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Castlight Health (CSLT) Q1 2021 Earnings Call Transcript

By Motley Fool Transcribing – Apr 30, 2021 at 8:31AM

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CSLT earnings call for the period ending March 31, 2021.

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Castlight Health (CSLT)
Q1 2021 Earnings Call
Apr 29, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, and welcome to the Castlight Health first-quarter 2021 conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to Tiah Davis. Thank you.

Please go ahead.

Tiah Davis -- Investor Relations

Leading today's call are Maeve O'Meara, chief executive officer; and Will Bondurant, chief financial officer. Maeve and Will will offer prepared remarks, and then they will take questions. The Castlight press release, webcast link and other related materials are available on the Investor Relations section of Castlight's website. This call contains forward-looking statements regarding trends, strategies and anticipated performance of the Castlight business, including, but not limited to, guidance for 2021, new sales, our ability to bring new innovation, the opportunities and impact of COVID on our own operations, our ability to sell in our operating results, opportunities and the impact of COVID on our customers and businesses and their decisions to buy certain benefits or institute workforce reductions, retention of existing customers, gross margin and operating expertise, trends, cash use, future cash position and the changes in the growth strategy and the company's performance.

These statements are made as of April 29, 2021, and reflect management's views and expectations at this time and are subject to various risks, uncertainties and assumptions. If any of these risks or uncertainties developed or if any of the assumptions prove incorrect, actual results could differ materially from these expressed or implied by our forward-looking statements. The company disclaims any obligation to update or revise any forward-looking statements. This call contains financial guidance, but the company will not provide any further guidance or updates on performance during the quarter, unless a Regulation FD complaint form.

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 Castlight's forward-looking statements. Today's call and presentation also includes certain non-GAAP financial metrics, such as non-GAAP gross margin, operating expenses, operating income and net income per share. These non-GAAP financial measures should be considered, in addition to, not a substitute for or in isolation from, measures prepared in accordance with GAAP. However, Castlight believes these non-GAAP metrics aid in the understanding of Castlight's financial results.

Disclosures regarding non-GAAP metrics and reconciliation to comparable GAAP metrics on a historical basis can be found under the heading Reconciliation of GAAP to non-GAAP Financial Measures of the earnings release that was filed before the call. With that, I'll turn the call over to Maeve O'Meara, CEO of Castlight Health. Maeve?

Maeve O'Meara -- Chief Executive Officer

Thank you all for joining us. On the call today, I'll discuss our achievements in the first quarter, including progress against the three goals we shared on our last call: growth, innovation and operating discipline. After that, I'll turn the call over to Will for a more detailed review of the first-quarter financials. Our total revenue for the first quarter of $35.1 million exceeded our guidance.

Our non-GAAP gross margin of 66.8% was 170 basis points higher than the same period last year, and Castlight achieved a fourth straight quarter of non-GAAP profitability and positive cash flow, reflecting our efforts to exercise operating discipline to support continued financial sustainability. Before I discuss each goal, I am pleased to share we agreed to expand our partnership with Boston Children's Hospital, BCH, and the CDC in support of the national COVID-19 vaccination effort. It has been a privilege to leverage our expertise in health navigation and complex healthcare data to support the country in this critical phase of pandemic response. The expansion will allow us to continue to serve BCH and the CDC through the duration of the vaccination effort this year.

Will will share more details on the financial impact. In addition, the team delivered several meaningful achievements against our goals for 2021 in the first quarter. Starting with our goal of ARR growth. Our annualized recurring revenue, or ARR, increased $1.3 million from last quarter to $128 million.

While the first quarter is typically a seasonally light sales and renewals quarter, we were pleased Blue Cross Blue Shield of Alabama chose to add Care Guides in February and proud that our customer experience teams delivered our lowest churn quarter since 2016. Looking forward, I'll comment on the three core factors to deliver on our goal of ARR growth: employer sales, health plan sales and renewals. Employer sales. Given the seasonality of our sales cycle, Q1 and early Q2 are our critical pipeline building period.

The combination of a growing navigation market, our competitive, high-tech, high-touch offering and strong team execution on pipeline-generation activities have allowed us to make meaningful progress against our pipeline targets. Our Q1 stage one pipeline generation was more than 130% of our target, and we have multiple active sales opportunities with very large employers that we view as winnable. We don't think 2021 will represent a full return to a normal buying year, but we do see faster progression through the early stages of the pipelines and expect a significant improvement from last year's COVID color dynamic. Health plan sales.

As we see progress with employers, our health plan business is robust and accelerating. Since February, several health plan prospects progressed from the early to mid-stage, including several digital navigation opportunities. In addition, we saw multiple net new opportunities related to the transparency and coverage regulations. Turning to our existing health plan partnerships, we believe there is potential for expansion across Anthem, Cigna and Blue Cross Blue Shield of Alabama.

As a point of validation, Blue Cross Blue Shield of Alabama signed an expansion in February to add Care Guides, and Cigna is in the process of adding additional groups in the Taft-Hartley business segment. These additional Cigna groups are covered under our existing contract, and thus, will not have an immediate financial impact, but both expansions demonstrate our health plan customers' confidence in our solutions and highlight the opportunity to expand existing plan partnerships. Renewals. As I mentioned above, Q1 represented our lowest churn quarter for Castlight since 2016.

This is partly due to a smaller 2021 renewal cohort, but it also reflects strong execution. As an example, we were pleased to renew one of our larger and more complex customer relationships with a meaningful seven-figure contract size. As we work to continue our improvement in retention, we transitioned our customer success managers to a variable compensation plan that aligns customer goals and renewal outcomes with the team's compensation. In addition, we will soon release a third-party study, demonstrating Castlight's impact on medical claims costs.

As I've said before, we believe third-party validation of our meaningful savings will support renewal conversations. I look forward to sharing more progress in coming quarters as our main renewal season is Q2 and Q3. Next, I'll turn to our goal of pioneering next-generation navigation. As I noted in February, our differentiated, high-tech, high-touch approach to navigation drives strong outcomes for our customers through an affordable combination of self-service and clinical expertise.

To that end, we continued to make progress with our Care Guide solution in the quarter. As I mentioned in Q1, we are committed to raising awareness and now see Care Guides in more than 30% of our pipeline discussions, and we were pleased to see the number of RFPs we received for Care Guides increased nearly fivefold over last year. In addition, we launched American Eagle on Care Guides, which is an exciting milestone as they are a net new customer who went to market for high-touch navigation and chose Castlight because of our Care Guides offering. Our national leadership role supporting the CDC and Boston Children's Hospital with COVID-19 vaccinations positioned us to support our customers with a truly best-in-market solution for vaccine navigation.

We launched a comprehensive in-app and Care Guide-supported solution for all of our clients in mid-February, which provides educational content, addresses vaccine hesitancy and guides users through an interactive experience to help them determine their eligibility and identify nearby locations with vaccine inventory. Our customers are also able to tailor their program around vaccination, including messaging, incentives or education-unrelated programs. Since the launch, one-third of our users have accessed and utilized vaccine navigation. Importantly, the solution also has helped drive new registrations as up to 65% of the newly registered users in the past 60 days accessed vaccine navigation for customers who promoted this solution.

While bringing innovation is a core tenet of our customer relationships, I believe vaccine navigation has been among the best-received features we've delivered to clients in my time at Castlight and is a great example of how navigation solutions should be able to flex to serve as critical infrastructure to support a customer's strategy or high-priority needs at any time. While Will will provide detail on our progress against our goal of continued operating discipline, I am pleased to be able to raise our 2021 outlook as a result of our expansion with Boston Children's Hospital and the progress we have made on renewals. Finally, as you've heard me say in the past, one of my top priorities has been building a world-class leadership team that can lead Castlight in its next chapter. I'm excited to announce that we have hired a new SVP and chief sales officer, Frank Jennings, to lead our direct employer sales organization.

I had the opportunity to work closely with Frank when he was one of Castlight's most successful sales leaders seven years ago. Since then, he's led the commercial organizations at several other digital health companies, including Covera, most recently, and Doctor on Demand for five years. I'm thrilled he is returning to Castlight. He brings deep industry experience, strong field sales leadership, Castlight knowledge and a commitment to the culture of our organization.

I'm excited to have Frank onboard and pleased with the immediate and visible impact he is already making on the organization. To close, I'm happy to report 2021 is off to such a strong start, and I feel confident in our ability to execute against our three priorities for the year: returning to ARR growth, pioneering next-generation navigation and continuing to demonstrate operating discipline while investing in growth. As always, I want to express my deep appreciation to the Castlight team for their unwavering dedication to our mission and the way they show up for our customers every single day. I'll now turn the call to Will for a review of the first-quarter financial results and our outlook for the remainder of the year.

Will?

Will Bondurant -- Chief Financial Officer

Thanks, Maeve. I'll start by reviewing our first-quarter results, and then we'll discuss our outlook for the second quarter and the full year. Beginning with annualized recurring revenue, or ARR, we were pleased ARR increased $1.3 million sequentially from 12/31 and ended the quarter at $128 million. As Maeve mentioned, the first quarter is seasonally a light sales and renewals quarter for our industry, and the ARR increase was principally a result of the expanded Blue Cross Blue Shield of Alabama relationship and Q1 being the lowest churn quarter we've experienced since 2016.

Total revenue in the first quarter was $35.1 million, which exceeded our quarterly guidance range with the upside driven by performance-guarantee achievement and our Boston Children's Hospital relationship. Revenue represented a decrease of 10% compared to a year ago, which was driven by the ARR decline we saw in 2020 and around $3 million of one-time revenue in the prior-year quarter. Subscription revenue accounted for 92% of total revenue, and professional services revenue accounted for 8% of total revenue this quarter, including the contribution from our Boston Children's Hospital CDC relationship. Turning to non-GAAP measures.

Our gross margin in the quarter of 66.8% compared favorably to 65.1% a year ago. Subscription gross margin was 77.5%, continuing to come in, in line with our expectations. Non-GAAP operating expenses as a percentage of revenue were 63.5% in the quarter, compared to 70.8% in the first quarter a year ago. This year-over-year improvement reflects our ongoing commitment to financial sustainability, even as we have made targeted investments to return to ARR growth this year.

Non-GAAP operating income of $1.2 million represented our fourth straight quarter of positive non-GAAP operating income. Similarly, our cash flow from operations was $7.6 million in the first quarter, which was a record level for Castlight, though it is worth noting that cash flow benefited from more than $3 million of favorable payment timing in Q1. We ended the first quarter with $56.5 million in cash in the balance sheet. With that, I'll speak to the impact of the Boston Children's Hospital CDC expansion, provide our initial outlook for the second quarter and update our full-year 2021 outlook.

As Maeve mentioned, we were pleased to expand and extend our support for Boston Children's Hospital as it relates to their work with the CDC on COVID-19 vaccinations and vaccine finder. Incremental to our original agreement, we added support for additional deliverables this year and extended our hosting and ongoing support through mid-2022, given the expected duration of the COVID-19 vaccination effort. Due to additional work from the amendment, we expect slightly higher revenue in Q2 and to continue to recognize revenue associated with the relationship through mid-2022. Reflecting the impact of our expanded Boston Children's Hospital relationship, for 2021, we are increasing our outlook and now expect revenue in the range of $135 million to $140 million; non-GAAP operating income between an income of $1 million and a loss of $4 million, non-GAAP income per share between an income of $0.01 per share and a loss of $0.03 per share based on approximately 160 million to 161 million shares, full-year gross margins in the mid-60% range and cash flow provided from operations between $2 million and $7 million.

We expect to end the year with more than $50 million of cash. As we said on our February call, we are now in a position to provide quarterly revenue guidance as well. For the second quarter, we expect revenue in the range of $33 million to $35 million. We are pleased with the progress in the quarter, including the sequential ARR growth and improved financial outlook driven by the Boston Children's Hospital expansion, and I'm confident in our team's execution against the goal of delivering ARR growth in 2021.

Before we open the line to questions, I want to thank the Castlight team for showing up as one team on a mission, making things happen each and every day on behalf of our customers, users and all of our stakeholders. One of those Castlighters is Tiah Davis, who read the safe harbor to open the call and was one of our quarterly Q1 employee spotlights. Thank you, Tiah. At this time, we'd be pleased to take questions.

Operator?

Questions & Answers:


Operator

[Operator instructions] Your first question is from Charles Rhyee with Cowen.

Charles Rhyee -- Cowen and Company -- Analyst

Yeah. Hey, thanks, guys, for taking the question. Just real quickly on Boston Children's, how much of the revenue -- is it fair to say that the revenue increase that we're expecting for the full year is all Boston Children's? Or is there anything else to think about that? And then in terms of the contribution, is the first quarter, when we look at the professional services line, is that the right run rate? Or is it -- or should we assume that kind of increases here and kind of runs at a certain level? And is that a consistent amount that goes to the first half of next year and then we kind of drop back to what we kind of saw beforehand?

Will Bondurant -- Chief Financial Officer

Yeah. Hey, Charles. First of all, we're -- I should say we're really pleased to have the expanded and extended Boston Children's Hospital relationship and pleased for the leadership role. It shows us playing and helping in the COVID-19 pandemic quite candidly.

On the questions itself, the principal driver of the increased guidance was the expanded Boston Children's Hospital relationship, so you're right on that point. In terms of contribution, what the agreement does is essentially extend us from an original agreement that went through mid-'21 to the mid-'22 time frame, really kind of the expected duration of the COVID-19 vaccination effort. What that means is you'll see that kind of run rate that was similar to Q1 running forward, though we did say in the prepared remarks that Q2 of '21 this quarter will be slightly higher, given some added deliverables that were part of the expanded agreement.

Charles Rhyee -- Cowen and Company -- Analyst

OK. So the contribution this year will be probably a little bit more than what we should expect in the first half of next year on a quarterly basis?

Will Bondurant -- Chief Financial Officer

I would say the contribution in Q2 will be a little bit outsized. But other than that, it should be fairly consistent with each of the other quarters from that start time frame in the mid part of Q4 through the middle part of next year.

Charles Rhyee -- Cowen and Company -- Analyst

OK. Got it. And then in terms of the core -- the ARR side, maybe -- you talked about the pipeline here and particularly the health plan side. Should we still expect -- is it your view we'll get another at least one health plan across the finish line by year end? And I know the target is to return to ARR growth.

Are you guys prepared at this point to kind of give a kind of a magnitude of where you think that AR growth range will look as we get to the end of the year?

Maeve O'Meara -- Chief Executive Officer

Sure. Thanks for the question, Charles. So I'll just start by saying that we were obviously pleased to be able to report an increase in ARR this quarter. Obviously, Q1 is typically a lighter sales and renewal quarter but pleased to see it moving in the direction that we want.

And as you have commented, we are committed to returning to ARR growth in 2021, and we're confident that we're going to do that and that we're set up well to deliver on that commitment. As you know, ARR is a function of three things. So it's a function of health plan sales, employer sales and customer churn. And to your commentary on pipeline, we're feeling good about both the health plan pipeline as well as some of the data that I shared on the employer pipeline.

So I shared that we saw a five times increase in RFPs. We also were at 130% of our stage one pipeline target and then, of course, had our lowest churn year since 2016. So if you think about those three pieces coming together, we feel that all three are going to be drivers of our return to ARR growth. And that's really the commitment that we've made and the commitment that we intend to keep.

I don't know, Will, if you want to add anything to that.

Will Bondurant -- Chief Financial Officer

No. And I think on the health plan side, the piece that you started on, Charles, we feel really good about that pipeline. You heard that in Maeve's prepared remarks. The nice thing that we have this year is the ability to add ARR through both new business, new plans coming onboard and through expansion of existing relationships.

And certainly, we've made progress in the expansion already but expect to have both of those contribute this year.

Charles Rhyee -- Cowen and Company -- Analyst

OK. And last question for me is if we look at the expense lines, you guys have done a really good job in this area on opex. As we think about returning to ARR growth this year and obviously going into next year, should we think of our operating expenses starting to grow more in line with ARR growth again after kind of years of kind of cutting back here to manage expenses? And then the -- a quick second part is you reported a non-GAAP operating profit. We didn't book an income tax provision.

Is it right to think we shouldn't be booking any kind of income tax provision, even as we generate non-GAAP operating profit at least this year? Thanks.

Will Bondurant -- Chief Financial Officer

Yeah. On the latter point, that's the right way to think about this year. In terms of the opex kind of more broadly, you've heard from Maeve, really, since she took the role that helping the organization show operating discipline has been an important priority, and we're glad that that's played out over the last four quarters, four straight quarters of non-GAAP profit, four straight quarters of positive cash flow. We do expect to make target investments on the opex lines as we return to growth.

We've talked before about those in the sales and marketing line, specifically in the health plan business, where we've got a real opportunity to capture share and then also in our Care Guide program, which is kind of R&D and also cost of -- cost revenue. But in general, we don't expect to see the opex lines kind of scale in a meaningful way as ARR growth scales. We'd expect to see that on the cost revenue lines but feel like we're in a reasonably good position to make target investments but not need to see meaningful step-ups over the course of, call it, the next eight to 24 months as we return to that ARR growth.

Charles Rhyee -- Cowen and Company -- Analyst

OK. That's helpful. Thanks, guys.

Will Bondurant -- Chief Financial Officer

Of course. Thanks, Charles.

Maeve O'Meara -- Chief Executive Officer

Thanks, Charles.

Operator

[Operator instructions] And there are no further questions in queue at this time.

Maeve O'Meara -- Chief Executive Officer

So with that, thank you all for joining us today. We're glad to share the progress we've made against our 2021 priorities. Have a great evening.

Operator

[Operator signoff]

Duration: 25 minutes

Call participants:

Tiah Davis -- Investor Relations

Maeve O'Meara -- Chief Executive Officer

Will Bondurant -- Chief Financial Officer

Charles Rhyee -- Cowen and Company -- Analyst

Maeve OMeara -- Chief Executive Officer

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