Feb 25, 2015
Executives
Shawn Jenkins - President, CEO, Director Milt Alpern - CFO, Secretary
Analysts
Greg Dunham - Goldman Sachs Nandan Amladi - Deutsche Bank Kevin Dennean - Jefferies Group, Inc. Adam Klauber - William Blair & Company Ross MacMillan - RBC Capital Markets David Hynes - Needham & Company
Operator
Ladies and gentlemen, thank you for standing by. And welcome to the Benefitfocus 2014 Fourth Quarter Earnings Conference Call.
All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.
[Operator Instructions] Thank you. I’d now like to turn the call over to Milt Alpern, Chief Financial Officer.
Please go ahead.
Milt Alpern
Thank you, operator. Good afternoon everyone, and welcome to Benefitfocus' fourth quarter 2014 earnings call.
We will be discussing the operating results announced in our press release issued after the close of market today. I am Milt Alpern, Chief Financial Officer of Benefitfocus and with me on the call today is Shawn Jenkins, our President and Chief Executive Officer.
As a reminder, today's discussion will include forward-looking statements such as first quarter and full-year 2015 guidance and other predictions, expectations and information that might be considered forward-looking under Federal Securities Laws. These statements reflect our views as of today only and should not be considered as representing our views as of any subsequent date.
These statements are subject to a variety of risks and uncertainties, including the fluctuation of our financial results, general economic conditions, the early stage of our market, management of growth, and a changing regulatory environment, that could cause actual results to differ materially from expectations. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to our Annual Report on Form 10-K which was on file with the SEC and our other SEC filings.
During the course of today’s call, we will also refer to certain non-GAAP financial measures. You will find important disclosures about those measures in our press release.
With that, let me turn the call over to Shawn. And then I’ll come back at the end to provide details regarding our fourth quarter results as well as guidance for the first quarter and full-year 2015.
Shawn?
Shawn Jenkins
Thanks Milt, and thanks to all of you for joining us today. I’m excited to report Benefitfocus delivered strong fourth quarter results with both revenue and profitability that exceeded the high-end of our guidance range.
Total revenue for the quarter was $40.2 million, an increase of 33% year-over-year. Both businesses contribute to the strong revenue growth in the quarter, with employer revenue increasing by 47% and Care revenue up 21% year-over-year.
At the same time, we also generated 900 basis points sequential and 500 basis points of year-over-year improvement in GAAP gross margin during the fourth quarter. We are seeing the power of our software’s and service business model at work as we scale.
We made an announcement earlier today that we have expanded our commercial relationship with Mercer. We are proud of our efforts that have help position the Mercer markets place as one of the largest broker led private exchanges in the country.
We are excited by the significant expansion of our relationship with Mercer and look forward to partnering with them to drive additional growth on the Mercer marketplace in years ahead. At the same time, Mercer has made a strategic equity investment of $74.7 million to acquire a 9.9% stake in Benefitfocus, which provides significant capital for us to execute on our long-term growth objectives.
These commitments by Mercer, both financially and operationally, are tremendous validation of our leadership in the private exchange and cloud-based benefits administration market. Looking our fourth quarter performance, we had 13 new large employer customers including the State of Delaware, Capella Education Company, Lane Construction, Omnicell, Schneider Electric and Summerwood Corporation among others.
Schneider Electric is a global specialist in energy management with over a 160,000 employees around the world and 25,000 employees in retires in the United States. They were looking for a better way to enroll at administrative benefit program in the United States with a goal of lowering costs by increasing efficiencies and eliminating data errors in manual touches and improving the user experience.
Schneider Electric chose Benefitfocus because of our modern user experience, breath and extensibility of our platform and our growing customer community. Lane Construction Corporation, a 125-year-old construction firm that specializes in heavy civil engineering projects, selected Benefitfocus due to the breadth of our product offerings and our integration capabilities.
The on Benefitfocus marketplace, Lane Construction will also be deploying our Benefit Service Center and Benefit Analytics Offerings in order to provide a comprehensive solution to their employees. In the Care business, we had a solid fourth quarter, including being engaged by CareFirst BlueCross BlueShield for their large group private exchange.
And we’ve gotten off to a strong start in 2015 by recently signing an expanded agreement with Anthem, who will deploy our e-enrollment, e-billing and e-exchange solutions to their BlueCross BlueShield plants in 11 States, including New York, Ohio and Georgia. With the expanded agreement with Anthem built on the successes we’ve had, demonstrated together in Anthem’s BlueCross BlueShield of Virginia plant over the last several years.
Looking at the full-year, 2014 was a record year for Benefitfocus as we expanded our leadership position in both the carrier and employer markets. Some of the highlights for the year include 53% year-over-year employer revenue growth, the addition of 160 new employer customers, 18% year-over-year carrier revenue growth, the fastest growth rate in years, establishing a leadership position in the private exchange market now powering our 20 private exchanges in the market.
In 2014, the changes we have been highlighting in the benefits administration market, the shift to the cloud, the rise of private exchanges and the consumerization of benefits shopping experience became widely recognized by both employers and carriers. They’ve recognized that the traditional approaches to benefits administration are no longer viable from a business, cost, regulatory, and constituent satisfaction perspective.
At Benefitfocus, we have seen this market change coming for some time and 2014 was a year of investment to ensure we were well positioned to take advantage of this major secular trend. We laid it out for you at the beginning of last year, three specific areas of focus.
And I’m pleased to say that our investments in each area are functioning well and ahead of expectations. I’d like to take a moment to highlight our success in each.
The first was the further increase to size and coverage of our direct sales organization in the employer business. We believe these investments were critical to ensure we had a well seasoned sales force in place to properly cover this high growth under penetrated market.
I'm happy to say that we have attracted a high number of, high-quality experienced sales professionals and managers across the country. The second area where we made additional investments was in our private exchange marketplace technology, which is an area that had seen substantial growth in the short period of time.
The additional investments we made in this area enabled us to support the significant number of new marketplaces I referenced earlier. [Indiscernible] of our investment was in the equation of our third-party implementation program.
This is a strategic priority for the Company, as it will help establish us as the cloud platform of choice for integrators, enabling us to bring a greater number of customers on to our platform more quickly, but also increasing our scalability. This investment was a huge success in 2014 and I am pleased to announce that Benefitfocus University recently graduated our first class of third-party implementers from Deloitte Consulting, ROC Americas, HRrchitect, Aasonn, and Providence Technology Solutions among others.
These companies are now actively working customer implementations, which will allow us to establish a standalone value for professional services, providing a material benefit to our future gross margins. A long-term benefit we hope to create with this program is a powerful network effect where world-class organizations would become brand ambassadors for Benefitfocus and ultimately help us generate sales.
We've been pleasantly surprised to see early positive results in this regard, which we believe is even more powerful because we started getting referrals without even having a formal referral or sales program in place. A great early example of this phenomenon was with Aasonn, who brought us into provide the benefits administration technology for a broader HR solution they were providing to Harte Hanks, a 4,600 employee company based in San Antonio, Texas.
This is an early stage example that we believe these partners have the potential to further broaden our market coverage. We are proud with the hard work done during 2014 to make these investments successful, and we believe they’re essential to positioning the Company for sustained long-term growth and improved profitability.
I’d like to give a shout out to all of our incredible Benefitfocus associates for your passion, creativity and commitment to building the world’s best software and services. You’re truly amazing and it is my privilege to work alongside of you everyday.
Looking ahead, 2014 is an exciting year for our Company as you progressed toward our long-term objectives. I’d like to lay out you our three areas of focus for the year.
The first is expanding our employer product offerings. In 2015, we're going to widen our focus on employer market by introducing new product capabilities that expand the value we provide to customers.
This will complement our continuing focus on landing new employer customers, while now expanding the products and services we offer. In a couple of weeks at one place, our largest customer community at the end of the year, we will be introducing several exciting new products for the employer market.
Here are just a few examples. The Benefit store and all new offering that expands our distribution of third-party voluntary benefits to consumers.
With the Benefit store, it will be significantly easier for employers to make a broader way of voluntary benefits available to their employees. Benefit store will also provide Benefitfocus incremental monetization opportunities, as we have placed through a flexible compensation model.
We have demonstrated over time that our platform drives higher participation rates for voluntary benefits offerings, and we’ve announced here in the upside generated by higher adoption amongst our customers and voluntary benefit providers. We have had several early adopted customers use the Benefit store for their employees during the most recent open enrollment season and the results were very strong.
We will be sharing these success stories at one place and formal introducing the new offering to our entire customer community. Another new offering is the Benefitfocus data cloud and analytics.
Our new analytics offering integrating hundreds of health data sources into a single data warehouse and providing online data analytics applications for employers, insurance carriers, and all stakeholders. There is a massive amount of data generated in our platform from the millions of people who account on us for the benefits and illustration needs.
And we see a significant opportunity to leverage that data to better enable more inform decision-making. We are very excited about these and other new product offerings; you will be able to watch our keynote presentation live via Web site, on March 10 from Orlando, Florida.
We hope you join. The second area of focus for 2015 continues to be private exchange marketplace platform.
As we have seen, this is a dynamic and fast growing part of the benefit’s market and we have established ourselves as the leader in the space. We are focused on extending the leadership by enhancing our platform and expanding in the new market segments.
At one place, we will be introducing an all-new member experience and communication portal, which will once again revolutionize the consumer experience. For marketplace operators, this new experience will provide greater flexibility in positioning products and leveraging the enhanced data Analytics capabilities to drive better adoption of a wide array of benefit offerings.
We will expand upon the success we had in our stronger segments, small and large group employers as well as individual. We are seeing very strong interest from carriers in individual market, our marketplace is for individuals, who have seen a significant uptick in volume through 2014, including more than 45% growth in applications and a 41% increase in policies sold.
This indicates that there is a substantial increase in qualified buyers, utilizing the Web to obtain health insurance. More than half of these buyers met the qualifications for auto approval of their policies demonstrating great improvement in underwriting efficiency.
We are also extending our reach into the retiree market, which presents many new and unique opportunities for the Company. And third area of focus for this year will be on the scaling of business to increase margin.
We are focused on leveraging the significant investments we made last year in order to drive improved profitability. Delivering improved gross margins as a top priority for management team and I'm confident we will do so in 2015.
Besides the efforts in our professional services organization have already discussed, we are targeting increased efficiency of our customer support services. We believe these priorities for 2015 appropriately balance making the investments necessary to position the Company to maximize the growth opportunity in this market, while also putting the company on a path to profitability.
We intend to make significant progress towards profitability in the coming years and anticipate reaching adjusted EBITDA profitability in the first half of 2017. We are committed to delivering both growth and profitability which we believe will generate significant long-term value for our shareholders.
In summary, our strong fourth-quarter results capped a terrific year for the Company. Our rapid customer growth and employer business has resulted in over 550 large employer customers, yet leaves us with a long runway ahead as we have just 3% of the 18,000 large employers in the U.S.
Our investments in the Benefitfocus private exchange platform has enabled us to become a leader in this dynamic and fast growing segment of market with over 20 market leading exchanges now running on our platform. We are incredibly excited about the opportunities ahead and believe we are well positioned to continue delivering strong top line growth, while making substantial progress towards profitability.
With that, let me turn it back over to Milt. Milt?
Milt Alpern
Thanks, Shawn. As discussed, we are pleased to have delivered a strong fourth quarter with financial results that were above our expectations from both the revenue and profitability perspective.
I'll review the details of the financial performance and we will finish with our guidance for Q1 and the full-year 2015. Before I begin, I’d like to review the terms of Mercer strategic equity investment in Benefitfocus.
Mercer purchased approximately 2.8 million shares of newly issued common stock representing 9.9% post issuance. And the currently outstanding common equity and Benefitfocus at a price per share of $26,000 $0.50.
Net proceeds to Benefitfocus [indiscernible] will be $74.7 million in cash. Mercer also received the warrant in connection will stock purchase, under which Mercer has the right to purchase an additional 2% of Benefitfocus common stock at any time, during the next 30 months, at $26.50 per share.
In addition, we separately announced earlier today that during the first quarter of 2015, we entered into an expanded $60 million credit facility, up from $35 million which can be increased up to $100 million as a recurring revenue growth. With the strategic equity investment from Mercer and our expanding credit facility, we have significantly strengthened our balance sheet and substantially increased our financial resources and flexibility.
We believe this will allow us to execute against our long-term growth initiatives and enhance our ability to take advantage of the generational shift to cloud-based benefits administration solutions. We believe the capital provided, from a strategic investment by Mercer.
That itself is sufficient to fund our growth priorities and maintain a meaningful cash balance. As we work to achieve adjusted EBITDA profitability on the time line Shawn referenced earlier.
Turning to our financial results, beginning with the fourth quarter. Total revenue was $40.2 million, an increase of 33% compared to the fourth quarter of 2013 and above the high-end of our guidance range.
Breaking this down further, software subscription revenue with 36.1 million representing 90% of total revenue and growing 28% year-over-year. Professional services revenue was $4.1 million, representing the remaining 10% of total revenue, and up a 107% over the prior year period.
Our Professional services revenue, similar to the third quarter, included the impact from the acceleration of revenue recognition from changes to their customer relationship period with several customers who are no longer utilizing the Benefitfocus platform. These were some of our smallest carrier customers, who represent only a small fraction of our carrier software, revenue.
Looking at revenue by segment, employer revenue for the quarter, which is $19.5 million or 47% growth compared to the year-ago period. While our carrier revenue was $20.7 million, up 21% from the year ago period.
Now let me review the supplemental metrics we report in a quarterly basis. We ended the quarter with 553 large employer customers.
An increase of 41% compared to 393 in the fourth quarter of 2013. And up from 540 at the end of last quarter.
As a reminder, from a seasonality perspective, the fourth quarter was typically our lowest sales quarter, with approximately two-thirds of business sign during the second and third quarters. On the Carrier side, we ended the quarter with 43 carrier customers, up from 40% in the year-ago period and compared to 44 at the end of last quarter.
This was not reflect the impact of the Anthem transaction. Shawn discussed earlier, which include nine incremental carrier customers added in the first quarter of 2015.
Our software revenue retention rate was once again greater than 95% in the fourth quarter. And we believe it is evident to do significant value Benefitfocus generates through its customers.
Moving down the P&L, I'll start by discussing gross profit on an adjusted basis, which excludes stock-based compensation, amortization with acquired intangibles and depreciation and amortization of capitalized software. Adjusted gross profit in the fourth quarter was $18.2 million, resulting in an adjusted gross margin of 45%.
As expected, we saw significant improvement in our adjusted gross margin in the fourth quarter. This was driven by an improved adjusted software margin which benefited from increased scale as we began recognizing additional revenue from [indiscernible] during open enrollment season, as well as the positive benefits from investments we made in our customer service organization to better service our employer customers.
Our fourth quarter performance represented the highest adjusted gross margin, in five quarters. And we expect to generate additional gross margin expansion in 2015.
In the second quarter, we began providing additional disclosure around our adjusted gross margin. In order to give investors better insight into the profitability of the business.
By aligning our professional services revenue and expenses in the period they’re incurred. This view of gross margin assume to be recognized professional services revenue as delivered during the fourth quarter.
Instead of the customer relationship period, which would have again increased our adjusted gross margin by approximately 600 basis points. We anticipate being able to establish standalone value through this work in our employer business in 2015, which will enable us to recognize professional services revenue on a prospected basis in the period the work is performed and not over the customer relationship period.
This will help in our reported gross margin more inline with the alternative gross margin just discussed. And put us in the path to achieve a long-term margin target.
Adjusted EBITDA was negative $8 million, or negative 20% of revenue. This is significantly better than our guidance of an adjusted EBITDA loss of $12.3 million to $12.8 million and compares to negative $5.1 million in the fourth quarter of 2013.
Our fourth quarter outperformance was driven in part by the revenue outperformance, which follow-ups the bottom line, as well as the timing of investments and new hires. In 2015, we expect to begin realizing leverage from many of the investments we made in 2014, which is expected to drive significant improvement in our adjusted EBITDA margin.
Some other items that will benefit margins in 2015 include exiting unprofitable customer relationships. We’ve reviewed each of our customer relationships and determining several legacy contracts were too resource intensive and unprofitable.
As a result, we’ve decided to terminate those customer relationships in 2015, which was not an easy decision. But having resource allocation discipline, it’s an important part of improving our margin profile.
This decision one of the short-term revenue impact beginning in the third and fourth quarters of 2015, which I will review in discussing guidance and also increase in our international headcount. We are working to expand our global capabilities and have recently added two additional international sites to a long standing primary allocation, in Hyderabad, India.
We believe these steps coupled with the growing scale of that business, will contribute to our ability to achieve our long-term adjusted EBITDA target margin of 20% over time. Non-GAAP net loss per share was $0.39 based on $25.6 million weighted average shares outstanding, better than our guidance with a loss of $0.60 to $0.62 per share and compared to a per share loss of $0.30 and $24.5 million pro forma weighted average shares outstanding in the year-ago period.
Looking quickly at our GAAP results, gross profit was $16.3 million. Our operating loss was $11.9 million and our net loss per share was $0.54.
Turning to the balance sheet, we ended the quarter with cash, cash equivalent to marketable securities of $56.2 million. This was a decrease from $60.9 million at the end of the third quarter.
The cash balance does not reflect the impact of the $74.7 million of net proceeds expected from the Mercer investment. Let me now provide a summary level review of the results for the full-year of 2014.
Total revenue in the year was $137.4 million, an increase of 31% on a year-over-year basis, and representing acceleration from the 28% growth we delivered for the full-year of 2013. Software subscription revenue was $125.1 million, representing 91% of total revenue growing 28% year-over-year, and professional services revenue was $12.3 million which represented the remaining 9% of total revenue and was up 75% over the prior year period.
On the employer side, revenue for the year was $62 million which represents 53% growth from the year-ago period. On the carrier side, revenue for the year was $75.4 million up 18% from the year-ago period.
Adjusted EBITDA for the full-year of 2014 was negative $43.8 million or negative 32% of revenue compared to negative $18.9 million or negative 18% of revenue in 2013. Non-GAAP net loss per share was $2.10 based on $25.2 million weighted average shares outstanding compared to a per share loss of $1.22 and $22.2 million pro forma weighted average shares outstanding in the year-ago period.
Looking quickly at our GAAP results for the year, gross profit was $50 million, our operating loss was $58.9 million, and our net loss per share was $2.51. Before I turn to look at our outlook for the first quarter and full-year 2015, I'd like to review a change that we’ve implemented in 2015 to our customer relationship period.
We have determined that we need to adjust our customer’s relationship period, which has been 10 years in both our carrier and employer segments to seven years. The impact of this change will be that we will recognize deferred revenue over this timeframe going forward instead of 10 year.
In 2015 this will positively impact our full-year revenue by approximately $5 million. With that said, I’d now like to turn to our guidance.
Starting with our full-year guidance, we expect revenue of $170 million to $174 million, which equates the year-over-year growth of 24% to 27%. Our revenue guidance for the year includes $5 million and incremental professional services revenue, given the change in our customer relationship period that I just discussed.
This will largely be offset by a $4 million negative impact from the decision to terminate certain unprofitable customers, which will impact of our software revenue growth in the third and fourth quarter. These items will result in a 700 basis point shift towards professional services revenue in 2015.
We're targeting an adjusted EBITDA loss of $35 million to $39 million, non-GAAP net loss of $59 million to $63 million and a non-GAAP net loss per share of $2.10 to $2.24 based on $28.1 million weighted average shares outstanding. Please note that we’ve adjusted our definitions for non-GAAP net loss and non-GAAP net loss per share.
Going forward, these items will exclude stock-based compensation expenses, amortization of acquisition related intangible assets and offering cost expense. For comparability with our peer group, we will no longer add back interest expense on building a lease obligation to these items.
For the first quarter, we are targeting revenue of $41 million to $41.5 million, which represents year-over-year growth of 34% to 35%. From a profitability perspective, we expect an adjusted EBITDA loss of $8.5 million to $9 million, non-GAAP net loss of $13.8 million to $14.3 million and a non-GAAP net loss per share of $0.51 to $0.53, based on $26.8 million weighted average shares outstanding.
In summary, we are pleased to have delivered solid fourth-quarter results that reflect the strong finish to an exciting year for Benefitfocus. We had solid momentum in the market today and today's announcement of the long-term commercial contract expansion and strategic equity investment from Mercer, further enhances our ability to capitalize on the long runway of opportunities for growth in this dynamic, multi billion dollar market.
We are also making significant progress towards our profitability. With that, we are now ready to take your questions.
Operator
[Operator Instructions] The first question comes from Greg Dunham.
Greg Dunham
Question, first one is for Shawn. The Mercer announcements, clearly it is an endorsement of the platform and the relationship.
But can you talk about the importance of this deal to the Company and the rational for why you felt now was the right time to make this agreement?
Shawn Jenkins
Sure. Thanks, Greg.
We talked a good bit leading into the IPO in last year about our investments in the private exchange marketplace technology that Benefitfocus is building and we're just having so much success there, so much momentum in that private exchange market. It's a massive shift in our industry.
For those that are learning about the Benefitfocus story, one way to thing about it is, it’s about a 170 million people covered by employer benefits in the country. Employers spend about $1.6 trillion a year on those benefits and in some study such as the [indiscernible] study say that as many as 40 million of those people are going to move to a private exchange over the next four, five years.
And so clearly, this is a big area of excitement and some big area disruption in the market and our early success with Mercer, now having a largest broker led private exchange in the country, built on the Benefitfocus platform, just -- really its created a great partnership with them, great leadership in their team and a partnership between our two businesses. So it just seem like, good time to continue to expand that.
And as we also said, we're now powering over 20 marketplaces, so many of our insurance carriers have selected the Benefitfocus platform to power their small group and large group and now individual and retiree exchanges. So its just a huge, maybe the first inning of a big game in the marketplaces and this will provide an ample capital to help invest in those areas as well as -- as we mentioned several times allow the Company to execute on its plan towards profitability in conjunction with our continued revenue growth trajectory.
Greg Dunham
Okay. And then, one more from me, I mean, clearly the number of employer adds this year was kind of a breakout year for the Company.
Can you talk about how the competitive landscape has changed since going public, year and half ago? What -- how are your win rates to date different than they were pre-IPO and how is that compared to shift changed?
Shawn Jenkins
Sure, great question. Well, our strategy continues to be a large employer sales force focused on what we call large employers.
They sell direct employers have a 1,000 or more employees in our employer segment. We also have our carrier business, we have a sales team that sells directly to peers, both of those teams are doing exceptional.
I think what’s really changed since the public offering Greg, is the Company has much more visibility, much more awareness when we call an employers now they generally know who Benefitfocus is. They’ve heard about us.
We are up from 393 employers a year-ago to 553. We added a 160 in the year, which is 41% growth in the employer count, that’s actually up from 37% growth in employer account the year earlier.
So it’s actually been an acceleration there. And so I just think the main difference is there is an awareness of our size, our scale, our ecosystem.
The system integrators -- one of the dynamics that might help make the point a little bit too, you said. I mentioned on the call that the system integrators are now beginning to introduce us into their channels and we talked about a win with Aasonn, which is one of our first system integrators brought us into a company called Harte Hanks and they were doing a full outsourcing arrangement with them and that SI arrangement led to our win there.
So we’re beginning to see that network effect, that ecosystem effect that brand awareness of Benefitfocus in the marketplace. And as well as just attracting a really topnotch sales team, so we’re very excited about the momentum we're carrying into ’15.
Greg Dunham
Hey, Greg, maybe one last one from for Milt, just make sure I have the numbers right. If you look at your guidance for ’15, you have a positive $5 million to closer [ph] of given the move intend to seven years.
And then, a negative $4 million as you’re turning off some of these unprofitable customers. Are you -- is there any benefit outside of these numbers related to the VSOE establishment and employer side or is that something that you’re not necessarily telling out to add to revenues.
Thanks.
Milt Alpern
Yes, hi, Greg. Yes, it’s a good question.
I mean, I think with regards to the way that you characterized it, you’re right, I mean it was kind of about $5 million up from the change in the customer relationship period that you mentioned, and then the elimination of some unprofitable opportunities that we focused on and rationalized this year. But, and with regards to what you’re referring to as standalone value, really the impact in 2015 is minimal, and I think that we will establish standalone value in the employer stakes which will allows us on a prospective basis to change the recognition of the revenue relative to deals that we continue to do.
And I think that relative to our guidance, we’re really not forecasting much at all of an increase in revenue in 2015 as a result of achieving that.
Greg Dunham
Perfect. Thanks guys.
Milt Alpern
You bet.
Shawn Jenkins
Thank you.
Operator
Your next question comes from Nandan Amladi.
Nandan Amladi
My question, so back on the Mercer relationship, does this investment restrict your ability to sell to other customers? Clearly you have 20 exchanges up and running already, but does it change any of the terms of the exclusivity or anything like that?
Shawn Jenkins
Yes, thanks Nan, we appreciate the call. Yes, our relationship with all of our big customers have big contracts and we are always looking to protect their special sauce if you will, their intellectual property, the way they do business, the Mercer’s case they’ve got some great consulting, great brokerage, great heritage in their brand.
And so clearly, the things that they bring to the table are special about Mercer and the Mercer marketplace, and I think that’s why they’re having a lot of success. But as we did mention, we now have over 20 market places, private exchanges many with our insurance carrier customers.
We continue to pursue that business aggressively, and so we’re still on the path of which we had. We did mention that we have expanded our relationship, the contractual relationship with Mercer.
So we’re excited about their ideas going forward and the things they’re going to lean into on the Mercer marketplace. But as far as you know specifics about the contract really it’s the path that we’ve been on with them for a number of years.
Nandan Amladi
Okay. And a quick follow-on if I might.
On the SI program I know you mentioned you graduated your first class of trained consultants. How much does that improve or increase your capacity to make these deployments.
How many people did you have doing this before and perhaps in percentage terms if you’re not willing to disclose the actual numbers, how much does it expand your capacity in ’15, and what should we expect in say ’16?
Shawn Jenkins
Yes, that’s a good way to think about it. Well, first of all we’re very excited to have the Benefitfocus University in full production, and the first class coming through with their certificates.
We have another class in session right now with more consultants from the third parties going through that. It will be our first year where these third parties are doing implementations on their own.
We talked in terms of maybe 10% or so of our implementations would be done by third parties probably in ’15. As Milt mentioned earlier it will take kind of the full year for that whole story to play out, but we’re well ahead.
I would say we’ve probably been a little bit ahead of our expectations on the numbers in the courses. So it’s definitely increased our bench.
I think the bigger way to think about it is, as our win rate -- our wins and employers grow, they’re helping us now. They’re bringing us into their customers as they have existing customers where maybe they are doing an SAP implementation or Oracle or something else.
We now have an awareness in that community, and as we win more business we think that it gives us an elasticity to our capacity, a flexibility so that as we ramp our business we have a more knowable fixed headcount that we’ll hire and bring on. And as spikes come or surges come in our business which we hope to see the elasticity will allow us to absorb that work, provide great service to those customers without really affecting our long-term strategy towards profitability in our gross margin profile.
Nandan Amladi
Thank you.
Shawn Jenkins
Thank you.
Operator
Your next question comes from John DiFucci.
Kevin Dennean
Great, thanks. This is Kevin Dennean in for John DiFucci.
Congratulations on the quarter and on the Mercer agreement.
Shawn Jenkins
Thank you.
Milt Alpern
Thanks Kevin.
Kevin Dennean
Just wondering if you could talk a little bit more about the software services revenue line, it grew 28% in the quarter, that’s an acceleration versus the prior quarter. But if we look at the middle quarters of the year, you really had some strong employer customer growth.
I think it was 70 and 52 customers in the June, September quarters. So my question is, are those customer live yet given the implementation times or are they shown up in the software revenue line in December?
And how should we think about those customers impacting the software revenue line in the first half of the year?
Milt Alpern
Yes, I think -- yes, good question Kevin. This is Milt; I mean I think that what you point out is right about the fact that those customers that we signed in the second and third quarters are going live.
Many of them did go live for open enrollments the later part of the year in the fourth quarter. And as a result, what you did see is that, kind of a pick up in the overall revenue line in the fourth quarter, and I think certainly you’ll see that kind of move into the first quarter as well.
Kevin Dennean
Okay, great. And just a follow-up -- just wondering if you can talk about how the platform has performed as you’ve added more customers, if you can talk about any metrics or insights about the platforms ability to scale.
Shawn Jenkins
Well, yes it’s a huge part of the focus and I would say the success of the platform, we did an enormous amount of enrolling through the fourth period our busiest open enrollment season by far with our large employer customers, with our carrier customer, and also we heard a little bit about direct to individual. We say about a 45% increase in the actual applications coming to our individual market place now for insurance care, so across the board incredible volumes year-over-year.
We do have a specialized performance team. They spend all day, every day throughout the year profiling the application, working on scale, working on the transaction volumes that are flowing through.
We really had a wonderful open enrollment season, availability uptime, responsiveness and whatnot, so very proud of the team. It was really a very successful open enrollment season for us.
We’re always improving, always investing but the good thing is we kind of saw this we have a growth coming a few years ago, and did a lot in our data centers and our cloud technology, in our data cloud and across our performance teams, and also work with our largest customers to profile their versions of the -- their installations of the Benefitfocus platform. Its all running on one code base, it all on the Benefitfocus cloud that we’re able to actually profile our specific largest customer and their utilization ahead of time and that’s becoming more and more of our testing, is actually performance testing.
So, it goes with a large customer relationships we have and how they help the company scale up.
Kevin Dennean
That’s great. Thanks very much.
Thanks for taking my question, and congratulations again.
Shawn Jenkins
Thanks a lot.
Milt Alpern
Thank you.
Operator
Your next question comes from Adam Klauber.
Adam Klauber
Thanks. Couple of questions on the -- on the Mercer relationship I think you mentioned expanded commercial relationship.
Could you add just some more color what that involves?
Shawn Jenkins
Sure, thanks Adam. So with Mercer we power the Mercer market place.
They have a private exchange. They have over 20 different carrier offerings that they have in the Mercer marketplace, and this is a relationship that goes back a couple of years.
It was a software services agreement. We have now expanded it to look out multiple years in their strategy, in their plan in the Mercer marketplace.
I think they do a great job of talking about their numbers and the volumes and their plan. So we always let our customers speak to what their intent in the market.
But clearly, the message here is that they plan to continue to build significant presence in the private exchange market place and their momentum this past year was just really phenomenal. So, we look forward to doing a lot more with them in the coming years.
Adam Klauber
Okay, thank you. And then, as far as the ownership stake, the Company [technical difficulty] the Company?
Shawn Jenkins
Adam, your phone was breaking up there a little bit. Can you try that again?
Adam Klauber
Sure. Does the Mercer stake, do they have any first right to refusal that comes along with that stake?
Shawn Jenkins
That’s a good question. We did mention they have a 2% warrant that they have in option, but as far as other features of the agreement, -- do you want to talk about that?
Milt Alpern
Yes, I mean I think Adam what you’ll see is that we’ll file with our 10-K later this week all the documents related to that transaction and a lot of the answers to some of the questions you might have will be incorporated in those documents. So, it will be filed with the K [ph].
Adam Klauber
Okay, thanks. And then as far as the carrier business, you mentioned you’re building some more private exchanges.
Is there any revenue component that’s volume based or is that all [technical difficulty] based still?
Shawn Jenkins
Good question. It’s a bit of both.
So, in our employer private exchanges we get -- its just subscription base, its based on the number of employees that are on the platform. But we have begun to introduce this idea of -- we have an individual private exchange which actually has the notion of policy sold associated with it, and we touched on a little bit this, the new benefit store offering which is really going to be made available to all of our constituents.
And in there -- in that case Benefitfocus this past opened enrollment introduced that, the Benefit store. So that as voluntary benefits are purchased by individuals through the Benefit store, we actually get a compensation associated with that.
So we see that driving incrementally up, our average sales price, our average revenue per subscriber in the customers that are using the Benefit store. So that’s very early stage with that.
We’ll be talking more about that at our One Place conference in two weeks in Orlando, but some really exciting early results from them.
Adam Klauber
Okay. Thank you.
Shawn Jenkins
Thanks, Adam.
Operator
You final question comes from Ross MacMillan.
Ross MacMillan
Thanks a lot. I think you just answered the first question I had, which was on the warrant.
I think that was 2% of the outstanding shares on the residual -- on the Mercer warrant, is that correct?
Milt Alpern
Yes, that’s correct, Adam. 2% of the outstanding equity -- Ross, I’m sorry.
Yes that’s 2% of the outstanding equity that they got a right to buy at the same price that they purchased the 9.9% stake at.
Ross MacMillan
That’s great. And my follow-up was on the, the customers that you’re making that decision to sort of discontinue supporting, would I be thinking about those in the carrier segment rather than the employer segment or is it actually a mixture of both?
Shawn Jenkins
It’s a little bit of both, okay. I mean there is little bit more maybe on the employer side, but it’s a little bit of both.
And I think as we look at it, it’s mostly -- most of the impact or the larger part of the impacted in the second half of the year. It’s a little bit in the first part of the year, but most of it is in the second part of the year.
Ross MacMillan
And then just one last one, some of the customer wins you had in Q4 sounded quite large like Schneider Electric. And I was just curious, what's your view right now on being able to penetrate employers with 20,000, 25,000 plus type employee numbers as a sight to that sort of call it 1,000 to 20,000 employee segment?
Shawn Jenkins
Yes, great question. We get up every morning, we think about these 18,000 large employers that are U.S.
based. We now have 553 of them which is 3% market share, and so there is just opportunity across the board.
We’re having growing success with some really large customers. You mentioned Schneider, a great new customer.
One that we announced in the middle of last year was Brookdale Senior Living which is about 80,000 employees and they went through open enrollment very successful with us, and just a great relationship with that big complex company, lot of locations around the country, great to see the software perform so well for them and in effect they’ll be actually at our One Place conference and just a really great success story. From a strategic standpoint, we haven’t isolated just the jumbo accounts or nor have we say we’re going to stay just in the middle.
We have coverage now across the market and the bigger ones take longer. So we like being in those conversations and we think some of them might take one, two, three years to work through just given the length of contracts they might have.
But we’re very excited about the early results we’re starting to see in some of the larger accounts.
Ross MacMillan
Great. Thank you.
Shawn Jenkins
Thank you.
Operator
Your next question comes from the line of David Hynes.
David Hynes
Hey, thanks. I think Ross just hit on my question around the carrier employer side.
Maybe Milt help me reconciling between the EBITDA and the net income guidance. What are you assuming in terms of interest expense in that building lease?
I know that changes a little bit. Are you assuming that increases in ’15?
Just help us build a model [ph].
Milt Alpern
Yes, it’s going to increase in ’15 DJ because of the new building that we just opened up in January of this year.
David Hynes
So how much -- do you have a number of what that we should be thinking about for ’15?
Milt Alpern
Yes, think about it in terms of $1 million to $1.2 million per quarter.
David Hynes
Okay. And it was $1.5 million in Q4, is that right?
Milt Alpern
That’s what it was, I believe. That’s right, yes.
David Hynes
Okay. And then, deferred revenue in the quarter, I mean we generally see kind of a sequential uptick in Q4, the growth was kind of muted to relative to what we’ve seen in the last couple of quarter.
Anything we should know there or does that have anything to do with changes in the services side of the business or maybe just help us with that line.
Milt Alpern
I think as we talked about on the call that there were few changes in relationship periods for customers that are no longer using the platform that we took out of the deferred revenue and we said I mean, those were some smaller carrier customers of ours that really were not too much -- not too significant to the revenue number. But we took those out of deferred as you know when a customer stops using a platform we accelerate the recognition with respect [technical difficulty] those.
David Hynes
Yes, that makes sense. Okay, thanks guys.
Milt Alpern
Thanks, DJ.
Shawn Jenkins
Thank you.
Operator
And your final question is a follow-up question from Terry Tolman.
Unidentified Analyst
Small [ph] questions. Thanks guys for taking my question.
Can you hear me, okay by the way?
Milt Alpern
Yes.
Shawn Jenkins
Yes, go ahead.
Unidentified Analyst
Okay. Well, there’s been a lot of tension on Mercer, I eco congratulations on that.
But also Anthem that sounds really interesting, and a big expansion, so nice job on that. Shawn, I guess my question, the first question is, I followed you guys for a long while now and watched you all scale the business.
But there had been primarily a focus on in the employer business trying to capture as many of those 18,000 potential units as you can. You’re talking about a couple of new products you’re going to launch at the, your user conference in a couple of weeks.
Is there any change or evolution here where maybe looking at how much net ads you have is the primary determinant and actually its going to be shifting a little bit towards how much you get out of each one you already have or should we still think about the main barometer of success as how many new customers you’re adding?
Shawn Jenkins
Yes, thanks Terry now the main strategy is to add new customers, new large employers. I think as we approached in the last half of last year 500 large employers and we spent more time with those employers.
We realized that really was, now its kind of a beautiful time to begin to unlock some of the additional value with the Benefitfocus platform, in no way a change of our growth strategy at all. We still are going out engaging with the 18,000 large employers winning their hearts and minds, talking about the culture of the great software that we provide.
But now that we have such a good large customer community and these, our conferences are really vibrant and the folks love the platform, the technology. It’s just brimming with ideas and so, the idea like the Benefit store providing more voluntary benefits to these employers really came out of customer community interaction.
We have been designing and thinking about it for years. But pretty patient with it and now is the right time to do that.
Expanding our analytics offering which we’ll talk about it once place, these are customer driven initiatives. The obviously beauty of it is, it makes the platform that much richer for the customer, more sticky, increases our average subscription price per member which we believe will lead to some additional margin improvement and ultimately a profitability in a couple of years.
So, it just seems like the right time to do it in 500 plus large employers. It’s just a great base to do it with.
But its still go out and win new large employers and bring them on. We’ll just have more things to offer now.
Unidentified Analyst
Okay. And Milt you talked about the puts and takes, the $5 million benefit and then from the customer [indiscernible] value changing the $4 million impact from the kind of calling your customer base.
I’m just curios though have you -- did you go through your entire customer base and do this analysis or was this just low hanging fruit and we could actually see some more of those analysis and potential calling out of some of the unprofitable customers as the year progresses. And then -- yes, go ahead.
Milt Alpern
I think we did a pretty through analysis Terry, and what you see there in that number are the ones that -- were the ones that really were -- we couldn’t reach any kind of an agreement to fix. I mean we did talk to a number of customers and in some cases fix the problem that we had.
I mean, Ray August who joined the company about six months ago now is our new COO, certainly is focused on customer profitability as a significant metric but he’s driving his team towards and together with our teams conducting this valuation and what you see in that roughly $4 million is the result of the ones that, I wouldn’t call them low hanging fruit but after the thorough analysis of a good number of customers the ones that we just couldn’t really get to the point of being profitable.
Unidentified Analyst
Okay. And I don’t know if this will be for you or Shawn, but just my last question and I appreciate you answering them.
It is related to United Healthcare and Aetna. Aetna obviously that was, we’re getting a lot of questions from investors a short while ago when they made their acquisition of was somewhat of a competitor of yours.
So maybe an update on Aetna and how that revenue relationship is. Is it intact and then anything on the update on United Healthcare is rolling out?
Thank you.
Shawn Jenkins
Yes, great. Thanks Terry and we are super proud about our large customers and I would just say on those two that you call out we’re on track with them.
So, we continue to have a great relationship with Aetna. They have been on the Benefitfocus platform for eight years now with electronic enrollment, electronic billing, our eSales portal that powers a lot of their broker capabilities, and a newer introduction of the Benefitfocus market place in the last half of last year.
So we still feel good about where we are with Aetna and their relationship with Benefitfocus this year and it’s always, obviously all in our guidance and everything. And then United as we talked about was going live in the fourth period which it went live in the fourth period of ’14 and so we’re on track with them as well.
So thanks for pointing that out.
Unidentified Analyst
All right. Thank you, guys.
Shawn Jenkins
Thank you.
Milt Alpern
Thanks, Terry.
Operator
The next question comes from [indiscernible].
Unidentified Analyst
Hey guys, I was just looking to get a little bit more clarity on the Aetna relationship and also the expansion on the Anthem which I know you kind of touched on in the last question a little bit.
Shawn Jenkins
Yes, just to sort of mention the Aetna, but on Anthem, Blue Cross Blue Shield of Virginia which is a Anthem plan has been a customer for little over three years now and they use our electronic enrollment and electronic billing capability. Great relationship and great partnership with that plan and we recently expanded that to now 11 of the Anthem and they’ll be using the Benefitfocus.
The enrollment, eBilling and eExchange capability, they have a lot of systems in the different states are just a great partner and its -- we’re really proud of our team when a existing customer expands with you that significantly, it just says a lot about the technology, the professionalism of our staff and the service that we’re providing and the value that we’re providing. So we’re very excited about that growth.
We work with a lot of Blue Cross Blue Shield plants on the country. We talked about Blue Shield of California in last call, CareFirst and so forth so just a good solid base of customers for us.
We’re real proud to have them.
Unidentified Analyst
Great. Thanks.
Good job on the quarter.
Shawn Jenkins
Great. Thanks so much.
I appreciate it.
Operator
The next question is a follow-up question from John DiFucci.
John DiFucci
Hey, guys can you hear me okay?
Shawn Jenkins
Yes, sure can.
John DiFucci
Great. This is also stronger than we had modeled, and our model sort of works pretty well.
Just curious, is there any change in the average time per implementation or time between when the new customer sign and when its said to recognize revenue or was there more revenue being recognized per customer, the results were impressive.
Milt Alpern
No, John I wouldn’t say that there was any real shift in the amount of time it took us to get customers live. I think when you look at the performance that we had in the second and third quarter where we added a 122 [technical difficulty] customers during that quarter, and we obviously have to get these customers live in time for open enrollment and we worked very hard to do so.
And as a result that then starts to generate revenue when they go live in the -- during the fourth quarter and time for open enrollment, that effectively is what drove kind of the out performance if you want to call it that from where the -- what you guys were thinking.
John DiFucci
Okay, great. So, one other question, now how many customers or representatives unprofitable?
And I’m just curious, do you think you can anticipate any fallout regarding the perception of Benefitfocus in your customers commitment. Is that something that’s obviously something that’s considered but it can also [technical difficulty]?
Milt Alpern
Yes, I’m kind of having a tough time John, I think you’re talking about how many of the customers are in that, the unprofitable category if you will, and I’m not quite sure what the other part was. But with regard to that I mean, there were several, okay.
I mean it wasn’t a large number. There were several customers that resulted in that.
John DiFucci
Okay. I guess, the rest of the question, I apologize I’m actually sitting on a runway, but are -- do you have to manage any fallout from your customer base considering your commitment to them.
I mean, if you’re going to be pushing out some customers that are unprofitable, is that something you consider -- something you’ve seen any follow-up from?
Shawn Jenkins
Yes, I’ll take that one. As one of the founders I want all of our customers to be happy and stay forever.
So, obviously these were some pretty long standing legacy customers where we had a fair number of services involved in them. We actually engaged with the customers over a long period and worked on it, and really it was just in some cases some of the customers are still here.
It’s just something we were doing for them. It just wasn’t in our disciplined approach going forward.
So we don’t feel like there was any disruption from those. There was plenty of notice, plenty of back and forth and a plan put in place.
We gave it a lot of thought and a lot of care, and it’s not something that we take lightly at all, and it’s not something that you’ll see in kind of any, sort of routine pattern. It’s just, we wanted to look at the margin, we want to look at profitability, we want to look at where we were making our investments long-term, sustainable and this was just a thoughtful approach to that, and then the customers were clearly involved in the process throughout it.
John DiFucci
Thanks, Shawn. Congrats [technical difficulty] good quarter.
Thank you.
Shawn Jenkins
Hey, thanks a lot. We appreciate it.
Safe flight.
Operator
And at this time there are no further questions. Do you have any closing remarks?
Shawn Jenkins
Great. Well thanks to everybody for joining the call.
Again I’ll shout out to all my associates at Benefitfocus, and our great customers and partners just a wonderful year and we’re very excited about kicking off 2015. So, thank you for joining us this evening.
I appreciate it.
Operator
Thank you for your participation in today's conference call. You may now disconnect.
Shawn Jenkins
Thank you.