across the business. We are investing, as you can imagine, in our services -- professional services organization to support these migrations and so that is part of the impact that you're seeing in terms of quarter-over-quarter decline in gross margins. But also, as we finish those migrations the majority of them in the first half of the year, driving that increase in margins to our long-term target range of 70% to 75% in the second half of the year.

Jeff Garro -- William Blair & Co -- Analyst

Got it. Thanks again, guys.

John Doyle -- Chief Executive Officer

Thanks, Jeff.

Operator

Your next question comes from Charles Rhyee with Cowen. Your line is open.

Charles Rhyee -- Cowen -- Analyst

Hi, thanks for the question. When we think about the guidance here, with the step down in the first quarter, obviously, as we think about Walmart transitioning away, can you talk about how we should think about the full-year EBITDA guidance $0 million to $5 million. Should we think about the first quarter being the biggest loss, assuming (ph) down year-over-year and then kind of trending back up. I guess the question being -- I'm sorry operating profit. I guess the question being, how should we think about sort of any kind of deleverage issues. Obviously, you talked about gross margin, but starting to think about cross sales marketing and G&A on the operating expenses. If you can give us any kind of color on how we should think about progression through the year? Thanks.

Siobhan Mangini -- Chief Financial Officer

Absolutely. Let me start with the top line and then I can move into the P&L. So, I'd say overall, really excited about how we performed this year as a team, and obviously, outperformed revenue guidance as well as driving to profitability. And that was a function of launching Complete and Engage all well; obviously, executing our sustainability goals. When we enter into the year, just to think about our business, we have over 90% visibility as we start the year and the variance is driven by customer launches. And you know the fact is that we essentially have the same amount of -- identical amount actually of era (ph) that launched 1/1/2019, as we did a year ago at the beginning of 2018. And so we're expecting a subscription revenue cadence that's very similar in 2019 as to what you saw in 2018.

So, the great news is we've done this before. What our 2019 revenue guidance incorporates is the planned launches of customers who signed and have product launching. I'd say what's different this year is our implementation timelines are faster than ever. So, we've actually launched, I mentioned the record levels in Q1, but also on a weighted average basis, the timelines are under five months, and sometimes it's fast as three months, in terms of how quickly we're launching customers. So, that's just a function of the scalability of the technology.

The other piece is that we've got inter-year bookings to revenue conversion in the second half of '19. So, we talked a little bit about that, but we had yields from Q4 move over into Q1, as some of those have closed already and then we've got some late-stage deals that were tapering and they have planned 2019 implementations and that's incorporated into our forecast.

I think the great news is, because we've got products like Engage and Complete out there, we can launch customers very quickly. And so that incorporated into the top-line guidance. I think we're really excited in terms of restoring growth and driving the business profitably. In terms of I think -- the second part of your question, in terms of what's happening on the operating expense lines, the good news is we've been positioning ourselves to be able to self-fund innovation and growth. And so, we're in a position to do that. You're right, there will be, in Q1, an operating loss, but then you'll see very strong progression from there on out. We expect to see a bit more savings from the Q4 run rate in sales and marketing and there are some restructuring of contracts that we'll be incorporating into, hitting that 20% to 24% of revenues range for the full year.

R&D, there will be a slight bit of investment, as I think John and I both mentioned, are not significant, but you can think on a full year basis, very similar to what we had in 2018. And then, G&A, we're effectively at the run rate, after the restructuring that we had in the third quarter and hitting 8% to 12% of revenues for the full year. And so, that in effect will drive that $0 million to $5 million operating gain that I talked about in terms of guidance.

Charles Rhyee -- Cowen -- Analyst

In anywhere you can go to give us a sense what you would expect for the operating loss in the first quarter to be, so that we can kind of build off of, as we ramp through the course of the year?

Siobhan Mangini -- Chief Financial Officer

It will be in the order of a couple of million dollars in terms of the loss. Nothing over -- as you can kind of think in terms of -- if you're getting to the quarter-over-quarter reduction of $7-ish million and that's off (ph) PS, as well as subscription, then you're going to see, I think, all the rest of the line items that I just walked through almost at their long-term, I mean, at their steady state in Q1. And that should give you a slight operating loss, and then from there on out being able to drive strong improvements.

Charles Rhyee -- Cowen -- Analyst

Great. And just one more follow-up here. You talked about sort of the faster implementation times. You historically talked about sort of, as we modelled this in terms of the recognition periods for ARR in our models. Should we take that to mean that with Castlight Complete and the ability of the scalability of technology, as we look beyond '19, we should be able to recognize our ARR on a faster clip?

Siobhan Mangini -- Chief Financial Officer

Yes.

Charles Rhyee -- Cowen -- Analyst

Should we (inaudible) start to build that into our models?

Siobhan Mangini -- Chief Financial Officer

Yes. So, I would say it's two-fold. You're absolutely right, we are seeing improvement in ARR our conversion. We started to talk about that last quarter. I think we're starting to very much prove it out, in terms of seeing accelerated launch timelines in Q1 of this year. And we've seen those launch timeline stabilize on average in terms of -- like I mentioned about five months on average in terms of the time to launch for customers in the first quarter of this year. As I just mentioned, as it pertains to the top line guidance and it's worth just talking about how close to ARR conversion, we did have a handful of deals that moved from Q4 into Q1; some of them have already closed, some of them are -- we've been selected and one that is tapering (ph). And they all had anticipated launch timelines in 2019, as incorporated into our guidance forecast. So, as a function of that, that means that we are going to see improved ARR conversion timeline, ARR to subscription revenue timelines. And you can think of that is almost moving three to four quarters, as opposed to the four to five quarters that we've seen in the past.

Charles Rhyee -- Cowen -- Analyst

Okay. And sorry, last one. Did you give total customers at the close -- at the quarter -- at the year-end?

Siobhan Mangini -- Chief Financial Officer

It's around 270 customers, a little less than 30% are Fortune 500.

Charles Rhyee -- Cowen -- Analyst

Great, thanks guys.

John Doyle -- Chief Executive Officer

Thank you, Charles.

Operator

Your next question comes from Richard Close with Canaccord Genuity. Your line is open.

Richard Close -- Canaccord Genuity -- Analyst

Great, thanks. Congratulations on the progress throughout the year here.

John Doyle -- Chief Executive Officer

Thanks, Rick.

Richard Close -- Canaccord Genuity -- Analyst

I guess my first question is on the freeing up on R&D. So can -- is there any ways for you guys to go into maybe a little bit more detail in terms of, as you think about innovation, where you want to spend your time, what makes sense from an additional add-on product. Just any details around that that would help us conceptualize?

John Doyle -- Chief Executive Officer

Yes, absolutely, and it gives me an opportunity first of all that to trump it a very recent innovation that we launched in the fourth quarter, which is Castlight's Q score methodology, which is a proprietary quality metric that we generate using 17 third-party quality data sources, as well as insights and analytics from our own internal data claims and so forth. And we're using those Q-scores to help our users distinguish clinical quality among providers.

Coverage with that metric is terrific across our book of business and represents a real advance in care guidance that we're excited. Now as we look forward, the high level framework here is that the winner in health navigation is going to be the company that is most effective at driving sustained engagement and ROI. And so, when we think about investing the capacity that frees up in the second half of the year, we're very focused on specific elements of the product that we believe will contribute to those two goals, and in particular, sustained engagement at levels that are higher than we've ever seen coming out of these launches of Castlight Complete.

And when we think about that question there, there are good analogies in other industries that can be a guide we think to better engagement in healthcare. These industries include examples like airlines, financial services, or even retail, where consumers are -- have come to expect frankly deeply personalized experiences, where they can complete the basic transactions that those domains typically involves. So take the banking example, you don't have anybody going to use their banking app because their -- specifically because it's got a compelling user interface or a bunch of exciting content. They're going to use the banking app because they can't deposit a check with their camera. And it makes their lives easier and more convenient. We think the next threshold in health navigation is to bring transactions into the platform so that users can be executing the core things that they're trying to get accomplished, whether it be something like appointment scheduling or bill pay. We have pilots on both of those activities in the second half of the year and they represent a significant focus for that additional capacity. So, I thought it would be helpful to give you some of the context for how we think about it and then the specifics.

Richard Close -- Canaccord Genuity -- Analyst

And then -- where do you think about, like let's say you add functionality along those lines eventually, how -- what that does in terms of customers and increasing the wallet share? Is there any thoughts in around that?

John Doyle -- Chief Executive Officer

Well, pricing in our space is ultimately all about ROI. So looking backwards at the care guidance business, we're driving an ROI -- validated ROI of 2x to 3x, that from our point of view only increases now as you look forward given that the leading indicator is engagement and search rates, all of which have improved dramatically with the launch of Castlight Complete. As ROI goes up, so does differentiation and pricing power in a market where ROI for many has been elusive, and when you think about something like appointment scheduling or bill pay or any number of other capabilities that are kind of in the same genre, you turn a healthcare navigation product from a nice to have very helpful product into something that more and more consumers view as a must-have to execute the things that they want to be doing in their health and healthcare experiences and we think that step function in engagement that we would expect with the addition of those capabilities leads to very clearly greater ROI. How does it do that?

Well, one of the things we've observed in user experience -- user data behaviorally is that folks tend to follow the path of least resistance in the choices that they make. And if you imagine a world where you've introduced levers like appointment scheduling and bill pay and you marry that with the kind of curation that Castlight is able to do at the network level such that essentially we're delivering virtual networks for many of our customers. If you're making the path of least resistance in terms of the options you show and then the way users can engage those options, you have those path of least resistance leading to the highest ROI activities we think that becomes a supercharger of the value that users and employers get out of the (inaudible) which ultimately again supports greater differentiation and pricing power. And so that's how we see it translating into topline.

Richard Close -- Canaccord Genuity -- Analyst

Okay, very helpful. I wanted to dive in on the second channel partner's late stage commentary there and what -- I think my headset is dying -- the commentary on the channel partner, you said maybe a shorter timeline or something along the lines of the timeline in the start-up expenses. So, if you can dive into that a little bit deeper and then just remind us back in terms of the timeline for Engage and the Anthem relationship and how that two would compare?

John Doyle -- Chief Executive Officer

Absolutely. So very important question, and I'll start with what we are not interested in doing at this point in the business, nor do we think it's necessary and that is embarking on a large build of net new product for a channel partner whose needs don't overlap well with the things we already do at Castlight. When you go back to the days that we were building Anthem Engage that product was absolutely a net new build we devoted most of our resources for almost an entire year to deliver Anthem Engage. What that gave us though was a start on the build of the health navigation platform that is Castlight Complete that we believe can satisfy the needs of a large number of potential channel partners, I would say, most immediately regional health plans. And if you think about the challenges that regional health plans have to confront in the area of digital health navigation, these products are complex products to build and support. The investments are significant. They're generally not the kinds of investments that plans operating at that scale can imagine making could possibly fit into their economic models and so that makes a partnered approach much more economically interesting for those kinds of groups.

And so, in contrast to the experience building out Anthem Engage, which was net new product, and this was the core point I was trying to get to in my remarks, we are absolutely in a position now where we can leverage product that we've built previously. We can configure capabilities out of the single stack that we use to deliver Anthem Engage and Castlight Complete to deliver another flavor of those capabilities for each net new partner. And so when we talk about the timelines for standing up a new partner and the cost associated with doing that, it's a much faster process and a much lower cost than the Anthem Engage example as a (inaudible). Does that help with your question?

Richard Close -- Canaccord Genuity -- Analyst

Yes, that's helpful. But just one final on that, as we think about -- OK, let's say you sign a second channel partner, when do you think you would be able to have initial sales and then incremental ARR from that?

John Doyle -- Chief Executive Officer

Yes. Well, our plan all along has been that 2019 sales were about continuing to support the success of existing channel relationships and I think we've demonstrated very clearly in our results from 2018 that those existing relationships are working very effectively and we certainly expect that to continue. On the direct side of the business, we think Castlight Complete and the pipeline we've got in place and our programs there to drive conversion rates set us up for everything that we need to achieve our growth goals for this year.

So the new channel relationship is really about sales in 2020 and revenue in 2021. I think there is the potential to go faster than that certainly, but from a planning perspective, that's what's assumed in our modeling.

Richard Close -- Canaccord Genuity -- Analyst

Okay. Thank you very much for the information.

John Doyle -- Chief Executive Officer

Thank you.

Operator

Your next question comes from Steve Halper with Cantor Fitzgerald. Your line is open.

Steve Halper -- Cantor Fitzgerald -- Analyst

Hi. Just two quick questions. You went through, sort of your cost reduction program in 2018. Obviously, headcount was impacted. What is your 2019 headcount plans? And then unrelated to that in the guidance, you talk about a higher share count and what's behind that please?

Siobhan Mangini -- Chief Financial Officer

Sure. (inaudible). So, in terms of headcount we were at 474 employees at the end of 2018 and to your point that was post a restructuring. In terms of headcount, there is minimal growth from there. We've certainly taken into account all of the headcount related restructuring -- from the restructuring. What are cost savings to be had is and I alluded to this a little bit in terms of my discussion with Charles is, sales and marketing, there were some restructuring of -- for example channel agreements and what have you, that will also play through the P&L and give us a little bit more benefit in the sales and marketing line item, and non-FTE related.

So, I'd say, first question is, have definitely moved through the restructuring in terms of personnel, still little bit of savings to be had in sales and marketing non-FTE related and then nominal growth in headcount from here on out. In terms of that higher share count, it's really effectively a similar levels to what we saw in 2018, so we actually had almost a similar amount of range. In terms of our expected growth, it's really just based on the grants that we've given to date and expected best in schedule for that, so nothing out of the ordinary.

Steve Halper -- Cantor Fitzgerald -- Analyst

Thank you.

Operator

(Operator Instructions) Your next question comes from Eugene Mannheimer with Dougherty. Your line is open.

Eugene Mannheimer -- Dougherty -- Analyst

Thanks. Good afternoon and congrats on a good finish to 2018.

John Doyle -- Chief Executive Officer

Thanks, Eugene.

Eugene Mannheimer -- Dougherty -- Analyst

Just two questions. Just looking at this sort of -- at a high level, if ARR is flat this year with last, but you're seeing -- at the same time, seeing a faster conversion of ARR to revenue, wouldn't that suggests we're going to see a little bit of growth this year versus the flattish outlook that you provided, or is there an area of conservativism built in here?

Siobhan Mangini -- Chief Financial Officer

Yes. Thanks, Eugene. So it goes back to what I talked about, I think we're feeling really confident in terms of the success that we've had in 2018 launching, Engage and Complete. But what we're incorporating into the guidance is having a strong launch quarter in Q1, I'm really pleased that we're seeing that, we're going to have almost 40 new customers launched in Q1. And then to that some of these deals that have been talking about that have moved into Q1 are launching into year. And I think to your point, we've done it, I think we're seeing the timelines come down and we're feeling really good in terms of the position we are to deliver; this mix of Complete and Engage and launch them on time in a timely fashion. So I'd say, I think of it is guidance in terms of us repeating what we've seen ourselves due in 2018.

Eugene Mannheimer -- Dougherty -- Analyst

Okay. Okay. Thanks, Siobhan. And with respect to services, would you expect professional services revenue to grow in 2019? And why does the cost of services continue to be about 2x the revenue you receive and when would we expect that to moderate?

Siobhan Mangini -- Chief Financial Officer

All, great question. So, I think the first piece in terms of services revenues, we did have one-time series of revenues associated with the build of our lower cost product that we distribute into some of the fully insured business with Engage. And so we do expect and you saw us step down in services revenue in Q4. We do expect a slightly lower services revenue sort of not necessarily growth -- not a kind of change, but definitely not at the level that you saw at the beginning of 2018 in terms of revenues.

In terms of the cost structure, it's a great question. And I'd say, there's a couple of pieces. One, there is the cost associated with launching customers and that is one activity that the team is doing. There's also been historically the cost of supporting some of these legacy platforms. And so, when I have alluded to the fact that we're making an investment in services to support the legacy platform there -- and that's -- from an accounting perspective, you actually expense that immediately.

There is cost in that services bucket that's related to frankly supporting legacy customers and legacy platforms and so we do expect to see efficiencies in the cost of revenue services bucket over the course of the year, as we're finished migrating customers off the legacy architecture.

Eugene Mannheimer -- Dougherty -- Analyst

Okay, great. Thank you.

John Doyle -- Chief Executive Officer

Thanks, Eugene.

Operator

There are no further questions at this time. So, I'll turn the call back over to John Doyle, CEO.

John Doyle -- Chief Executive Officer

Thank you for joining us on today's call. We are excited about the foundation that we've built at Castlight to deliver the most scalable and powerful digital health navigation solutions in the market. We hope to see some of you at the Cowen Healthcare Conference in March. Have a great evening.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 46 minutes

Call participants:

Gary J. Fuges -- Head of Investor Relations

John Doyle -- Chief Executive Officer

Siobhan Mangini -- Chief Financial Officer

Jeff Garro -- William Blair & Co -- Analyst

Charles Rhyee -- Cowen -- Analyst

Richard Close -- Canaccord Genuity -- Analyst

Steve Halper -- Cantor Fitzgerald -- Analyst

Eugene Mannheimer -- Dougherty -- Analyst

More CSLT analysis

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