May 7, 2015
Executives
Shawn Jenkins - Chief Executive Officer Milton Alpern - Chief Financial Officer
Analysts
Greg Dunham - Goldman Sachs Nandan Amladi - Deutsche Bank Brian Peterson - Raymond James Kevin Dineen - Jefferies Adam Klauber - William Blair Stephen Lynch - Wells Fargo Ross MacMillan - RBC Capital Markets
Operator
Good afternoon. My name is Mary and I’ll be conference operator today.
At this time, I would like to welcome everyone to the Benefitfocus Q1 2015 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 conference over to the CFO, Milt Alpern. Please go ahead, sir.
Milton Alpern
Thank you, operator, and good afternoon everyone. Welcome to Benefitfocus’ first quarter 2015 earnings call.
We will be discussing the operating results announced in our press release issued after the close of market today. I’m Milt Alpern, the Chief Financial Officer of Benefitfocus and with me on the call today is Shawn Jenkins, our Chief Executive Officer.
As a reminder, today's discussion will include forward-looking statements such as second 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 risk, 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 is 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 can find important disclosures about these measures in our press release.
With that, let me turn the call over to Shawn. And I’ll come back at the end to provide details regarding our first quarter results as well as our updated guidance for the second quarter and full-year 2015.
Shawn?
Shawn Jenkins
Thanks, Milt, and thanks to all of you for joining us today. Benefitfocus carried significant business momentum into 2015 with a strong first quarter results that exceeded the high end of our guidance range from both a revenue and profitability perspective.
The total revenue for the quarter was $42.7 million, an increase of 39% year-over-year that was driven by employer revenue growth of 57% and carrier revenue growth of 25%. Non-GAAP gross margin of 48% was up 600 basis points sequentially and 1,000 basis points year-over-year.
During the first quarter, we made great progress against our three strategic priorities for 2015, which will position us well to achieve our objectives this year and generate meaningful growth in improving profitability in the years ahead. I’d like to take a few moments to review our progress in these three strategic areas so far this year.
Our first key area is expanding our employer product offerings. As a company, we have done a great job in recent years increasing our larger employer customer base to 568 at quarter end, which is double the size that we had at the end of 2012.
A consistent theme we’ve heard for many of these customers is Benefitfocus to expand our products and services that help them further unlock the power of their benefits, while lowering their cost. This type of land and then expand strategy has always been part of our long term product roadmap and during the first quarter we achieved a major milestone with the introduction of several new employer product offerings at our One Place user conference.
These include the BenefitStore, our new capability for voluntary benefits such as critical illness, hospital indemnity, accident, legal and life insurance offerings that enable employers to expand the benefits offered to their employees at no additional cost to the employer. Through the BenefitStore, we simplified the voluntary benefit selection process for both the employer and employee, while at the same time expanding the number and type of benefits made available.
Next is our Core & Advanced Analytics, which dramatically enhance the ability of benefits administrators to aggregate large data sets to make more informed decisions. These new solutions aggregate healthcare and benefits data from multiple sources and translate it into actionable information that helps employers identify cost drivers and design plans that better meet the needs of their workforce.
Next, our eBilling and payment capabilities for our employers. Employers can now consolidate invoices and payments and have advanced reconciliation features that make it simpler and much more efficient to manage the ongoing billing process.
In creating this new capability, we leveraged our 10 plus years of engineering for carrier eBilling and payment. It is a great example of how our one platform two market strategy is an advantage for our customers.
And finally, the Benefit Service Center, our new member support offering that provides employers and their employees a team of dedicated support specialists who are passionate, well trained on our technology and specializing in benefits support, thus providing a far superior experience than traditional legacy third-party support providers. Customer reaction to these new products and services at One Place and in the weeks following has simply been tremendous.
Our community of customers are embracing the vision of a suite of solutions that can dramatically improve the quality and cost efficiency of their benefit offerings. The introduction of these products provides a meaningful up sell opportunity and it significantly increases the potential of PEPM pricing we can achieve going forward.
An example of the early impact of these product introductions and the success of our land and expand strategy are the 17 customers we signed for the BenefitStore offering in the first quarter, which compares to a total of eight customers all of last year during our limited roll out. We see a significant opportunity with the BenefitStore in particular which provides Benefitfocus the ability to generate compensation and directly benefit from improved employee adoption of voluntary benefits.
Our second area of focus for the year is to further extend our leadership in the private exchange marketplace. We have built the most comprehensive private exchange platform in the market and we continue to make significant product enhancements to best serve the needs of this dynamic fast-evolving market.
We continue to add new private exchanges during the quarter and now support a remarkable total of 25. An exciting new private exchange win during the quarter was CareFirst's largest employer marketplace.
CareFirst, the BlueCross BlueShield plan in Maryland and Washington DC is a long time Benefitfocus client who is already using our marketplace solution to power their small employer exchange, a great demonstration of the momentum we have in the private exchange market and our ability to leverage our long track record of success with carriers into new growth opportunities. CareFirst is also a powerful example by differentiated approach to the private exchange market since we are the only platform that supports individual, small employer, large employer and retiree marketplaces.
Our third area of focus for 2015 is scaring the business and increasing margins. We got off to a great start in this area by delivering our best gross margin performance since becoming a public company.
One of the areas we are beginning to see a notable improvement in is the efficiency of our implementation teams, which positively impacts revenue as more customers come on to our platform faster. The entire company is focused on driving greater efficiency and scale, while continuing to provide a world-class customer experience.
We feel very good about the progress we’ve made in recent quarters. Taking a closer look at our first quarter performance, we signed 15 new large employer customers, including Arizona Chemical Company, Chicago Mercantile Exchange, the Facchina Group of Companies, Giant Eagle, the H.
Lee Moffitt Cancer and Research Institute, Hoss's Steak & Sea House and McCarthy Holdings, among others. Giant Eagle is one of the largest family-operated companies in the country and operates over 400 grocery stores.
The key differentiator in this transaction was our ability to integrate with our existing enterprise software systems, which will help them extend the useful life of certain legacy platforms. Our Benefit Service Center was an additional differentiator due to our ability to handle complex [indiscernible] in a seamless fashion for their very large workforce.
The Chicago Mercantile Exchange is part of CME Group, the world's leading derivatives marketplace. They chose Benefitfocus based on our user interface, our deep data integration and our ability to serve the growing proportion of its employee base choosing high deductible health plans.
They are also integrating a tailored incentivized wellness program into their benefits offering which demonstrates the flexibility of the Benefitfocus platform. Additionally, they chose our new Core & Advanced Analytics solution, an exciting early proof point on the demand for expanded employer product offerings.
The H. Lee Moffitt Cancer Center and Research Institute located in Tampa, Florida is the top-ranked hospital for cancer cure in the Southeast for more than a decade.
They chose Benefitfocus due to our elegant user experience, integrations with Equifax Workforce Solutions, automation of life events and reporting efficiencies for things like tracking of variable hours and enrollment notification. This is also an exciting win as the implementation will be managed by one of our third party system integrated partners, Providence Technology Solutions.
These great new customer wins help demonstrate the added value of our new expanded employer product offerings. We've also continued to work to expand our distribution capabilities and we are excited by the announcement we made earlier this week that we have signed a resale agreement with SAP.
Through this agreement, which builds on our existing cooperation with SuccessFactors and integration with Employee Central, SAP will resell the Benefitfocus marketplace as SAP U.S. Benefits Managed by Benefitfocus.
This cloud application extends SAP's market-leading core human resources and talent management solutions and will streamline online enrollment, employee communications, and benefits administration year around for customers and US based employees. It is a very exciting announcement.
In our carrier business, we've gotten off to a strong start on developing implementation plans and timelines for the nine Anthem customers that we announced in our last call. We are seeing the largest insurance carriers in the country turned to Benefitfocus to introduce our advanced capabilities which is a great validation of the value our platform delivers what carrier customers.
Finally, we recently announced the promotion of Ray August from Chief Operating Officer to President and COO. In this expanded role, Ray will be responsible for all of our operations, customer initiatives and our day-to-day performance.
As CEO, I will continue to focus my time on the company's long-term strategy, our product innovation and communicating our message with great passion. I will also continue to help develop our company's unique culture which we view as key to our success.
I am thrilled to have Ray take on this new role and believe this expanded management structure leverages our respective skill set to ensure Benefitfocus is best positioned over both the short and long term. In summary, we continued to perform at a very high level in the first quarter and are well positioned to deliver another strong year of performance.
We are executing well against our strategic objectives and our investments in expanding employer and private exchange solutions and increase the value we can provide our customers. This is a great time for Benefitfocus and we believe we are in an excellent position to continue delivering strong top line growth and improving profitability.
We are in the early stage of a massive $1.7 trillion benefits industry moving to the cloud and we are thrilled to be a leading part of this transformation. With that, let me turn it back over to Milt.
Milt, take it away.
Milton Alpern
Thanks, Shawn. We are once again pleased to have delivered strong quarterly results that exceeded our expectations from both a revenue and a profitability perspective.
I'll begin by reviewing the details of our financial performance and then I will finish with our updated guidance for the full-year of 2015 as well as our outlook for the second quarter. Total revenue for the first quarter was $42.7 million, an increase of 39% compared to the first quarter of 2014 and above the high end of our guidance range of $41 million to $41.5 million.
The revenue outperformance in the quarter was due in part to increased efficiencies in our professional services organization as well as several customer implementations that occurred sooner than we have anticipated. Breaking this down further, software subscription revenue was $37.8 million, representing 88% of total revenue and growing 32% year-over-year.
While professional services revenue was $4.9 million, representing 12% of total revenues, and up 125% year-over-year. Professional services accounted for a larger percentage of revenue in the first quarter as a result of the change of our customer relationship period which accelerated the recognition of professional services revenue.
As a reminder, last quarter we announced that we changed the length of our customer relationship period for both our carrier and employer segments to 7 years from 10 years. Looking at revenue by segment, employer revenue for the quarter was $20.9 million, up 57% to the year-ago period, while carrier revenue was $21.8 million, up 25% from the year ago period.
Now let me now review the supplemental metrics that we report on a quarterly basis. We ended the first quarter with 568 large employer customers, an increase of 150 compared to 418 in the first quarter of 2014 and up from 553 at the end of last quarter.
Overall, we saw good deal activity in the first quarter of this year. Our new employer customer count reflects the shift in timing of our annual customer event One Place this year from May to March and our introduction of limited time bundled pricing packages for our new employer product offering.
We also ended the quarter with 52 carrier customers, up from 43 in the first quarter of 2014 and at the end of last quarter. Our carrier customer count reflect the nine incremental carrier relationships from the expanded agreement with Anthem that we announced in our last earnings call.
Our software revenue retention rate was once again greater than 95% in the first quarter, which we believe is continued evidence of the significant value our platform generates to our customers. Moving down the P&L, our non-GAAP gross profit was $30.6 million or 48% non-GAAP gross margin.
This represents a 600 basis point improvement over the last quarter and 1,000 basis points improvement from the year ago period, and is the highest non-GAAP gross margin we reported since being a public company. There are several factors that drove this significant gross margin expansion that we saw in the first quarter, including increased efficiency at our professional services organization, accelerated revenue recognition due to the change to our customer relationship period and seasonally lower professional services engagements.
In the quarter, had we recognized professional services revenue as delivered instead of over the customer relationship period, our adjusted gross margin would have been 300 basis points higher. In addition, software gross margins were up 400 basis points year over year, reflecting the increased scale in our business among both our direct and indirect customers.
Adjusted EBITDA was negative $7.8 million or negative 18% of revenue and is better than our guidance of an adjusted EBITDA loss of $8.5 million to $9 million and compares to negative $8.8 million in the first quarter of 2014. Our EBITDA outperformance was a result of our revenue outperformance which largely falls to the bottom line.
We continue to believe that we can achieve our long-term adjusted EBITDA margin of 20% over time. Non-GAAP net loss per share was $0.40 based on 26.7 million weighted average shares outstanding, significantly better than our guidance of a loss of $0.51 to $0.53 per share and compares to a per share loss of $0.46 on 24.5 million weighted average shares outstanding in the year ago period.
Looking quickly at our GAAP results, gross profit was $20.2 million, our operating loss was $12.5 million and our net loss per share was $0.55. Turning to the balance sheet, we ended the quarter with cash, cash equivalents and marketable securities of $107.4 million, up from $56.2 million at the end of the fourth quarter and include $74.5 million of net proceeds from the Mercer investment we announced in February.
During the first quarter, we also had greater than usual cash outlays due to several one-time items that were paid for in the quarter, including expenses associated with our One Place conference which we hosted during Q1 instead of in Q2 as we've done in the past. I’d now like to finish with our guidance for the second quarter and full year 2015.
For the full-year, we expect revenue of $172 million to $175 million, which equates year-over-year growth of 25% to 27%. We're targeting an adjusted EBITDA loss of $35 million to $38 million and a net loss per share of $2.10 to $2.21 based on 28.1 million weighted average shares outstanding.
Turning to the second quarter, we are targeting revenue of between $41.8 million to $42.3 million, which represents year-over-year growth of 29% to 31%. From a profitability perspective, we expect an adjusted EBITDA loss of $11.2 million to $11.7 million and a non-GAAP net loss per share of $0.57 to $0.59, based on 28.5 million weighted average shares outstanding.
As a reminder, last quarter we shared our adjusted definition 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 purposes, we no longer add back interest expense on building lease obligations to these items. In summary, we are very pleased to have delivered a strong start to 2015 with first quarter results that exceeded our expectations on both the top and bottom line.
There continues to be strong demand for our platform as benefits management becomes increasingly complex and we believe we are well positioned to capitalize on the momentum in this highly dynamic multi-billion-dollar market. With that, we are now ready to take your questions.
Operator, let’s begin the Q&A.
Operator
[Operator Instructions] Your first question comes from the line of Greg Dunham with Goldman Sachs.
Greg Dunham
Shawn, the first one for you, you mentioned the 17 customers that signed on to the BenefitStore, can you talk about the business model with some of those offerings and where are you finding the most traction?
Shawn Jenkins
We are really excited about the launch of these new expand product offerings that we talked about at One Place, really been fantastic reception and BenefitStore in particular is a new offering that we've made available commercially launched at One Place. And what we're doing there is we are working with existing customers and working into our agreements with our new customers as well.
It's a way for them to add additional voluntary benefits, many of these benefits they've never offered before or they were offered in some more restricted fashion, so they can offer say critical illness insurance or additional life products and so forth. By working through the BenefitStore which is a brokerage operation that we've set up, we bring in the offerings to the employer, they make their selections and then we read them into the enrollment experience.
Because we are both designing the software and also working with the voluntary benefit providers, we are able to get much higher adoption of these programs, we are able to communicate them better, use data to drive the decision process, make it all the same part of the seamless experience for the employee, so we are seeing much higher adoption rates by the employees as they make their selection. The business model specifically to your point, Greg, is it's a combination in some cases we get a PEPM throughout the year and/or a share in the compensation of the commission structure of these products.
So those 17 customers that we added in the first period, up from eight of all of last year in our limited roll out, we'll have voluntary benefits presented to their employees when they go through open enrollment either this summer or if there is a follow-up enrollment later this year. And then based on the effective date of those benefits, let's say that they have a follow-up enrollment season, the benefits will be selected, the way the revenue actually then shows up for Benefitfocus would be January 1 of the following year, so be it 2016 revenue factor and then we would get paid or we would begin to recognize monthly amount of that compensation structure going forward.
Greg Dunham
One more from me, the SAP announcement is a big announcement obviously, but you had a relationship with SuccessFactors before, can you compare and contrast the different between what you had in place before with SuccessFactors and what's new and how does it affect the business going forward?
Shawn Jenkins
We are so excited about this, I'd tell you what it is, it's a massive arrangement for us, we're working with the folks at SAP and they have having SAPPHIRE conference in Orlando right now and we are just getting great interest from their customers. So we have been working with SuccessFactors, a company they acquired several years ago.
Our SuccessFactors relationship flowing through to SAP was an integration with SuccessFactors, we've worked on a set of APIs between Benefitfocus and Employee Central so that the data can move back and forth. We kind of had a joint selling arrangement, they would introduce us into their prospects and whatnot and then the Benefitfocus folks would come in and do the demonstrations and we would win the account and those accounts would buy from Benefitfocus on our contracts.
We had a lot of success with that, we've grown that business, we've gotten tighter integration and I think really it's proving ourselves and since the public offering and Benefitfocus getting larger and larger and our increased R&D investment and whatnot, we're really excited to announce this next phase. What's different now is really it's a much deeper relationship, so we will be going deeper on the technical integration, sharing the way the user experience will work, for example, so that employees of SAP across the product portfolio will be able to inherit that experience into the Benefitfocus platform.
I think structurally the biggest difference is SAP can now sell this on their own contracts and the SAP salespeople will be equipped with the demonstration, with all of the information about the products, so SAP sales force feet on the street in their accounts, the existing accounts and prospective accounts will be able to sell Benefitfocus, they will be able to price Benefitfocus, they will be able to contract with Benefitfocus and bring the deal all the way through to closure. So really exciting opportunity for us and just since the announcement we've already had a great deal of activity of excitement.
So really proud of that.
Operator
Your next question comes from the line of Nandan Amladi with Deutsche Bank.
Nandan Amladi
So first one for you, Milt, gross margin clearly best in your recent history and there are still a lot of moving parts this year. So how should we think about what the trajectory looks like for the remainder of this year, going into next year?
Milton Alpern
Certainly we achieved a non-GAAP gross margin in the first quarter of 48%, which is up about 1000 basis points from where it was in the first quarter last year. A couple of things to think about, part of the increase in margins, some of that was due to the acceleration of revenue as a result of the change in our customer relationship which basically added about 2% of the 10% increase that you see.
And as we talk about margins going forward, I think as is our typical trajectory, I think you will see margins in the second quarter as we make some increased investments in certain areas as we ramp up our open enrolment fees and so forth, I think you will see margins dip some, but then certainly come back as we get into the last quarter of the year. And when you look at what we're looking at for the year, I think you will see a substantial increase in margins overall for the year, although I think 48% is probably the high.
Nandan Amladi
And a question for Shawn, the number of new employers added, you had a couple of large ones like Giant Eagle that you added this quarter, the total number perhaps came a little bit lighter than people were expecting. So as you sign some of these larger customers, is that a function of longer sales cycles or can you characterize what might have happened this quarter?
Shawn Jenkins
I think the biggest change when you look at the years, we had historically had our One Place conference in May, so last year it was in May, this year we moved it up to March. We did something interesting in middle of March when One Place was held, we introduced a series of new expanded product offerings for the employer base as you've seen.
And when we did that, we put some pricing bundles together both for the new prospective customers, deals that were in flight in the first quarter as well as existing customers. We had to give them more time than like 2.5 weeks.
So we actually created a pricing situation where you had until really end of the month of April to get that pricing goes bundles, it affected almost every deal that we had in flight. Some of the deals that we announced, actually all the deals that we announced today in the call, but one of those either bought the service center or the analytics or the BenefitStore.
So we saw a flurry of activity about these new products, people want to see what they were, they want to understand the pricing and we effectively moved the March 31 date back for signing pressure to give everyone a little bit more time to digest these new products. So it was expected, it was designed.
As you know our model, you've been studying our company for a while, our big selling season is really the second quarter and the third quarter and we've got new great deal activity, we're really optimistic about the year as you can see from our guidance and whatnot. So it was really more of a phenomenon of moving our conference in the dynamic of the new products that we introduced.
At the same time, we had really big – great new big customers in there and the customers that did buy from us [indiscernible] were adding more than just a core platform. So we're – the underlying message is that idea of adding expanding the offering is really working quite well.
And at the other phenomenon I would say too, Nandan, is we added 17 BenefitStore customers in the quarter, up from eight a year before, but really it was zero in the first period of last year. So you compare just the BenefitStore alone, zero in the first quarter of last year, 17, there is a ton of momentum in the business.
And maybe one other point, we added nine carriers this quarter and I don't have the number in front of me what we added in the first period last year, but it was probably one or two. So huge carrier quarter and that's the beauty of one platform two markets, each quarter you got different surges happening, whether it's the BenefitStore, the carrier business, but those are some of the dynamics, but really we continue to give you the guidance that they've got and really optimistic on the year.
Operator
Your next question comes from the line of Terry Tillman with Raymond James.
Brian Peterson
This is Brian Peterson in for Terry. So I know you had a lot of large new carrier wins this quarter, just curious how the deliveries going there, any potential update on the on boarding of some of the SIs to help you deliver some of that business?
Shawn Jenkins
So with the carrier adds, the big carrier momentum in the quarter was our expansion with Anthem. Anthem, the BlueCross BlueShield and their affiliate plans in just for a little bit update for folks, we have been working with BlueCross BlueShield of Virginia for the last couple of years and through our success there really earned the right to add these nine additional states which they will be rolling out the Benefitfocus e-enrolment, eBilling and our e-exchange capability.
We are off to a really good start, it's a big implementation for us. It will take 2015 really to do the full implementation.
So bigger the carriers are, the more complexity longer they take, but we are feeling very good about that. We are off to a really strong start and deepening that partnership.
Because we have worked with them for a number of years, we have close relationships already in place and a lot of debt exchange had already been happening between our companies, but we are really off to a good start there. The second piece of your question was around SI community and as we talked about a little bit, we graduate our first set of SI system integrators in December and we just announced that program in May of last year, so that was the beginning of the university, the training, the certification.
We're really excited about the system integrators that came into the program in 2014. We finished our first class in 2014 as we have laid out and they are now doing implementations and we are well on track there to have system integrators, actually they are working on projects right now with our employer business.
So we're super excited about that dynamic. Let's say one other thing there too, you kind of heard and see in the results here, we'd pulled some revenue into the first quarter from some faster go-lives and there's a wise proverb that says he who teaches learns twice and one of the things that we found from the system integrator program is we – as we teach third parties how to implement, we are getting much better implementing ourselves by putting the curriculum together and the discipline for other people.
It's improved our own implementation process even faster than we were already doing on our own. So we are seeing benefit from the SIs coming up to speed, but it's also really been great for our own internal implementation as well.
So we can't be more pleased with the results there.
Brian Peterson
And just a comment on the selling season as you guys head into the second and third quarter, any update on the number of RFPs that you're seeing this year, you seeing a catalyst potentially from ACA, just any qualitative thoughts there?
Shawn Jenkins
I don't have a RFP stat for you and I think that the year is going as we thought it would go, so the level of activity, we increased our sales process last year, actually every year for the last several years and we're really happy with the team that we have and the talent that we've been able to attract. I think we've got the best SAAS based sales team in the industry right now.
So they are executing, they are extremely busy. The announcement with SAP has created even more activity, our expansion with Mercer and the amount of activity that they are seeing in the Mercer marketplace.
We now have 25 private exchanges which creates all sorts of additional activity for our team. So it's a busy time, I assure you, and there is a lot of enthusiasm.
There is nothing specific in the Affordable Care Act right now that changed as far as our talking to employers. There may be a question a little bit later, specific question about an element of the Affordable Care Act, we would be glad to handle that.
But specifically to your question, nothing has certainly slowed down with selling with the Affordable Care Act, the tailwinds are still intact. There is always nuances going on in there, but that pattern is still very much intact.
Operator
Your next question comes from the line of John DiFucci with Jefferies.
Kevin Dineen
This is actually Kevin Dineen standing in for John. Shawn, I know you talked a little bit about the SAP reseller agreement, but wondering if you can expand on it?
SuccessFactors obviously has a large install base, but can you maybe quantify what your expectations are for the agreement in terms of customer net adds and incremental revenue opportunity over some multi-year view? And then also if you could talk a little bit about what the economics look like, does Benefitfocus handle the installations, is it a third-party integrator, just any more color you can give us on the SAP reseller agreement?
Shawn Jenkins
So I’ll start and Milt you can chime in too. The 2015 impact on revenue, we don't think there is nothing different about the guidance that we've given you on the revenue, we have updated it for this quarter and increased it a bit as you can see.
So the real impact is we believe it will put a lot more activity into our sales pipeline. It certainly increases the number of people that are in the market with the demo and the ability to communicate the Benefitfocus platform.
As far as the metrics are on their existing customer base and that kind of stuff, we don't have anything to publish for you there. I think as we get deeper into the formal public relationship, having been out there bit more in coming quarters, we will probably say a bit more about it.
So I think of it more as a 2016 phenomenon, building our sales pipe now, more interactions and activity on the front end. The beautiful thing about the economics as it works just like the rest of our subscription model, so SAP customers can buy the Benefitfocus technology from SAP on their contract and they can contact with them.
We will do the implementation directly if you are Benefitfocus resources or they can use a system integrator. I think the SI program that we put in place was actually very impactful in expanding our relationship.
So they can use the great system integrators that are now trained on Benefitfocus platform, many of which also do a lot of SAP or SuccessFactors implementation. So for those customers using an SI, they can buy the implementation from the SI, contract with them, buy the technology from SAP, contract with them, but once they go live on the Benefitfocus platform, it will continue to be a per employee per month subscription model, similar to the pricing that we have in the market now obviously.
And then I think some of the real beauty of it is the tighter integration with the SAP platform, as we do our releases and SAP does their releases, we'll keep those in sink for those customers and then those customers who have the ability to begin to purchase our additional products and services, over and above the core offering there. So I think it creates an additional expense an opportunity in the out years as well.
Operator
Your next question comes from the line of Adam Klauber with William Blair.
Adam Klauber
Couple of different questions. You obviously had a lot of success with Mercer exchange market last year, would you say activity or RFPs for the Mercer exchange is higher this year than last year?
Shawn Jenkins
Mercer as a public company reports their numbers, they put their numbers out. We don't comment specifically on the Mercer pipeline or their adds.
They did have a call recently and they were very optimistic on the call of what they were seeing, I would probably refer to their public comments on it. Clearly, their enthusiasm for the Mercer marketplace, the success they've had in the last two years has just been phenomenal and I think their expansion and investment with Benefitfocus is a pretty clear indication I would say of their optimism going forward.
But specific metrics around their pipeline, their customer adds that they are expecting, I'd refer you to their comments that they've got on that.
Adam Klauber
And then as far as the general employer selling season, I've heard from a number of people in the market that quite active season, in general, are you going to – situations more directly from your sales force or is it more on an RFP basis?
Shawn Jenkins
Most of the work that we do is direct with our sales team. I mean, we have, as I said earlier, just an incredibly talented software as a service cloud-based sales team out in the field.
Now that many of them have been with us for two or three or four years now and they're building their patch and their territories are getting very, very well developed. They've got a lot of great relationships.
We do a lot of regional events, we do lunches and we call them city tours and whatnot, so we are hosting events in the cities. We are working primarily directly with the employers.
I would say that things like the Mercer marketplace and our relationship with Mercer, our carrier private exchanges and more and more I think the big consulting houses that as we become a public company, as Benefitfocus has gotten a lot bigger, we are showing up on more traditional RFPs and that process has increased for us. But still our primary mode of activity has been just direct contact with these employers and then working with all of their influencers and consultants that they've historically worked with.
Adam Klauber
And then finally on the SAP relationship, obviously that's a huge, huge win for you guys. With the selling season being really almost at its peak now, in the next month or so, will that relationship probably more important for next year's selling season than this year's selling season?
Shawn Jenkins
Yeah, definitely I think so. I think SAP is just a huge company such broad customer base and I do know that benefits is really high on everybody's list and I think that we do have some opportunity there to pull some stuff through that channel this year, but primarily looking at it as deepening that relationship, there is a lot of training of the SAP sales force to do, there is a lot of collateral and so forth to push into their organization, which we are prepped and ready to do.
I think it will be more of a 2016 type of thing. One obvious way to think about though is anybody that might be quasi considering at this year, maybe they are already in our pipe, clearly any SAP customers that are already in the Benefitfocus pipe, we would be optimistic and hope that this deepening relationship and their public announcement about it, and they've got a great blog on their – Mike Ettling's blog post there at SAP, Head of their cloud, HR cloud, that's a great read if anybody wants to check that out.
We think that type of relationship with our teams is going to really help those customers that may be were already moving through our pipe feel that much better about moving forward with Benefitfocus.
Operator
The next question comes from the line of Stephen Lynch with Wells Fargo.
Stephen Lynch
I guess just to start out, I was wondering if you could give us some – maybe an update on how things are progressing with the effort to establish stand-alone value of your professional services, does that still seem probable by the end of the year?
Milton Alpern
Absolutely. As Shawn alluded to it before, directly spoke to the fact that our systems integration bundle program which we graduated the first partners out of our training classes and certification classes in the end of last year is off and running.
I mean, we've actually got system integration partners who are actively in the process of performing implementations today and certainly our expectations which we had set to have standalone value established in the second half of the year is certainly still very, very achievable and expected.
Stephen Lynch
It does look like revenue per employee count maybe hit an all time high in the quarter and I know that – I know you mentioned that you saw both some larger clients may be in the quarter as well as higher product adoption across the portfolio. I'm wondering though if maybe you could give us a sense for which one of those drove most of the strength if it was leaning toward one of the other.
Shawn Jenkins
The growth that we saw you in revenue in the first quarter, certainly as we said before, really primarily comes from the timing of some implementations that occurred in the first quarter that were ahead of schedule, which I think certainly is a testament to our ability and some of the efficiency that we are achieving on our professional services and implementation organizations. Also in the first quarter, certainly on the software side, we get the benefit of full quarter's worth of all the implementations that occurred in the fourth quarter of last year.
So that's kind of an expected increase in revenue that we've seen in the first quarter of every year. And lastly, I think we've talked about before that particularly in the carrier side of the business, we see some kind of what I'll say reshuffling or rationalizing of customer counts or the number of lives that carriers are supporting on our platform and so there is usually a little bit of a revenue, a modest revenue bump that we get as that reshuffling takes place at the beginning of every year.
Milton Alpern
And maybe I'll just add a little bit too that. As far as the slice of that, that was about revenue per employer, the metric around, getting at the size of the employers.
Our average size of employer has been steadily increasing over the last couple of years really. And it isn't any sort of change in strategy, we are not exclusively going after larger and larger ones.
Any employer that has 1000 or more employees, we are engaged in promoting Benefitfocus to them. But I think the public offering and the size and scale of Benefitfocus and the awareness has naturally brought us into more and more larger conversations and as those have flow through the system, we added 160 employers last year, put a lot of those on in the fourth quarter and some of those were bigger.
And so that's probably a trend that has been in the works for a little while and you're just seeing that manifest itself really from the big fourth quarter adds.
Stephen Lynch
And then I guess maybe finally, could you give us some color on why Q2 revenue might be down sequentially, was there some sort of benefit in Q1 that's not going to recur or is this related to an earlier than expected roll off of some of those older unprofitable relationships that you're planning to terminate this year?
Shawn Jenkins
I think primarily, as I said a moment ago, I think we realized some revenues in the first quarter a little bit earlier than expected, that was typically expected to go live in the second quarter. And so we typically see then as a result bit of a leveling of in revenue growth in Q2.
But your point about the rationalization of some of the unprofitable customers that we talked about at year end, we will begin to see some of that in the second quarter, naturally it was expected, as I said, it's something that we did certainly improved the profitability of our business.
Operator
Next question comes from the line of Ross MacMillan with RBC Capital Markets.
Ross MacMillan
Shawn, when I think about the Mercer relationship, could you help me understand, so last year I think it went from, round numbers, but call it 200,000 active lives to about 1 million active lives. When did those roll on, did those roll on in Q4 and they are fully in the numbers in Q1, is that the right way to think about it?
Maybe you can help me understand that. And then second, either Shawn or Milt, when I think about the pricing of Mercer, I think about what you traditionally said about your employer PEPM being $3 to $5 and carrier PEPM about call it $1 or $1.25, where does Mercer sit in that range?
Shawn Jenkins
So the first part, you are right. So Mercer adds in all of our channel partner, private exchange adds follow a very similar pattern, they go through to implementation process depending on when the employer wants to do their open enrollment fees in, once they go live we'll begin to get that subscription revenue.
So that all tracks well. They are generally on by the end of the fourth period and then they show up for 100% effectively in the first period.
Because Mercer is such a big partner and there are ongoing big projects and so forth, they do have a bit of a characteristic that sometimes mirrors a little bit of a carrier business where we might activate some additional functionality that we've been working on in another quarter, separate from the actual employer cadence. So we do see a little bit of additional steps up to new tiers or something like that depending on the volumes that they are running through.
But for the most part, it follows the pattern of the employers come on in the third and fourth period and then you begin to see that. As far as the pricing goes, I know that folks are always trying to triangulate our pricing with the public companies we deal with and what they report.
One metric that always helped me in this business, understand, the numbers here is, we charge effectively a per employee per month rate at Benefitfocus. The individual who is employed.
Many times what you see reported from folks that are aggregating, you'll see a membership number or a full subscriber number and that would add the dependent, so it'd add the spouse or kids if they are on the policy. We don't necessarily get more money for those additional dependents, but when you take a bigger number like 1 million subscribers or 2 million subscribers, sometimes you will see those numbers don't tie directly to what you would Lead to be our pricing model and that's because we are focused on the employee count and kind of everyone rides along to that number.
Specifically, though, our private exchange pricing is between our carrier and our direct employer pricing, a single employer buys from us and they get that pricing that we offer to them, carriers buy in massive bulks from us and we do one-time implementations and feed all that through. A private exchange, in this case, is getting the benefit of that bulk pricing, but it's still multi carrier and there is a lot of moving parts in there.
So it's in between the ranges that you were talking about.
Milton Alpern
And keep in mind too, Ross, this is Milt. I mean, obviously in that indirect model with Mercer, I mean, a lot of the expenses of the sale and even in the implementation, in some cases, are borne by them and so the pricing model is an indirect model where there is an occasion that some of those costs are going to be borne by Mercer.
Ross MacMillan
And one quick follow-up just on the carrier side, I remember last quarter, Shawn, I think you talked about your success in Q1, I think it was with Anthem and some subsidiaries of Anthem. Was that the lion's share of the growth in the carrier number this quarter, I missed the earlier part of the call, so I'm not sure if you made any comments around that?
Shawn Jenkins
Anthem, BlueCross BlueShield plans of national publicly traded company umbrella, we had net nine carrier adds in the first quarter, all those were Anthem plans, individual states that came through this umbrella agreement. Each of them will be getting the Benefitfocus electronic enrolment, eBilling and eExchange technology and they're on a staggered roll out that as the implementation discovery and work has already begun.
But it would take all of 2015 to get that implementation really solidified.
Operator
At this time there are no audio questions.
Shawn Jenkins
Thanks everybody, appreciate everybody joining for the call, and we will talk to you again next quarter. Thank you, operator.
Operator
Thank you. That does conclude today’s conference call.
You may now disconnect.