Nov 3, 2016
Executives
Michael Bauer - Director of IR Shawn Jenkins - CEO Jeff Laborde - CFO
Analysts
Brian Peterson - Raymond James Frank Sparacino - First Analysis Ross MacMillan - RBC Capital Markets Nina Deka - Piper Jaffray
Operator
Good afternoon ladies and gentlemen and thank you for standing by. Welcome to Benefitfocus third quarter 2016 earnings conference call.
At this time all participants are in listen only mode. [Operator Instructions] Please note, this conference is being recorded.
I will now turn the conference over to your host, Michael Bauer, Director of Investor Relations. Thank you, you may begin.
Michael Bauer
Thank you, operator. Good afternoon and welcome to Benefitfocus's third quarter 2016 earnings call.
We will be discussing the operating results announced in our press release issued after the close of market today. Joining me today are Shawn Jenkins, our Chief Executive Officer, and Jeff Laborde, our Chief Financial Officer.
Shawn and Jeff will offer some prepared remarks and then we'll open the call up for a Q&A session. As a reminder, today's discussion will include forward-looking statements such as fourth quarter and full-year 2016 guidance and other predictions, expectations and information that might be considered forward-looking under federal security laws.
These statements reflect our views as of today only and should not be considered as representing our views at any subsequent date. These statements are subject to a variety of risks and uncertainties, including the fluctuation of our financial results, recruitment and retention of key personnel, 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 our 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 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 those measures in our press release. With that, let me turn the call over to Shawn.
Shawn Jenkins
Great, thanks Mike. Good afternoon everyone and thank you all for joining us today.
During the third quarter Benefitfocus delivered strong results that exceeded our expectations. Total revenue increased 28% during the quarter and with adjusted EBITDA of $1.1 million we achieved profitability a full quarter at head of our expectations.
This is a significant accomplishment for our company and we believe this year-over-year improvement of over 2100 basis points in EBITDA margin demonstrates the operational leverage inherent in our business. During the quarter we once again delivered revenue retention rates in excess of 95% and employer revenue in the quarter increased 55% as our large employer count increased to 827.
Both our revenue retention rate and the growth in our installed base underscore the value we provide large employers as they continue to transition benefits management to the cloud. As we discussed last quarter we also believe the growth in our employer business strengthens our carrier business.
Our insurance carrier clients recognize that our investment in the employer market flows through to their platform and with over 50 of the top 100 insurance carriers as customers, we remain focused on helping our insurance carrier clients add more subscribers to the platform and cross sell additional solutions onto our installed carrier base. As we look ahead to 2017 I would like to provide some perspective on the market dynamics we are seeing taking shape and how Benefitfocus will benefit from them in the coming year.
The first is that we continue to benefit from a secular shift as large employers move core operational activities such as benefits management to the cloud. During the quarter large employers continued to turn to Benefitfocus to help them engage employees, improve benefits personalization ad plan fit, reduce benefits expense, and streamline administration and compliance.
One highlight during the quarter was our continued momentum in the national accounts segment as our recently formed national account sales team closed six national accounts, up from three in the year ago period. A second key market dynamic is the continued shift of employers offering a wider array of health plan designs, including high deductible health plans.
To enable this shift an employer needs a flexible modern software platform. The wide array of supplemental benefits in their linkage to these new health plan designs requires a new way to communicate to employees.
The combination of our consumer mobile first design and our Benefitstore offering is really unlocking the power of this move for employers. We believe we are in the early stages of this generational shift and stand to benefit for years to come.
A third dynamic is the significant increases in insurance premiums in the individual market on the Affordable Care Act public exchanges. While we do not serve this particular segment of the market we do believe it will result in some tailwinds for both our carrier and employer businesses.
The primary impact will be refocusing of the market back to employer provided health insurance. We are already seeing increased activity in our carrier sales pipeline as it relates to investments in their employer group businesses and ways to expand their offerings to those employers.
We also believe that our employer business will further grow as the value of the benefits they provide will become a competitive advantage in the labor market. This, we believe, will result in employers moving faster to the cloud and to modern consumer experiences for their employees.
With these market dynamics as a backdrop, let me share some highlights of the quarter. I'll start with our employer business where we saw a sustained increase in average deal size and great traction from our expanded employer solutions.
For example, during the quarter average deal size increased approximately 125% on the heels of large new customer bookings, product mix and back to base strength. In particular our new national accounts team continued to exceed our expectations with the six new national accounts I mentioned earlier.
Let me highlight a few of these national account wins. In July, we closed a multi-year multiproduct transaction at a massive retailer with 120,000 employees.
This employer selected Benefitfocus marketplace, core analytics and benefit service center to improve efficiency and eliminate extensive manual tasks required by the company's previous legacy systems. The scalability of our platform, employee communication capabilities and mobile first strategy were also cited as key contributors for their selection of Benefitfocus.
During the quarter we continued to strengthen our position in the higher education market by adding two marquee universities in the Midwest. First, a large public research university selected Benefitfocus marketplace, core analytics and Benefitstore for its 19,000 employees.
Also in the quarter we added a large private research university that selected Benefitfocus marketplace and our core and advanced analytics solution for their 20,000 employees. Additionally during the quarter a national retailer with over 38,000 employees selected Benefitfocus marketplace, core analytics and benefit service center to improve their existing benefits and administration process, increase employee satisfaction and free up their HR team resources from the time consuming administrative tasks of their legacy bank benefits enrollment system.
Our back to base sales team also posted another strong quarter. We continued to close add-on transactions into our installed base and also over two thirds of our new employer customers continued to select more than one product.
These positive developments drive higher average annualized recurring revenue per transaction. During the third quarter we added 24 new large customers.
This was lower than the year ago period as a result of two main factors. First, as it had been noted by the major private exchange sponsors, the 2016 selling season experienced slower growth than previous years.
We remain optimistic, however, on this private exchange channel and believe this business should steadily improve as private exchange sponsors fine tune and optimize their offerings. The economics for employers and exchange sponsors remain compelling and deploying private exchanges on our flexible adaptive platform remains the most effective way for participants to benefit from this new market opportunity.
And second, our large employer sales team continues to ramp up. As we shared last quarter we transitioned roughly 25% of our employer sales capacity to focus on national accounts at the start of 2016.
This reassignment means we had less coverage and less tenure focused on the 1000 to 10,000 employees segment when compared to 2015. During the third quarter we began ramping this team and have an aggressive hiring plan as we prepare for 2017.
Shifting to our carrier segment. Demand for our solution continues to strengthen.
As we have highlighted throughout the year we have focused on carrier business on two priorities that will drive to return to multi-year revenue growth and further strengthen our leadership position within this highly strategic segment of the market. First, with over 50 of the top 100 carriers on our platform we are making great progress, cross-selling solutions into our installed base and with the assistance of our expanded carrier focused market adoption team, we are implementing strategies for our carriers to grow the size of their memberships on our platform.
And second, we continue to focus our carrier business towards recurring product revenue and profitable professional services revenue. The results of the past three quarters have been really encouraging and the execution during the third quarter was strong as we had six large renewals while also increasing our penetration within our installed base.
Let me provide an example from the quarter that highlights the success of our carrier sales team. Earlier this year we began conversations with a large eBilling customer that had yet to broadly deploy our eEnrollment solution.
Working closely with this customer we were able to support a platform consolidation to Benefitfocus and migrate the carriers group business on to Benefitfocus’s eEnrollment platform. Moving to Benefitfocus lower the carriers’ operational costs and will help improve group retention and engagement.
The impact on our carrier business is also meaningful as we increased our strategic importance with a large customer and added over $1 million in incremental annual recurring revenue. During the quarter we also hosted our first carrier executive forum here in Charleston.
During the course of the event over 20 SVP level executives from the country's largest health and voluntary insurance carriers joined us for two days of engaging discussion focused on consumerism and technology in the insurance industry. We expect the event to play a meaningful role in accelerating our pipeline as we head into 2017 and look forward to reconvening the group on a regular basis.
From a product perspective, our autumn release – in our autumn release we extended our mobile capabilities to support full mobile enrollment. Customer feedback for this new capability has been wonderful.
One benefits leader for a large retailer with more than 44,000 employees shared the following. We've had a great response to the mobile app so far as our store employees really need a portable mobile way to enroll in our plans.
It speaks to our audience and our innovative culture. Our One Place 365 Idea Community continues to be a source of strength for Benefitfocus and was responsible for several new and important features delivered within the autumn release.
Our Idea Community is the first crowd sourced product innovation platform in our industry and the autumn release represents a major milestone. Together with our thriving customer community we are delivering innovation that the market really loves.
As I reflect on year to date 2016 I'm so proud of the progress we have made on our primary strategic objectives. In particular I believe our focus on operational scale and continued growth will result in Benefitfocus becoming a much larger and more profitable company over time.
Entering 2016 we made a decision to concentrate our efforts on achieving adjusted EBITDA profitability by the fourth quarter. As I outlined today we have achieved this important milestone one quarter ahead of our expectations.
Looking ahead to 2017 I'm very excited about the expanding employer sales go to market team and the performance of our carrier sales teams. With the market dynamics in our favour we made great progress during the quarter on our aggressive sales hiring plan as we ramp up our employer, back to base and carrier sales teams heading into 2017.
I continue to be impressed each day with the calibre of talent we are attracting to Benefitfocus. While we are executing well on our long term plan we also anticipate some short term revenue implications as a result of our focus on national accounts in 2016, the continued rapid development of the Benefitstore and some muted near term private exchange growth.
Let me share some of the details on each. First is the implementation timeline and revenue impact associated with our national accounts business as we ramp up this customer segment.
Many of these accounts with 10,000 plus employees are simply more complex and we'll go live during 2017 versus our historical cadence of customers going live during the third quarter or fourth quarter of the same year that they sign the contract. In addition, the shift of our focus by our sales organization towards national accounts resulted in signing fewer 1000 to 10,000 employer customers than our original expectations.
As noted earlier we are actively hiring to expand coverage in this market segment and will be in position for a strong selling season in 2017. With regard to Benefitstore, as I previously mentioned, demand remains very strong.
However the revenue from voluntary benefits commissions will lag our initial expectations due to a combination of differing adoption rates across insurance products and our decision to provide commissions splits with select brokers. We have been forming strong relationships with our customers’ existing brokers around the country and are including them in the Benefitsstore program.
While this impacts our near term revenue share it strengthens our relationships in the brokerage community and provides positive momentum to the sale of other solutions like the Benefitfocus marketplace platform. And finally as I noted earlier, many of the private exchange sponsors experienced slower growth during the 2016 selling season when compared to the prior year.
We remain excited about the long term economics of this business and have plans in place to improve the performance of this channel in 2017. As we enter 2017 with a terrific product roadmap that will be showcased in a few months at our One Place User Conference and a clear path to profitability, I feel very good about our growing sales footprint and I'm confident in our ability to deliver a strong 2017 selling season.
Our multi-year investments in our products and our platform are really beginning to show tremendous operational scale which is leading to improved profitability, expanding gross margins and increased speed of our implementations. We are on a long term path to building the platform of the future for our massive $1.6 trillion benefits industry.
This industry is huge and complex yet we uniquely understand it and have built the technology to truly transform it. Our progress in many areas but especially national account employers, this is a strong indicator that as employers move in mass to the cloud the Benefitfocus platform is becoming their platform of choice.
Finally as we head into our busiest time of the year with open enrollment, I want to extend special thank you to all of our associates who have been working so hard to ensure the success of our customers. Our success would not be possible without your dedication and passion.
Thank you for all that you do to make Benefitfocus such a great company and have such a great company culture. Now I'd like to welcome our new CFO Jeff Laborde.
We're fortunate to have Jeff joined our leadership team and welcome the contributions that will come from his extensive financial experience in the years to come. With that, Jeff, take it away.
Jeff Laborde
Thanks for the introduction, Shawn. And many thanks to the broader Benefitfocus team for the warm welcome.
Today marks my seventh week in the seat as CFO and I have been working closely with the leadership team to come up to speed on the business as well as to get acquainted with the members of my finance team. I'd like to highlight how impressed I've been in my interactions with management across the company, the Benefitfocus culture, our new product offering pipeline and a dynamic market that we're focused on.
I believe we have an outstanding opportunity to reinforce our leadership position in the benefits management platform of choice heading into 2017. In addition to coming up to speed on the business, I've also devoted a significant amount of time to understanding the details and attributes of the company's broader financial profile.
An early fruit of these efforts is reflected in our announcement on Monday of the opportunistic expansion of our revolving loan facility. Specifically the amendment increases the size of our aggregate loan amount from $60 million to $95 million.
Additionally we extended the term to a new three year period. We were pleased to work once again with Silicon Valley Bank as our syndication agent and in addition to upsized commitments to the facility from our existing lenders welcome Goldman Sachs to the lender syndicate.
Combined with our significant progress on our adjusted EBITDA targets, we believe we are well positioned from a liquidity perspective for the foreseeable future. Turning to our Q3 results, I'll begin by reviewing the details of our financial performance.
And then I'll finish with our updated guidance for the quarter. Total revenue for the quarter was $58 million, an increase of 28% compared to the third quarter of 2015.
This result was at the high end of our guidance range and driven by sales of new products to both new and existing customers as well as strong revenue retention. Employer revenue for the quarter was $35.4 million, up 55% compared to the year ago period and carrier revenue of $22.7 million was flat compared to the same period last year.
Both revenue segments performed in line with our expectations for the quarter. Breaking revenue down further.
Total software subscription revenue was $49.3 million representing 85% of total revenue and growing 25% year over year. Employer software subscription revenue was $31.9 million and grew 50% year over year.
As highlighted last quarter the sequential decline in software subscription revenue reflects ACA related revenue that was recognized upon completion in Q2. Total professional services revenue was $8.7 million representing 15% of total revenue and up 43% over Q3 2015.
The year-over-year increase in both employer and carrier professional services revenue reflects a number of factors, including improved scheduling of services work with the creation of our new open enrollment reservation system as well as higher implementation and other consulting activity levels from our new and existing customers. Moving down the P&L.
Our non-GAAP gross profit totaled $29.7 million representing a 51% non-GAAP gross margin. This compares favorably to 50% in the prior quarter and 43% in the year ago period.
Importantly during the quarter we experienced accelerated year-over-year gross margin improvement for both our carrier and employer segments. The almost 800 basis point improvement over last year reflects the benefits of ongoing revenue growth, increased operating efficiencies and cost management efforts.
The non-GAAP software gross margin of 60% was down from the prior quarter and year ago period while professional services gross margin improved to a negative 1%. The sequential and year-over-year improvement in professional services gross margins reflects several areas of progress in the professional services organization, including higher capacity utilization, the combination of certain product specific delivery teams and continue prioritizing of our implementation services and new releases of our software.
The decrease in software gross margin in the quarter was primarily due to revenue mix and higher open enrollment costs in typical [ph]. During the third quarter we started ramping our seasonal investments in support of our new user population earlier than in past years both in connection with our new reservation system and for our largest employer client.
For this year's open enrollment, the contract with our largest employer customer included the additional support of over 200,000 retirees. To support this large additional population we started open enrollment earlier in the year and with additional support resources.
As our continued platform investments in innovation drive greater efficiencies within software services and the profitability of professional services improves we remain confident in our ability to continue to meaningfully expand gross margins while ensuring the best possible experience for our customers. Moving on now to adjusted EBITDA.
We're pleased to report that the company achieved a major milestone in the quarter with adjusted EBITDA becoming profitable one quarter ahead of plan. Q3 adjusted EBITDA was $1.1 million or 2% of revenue.
This was significantly higher than our guidance of an adjusted EBITDA loss of negative $4 million to negative $3.5 million and represents nearly a $10 million increase over the negative $8.8 million in Q3 2015 results. Our adjusted EBITDA was positively impacted by our revenue growth in the quarter and the ability to translate progressively more of every dollar of revenue into gross margin contribution due to our ongoing scale, technology and services improvements, indicative of our increasing scale.
During the third quarter total operating expenses declined as a percentage of revenue on a sequential and year over year basis. Importantly as an organization we remain focused on balancing additional investment in the business with our overall revenue growth and adjusted EBITDA profitability.
Non-GAAP net loss per share was negative $0.14 based on 29.7 million weighted average shares outstanding. This result was better than our guidance for a loss of negative $0.34 to negative $0.32 per share and a year ago period loss of negative $0.46 per share based on 28.8 million weighted average shares outstanding.
Looking at our GAAP results. Gross profit was $28.9 million, representing a margin of 50%.
Our operating loss was a negative $6.5 million and our net loss per share was a negative $0.29. Moving to the balance sheet.
We ended Q3 with cash, cash equivalents and marketable securities of $55.3 million. Total deferred revenue declined by $3.9 million sequentially to $79.7 million and as discussed in prior quarters, largely reflects changes we have made in our carrier professional services engagements to reduce the number of both lower margin and deferred revenue recognition carrier professional services engagements.
On the statement of cash flows. Cash used in operations totaled $627,000 for the quarter, an impressive improvement of over $8 million cash used from the year ago period, reflecting our top line growth and improved margin profile.
Looking ahead as I enter my first full quarter here at Benefitfocus, I will be spending a significant amount of time initially on certain more strategic areas and actions, including company-wide budgeting for calendar 2017, enabling our organizational drive for profitable revenue growth and continuing our gross margin expansion as well as evaluating further opportunities for improvement. I will now turn to our outlook for the fourth quarter of 2016.
For Q4 of 2016 we are targeting revenue of $62.3 million to $63.3 million. From a profitability perspective, we expect adjusted EBITDA of $1.5 million to $2.5 million, a non-GAAP net loss of negative $4.2 million to $3.2 million and a non-GAAP net loss per share of negative $0.14 to negative $0.11 based on 29.8 million weighted average shares outstanding.
Additionally we are narrowing our full year 2016 free cash flow guidance to be in a range of negative $37 million to negative $34.5 million. Although we are early in my tenure and our 2017 planning is underway, I'd like to provide some initial perspective on 2017.
We are making steady progress against a number of our long term model targets. As noted previously, now that we have achieved adjusted EBITDA profitability we are ramping up our investments in our sales organization and our focus on the following four primary financial objectives for 2017.
First is to grow revenue. In 2017 we plan to invest in both our employer and carrier sales organizations to improve upon our fourth quarter revenue growth rate.
Second, to continue to incrementally expand gross margins. Third, to achieve adjusted EBITDA profitability for the full year, and fourth, to drive towards free cash flow positive by the end of the year.
In summary, I'm excited about our opportunity and believe we are well positioned to further strengthen our leadership position in the multi-billion dollar benefits management market. We are ramping sales force and improve profitability.
We believe we are well positioned to deliver strong growth and long term shareholder value. With that we are now ready to take your questions.
Operator, please begin the question and answer session at this time.
Operator
[Operator Instructions] Our first question is from Brian Peterson from Raymond James.
Brian Peterson
Thanks guys and thank you for taking the question. So Shawn, just wanted to hear on your comments a bit.
I know you mentioned three drivers that that may cause a little bit of a shortfall in ’17, maybe versus what we historically expect. Is there any way that you'd be able to size those in terms of the magnitude on a rough basis?
Shawn Jenkins
Good question. Thanks Brian.
And yes, so from our perspective what we're seeing as we look into the new year, first of all this national accounts business. I mean we're having an exceptional year there and as you recall we took about 25% of our sales capacity and put in the national accounts team the beginning of the year and they're doing fantastic, they're way ahead of plan.
And as we sign these large national accounts, 10,000 employees or more, what we would expect and what we see happening is rather than them -- those customers going live normally in the fourth quarter of the same year, so call it this time for this open enrollment, many will actually go live in the first half or middle of 2017. So that's going to have an impact both on this fourth quarter and in the next couple quarters.
The good news though is like we talked about in the remarks, in the third quarter we saw average deal size up by 125%. And so these are some really big customers multi product sales.
The next piece is the Benefitstore, that’s a new product for us over the last year and a half or two years, it’s extremely popular with customers. But as we dial it in as we fine tune it we've begun to work with more brokers around the country who are working with customers already and doing really including them in the Benefitstore program.
And so part of the dynamic there is instead of Benefitfocus receiving a 100% of the commission for the Benefitstore products we will be in some cases sharing that with a broker which we think is a great strategic decision, because it kind of widens our footprint with these brokers and we think will lead to additional sales. And in the private exchange really across the country the market has been a little softer than the year before.
We are actually optimistic on the private exchange over the next couple of years. But if you look at the -- I don't that I have a percentage, which one is bigger.
They're actually all kind of similar I would say but we think we have -- in each of those cases we believe that going into ’17 we've got plans to not just mitigate it but actually build upon them particularly towards the second half of ‘17.
Brian Peterson
Got it. And just a follow up on that, with some of the national accounts, is it typical in those situations that they would ramp up with you guys at a time period that's not consistent with open enrollment where they might use the legacy platform this year and ramp you guys up over the course of the year and then in the third quarter and the fourth quarter of ’17, then you would be live for open enrollment.
Is that kind of a cadence you're seeing with those customers?
Shawn Jenkins
Yeah, that's a good -- great question. Great observation too and just a little bit for the audience, and so our normal selling season at Benefitfocus would be to sell -- decisions get made in the second or third quarter for most employers to use the new Benefitfocus platform for their open enrollment which happens to be going on right now.
We've finished those implementations in the third and fourth quarter. With the national accounts we tend to fit more into an overall enterprise move to the cloud.
These are great multi-year agreements, huge customers and we write-off of a series of them over 20,000, 30,000, ones over 100,000 of lives. And so oftentimes we will be coordinated with other activity that's going on inside the carrier.
We have some that will go live in the second quarter of next year, for example, third quarter and as you would expect if we signed in this year the goal would certainly be to get it live prior to open enrollment of the following year. There is a really nice sort of trade off, if you will.
It does allow us to smooth our implementations a bit. So if you think about our implementation resource being so heavy going into open enrollment season which it will continue to be with the majority of our customers.
With the national accounts we will actually be able to do a lot of work on the implementations in the first and second quarter of next year. We have the resource to do it.
And so we think that will actually be good for resource allocation to actually help professional services margin as a result, so it's good outcome.
Brian Peterson
Well, that’s a perfect segue for one more question, if I can sneak one in for Jeff here. But the services margins were actually much better than we expected and I know you mentioned the scheduling of reservation system utilization.
Is that something that we can think as sustainable going forward given everything you just said Shawn or are we still going to have some puts and takes there? Thank you.
Shawn Jenkins
Well I’ll start and I’ll let Jeff chime in. We definitely have invested a lot in our product, in our implementation methodology, in the tools that we use, the quality checks that we have that are automated.
And so just as an organization with scale, we're getting better and better all the time. I just was looking at a customer over 30,000 employees just went with open enrollment this week and gave us a ten out of ten on their implementation, we're extremely proud of that very large customer and that great feedback.
So with scale, with the operational excellence, with the work that Ray August, our president, has been doing, we're getting better, our implementations are getting faster and we've got more tools to manage them. So I do think it is a theme that is definitely sustainable and I think it will carry into our carrier business but I'll let Jeff who is studying this phenomenon to add a little bit.
Jeff Laborde
I think you largely covered it, Shawn. I think a lot of the changes are well underway and we’re reaping the fruits of those efforts.
We do expect there to be some movement around as you would expect puts and takes from quarter to quarter but the broader trend line is absolutely one of long term improvement. And it is, as you can imagine, an area that I plan to spend a lot of time on going forward.
Operator
Our next question comes from Frank Sparacino from First Analysis.
Frank Sparacino
Hi guys. So I'm just coming back to the private exchange for a minute.
I guess just maybe further clarification on the first question in terms of -- do you think that's a 1%, 5% type of headwind as you enter 2017 and then when you look at longer term in that space, what makes you optimistic on the certain parts of the market whether it be some of the large state based employer groups that are maybe moving in that direction or any additional color would be helpful?
Shawn Jenkins
Sure. Well, I'll start with the second half.
Private exchanges are a terrific overall service offering and benefits a way to -- really put a wide array of benefits in front of an employee base and we find that particular types of employers in industries tend to see tremendous lift. So the economics and the multi-year view and the way you can bundle products together in private exchanges is definitely to me as someone who's been in this industry for a long time is every bit is exciting and we're every bit as optimistic about what it can do for employers and employees and their family, as say four years ago when I think the broader market was just getting that term for the first time.
So it was a lot of enthusiasm in the first couple years of the rollout of the private exchanges in coordination with Affordable Care Act and all that kind of national conversation. I'm more convinced than ever that the economics inside those private exchanges work very well for a percentage of employers and as the private exchange operators fine tune their messaging and do the work that they need to do in the selling cycle, I think we'll see the expansion of the private exchange market, no doubt.
And to the point of headwind we think that our revenue at Benefitfocus on private exchanges will actually grow next year. So there's no headwind as far as -- you mentioned 1% or something like that.
So we would say that private exchange revenue at Benefitfocus would be up next year. It just may not be up at the rate it was from say two years ago at that initial break that had been growing up.
I think longer term it does sort of equal out and will be stronger but just to clarify that point.
Operator
Our next question is from John DiFucci from Jefferies.
Unidentified Analyst
Hi guys, this is Joe on for John. Thanks for the question.
So it looks like after a bit of a disappointing year in carrier, you’re starting to have some positive momentum there with the executive forum and some ups opportunities, can you just talk about the medium term and longer term outlook in that business and then do you think we can have a path to double digit growth again?
Shawn Jenkins
Sure. Yeah we are particularly excited I would say for a lot of reasons on our carrier business.
And so we did host a first carrier executive forum in Charleston. It was a terrific attendance of SVP and EVP level, the execs from health and life insurance companies.
A couple of things that we really see happening. And I mentioned it in some of the remarks.
With the Affordable Care Act in the individual market and as price increase that’s happening we're kind of going back to a national conversation about that. And to me and to the carriers what it's really emphasizing is the value of employer based benefits which is the platform that Benefitfocus provides.
And so the carriers are looking for ways to win more employers, provide more value to employers and particularly offer more products. Health insurance companies are looking at partnerships, they're adding new products themselves that they can sell into the employer space.
And so we see a real -- we see a growth in our carrier pipeline around these themes of employer provided benefits bundling programs together. A couple areas of real strength that we see and we mentioned some in the last quarter and this quarter a little bit are our eExchange which is actually our data transformation service.
We've been doing some work in that area and have had several deals where carriers are using our enrollment today but they want to expand and offer eExchange and eBilling, so bundling of products but we definitely see an uptick in the growth and we do believe we can get back into the double digit growth in the carrier business in the years to come for sure.
Unidentified Analyst
And then as we see a mix shift slow down in logo wins but more than a mix shift towards these large national accounts. Can you just break down the value proposition both revenue and profitability wise of the larger deal wins versus the smaller ones?
I would assume there's an implied discount per user per month. So I was just wondering if you kind of talk about the value proposition.
Shawn Jenkins
Yes, totally. On the economics they're similar.
So actually it's a phenomenon that we see in the benefits space with our bundling. When we sell to a larger employer, say, over 10,000 employees, they tend to actually buy more products generally because they're coming away from perhaps a consultant or outsourcing arrangement and they are used to having a pretty broad bundle of services.
And as we've introduced more services and more products over the last couple years I think it's one of the keys that’s helped to unlock this national account space for us, so we can do their analytics for them, or service center, the Benefitstore, of course the great mobile capabilities we're providing with Benefitfocus platform. And on the actual discounting, the PEPM, we don't discount a lot for size.
Obviously there's some economies of scale to us to having a 40,000 employee customer on the Benefitfocus platform and we share that in the appropriate way with employer. But – and our gross margin profile would not look any different.
We would say in the national accounts space from down market. Matter of fact, you could argue sort of conceptually at least that it might be a little bit better because we tend to have more products bundled together and we get tremendous leverage.
So we will be doing one payroll data exchange, we will do the one health plan with that large employer. Whereas if we were doing say ten or fifteen or twenty smaller employers, we have all that duplication of data exchange.
So there's actually some pretty good economies that go up market. And then maybe just a last thought because we're so expert at these enterprise carrier arrangements, long multiyear agreements, substantial volumes on the platform, I think we're uniquely capable of interacting with these large employers and understanding the size and scale and how to manage them.
So I think our brand is getting stronger and stronger in that market at a pretty rapid clip.
Operator
Our next question is from Ross MacMillan from RBC Capital Markets.
Ross MacMillan
Shawn, I just wanted to ask just so I'm clear in my head. I missed some of the comments earlier but I think you said obviously although the employer units are down the average deal size was up on average 125%.
So that would suggest that there was pretty nice healthy growth in, call it, ACV or UARR, I was coming up somewhere north of 30%. And I just wanted to make sure I was understanding that correctly.
Maybe you could just confirm kind of my math there if that's fair.
Shawn Jenkins
Sure. Well, I can say that you're right.
Our average deal size is up 125% over the prior year. The other thing I'd say is our total net subscriber adds for the year is up year to date.
I don't know that 30% number but I think the overall impression that you were I think giving me was -- is correct. I'd have to think about the ACV number a little bit, but.
Ross MacMillan
Okay, that's helpful. And then just I'm sure you've had the question on the private exchange partnership you have.
I think you made a comment that you were optimistic that maybe by second half of next year we could see things begin to pick up in that market. I wanted to get just test you on Cadillac tax or other potential drivers for that space that you could see emerging on the horizon.
Is there anything in particular that makes you more optimistic about that market looking either late next year or into ’18?
Shawn Jenkins
Yeah. It’s a good question.
And to me as an employer myself who buys benefits and then as someone that studies this industry obviously every day, the economics of the private exchange are very compelling for a certain percentage of employers. Certain profiles employers and workforces if they move to a private exchange can really gain a significant, I would say, multi-year cost curve management.
So typical employer sees an increase in their health insurance every single year basically forever and what the private exchange operators are doing and particularly the ones that are using the Benefitfocus platform because of the technology, the way they can bundle products together, the analytics they can use and some of the ways they can really negotiate these programs over multiple years, they're able to get control of these health care costs. And that is a very compelling thing.
In addition, they're able to put more benefits in front of the employer and employee. So things like voluntary benefit programs, other HSA related programs really make for a great experience for the employee.
And for whatever reason this particular year in 2016 across that industry was not as strong as we've seen the last couple of years. The value proposition to me is every bit as compelling.
With the presidential election I think a lot of questions will certainly get answered next week. I think regardless of which way that that election goes, we see tailwinds from that being resolved, we see carriers and I think private exchange operators investing in the private exchange and marketing them, and I think employers will be probably more free to begin to make those decisions again next year.
Operator
Our next question is from the Nina Deka from Piper Jaffray.
Nina Deka
Hey guys, congrats on the profitability this quarter. So let’s see, so you mentioned that the productivity of sales team focusing on the national accounts is -- they're actually performing better than originally expected.
Are you also seeing any tailwinds from the SAP partnership with respect to national accounts? Do you believe that, that is also enhancing your visibility and helping sign some of these larger deals?
Shawn Jenkins
Yeah, great question. Definitely, SAP in the relationship and the great work that we're doing with them, I mean we are jointly at their conferences working with their customer base and the new sales activity.
The integration that we now have with SAP Employee Central and the way that the Benefitfocus platform and the SAP products work is getting better each quarter. We had a big autumn release in September and in December our fall – our winter release.
We continue to add great capability to make the Benefitfocus platform and the SAP software work even better. And so as we naturally interact with these national accounts, these jumbo many times big global organizations, that relationship and the work that we do together certainly helps us.
I think that combined with what I was mentioning earlier, Nina, about the bundle of products that we're now offering in the market and our seasoned sales force and the tenure really across our employer sales team but in particular our national accounts team, we have many people now that have been with us two, three, four, five, six, even seven years which is way back for us and starting the employer business and has been some great promotions in there this year and just really that team has got their stride. And so what we're doing is we're naturally backfilling the folks that were promoted into those national account roles and into management.
And we're aggressively hiring into our what we call our large employer activity 1000 to 10,000 lives, we have some great folks that are joining the company. And as Jeff can add we have all that baked into our plan and it will continue to be EBITDA profitable even as we significantly ramp our sales team and the SAP relationship is a big part of that go forward as well.
Nina Deka
That's helpful. And then also how long do you think it will take for the newer reps who will focus on the less than 10,000 employer market to be fully productive?
Shawn Jenkins
Yeah, we have a natural onboarding cadence in our model, our thesis I guess a year two before we went public going back four, five years has really gotten dialed in. We've gotten I'd say pretty expert at the type of sales person that can be very successful at Benefitfocus because we want them to enjoy a lot of success and with our brand becoming more well known, with our product portfolio becoming more broad and our more folks – or more companies know about Benefitfocus and we're really becoming that platform standard, it gets quicker and quicker for these folks to come up to speed and our training, our onboarding process we've invested a lot in that area over the last couple of years.
So there still is sort of a break in time and then we have a natural selling season. So our plan is to bring folks on now and have them trained in the field so that they can sell into the second, third quarter of next year which obviously activates revenue in the third, fourth quarter of late ‘17.
Jeff Laborde
Yeah and it's Jeff. I would add that we -- as you know moving to the three pronged model from the historical one team approach, there are different ramp times depending upon the specific, among back to base in particular who we see ramping faster and in particular in their ability to cross sell some of those sales cycles are shorter etc., more at that versus the enterprise, the higher end, the more longer term sales cycles more sophisticated customers, those folks take a bit longer.
Nina Deka
And then just one more, the carrier executive forum, was there anything actionable that came from those meetings in terms of potential new product development and what might be the timeframe of any impact coming from these meetings?
Shawn Jenkins
Yeah, great question. That’s the actual design of the meeting and so it was a working group as we mentioned 20 plus folks of 20 large carriers and we talked at length about their plans for the New Year, areas of investment for their particular insurance company and actually put some work groups together.
So there's a fair amount of work that came out of that as we plan our R&D budget or product roadmap for the carrier business going into the new year. We plan to hold that group roughly semi-annually.
So we'll do it every six months or so. And there's good follow up from each of the participants.
It's great to see that rarely do you have health plans and ancillary and life insurance companies in that same type of intimate format and really a lot of strength going on in that area. So well more to come, we’ll keep you posted.
End of Q&A
Operator
[Operator Instructions] Ladies and gentlemen we have reached the end of the question and answer session. I’d like to turn the call back to management for closing remarks.
Shawn Jenkins
Super. Thanks everybody for joining the call tonight and just incredibly proud of all of our Benefitfocus associates for reaching the major milestone of EBITDA profitable and such a great open enrollment season that we are now in and really proud of you and really excited to be working with Jeff and the executive team here has become a quick friend and we look forward to doing many calls together.
So thanks so much and have a great night.
Jeff Laborde
Thanks everybody.
Operator
Thank you. This concludes today’s teleconference.
You may disconnect your lines at this time. Thank you for your participation.