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Castlight Health (NYSE:CSLT)
Q2 2021 Earnings Call
Aug 03, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. 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. These statements are made as of August 3, 2021, reflect management's views and expectations at this time and are subject to various risks, uncertainties and assumptions. 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. Castlight disclaims any obligation to update or revise any forward-looking statements, except as required by law.

Today's call and presentation also includes certain non-GAAP financial metrics. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP. 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 with the SEC 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 to review our second-quarter 2021 results. Today, I'll start by sharing an update on the continued progress in our business, including our view of this year's direct-to-employer and health plan selling season. I'll then comment on some exciting updates to the Castlight team. And finally, I'll share some perspective on our longer-term growth initiatives.

I'll start with a brief highlight of some key numbers. We saw a slight uptick sequentially in annualized recurring revenue, or ARR, which continued to move in the right direction for the second quarter in a row and was $128.2 million. Q2 was another very high customer-retention quarter with strong sales activity setting us up well for Q3. Our total revenue for the second quarter of $35.6 million landed at the top end of our guidance range.

Our non-GAAP gross margin was 69%, and Castlight achieved a fifth straight quarter of non-GAAP profitability and positive cash flow. Turning to the progress in our business. I'll begin with direct to employer. This was an incredibly active pipeline generation and RFP season, which benefited from our new Care Guides offering.

In total, our RFP volume is up from the pre-COVID levels of 2019, meaningfully higher than 2020, and we enter Q3 with our largest late-stage pipeline in four years, and we see multiple pathways to achieving our targets for the year. By way of example, we were pleased to sign a Castlight Complete deal worth approximately $1 million of ARR in the first two weeks of Q3. Further, in addition to our pipeline activity, we announced a new channel partnership with Businessolver where we are a preferred navigation vendor and were selected by a brokerage house in a competitive process to support a portion of their business as the navigation vendor. On the health plan side, our initiatives progressed as planned in the first half of the year.

We have developed a strong pipeline with a mix of expansion opportunities and potential new clients. As of today, we have one late-stage opportunity and several promising mid-stage opportunities. Our BCBS Alabama implementation of the digital navigation and Care Guides offerings are progressing on schedule, and we are working closely with Blue Cross Blue Shield of Alabama to meet market demand and to enable their team's efforts. In both the employer and health plan market, we continue to see potential tailwinds from Transparency in Coverage regulations as a best-in-class Care Guidance and healthcare navigation vendor.

Importantly, we are starting these conversations with transparency, but they are quickly evolving into broader opportunities. From a retention standpoint, we continued to demonstrate meaningful progress. Q2 represents one of our best quarters in the past five years in terms of churn. I'm confident we are on track to show a meaningful improvement in retention compared to last year, even though we do still have important second-half renewals to complete.

As evidence of our continued improvement in the health of our book of business, our customer NPS in Q2 rose to 46 from negative territory when I stepped into the CEO role two years ago. I'm very proud of this progress, which I know has taken tremendous work from the entire organization. Importantly, supporting our progress with clients, we were pleased with the results of a third-party actuarial study released in May by Santa Barbara Actuaries, a highly respected firm led by Ian Duncan that is trusted and heavily utilized by the large self-insured employer market. The results demonstrated a 9.1% year-over-year reduction in medical spend among those who use Castlight compared to a matched control group and validate the clear ROI from utilizing Castlight's navigation technology.

The study found lower medical spend across members at every clinical risk level, including those with and without a chronic condition. This reinforces a key value proposition we bring to market as the only navigation vendor able to demonstrate impact across a broad portion of a client's population. We have an exciting announcement from a team perspective. In the quarter, we brought on our India-based development team as FTEs.

This talented and experienced team, many with tenures of four-plus years had previously been working with us as part of a third-party since 2014 and has been responsible for meaningful innovation in our platform. During the transition, we were able to retain 100 out of 104 members of our team, which is a reflection of engineering and product leadership, our operational muscle in the people and finance functions and Castlight's strong R&D culture. Importantly, bringing our India R&D operations into Castlight directly will allow us to scale and grow our team in India. Taking a step back from the quarter, I want to close by speaking to the next evolution of our growth strategy.

When I stepped into the role of CEO two years ago, Castlight was viewed as a purely digital navigation company and, honestly, often known only for its role in creating the category of transparency. On my first earnings call in July 2019, I spoke about the immediate strategic shifts needed, namely expanding the go-to-market through health plans and the addition of high-touch navigation. Following that call, we stood up a health plan sales team and announced our Care Guides offering. In July 2019, though, I also shared and I quote that, the shift to value-based care, the introduction of alternative delivery models and payer/provider consolidation has created demand for healthcare data infrastructure that provides information on the consumers' health and enable steerage to higher-quality, lower-cost providers.

This is the core of what we do. our architecture is services-oriented, so we can expose the technology services that support our current offerings and power user experiences in new buyer categories such as retail pharmacies, labs, telehealth providers and more. Given our progress against the key growth levers, we can now begin utilizing our data and technology capabilities to support the demand for healthcare data infrastructure that provides information on the consumers' health and enable steerage to higher-quality, lower-cost providers. As we laid out two years ago, we have seen interest in this capability from new buyer categories like telehealth providers offering virtual primary care, on-site/near-site clinics, retail pharmacies and more.

While this commercial development is still early stage, we believe it will meaningfully expand our market opportunity and enable long-term growth. We will keep you updated on our progress. To conclude, I am pleased with the progress we've made in the first half of 2021. We continue to deliver against our financial goals, and we're poised to reaccelerate our growth in the second half of the year.

As always, I want to thank the team for their commitment to our mission as we serve our customers with the focus that comes from the privilege of purpose. I'll now turn the call to Will for a review of the second-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 second-quarter results and then will discuss our outlook for the third quarter and full year. Beginning with annualized recurring revenue, or ARR, our ARR of $128.2 million increased slightly sequentially. While we signed some new business in the second quarter, our pipeline is back half-weighted this year for both the employer and health plan markets, as Maeve mentioned.

We are confident that our team will be able to implement the new business signed in the third quarter and be ready to launch on January 1. Total revenue in the second quarter of $35.6 million increased 2% sequentially and was essentially flat compared to a year ago. Subscription revenue of $31.1 million represented 87% of our total revenue, and professional services revenue accounted for the remainder. Our PS revenue reflects continued contribution from the Boston Children's Hospital, CDC VaccineFinder work.

Total gross margins of 68.7%, increased 190 basis points sequentially and 40 basis points compared to a year ago. The increase was driven by top-line contribution from the VaccineFinder work and continued operational efficiencies. Subscription gross margins remain over 77% for the fifth straight quarter. Operating expense as a percentage of total revenue of 63.5% was relatively flat year over year as we hit the anniversary of our cost management measures implemented last year and started to see the return of some expense associated with COVID-19 savings.

As Maeve mentioned, in the quarter, we established an Indian entity and hired approximately 100 individuals as FTEs who previously worked with Castlight at a third-party as part of our development teams. Given this, our total headcount increased to approximately 550 from approximately 450 at the prior quarter. We don't expect a material change in our 2021 expense from this transition but are very excited about welcoming these talented individuals fully into the Castlight family and look forward to continuing R&D scale through our Hyderabad location. Non-GAAP operating income of $1.9 million is our fifth consecutive positive quarter of non-GAAP profit.

Similarly, we reported positive cash flow from operations of $4.6 million and drove our cash balance to $60.7 million at the end of the quarter. Turning now to our 2021 outlook. We are reiterating the 2021 outlook provided in Q1, including full-year revenue of $135 million to $140 million; non-GAAP operating loss of $4 million to an income of $1 million; non-GAAP loss per share of $0.03 per share to income of $0.01 per share based on approximately 160 million to 161 million shares outstanding; gross margins in the mid-60s; cash flow from operation between $2 million and $7 million; and cash balance at year-end to be more than $50 million. For the third quarter of 2021, we expect revenue in the range of $33 million to $35 million.

In conclusion, we are pleased with another quarter of strong financial results and are excited for the strength of our pipeline entering Q3. We look forward to sharing our progress through this quarter as we look ahead toward 2022. With that, we'd be pleased to take questions. Thank you.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Charles Rhyee from Cowen. Your line is open.

Charles Rhyee -- Cowen and Company -- Analyst

Yeah. Thanks for taking my questions. Maybe start, Maeve, just a couple of ones. You talked about sort of the pipeline for additional health plan clients and you kind of listed off a couple of near-, medium-term opportunities.

Are these all Blue Cross Blue Shield kind of plans? Or are there non-Blue Cross plans in this mix?

Maeve O'Meara -- Chief Executive Officer

Yeah, sure. Hey, Charles, thanks for the question. So as I mentioned, we have a late-stage opportunity and several mid-stage. Just to level set, late stage for us means that we've been selected and are in contracting.

Mid-stage means that we're at a finalist stage and would expect selection to happen this year, presumably. And in terms of the nature of those opportunities, I think you're calling out where we do believe we have a sweet spot, which is some of those large regional Blues. So certainly, those are included, as well as other types of plans.

Charles Rhyee -- Cowen and Company -- Analyst

OK. Thanks And on these mid-stage opportunities, who are you typically competing against right now? What does this competitive landscape look like when -- yeah, basically, what type of companies are you competing against in these mid-stage opportunities?

Maeve O'Meara -- Chief Executive Officer

Yeah. No, thanks for the question. So in terms of -- what I guess I would say is that the challenge that we see in the health plan market, really from a velocity perspective, is that there are not a ton of RFPs in a given year. So very often, a lot of our work is actually focused on opportunity creation.

And once there is an RFP, we certainly feel very good about our ability to win. So the kind of competitive question that you're asking, I'd say that the larger competitive dynamic is really a do we build in-house or do we partner question at the plan level. And then in terms of who we see actually competing once there is an RFP is a range across players in the well-being space, the navigation space and then some of the traditional transparency vendors. So it varies a little bit in terms of how the actual RFP is written.

So it is a bit of a range of competitive set. But I think the most important dynamic is really that first question around build versus partner.

Charles Rhyee -- Cowen and Company -- Analyst

OK. Thanks. And just to follow up on that. Does that mean that with these RFPs, are these health plans just looking for single solutions just like either navigation or transparency? Or like, how many these are kind of more kind of comprehensive RFPs that would like Castlight Complete, that would be --

Maeve O'Meara -- Chief Executive Officer

Yeah. No, it's one of the things that's actually really exciting about the pipeline is that they are in navigation, both digital and high-touch Care Guides. So what we like about what we're seeing is that when we look at the capabilities that we do feel like we're uniquely well-positioned to win those opportunities.

Charles Rhyee -- Cowen and Company -- Analyst

OK. Thanks. And then just one last one. In the guidance, the $33 million to $35 million for the third quarter, can you give us a sense of what the split we should think about between subscription revenue versus professional services? It looks like we obviously outperformed here in the second quarter.

It seems like it's probably more related to Boston Children's. Just want to get a sense for that on third quarter. Thanks.

Will Bondurant -- Chief Financial Officer

Yeah. Absolutely, Charles, and thanks for joining us today. So you're right, in the second quarter, we were glad to kind of be at the top end of the range, outperform. That upside was principally driven by Boston Children's Hospital.

There were a set of deliverables in Q2 that had revenue associated with them as we launched the Vaccines.gov site and delivered on some of the kind of the key commitments of that relationship. Going forward, in Q3, we expect the Boston Children's Hospital CDC revenue to step down, but it will still be a meaningful driver. Look something more like Q4, maybe a little bit more than Q4, from a Boston Children's Hospital contribution. And then you heard the $33 million to $35 million Q3 revenue guidance.

Charles Rhyee -- Cowen and Company -- Analyst

OK. Great. Thanks a lot. I'll jump back in queue.

Will Bondurant -- Chief Financial Officer

Absolutely. Thanks, Charles.

Operator

[Operator instructions] Your next question comes from the line of Richard Close from Canaccord Genuity. Your line is open.

Richard Close -- Canaccord Genuity -- Analyst

Great. Thanks. I get to ask a question this quarter. I appreciate it.

Yes, I was wondering if you could just go into the retention. And you're talking about churn being the lowest it's been in quite some time. Can you just help us out with what's resonating with clients? Is it just simply you've gone through enough, and so you're left with solid customers? Just how you think about that, where you are with respect to the whole process since you've taken over.

Maeve O'Meara -- Chief Executive Officer

Sure. Yeah. No. Hey, Richard, nice to hear you, and thanks for the question.

And you're right that we're certainly glad to see the low churn and happy to have renewed some of our important customers over the first half of the year. And we definitely think that there's a lot of things that are contributing to the feeling that we've turned to the corner. So I've talked in the past about a healthy book of business which, by a lot of metrics, we would say that we have the healthiest book of business that we've had in years. So first, there's that element of just kind of operational excellence, which is something that we didn't have at all times, and we really do feel like that's something that we've executed really well on.

The other really three legs of the stool have been around are you delivering value. We talked a little bit about our third-party validated study. We're glad to have this study, but it also just supports the results that we've been sharing with our customers. The second is great relationships at every level of the organization.

And I think having the right people and giving them the right support is a huge part of that. And then finally, really seeing the world evolving in the same way, such that the key to navigation is really ensuring that you're supporting the customer strategy and that you're really a strategic partner. So I think that all of those factors are really supporting us in having this healthy of a book of business and, therefore, really allowing us to have -- turn the corner on churn.

Richard Close -- Canaccord Genuity -- Analyst

OK. That's helpful. And can you just refresh me? You made some comments with respect to renewals and whatnot. So how does the rest of the year look again? Have you gone through much of the renewal process? Or where are you?

Maeve O'Meara -- Chief Executive Officer

Yeah. No. I'll just -- I'll comment and then, Will, you should add a little bit of detail. It's a great comment of -- obviously, we've been happy to have low churn and renewed some of our important customers.

I would also say that we still do have the majority of renewals in the second half. And certainly, we feel that given the health of book of business and given the smaller size, that we're in a good position. But absolutely, we're focused on those renewals, which are happening in the second half. Will, did you want to add details to that?

Will Bondurant -- Chief Financial Officer

I think that's right, Richard. We still have, I would say, the majority of the renewals for the year to be done but saw meaningful progress in Q2, including a seven-figure renewal, a large six-figure renewal. It's a really important client. So our team did a nice job.

Richard Close -- Canaccord Genuity -- Analyst

Great. That's good news there. And then just on the employer side since Charles asked about the health plans, I'll ask on the employer. You seem pretty positive in your commentary.

Can you just update us on what is the market like in terms of appetite for these type of services? Has there been any meaningful change, I guess, as the year progressed? Just any update there.

Maeve O'Meara -- Chief Executive Officer

Sure. I'll start off and, Will, certainly, feel free to add. So just from a market perspective, I think, as we've talked about, the navigation market is growing. And so I think just generally, we're feeling the benefits of a market that is looking for navigation and I think increasingly looking for a mix of technology and service, which we're well-positioned to offer.

In terms of -- just as we think about the employer business to provide maybe a little bit of commentary on our pipeline because I think it gives some perspective on the conversations we're having. So within our pipeline, we do have quite a bit of diversity. So there's some very large opportunities, some smaller deals. The majority of what we see is Complete and Care Guides.

So the majority of the opportunities do include Care Guides. And some of those opportunities in the pipeline have actually come through Transparency in Coverage conversations. So that's certainly been another kind of contributing factor to the conversation. So from a market perspective, we think we're in a growing market and uniquely positioned because of the high-tech, high-touch offering, and I think that's reflected in what we see in the pipeline for the second half of the year.

Richard Close -- Canaccord Genuity -- Analyst

OK. That's helpful. I'll jump back in the queue. Thanks.

Congratulations.

Operator

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

Charles Rhyee -- Cowen and Company -- Analyst

Yeah. Thanks. Hey, just wanted to follow up real quickly in terms of the second-half renewals. What percent of the ARR is up for renewal, is left to be renewed for the remainder of the year?

Will Bondurant -- Chief Financial Officer

Yeah, Charles. We had shared entering the year that our renewal book for 2021 was about half of the renewal book for 2020. So we've got a little bit of a favorable year and that about 70% of that was in the second half of the year. So that's kind of the thing to be thinking along, it's, call it, two-thirds of the renewals left to do.

We're pretty far along that path and have line of sight to, certainly, all of the large customers and renewal paper in front of all of them. So we do feel good about where we are at this point in the year but have some meaningful renewals still to clear.

Charles Rhyee -- Cowen and Company -- Analyst

And then just on those renewals itself, like, what percent of those -- do any of those contain expansions to add Care Guides? And if so, like what kind of -- what percent of those renewals are contemplating expanded services? Thanks.

Will Bondurant -- Chief Financial Officer

Yeah. Absolutely. And we give our customer success and sales team a lot of credit for introducing Care Guides to essentially every one of our customers over the last six to nine months. And we're in conversations with, honestly, about half of our customers about Care Guides at varying stages.

A handful of the renewals in the second half of the year actively have Care Guides contemplated as part of the renewal and expansion. But we do expect to see several Care Guides upsells in the second half and, more importantly, expect to continue that cross-sell tailwind into 2022 as well.

Charles Rhyee -- Cowen and Company -- Analyst

Great. So those renewals that have Care Guides in it, that would lead to a higher ARR for the renewal then?

Will Bondurant -- Chief Financial Officer

That's right. So typically, Care Guides, when we're including it alongside Castlight Complete, is a 30% to 40% uplift in the ARR. When it happens at renewal, there can be some netting out of changes in the lives or the membership and then price negotiation. But yes, it would typically lead to an increase or expansion in ARR, which we then would benefit from in terms of that cross-sell.

Charles Rhyee -- Cowen and Company -- Analyst

OK. Great. Thanks.

Operator

Your next question comes from the line of Richard Close. Your line is open.

Richard Close -- Canaccord Genuity -- Analyst

Thanks. I guess Charles and I are tag-teaming today. Will, what was that number on the uplift on ARR from adding Care Guides? Did you say 30% to 40%?

Will Bondurant -- Chief Financial Officer

Yeah. Absolutely. You guys are like synchronized swimmers of the Olympics or something, Richard. But -- the relay race or something.

But it's -- you're right, it's typically a 30% to 40% uplift in the contract value when we add Care Guides to a Castlight Complete customer relationship.

Richard Close -- Canaccord Genuity -- Analyst

OK. So let's say you have one of these renewals in the second half, you upsell Care Guides, how do we think about that as how quickly that can be converted to revenue? Is that like January 1 sort of liftoff?

Will Bondurant -- Chief Financial Officer

It's a good question. Our Care Guides solution typically can be launched more quickly than the full digital platform for a customer that's already live. And so the kind of time needed is six to eight weeks. But in terms of client strategy, they're typically, at this point of the year, going to be looking at 1/1.

And so you're correct that in those conversations, we're most likely talking about '22 revenue contribution.

Richard Close -- Canaccord Genuity -- Analyst

OK. That's helpful. And then maybe back on the health plans, the late stage, appreciate the details what late stage is in terms of you've been selected. How long do you think that takes to go from selected to the papers are signed? And when would we think about, like, that as potentially beginning to contribute revenue?

Will Bondurant -- Chief Financial Officer

Yeah. I would say -- I'll speak broadly or generally about the health plan market. We've seen some of these move more quickly, some of them move more slowly. But once we are selected, we enter into a contracting period which is anywhere from kind of six weeks to three or four months, depending on the plan.

And then from that, we are into an implementation period, which typically is on the order of about 12 months. If you think back to last year, we signed our relationship with Cigna in August and launched them on 1/1. So that was the faster end. We signed a relationship with Blue Cross Blue Shield of Alabama in December, and we'll launch them in Q4, so a little bit closer to 12 months.

So if we sign a plan this year, we would typically be expecting that to be revenue-contributing starting in the second half of '22 and full contribution in '23.

Richard Close -- Canaccord Genuity -- Analyst

OK. That's very helpful. And then can you just update us on Cigna in terms of how that has gone and maybe their, I guess, view on the offering and whether there's opportunities to expand? And then maybe an update on Anthem and time line on Anthem.

Maeve O'Meara -- Chief Executive Officer

Sure. I'm happy to start there. So in the context of Cigna, so just to kind of refresh you, where we began was transparency for their Taft-Hartley clients with the 1/1 launch. So we had an on-time, really successful launch and are now in discussions with Cigna, looking to expand the offering to additional groups.

So if you recall some of the details, that wouldn't immediately contribute to revenue. But it's still, I think, a really positive signal about the expansion within the Taft-Hartley business group. And really, the focus of the team is ensuring that we're engaging at the right levels throughout the Cigna organization because the opportunities that we see around expansion is really both within Taft-Hartley but then, of course, product expansion and then expansion in other Cigna segments. So what I would say is that the launch was successful.

We have a happy client, and we are expanding to other Taft-Hartley groups but, of course, broader expansion would really be looking at both product, as well as other segment expansion. So that's really where we are with Cigna. And as it relates to Anthem, we continue to have just, honestly, an incredibly positive relationship really at every level of that organization. And our conversations continue to be about really the evolution of the partnership.

So we've had a number of conversations around other ways that we can partner and grow together. And that's something that obviously I'm spending a lot of my time on. So look forward to giving an update on that at the right time.

Richard Close -- Canaccord Genuity -- Analyst

OK. That's helpful. And then just going back to Cigna in terms of expanding to additional groups in Taft. Is it because you signed a contract for a set amount in terms of why, if you expanded within Taft, it wouldn't be incremental revenue? Is that -- am I thinking about that correctly?

Will Bondurant -- Chief Financial Officer

The contract structure we've aligned on with health plans is for there to be kind of an initial tranche purchase threshold of members or a group of members. And so until all of those are used up, there's no incremental revenue. We wouldn't be at that threshold as these new groups come on.

Richard Close -- Canaccord Genuity -- Analyst

That makes sense. Thanks for reminding me on that. Congratulations on the progress.

Maeve O'Meara -- Chief Executive Officer

Thanks, Richard. Appreciate the questions.

Operator

[Operator instructions] There are no questions at this time, presenters. Please continue. 

Maeve O'Meara -- Chief Executive Officer

Great. Thank you all for joining us today, and we look forward to continuing the conversation. Have a great day.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

Maeve O'Meara -- Chief Executive Officer

Will Bondurant -- Chief Financial Officer

Charles Rhyee -- Cowen and Company -- Analyst

Richard Close -- Canaccord Genuity -- Analyst

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