Castlight Health (CSLT) Q3 2019 Earnings Call Transcript

Castlight Health (CSLT)
Q3 2019 Earnings Call
Oct 24, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Castlight Health Q3 2019 financial results conference call. [Operator instructions] Thank you.

I would now like to turn the call over to Mr. Gary Fuges, head of investor relations. Sir, please go ahead.

Gary Fuges -- Head of Investor Relations

Good afternoon, and welcome to the Castlight Health third-quarter 2019 conference call. Leading the call today are Maeve O'Meara, chief executive officer; and Siobhan Nolan Mangini, president and chief financial officer. Also joining today's call is Will Bondurant, our new chief financial officer, effective November 15th. Maeve and Siobhan will offer their prepared remarks, and then we'll take your questions.

Press release, webcast and other related materials are available on our website. This call contains forward-looking statements regarding our trends, strategies and the anticipated performance of our business, including, but not limited to, our guidance for the full-year 2019, new sales retention of existing customers, gross margin and operating expense trends, future cash position and the impact of management changes and changes in our growth strategy on the company's performance. These statements were made as of October 24, 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 October 24, 2019, the information in the call may no longer be current or accurate.

And we disclaim any obligation to update or revise any forward-looking statements. We provide guidance in this call, but we will not provide any further guidance or updates on our performance during the quarter 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 expense, operating loss 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 Maeve O'Meara, CEO of Castlight. Maeve?

Maeve O'Meara -- Chief Executive Officer

Thank you for joining us on today's call. We are pleased to update you on the positive steps we have taken toward stabilizing our current business and building a foundation for future growth. Over my first 90 days, I outlined four priorities for the year, solidify our relationship with Anthem, jump-start our health plan growth strategy, execute concrete initiatives to reinvigorate a healthy employer book of business. And finally, build out our executive leadership team.

I'm pleased to report significant progress against all four of these priorities. I will begin with our new go-forward Anthem relationship. Today, we announced an expanded enterprise license agreement with Anthem with two important pieces: first, the agreement renews and expands the contract for the highly successful Engaged health navigation solution that has delivered strong results, including a 55-plus NPS and 24% increase in the closure of gaps in care. Second, the agreement provides Anthem a nonexclusive enterprise license for components of our underlying platform technology, such as personalization and transparency.

This agreement provides business stability while also laying ina foundation for growth, with a total contract value of almost $170 million over the 30-month term, this agreement provides increased revenue stability and visibility through mid-2022. We estimate the contract represents a 20% increase in Anthem ARR compared to its level at the end of Q3. As one single enterprise license will have a clearer line of sight into a significant portion of our subscription revenue and should reduce our exposure to employer and member variability. In addition to this stability and increased economics, the second piece of the agreement is important because it introduces a new framework for us to work together where Anthem can leverage our underlying technology capabilities across their digital solutions.

This model is also an important proof point that we believe will help support our go-to-market strategy with other health plans: the ability to license and embed core components of our technology in addition to the full navigation platform. We are honored to be a longtime Anthem partner and share a commitment to delivering the best customer experience possible to Anthem members. Anthem is a referenceable partner and customer, which is critical as we seek to expand our health plan relationships. Beyond Anthem, our second priority was jump-starting our health plan growth strategy.

Our diagnosis on the state of health plan initiatives led us to conclude that we needed more talent with experience in selling and partnering with plans. My first step was to assemble a dedicated accountable team and begin building the organizational machinery to sell and deliver on our health plan business. Team activities included product and packaging, demo and marketing collateral and demand generation. In addition, I personally met with over a dozen health plan senior leaders since our last call, and each of these conversations have increased my confidence that our value proposition resonates with plans.

There is still a lot to learn, and we understand the long-planned sales cycle, but we're confident in the value we can bring to the member experience and cost of care through capabilities like personalization, engagement, an intelligent provider directory and transparency. The third priority I highlighted was improving the health of our direct-to-employer book of business. As we discussed on last quarter's call, we believe that a healthy book of business requires delivering credible value, continuous innovation and deep partnership at every level of the organization. In addition, servicing our clients requires operational excellence.

We have made progress across all dimensions. Value and innovation move hand-in-hand, and I'm delighted with this week's announcement of our new Castlight care guides, a unique high-touch offering that combines the best of Castlight's personalized health navigation technology with clinician services. Powered by our data and technology infrastructure, Castlight care guides amplifies the core strengths of our platform to identify individuals who may have more complicated health needs or require personalized guidance to navigate basic barriers to care. Customers have told us they want their users to get the right care with the right provider or partner at the right time.

And with Castlight care guides, we're enabling them to achieve this goal without having to choose between a digital or high-touch interaction. We've launched a charter customer program for Castlight care guides, including a Fortune 500 manufacturing customer, which will help us develop the high-touch road map. We plan to make this solution broadly available in mid 2020. The product will be a buy-up for our care guidance and complete customers.

Co-innovation is a critical ingredient to building partnership. In August, we hosted our customer advisory board with 20-plus of our largest clients, accounting for about one-third of our direct-to-employer ARR. We reviewed our 12-month road map priorities, previewed Castlight care guides, hosted a keynote on our machine learning work and ended with a co-innovation session. We were energized by the feedback from customers and extended the momentum by launching four customer councils to participate in quarterly roadmap sessions with topics ranging from personalization to steerage to analytics to well-being.

I mentioned that operational excellence is a foundational requirement. We have demonstrated our operational muscle in multiple ways over the last quarter. In August, we announced our new Salt Lake City Customer Center of Excellence. In the last 90 days, we executed a partnership with the state of Utah, signed a lease, began construction on our new facility and hired our first-class of customer support guides.

Many key Castlighters from our Charlotte location have committed to moving to Salt Lake City, and we are tracking to be fully transitioned by early Q1 without compromising service levels. Our buyers are excited by this investment and recognize it as a critical asset for us and providing them a phenomenal customer experience. In addition to our progress in Salt Lake City, we demonstrated operational excellence in migrating the remaining customers on the legacy wellbeing offering. We've now completed over two dozen migrations to date, including five large customers in early October and have only four customers left to migrate in December.

This has been a massive cross-functional effort and a testament to the discipline of the team. The completion of this task will allow us to shift resources from supporting a legacy offering to investing in innovation and growth. Finally, I'd like to update you on our work to put in place an inspirational leadership team to execute against our priorities. We are committed to seeking exceptional leaders from outside of Castlight while also expanding the scope of top performers inside the organization.

I'm excited to announce two external leadership additions and an internal promotion. Helen Kotchoubey has joined us as EVP and COO. Matt Moran has joined us as SVP of corporate development and Will Bondurant has been promoted to SVP and CFO. Helen is an experienced healthcare operations leader.

She most recently served as chief of staff at New York Presbyterian, Brooklyn Methodist Hospital, where she integrated the hospitals into a nationally recognized healthcare delivery system and managed a 300 person staff across 16 departments. Prior to that, Helen spent 11 years at New York Presbyterian in a number of leadership roles, managing a nine-figure operating budget and leveraging technology to improve the patient experience. She'll be instrumental in driving operational excellence across our entire business as well as bringing the provider perspective to the table. Matt joined Castlight to support us in leading our new growth strategies, beginning with health plans.

He has a great combination of digital health and deep Blues plan experience, so he understands how to drive value-add digital solutions into the payer space. Most recently, Matt was at Rally Health, and he's held roles at Prime Therapeutics and Health Care Services Corporation, the second largest Blue in the market. In his role, Matt will lead our strategic sales and partnership development initiatives pertaining to health plans and ecosystem relationships. I'm thrilled to welcome both Helen and Matt to the team.

Will Bondurant has been part of the Castlight family since 2013 with broad experience across finance and corporate planning, strategy, health plan development, product marketing and operations. Most notably, Will has been a key contributor in our Anthem relationship and was instrumental in architecting our new enterprise license. Having worked closely with Will over the years, I know he understands the financial and operational intricacies of Castlight extremely well. I'm confident he will be a phenomenal partner as we move the business forward.

It has been a nonstop 90 days. While the new Anthem agreement and our expanded relationship is the most visible proof point that we're making progress. I'm equally excited about jump-starting our health plan growth strategy, reinvigorating our customer base with value-focused innovations, and perhaps most importantly, assembling the right team to lead Castlight in its next chapter. As we approach the end of the year, we have three key priorities to set us up for 2020.

Leadership team, new growth vectors, and a healthy employer business, grounded in innovation. We are laser-focused on the right commercial leadership across both sales and marketing to position us for a successful 2020 selling season. Great companies are built by great people, so we will continue to prioritize talent and setting them up for success. Finally, I want to thank the incredible Castlight team who has shown up with energy and resilience in this time of change.

I'm grateful for the dedication and passion they bring to Castlight. Our team is talented, tenacious and focused on our mission, and they inspire me every day. We are driving real value, and I am proud to be pioneering innovative approaches to healthcare's toughest challenges. I will now turn the call over to Siobhan, who will review our Q3 performance and 2019 outlook.

Siobhan?

Siobhan Nolan Mangini -- President and Chief Financial Officer

Thanks, Maeve. Good afternoon, everyone, and let me also thank all of you for joining us on today's call. The Castlight has had a very productive quarter, and I look forward to reviewing our Q3 results and full-year outlook. After that, I'll introduce you to Will, who will be taking over CFO responsibilities on November 15.

Then we'll take your questions. We ended Q3 with $137.4 million in annualized recurring revenue or ARR. Our complete platform product grew to nearly 30% of ARR with a diverse set of customers expanding to complete. While Q3 sales were below our plan, approximately half of our Q3 bookings came from existing customers who upgraded to our full navigation products.

This is a proof point that large employer customers value our technology. We again saw churn from customers who are not on our full health navigation offering. This continues to emphasize the importance of co-innovation and partnership on our direct-to-employer business, and our ability to stabilize our book of business with our health navigation products going forward. Our focus on high-quality and durable revenues makes us particularly excited to announce our new enterprise license with Anthem.

With this license, noncancelable backlog at the end of Q3 would have been around $250 million versus $122 million, we will be reporting as of September 30 in the 10-Q. With this enterprise license, we will now have over 45% of our ARR with Anthem offering our highly scalable industrial strength technology to its members. It's important to note that the ARR at the end of Q3 that I just shared does not include the impact of the new Anthem licensing agreement, which was signed in October. Incorporating both the benefit of the Anthem contract as well as our expectations for a seasonally light Q4 sales, we expect to end 2019 with approximately $140 million to $145 million in annual recurring revenue.

We could not be more pleased with the Anthem enterprise license structure as it provides Castlight with high-quality revenue visibility improved economics and a proof point for our growth strategy. Third-quarter revenue was $35.5 million, in line with our expectations and year-to-date revenue tracking for our full-year guidance range. Reported revenue is a function of completed implementations, and Q3 is a seasonally light quarter for launches. Subscription revenue was 98% of total revenue, while services revenue was 2%.

In particular, we saw services revenue decline 83% year over year. Q3's revenue reflects the growing mix shift of our revenue base with Anthem as Anthem customers do not have professional services revenue, coupled with a reduction in some onetime service fees. Given these dynamics, we expect professional services revenue to be in a similar range as it was in Q3 going forward. Now let's turn to third-quarter non-GAAP financials.

Q3 non-GAAP gross margin was 62%, which primarily reflects professional services costs associated with Q3 legacy wellbeing customer migrations as well as investments we're making to maintain support service levels as we move to our new Customer Center of Excellence in Salt Lake City. We expect to support investments to continue through Q1. Overall subscription gross margin remained healthy at 78%. In the near term, as we make critical infrastructure investments in both our Customer Center of Excellence as well as in our high-touch Castlight care guides offering, we expect to see subscription gross margins in the mid 70s, and total gross margin to remain closer to current levels in Q4.

Overall, we continue to maintain discipline with our expenses across Castlight, while setting a foundation to restore sustainable growth. Total non-GAAP operating expenses were $27.4 million, up about $600,000 year over year. Sales and marketing expense was elevated due to onetime expenses but remained within its 20% to 24% of revenue target range. While DNA reflects some increased spending as we prepare for 404B adoption at the end of this year.

Overall, we continue to invest aggressively in R&D to drive innovation for future growth. Based on these factors, third-quarter non-GAAP operating loss was $5.4 million. Cash used in operations was approximately $7.4 million, and we ended the quarter with $56 million in cash, cash equivalents and marketable securities. We expect to end the year with more than $60 million in cash.

With that, I'll now discuss our outlook. Our full-year 2019 guidance is as follows: we are reiterating our prior revenue guidance range of $140 million to $145 million. Non-GAAP operating loss will exceed $13 million, which is the high end of our previously shared $8 million to $13 million range. This is primarily due to investments we're making around customer stability and operational excellence.

And non-GAAP loss per share will exceed $0.09, which is the high end of our previously issued $0.06 to $0.09 loss per share range based on 145 million to 146 million shares. I'm incredibly proud of the progress we made this quarter across multiple fronts, executing our Anthem partnership, standing up our health plan go-to-market strategy and team, delivering multiple sources of innovation and collaboration to our customers and growing and expanding our leadership team. These early actions are not fully reflected in our financials and our full-year 2019 guidance, but are setting the stage for both stability and growth in our future. Finally, I'd like to take a moment to introduce you to Will, who will be taking over as CFO in mid-November.

Will was my first hire in our finance and strategy team six years ago and has been a versatile leader and high-performing operator for Castlight since he joined us in 2013. I believe Will's breadth of experience will make him an outstanding CFO, especially as we sell into new markets to monetize our technology. I'm sure you'll hear from him during Q&A, and anticipate you'll have a chance to speak with him over this quarter. Before we take your questions, I want to take a moment to thank Castlight team for their focus on our top priorities and dedication to our mission.

They are the key reasons why we accomplished so much over the last 90 days. And Maeve, Will and I are all grateful to be working with them on each step of this journey to simplify healthcare. Operator, we'll now take your questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Jeff Garro with William Blair.

Jeff Garro -- William Blair and Company -- Analyst

Yeah. Good afternoon. Thanks for taking the questions. A lot in the release today.

I think I'll start with the care guidance. So you're announcing this project at a fairly early stage, which I think implies you want to signal to clients that this is a service that will be available from Castlight soon. I was hoping you could summarize some of the client feedback you've received before and after the announcement, and also help us with the time line, kind of bridging the gap between the charter program now and then general availability sometime in 2020, as you mentioned.

Maeve O'Meara -- Chief Executive Officer

Sure. Absolutely. Jeff, thanks for the question. So first, just to take a step back.

So Castlight's mission is to help make healthcare as easy as humanly possible and get people to the right care at the right provider or program. So for us, we very much view this as the next natural step on our journey. And given what we've built with our personalization engine and navigation technology. There's just a very clear opportunity for us to identify populations with more complex care needs and help them with their next best action.

So to your point on understanding the market. We saw a really big gap around bringing a tech-first approach that doesn't force a customer to choose between a digital or a high-touch model, which is one of the reasons that we're moving to fill that gap. So in terms of just from a time line perspective, as you mentioned, we've kicked off our Charter Customer group, which is actually a way that we've co-innovated in the past. So we're excited to bring that back to Castlight, and we do have our first customer launching next month, which is the Fortune 500 manufacturing company.

And really, what we're looking to do with the Charter Customer group set in Q4 and through Q1 is really evolve and expand the 2020 road map. From a time line perspective, we plan to enable our sales team at sales kickoff in January. That's typically when we do all of our training and enablement with the product being GA in mid-2020. And so we do expect to be actively in the market with this in the Q2, Q3 sales cycle.

Jeff Garro -- William Blair and Company -- Analyst

Good to hear. A follow-up on the care guidance by asking about the margin impact essentially. Can you explain a little bit further how Castlight will use technology either existing or in development to deliver this higher touch service with maybe greater efficiency than some similar services?

Siobhan Nolan Mangini -- President and Chief Financial Officer

Absolutely. It's great to talk to you, Jeff. I think what's really exciting here is what Maeve was highlighting, we're moving from technology and an incredible tech-asset and data infrastructure asset into services versus the other way around. And so we're being very thoughtful about the investment.

And this is an investment not just in people but actually in technology and manifesting that APIs into the tech and -- that our support that use. In the near term, as I said in my prepared remarks, we do expect subscription gross margins to decline a little bit into the mid-70s as we're making that investment. But then we do expect after that investment, we're going to see margins begin to progress again because of the investment we're making in technology and the expectation that we're going to see, frankly, more efficiency with our Tier 1 reps even outside of the high-touch services. And then what we're going to be able to see with the clinical support.

I think one of the things that's really exciting, and frankly, Will, Maeve and I are out in the market with customers all the time is that this is going to meet the market where they are. We hear customers frequently say that there is a need for health navigation, and they don't want to choose between services or technology, and we're really being able to deliver one package now at a, frankly, a very cost-effective price point. And I think we're being really, really smart in terms of how we're investing in that right now.

Jeff Garro -- William Blair and Company -- Analyst

Great. That helps as well. I'll ask a question on the Anthem renewal and expansion as well. I was hoping for a little more color on what the changes might be in the economics to the renewed portion.

And then any framework you can provide on the revenue model and potential scope on the expanded license agreement? It sounds essentially like a term license agreement that will be recognized ratably, but I was hoping for a little more color there.

Maeve O'Meara -- Chief Executive Officer

Sure. Well, before we speak to the economics, I just want to start by sharing just how honored we are to be a long-term Anthem partner, and we're thrilled to be expanding the relationship. So stepping into this role, solidifying and strengthening our Anthem partnership was my No. 1 priority.

And after over five years of working so closely with the Anthem team, it's particularly gratifying to be able to share this. So I think we could talk more about the actual structure. But I think your question was on the economics. So Siobhan, do you want to start off? And then, Will, maybe you can talk through the mechanics?

Siobhan Nolan Mangini -- President and Chief Financial Officer

Sure. Yes. So I think, Jeff, you're right. I think what's really exciting here is we're seeing a move into an enterprise license agreement.

It dramatically simplifies, frankly, where we were before, and Will can touch upon the mechanics of the deal. To your point, just in terms of the pure economics, and what we're seeing here is Anthem was about 40% of ARR at the end of Q3, and we're seeing 20% growth from that. And in terms of when this will go into effect, it will be 1/1/2020. And so you'll start to see that contribute then.

I think what we're -- I think, what's very different here is -- and I mentioned this in my prepared remarks, this is now going to be a noncancelable contract, so we're seeing the noncancelable backlog double as a result, as I mentioned. And then just finally, as we think about what happens once the contract goes into effect, you're right, you basically start to see revenue over the following 30 months, given its one enterprise license agreement with Anthem.

Maeve O'Meara -- Chief Executive Officer

Maybe I'll just let Will very quickly touch upon kind of the frontier of where we went and the underlying mechanics of the deal.

Will Bondurant -- New Chief Financial Officer

Sure. Thanks, Siobhan. And Jeff, great to talk. So if you think about the previous relationship with Anthem, we had multiple products and multiple contracts, and you heard that in the complexity sometimes in our financials.

Going forward, it's a single enterprise license, one stable standard revenue base, that encompasses all of the products we've been offering historically, including engaging market, of course, as well as the new engage APIs. And we are excited to simplify the relationship but also to expand it going forward.

Siobhan Nolan Mangini -- President and Chief Financial Officer

Just a final note -- 

Jeff Garro -- William Blair and Company -- Analyst

Great. Appreciate the comments. 

Siobhan Nolan Mangini -- President and Chief Financial Officer

and Jeff, this is for everybody that's on the phone, is it sounds like EDGAR was down. And while we were trying to file this. So there will be an 8-K given the materiality of this agreement that should be populated after this call. I think there's just some issues on that for right now.

Jeff Garro -- William Blair and Company -- Analyst

Got it. Will keep an eye out for that. I'll jump back in the queue. Thanks again.

Siobhan Nolan Mangini -- President and Chief Financial Officer

Thanks.

Maeve O'Meara -- Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Charles Rhyee with Cowen.

Charles Rhyee -- Cowen and Company -- Analyst

Yeah. Hi. Thanks for taking the question. Maybe talking about the bookings in the quarter, you said a little bit light here than you expected, but I -- if I missed it.

It sounds like you're all saying you're expecting 4Q sales to also be a little light as well apart from the Anthem deal. Can you kind of go into sort of your expectations here in the sales process for the fourth quarter as well and the year end?

Siobhan Nolan Mangini -- President and Chief Financial Officer

Yeah, absolutely, Charles. I'll take -- talk a little bit about what we're expecting in Q4. I think it's also -- I want to make sure that Maeve can talk some of the early observations in terms of direct sales performance overall. So in Q4, it's seasonally a very light sales quarter, we've got a handful of deals that have slipped from Q3 that we're tracking, but we're not expecting much conversion at this point in time.

And then I think the other dynamic here is just renewals are typically concentrated in Q4. So we've got about 30% of our renewals still up in the fourth quarter, and so we're being thoughtful in terms of how we incorporate them into the ARR guidance that we shared today for year end. Maeve, would you like to maybe talk a little bit about the direct sales in particular?

Maeve O'Meara -- Chief Executive Officer

Sure. Yes. So in my first 90 days, I did a deep review of our commercial strategy, and based on that diagnosis, I believe that despite having tenured and talented reps in the field but we do have lots of room for improvement. So we're laser-focused on bringing in the right commercial leadership across both sales and marketing, and we're moving with urgency to ensure that we're well positioned for the Q2 and Q3 2020 selling season.

Just to provide a little bit more color to the opportunities that we're seeing around improved execution are really falling into two buckets. Number one is the go-to-market strategy and enablement and our gaps there are around clear resident messaging and actual tactical plays. And then secondly, deal executions, so better diagnosis of pipeline conversion rates by stage, specifically, we're focused on how we unstick some of our later-stage deals. But those are some of our early observations from a direct sales point of view.

Charles Rhyee -- Cowen and Company -- Analyst

Great. That's helpful. And then one more follow-up question on the care light care guides -- sorry, Castlight care guides. You talked about bolt-on investment here as you build it out.

Is that right to think that you're maybe staffing clinicians? And is it right to think that as this ramps up relative to the current margin profile as this becomes really a service business, right? So it would have sort of lower sort of operating margins on a steady-state basis?

Siobhan Nolan Mangini -- President and Chief Financial Officer

Yeah. So you're right, there's going to be some level of clinical support here. We're not talking large numbers of people. And actually, the most significant investment right now is really in the technology, and not to get too specific, but we're literally exposing the underlying APIs into Salesforce, which is what our support guys use.

And so that's really what I'm talking about in terms of investment of technology. The expectation here is to drive efficiencies, both in terms of, frankly, Tier 1, Tier 2 support. You'll see more efficiencies as we drive improvement there, and then, frankly, a much more efficient service model with the clinicians that you're asking about. But in the near term, do expect that you'll see some drop in the subscriptions gross -- subscription margin specifically, as I said, mid 70s for Q4 2019.

Maeve, do you want to maybe talk about the use cases of like how a clinician might use the technology?

Maeve O'Meara -- Chief Executive Officer

Sure, absolutely. So -- and I think it's actually worth noting that the use case actually spans both administrative. So how do we help people remove basic barriers to care such as appointment scheduling to some more complex clinical use cases? So a very simple example would be right now in our data, we identify polychronic patients and are able to see if they don't have a primary care physician. We would be able to both do an outbound touch point to connect them with a provider, who treats patients like them, or if they came in for a question about their benefits or insurance card or HSA, actually proactively treat that use case.

So it's really leveraging a lot of the work that we've done around personalization and understanding the conditions of the population to recommend next best action.

Charles Rhyee -- Cowen and Company -- Analyst

Thanks. That's helpful. And just one -- sorry, one follow-up question on the numbers here. With the investment -- you're saying sort of mid-70s margin on subscription side.

With these kind of vestments you're making, how should -- are these -- some of these are onetime investments that we should expect to kind of roll back off, so that as we're thinking further out in our model, let's say, next year and beyond, we should get some of this back? And I guess that also translates into the operating income loss. How should we think about sort of the pace of that? Or is this sort of the new baseline as we can then kind of grow back up?

Siobhan Nolan Mangini -- President and Chief Financial Officer

So let me talk about Q4 specifically and then general trends will obviously update 2020 guidance in February. But in terms of the investment levels in technology and people. I do expect that will continue beyond Q1. Maeve said, we were expecting the product to be generally available mid next year.

So there will be that investment, both in the tech build out as well as people. And I think we'll have more information around what kind of efficiency can we drive with support overall given we're launching the care guides, but also doing this move commensurate right now. So what kind of efficiency are we expecting to see? So there will be some level of duration. I don't expect it to be like a multiyear investment.

If you can imagine, this is going to be a frozen level of R&D build to get this up and launched. And then there's some level of people that will support the buy-up. But we're being, I think, pretty thoughtful around what level of investment in terms of clinicians do we need. But yes, I do think there's some level of duration in terms of the margin side of things.

In terms of opex, which I think was the second piece of what you were saying. On the sales and marketing side, there were some onetime expenses that translated into the P&L this quarter. So I do expect to see a little bit more efficiency in that line item in Q4 and beyond. R&D, I think we're operating closer to a steady state right now.

G&A, long-term target of 8% to 12%, in particular, because we have 404B, we need to be stocks compliant for year end, I expect that we'll see some efficiencies as we look forward. But when you look into like the next quarter, we're going to get a little bit efficiencies in opex, but not a huge amount, just based on where we are.

Charles Rhyee -- Cowen and Company -- Analyst

Great. Thanks a lot.

Operator

Your next question comes from the line of Brian Peterson with Raymond James.

Alex Sklar -- Raymond James -- Analyst

Hi, this is Alex Sklar on for Brian. I just had a couple of other follow-up questions on the Anthem deal. First, is there -- are there any additional investments needed on your part to enable that ARR step-up? And then also, are there any variable revenue components that could provide upside to the TCV announced either in terms of savings goals or something else along those lines? And then I have a follow-up. Thank you.

Siobhan Nolan Mangini -- President and Chief Financial Officer

Super. Great. I'll dive into some of the components in terms of variable, but first, I think it would be great to have Will hit on your first question.

Will Bondurant -- New Chief Financial Officer

Yeah, absolutely. So as we think about the relationship, we've obviously been working with Anthem for a long time and have worked together to build the products and have them available in market. And so the products encompassed in the enterprise license are all deployed today. And we don't expect them to require additional build and I'm really excited to actually deploy them to additional folks and don't expect increased investment or there'll be a product build out.

In terms of the kind of the upside. When you have a chance to see it -- we had thought it would be filed at this time and apologies that EDGAR apparently is down. We are filing the entire agreement because of the materiality. So you will see that the agreement is structured with a set number of seats.

And so there is upside above that that number potentially. We don't necessarily expect Anthem to hit that number in the near term.

Alex Sklar -- Raymond James -- Analyst

OK, great. And then one other one on the deal. Could you just talk about how the ARR to revenue conversion post Anthem? How we should see that in the numbers?

Siobhan Nolan Mangini -- President and Chief Financial Officer

Yeah, absolutely. That's a great question. So ARR, ultimately is our best predictor for subscription revenue, and that's why we gave guidance on it today, expecting to end the year at $140 million to $145 million in ARR. Effectively what drives conversion is implementation time line, dive that, and then churn headwinds.

Typically, we see about 90% of our ARR convert into subscription revenue the following year. And right now, we're expecting a very similar trend for 2020 in that 90-ish percentage range. Overall, we're super pleased with the progress that we've made to stabilize current revenues and the stability that the Anthem contract provides us.

Alex Sklar -- Raymond James -- Analyst

OK. Great. Thank you.

Operator

[Operator instructions] And your next question comes from the line of Jeff Garro with William Blair.

Jeff Garro -- William Blair and Company -- Analyst

Yeah. A couple more from me. Thanks. So I guess the first is, you mentioned the meaningful advances in jump-starting the health plan growth initiative and all the meetings and how you're feeling good about the progress there.

I was hoping you could frame that discussion a little bit in terms of the pipeline kind of in terms of relationships or dollar value of pipeline, kind of what was there before and what's been added to it now? And some type of outlook on how that might convert to ARR over the next 12 months or beyond?

Maeve O'Meara -- Chief Executive Officer

Sure. So I'll start off, and I know Siobhan wants to add a couple of comments around the pipeline as well. So candidly, Jeff, when we started off, the first thing that we did was a diagnosis of the current state. And what we did determine was that the pipeline really was effectively empty.

So we didn't have any qualified deals at any stage of maturity that we thought could move forward. So a big first step was actually putting in place that organization that we talked about. So having a dedicated team pulling from both internal leaders as well as recruiting the external leaders. And so as you mentioned, I have been on the road with health plans, and I think the excitement around the assets to just add a little detail there have been primarily, I would say, in three areas.

So transparency, ton of interest around provider directory, certainly getting some tailwinds from some of the Washington conversations, as you can imagine. Personalization, specifically care pathways, gaps in care, a lot of interest there as well. And then finally, integration. So bringing together all of the clinical resources and external programs.

So the good news is we got a lot of interest. The kind of challenging news is that these are long sales cycles, so we're thinking creatively about, frankly, how to move things more quickly through the pipeline. We do believe that the Anthem agreement is going to be substantively important for us, both as a referenceable customer, but also the fact that the model is about exposing some of the external APIs. And I think one of the key insights in the time that we spent with plans is how important it is to meet them where they are on their technology journey and being able to be more plug and play.

So in terms of qualifying the pipeline, Siobhan, I know that you wanted to add a couple of comments. But Jeff, I would say that this was -- we're 90 days in is kind of the high level. And I would say that we have moved deals in through -- into a stage 1 phase. But we're definitely early in qualification.

Siobhan Nolan Mangini -- President and Chief Financial Officer

And what I was just going to add is when I think about like how that translates into the model, what you're thinking about here is, obviously, we now have a proof point, which is super exciting with the enterprise license of how we can work with other plans. Translating that to ARR is much more of like a 2020 exercise, where that then contributes to revenues in 2021 is how I would actually think about that, of where we are at this stage.

Jeff Garro -- William Blair and Company -- Analyst

Got it. That helps. And one last one for me. Given the comments about the expansion of health plan relationships and also the new Anthem model.

Maybe you could give a little more commentary on how you're going to balance those efforts with reinvigorating the direct to employer? Because it seems like the incentives have shifted in the Anthem business, and if a similar model is rolled into future health plan relationships, I know the direct-to-employer market is very wide, but wanted to hear your thoughts on how to balance those varying incentives.

Maeve O'Meara -- Chief Executive Officer

Yeah. Well, I'm happy to start and Siobhan should certainly add. I mean, I think that the truth is the type of partnership that we have with Anthem is about two things: it's about a great product meeting a real market need and then trust and respect between leadership teams. So I understand your comment on incentives.

But as we think about building a long-term business, it's very important to us to continue to meet the needs of Anthem customers and membership. And given the way that we've architected the technology as we continue to innovate on the direct-to-employer side, we are able to roll that into benefit, engage customers as well. So I guess, my first comment would be, as a partner with Anthem and as a valued member of their ecosystem, we do have a strong commitment to our existing customers and membership. And then the second piece is really just a product architecture commentary, which is our innovation on our direct-to-employer side, we have the ability to turn that on or off into our health plan business as well.

Siobhan Nolan Mangini -- President and Chief Financial Officer

Yeah. And I think the thing that's really important is actually what made us emphasizing. The way the technology is built to single-shelf architecture. It really is how do we innovate with both Anthem and employers, and it's a win-win.

And frankly, right now, the way I think about it is we've created stability and growth with the Anthem relationship. We've put into place a bunch of initiatives for our direct-to-employer business. And obviously, care guide being one of the most concrete new products that we're putting in place. And then it's around diversifying further in terms of adding additional health plans who are benefiting from that tech stack.

And so I think it honestly is a testament to the technology that we're able to be to service both lines of business, I think, as well as we can.

Jeff Garro -- William Blair and Company -- Analyst

Got it. Thanks again.

Siobhan Nolan Mangini -- President and Chief Financial Officer

Sure. 

Operator

Your next question comes from the line of Charles Rhyee with Cowen.

Charles Rhyee -- Cowen and Company -- Analyst

Yeah. Hey, and just a quick follow-up question. What was the ending customer number for the quarter?

Siobhan Nolan Mangini -- President and Chief Financial Officer

Yes, we're expecting about to have around 250 customers at the end of the year and still 40% of Fortune 500.

Charles Rhyee -- Cowen and Company -- Analyst

And the quarter end was about the same?

Siobhan Nolan Mangini -- President and Chief Financial Officer

Around the same. I would say there's a slightly higher as we're expecting to have effective customer [Audio gap]

Duration: 42 minutes

Call participants:

Gary Fuges -- Head of Investor Relations

Maeve O'Meara -- Chief Executive Officer

Siobhan Nolan Mangini -- President and Chief Financial Officer

Jeff Garro -- William Blair and Company -- Analyst

Will Bondurant -- New Chief Financial Officer

Charles Rhyee -- Cowen and Company -- Analyst

Alex Sklar -- Raymond James -- Analyst

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