Mar 1, 2022
Operator
Greetings, and welcome to the Benefitfocus Q4 2021 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.
I will now turn the conference over to your host, Doug Kuckelman, you may begin.
Doug Kuckelman
Thank you, operator, and good afternoon, and welcome to Benefitfocus' Fourth Quarter 2021 Earnings Call. Joining me today are Matt Levin, President and Chief Executive Officer; and Alpana Wegner, Chief Financial Officer.
Matt and Alpana will offer some prepared remarks, then we'll open for questions. Before we begin, let me remind you that today's discussion will include forward-looking statements that involve risks and uncertainties, market developments and opportunities and the impact of our growth strategy that could cause actual results to differ materially.
For more information, please refer to risk factors discussed in our most recently filed Form 10-K. We also will refer to certain non-GAAP financial measures.
Important disclosures about those measures can be found in today's earnings release. Lastly, we will reference a presentation furnished in an 8-K, which you can also find in our Investor Relations website at investor.benefitfocus.com.
With that, I'll turn the call over to Matt.
Matt Levin
Thank you, Doug, and good afternoon, everyone. Today, we will discuss our fourth quarter and fiscal year 2021 results.
As we close the year and look ahead, I would also like to discuss the significant opportunity we have in front of us to create value for our shareholders. I have never been more confident that Benefitfocus is well positioned for growth and to win in this industry.
Benefitfocus has carved out a differentiated position in the benefits administration market. I joined the team with a conviction that we can strengthen our offering and in turn, put ourselves back on a long-term growth trajectory.
Last year, I spent a significant amount of time listening to our customers, brokers and third-party evaluators. Based on the feedback from those discussions, it became clear to me that we had some challenges, but also a lot of opportunity.
We took that feedback seriously, and we have been transparent in our commitment to make the changes necessary to rebuild our reputation as a safe set of hands for our customers. As an organization, we have been unwavering in our focus and decisive in our actions to transform our business.
Today, I will discuss the progress made to date and explain how we are executing against our transformation strategy and what's still to come. In a short period, we have delivered meaningfully against our commitments to improve our service levels, begun strengthening our go-to-market channel relationships and invested in our team with the addition of industry veterans.
We are looking forward to providing additional insight into our growth strategy, accomplishments in our mid- and long-term financial targets at our Investor Day on May 10, 2022. If you turn to Slide 5, I'd like to discuss three key takeaways from today.
First, I can confidently say that we are on track to return Benefitfocus to long-term sustainable growth. We have a differentiated platform in an attractive industry with a total addressable market in the $30 billion range.
We believe that executing our strategy using our considerable domain expertise, and leveraging our leading technology platform will drive sustainable ARR growth and in turn, deliver significant value to shareholders. Second, we are making great progress towards improving service excellence, our most important initiative over the past eight months.
Our last open enrollment, the best in our history, is a testament to the transformational efforts underway. We achieved some of the best customer satisfaction scores ever as a company, which I will share with you in a moment and is a reflection of the hard work and commitment of our associates.
Third, we are delivering on what we promised. We call that our say-do ratio, meaning when we say we're going to do something, we deliver.
I'll now walk you through our 3-pillar strategy as well as the progress we are making against each. Turning to Slide 7.
The first pillar is to strengthen the core of our company, aimed at serving our customers with excellence and strengthening our solutions platform. We have been investing across Benefitfocus to improve our service levels and enhance our solutions platform.
We firmly believe that service excellence is key to creating value for our customers and shareholders, creating a flywheel effect. By delivering excellent service, we earn higher NPS and customer satisfaction scores, which improves customer retention, increases customer references and translates into a growing ARR base.
Service excellence is also to our brokers and third-party evaluators who generate referrals for our business. Additionally, we improved implementations and testing processes to ensure a smooth customer experience.
We focused on readiness and data exchange as well, improving our open enrollment on-time starts to 99% for the employer business, and we reached 100% for the health plan business. We also reached 99% for on-time data exchange, a meaningful improvement from last year.
Finally, our customer satisfaction scores for open enrollment increased to 95% this year, which is our highest in recent years. The feedback from our customers has been overwhelmingly positive.
Testimonials reveal that end users have greater clarity around their benefits and increased conviction about their benefits selections. Additionally, they find the guided enrollment experience helpful.
The tool is intuitive and most importantly, they have peace of mind for themselves and their families. I'm also encouraged by the momentum we are gaining with brokers.
We are seeing referrals from brokers at a meaningfully higher rate than we have seen in recent history. We are also in the final stages of being added to the preferred vendor panels for a couple of the largest brokers in the U.S.
This highlights the progress we've made in improving our service levels. Being part of these broker panels will give us the ability to partner with them to add value to their large customer bases.
The progress on this important milestone reflects our ongoing efforts to strengthen our broker relationships and also provides a blueprint for future broker partnerships. The seal of approval from brokers and third-party evaluators is a strong validation of our efforts, positions us as an attractive partner and will help drive more business from current and new customers.
Regarding strengthening our solutions platform, we enhanced our administrative services suite with the acquisition of Tango Health. This enables us to further improve our service levels and administrative services for our customers through more advanced data technology and delivery processes.
We are bundling Tango suite of offerings with new customer contracts and will cross-sell it to our current base of customers. Importantly, this more robust and comprehensive solutions platform should enable us to improve attachment rates, move up market and grow our revenues.
And to strengthen the core, we have assembled the best team in the industry. Last year, we brought in top industry leaders in sales, product, engineering, marketing and customer delivery to ensure we have the domain expertise to drive our multiyear strategy forward with energy and confidence.
As I have said in the past, I would put our team up against any in the industry. Turning to Slide 8, growing with intent.
Our second strategic pillar is designed to power our growth by bolstering existing capabilities and moving into attractive adjacencies as well as strengthening our value proposition to our current customers and end users. Our disciplined approach enables us to strategically deploy our capital to focus on the right opportunities at the right time so that we can expand our product offering, increase our market share, build scale and drive shareholder value.
The Tango Health acquisition is an example of our disciplined capital allocation process, while also enhancing a core capability and expanding our administrative service product offerings. We are also leveraging the data on our platform to deliver superior tech-enabled services and insights.
Our data helps us better serve our customers during their enrollment and empowers them to better utilize their benefits with tailored plans, resulting in improved engagement and utilization of benefits. These offerings also help the broker community better support customers as they think about key areas such as plan design and ancillary services.
Our most recent data offering, called Rx Insights, is gaining traction with early adopters who have subscribed to this product since our launch last fall. We recognize the need for a product like this in the market and we accelerated our development cycle to bring this solution to customers in less than a year, driving additional customer value and growth opportunities in the process.
Lastly, we continue to focus on moving upmarket. We are working to fill gaps in our solutions offerings, but believe we are uniquely positioned given our domain expertise and foundation and technology to serve a larger customer base.
Turning to Slide 9. Our third pillar, operating with efficiency, speaks to our focus on creating long-term shareholder value through profitable growth.
Benefitfocus was founded as a technology company and our platform has allowed us to drive operational efficiencies and process automation that our customers appreciate. In addition, our team's sensible rationalization decisions have enabled us to achieve a cost structure that is producing industry-leading margins while increasing our competitiveness.
We expect these focused efforts will help us expand margins over time as we continue to grow our revenue and scale the business. And we will continue to reinvest efficiencies to support our growth strategy and improve our return.
I will let Alpana further explain how this strategic pillar has been an important driver of our results. As we look to the months ahead and given the nature of the business cycles in our industry and our subscription recurring revenue model, the lion's share of our recent progress will be reflected in our 2023 financials.
But I'm pleased to say that we expect to see a significant improvement in our underlying organic growth rate, and I'm more excited than ever about the prospects of creating a sustainable high-growth business model. With more than 20 years of domain expertise, we have a solid base to build on.
Our customers are facing increasingly complicated health care challenges. Benefits management, in particular, is becoming more complicated, more expensive and at the same time, a more integral part of the value proposition that companies provide to their employees.
The products and services that Benefitfocus delivers will increasingly give our customers a competitive edge in this rapidly evolving environment. As we solidify the improvements I've discussed and strengthen our customer relationships, we have the opportunity to both win market share and expand into natural adjacencies.
Simply put, as we earn the right to serve, we become an increasingly attractive partner for customers, positioning us to win business and take share in a large and growing market. I'm confident we can grow in the mid-single digits in the medium term, and if we continue to deliver on our strategy, we will be well positioned to meaningfully exceed this.
I'm encouraged by the progress we've made in the last eight months and confident we are on track to achieve our vision. This team has been here before in this industry, and we're excited for what the future holds.
I want to take a moment to recognize and thank our entire team especially our associates who have shown their dedication to and passion for serving our customers with excellence. Now over to Alpana to walk through the financials.
Alpana Wegner
Thanks, Matt. I'll start with an update on our commercial traction this past quarter before getting into the highlights of our Q4 financial results, and then I'll cover guidance for 2022.
We continue to be pleased with the SAP channel where you're seeing a trend of increasing ARR deal size. During the fourth quarter, we also saw good momentum in upselling to existing customers and closed several Rx Insights deals with both new and existing customers.
And our health plan team renewed five health plans in the fourth quarter at or above existing ARR. Turning to Slide 11 to take a closer look at Q4 revenue.
Overall, I'm pleased that we once again delivered results in line with or above guidance. We exceeded our revenue guidance for the quarter and full year.
This marks the seventh consecutive quarter in which we have met or beat our revenue guidance. Total revenue for the quarter was $75.1 million due to better-than-expected subscription and platform revenues.
The approximate 1% decline in revenue year-over-year was driven primarily by lower professional services and planned reductions in noncore revenue. As a reminder, noncore revenue includes legacy Connecture on-prem and unprofitable professional services revenue and the runoff of the Mercer relationship.
Total software services revenue was $63.8 million, up 2% year-over-year. Software services revenue retention improved by almost 300 basis points year-over-year, and software revenue, as a reminder, includes subscription revenue of $44 million and platform revenue of $19.8 million.
Subscription revenue was down 2%, better than expected due to lower customer credit and the inclusion of Tango Health. The year-over-year decline was due to two health plan renewals that were at lower levels as expected and the planned reduction of noncore revenue.
Platform revenue was up 14% year-over-year, also performing better than expected due to higher volumes of premiums and specialty enrollment. Q4 platform revenue reflects the seasonality of our voluntary benefits enrollment.
Professional services revenue performed as expected, down 19% year-over-year, primarily due to the comparatively lower demand for customer requests from health plan customers. Looking at our Q4 margin results on Slide 12.
GAAP gross margins were 54%, relatively flat year-over-year. Non-GAAP gross margins were 55%, down approximately 150 basis points year-over-year, primarily driven by the decline in professional services gross margin, which reflects the recent increase in labor costs for seasonal open enrollment hiring.
Software services GAAP gross margins were 69% in the fourth quarter, up approximately 2% year-over-year. Software services non-GAAP gross margins were 70%, approximately 100 basis points higher than last year, reflecting our ongoing focus on automation and process efficiencies.
Adjusted EBITDA was $18 million during the fourth quarter, above the midpoint of our guidance. Our adjusted EBITDA margin for the quarter was 24%, a decline from 27% last year, reflecting the increase in seasonal contract labor costs I just mentioned.
During the past two years, we focused on improving operating margins to achieve greater scale in the business through three primary areas. First, we automated and simplified manual delivery processes, which enabled us to streamline our organizational structure.
Second, we increased our sales and marketing productivity. And lastly, we exited certain noncore offerings that were not profitable.
As a result of this work, we have seen margin improvements over the past two years. For the full year 2021, our adjusted EBITDA margins were 19%, up over 200 basis points from prior year.
Our higher margins have helped us to improve cash generation, allowing us to invest in our team, our platform and our growth strategy. GAAP net income available to common stockholders was $1.2 million and GAAP net income per weighted average common share on a basic and diluted basis was $0.04 compared to GAAP net income available to common stockholders of $1.3 million, with GAAP net income per weighted average common share on a basic and diluted basis of $0.04 in Q4 of last year.
Non-GAAP net income available to common stockholders was $8.3 million and non-GAAP net income per weighted average common share basic was $0.25 and $0.24 on a diluted basis, which exceeded the high end of our guidance due to a net income tax benefit triggered by the Tango acquisition. Non-GAAP net income available to common stockholders in Q4 of 2020 was $6.1 million and non-GAAP net income per weighted average common share basic was $0.19 and $0.18 on a diluted basis.
Moving on to our balance sheet and capital allocation on Slide 13. We ended the fourth quarter with approximately $68 million in cash and marketable securities, a decline of approximately $26 million from the third quarter reflecting the acquisition of Tango Health.
During the quarter, we generated $2.1 million of free cash flow. And for the full year, we generated approximately $24 million of free cash flow, a 20% increase year-over-year and above the midpoint of our guidance range.
As we think about future uses of cash, we will continue to prioritize fortifying our customer service experience, accelerating our product road map and pursuing select tuck-in acquisitions to accelerate our growth strategy. As of December 31, 2021, our debt-to-EBITDA ratio was 4.2x.
Also note that our full $50 million line of credit remains available to us. Shifting to Slide 14 to discuss our outlook for 2022.
Our outlook for 2022 remains relatively unchanged. We have strong visibility into 2022 revenue trends with over 90% of our revenue booked and in backlog.
Based on our customer retention expectations as well as strong open enrollment season we just delivered, we continue to expect a revenue growth inflection point to occur near the end of the year. For the full year 2022 on a reported basis, we expect total revenue between $252 million and $258 million.
We expect adjusted EBITDA between $44 million and $50 million, representing a 19% adjusted EBITDA margin at the midpoint of our revenue and adjusted EBITDA ranges. And we expect free cash flow between $18 million and $24 million.
To help you with your modeling of 2022 revenue at the midpoint, we expect three points of decline in revenue from the two health plan renewals at lower levels we've previously mentioned, one point of decline from the continued runoff of noncore revenues and three points of growth from the revenue contribution of Tango Health. Additionally, we expect to begin to see the seasonality of go-lives in the second half of the year.
For the first quarter of 2022, we expect revenue between $59 million and $61 million, again, with the largest year-over-year decline in subscription revenue. Adjusted EBITDA between $7 million and $9 million.
And non-GAAP net loss available to common stockholders between $5 million and $3 million, which represents a non-GAAP net loss per share of between $0.15 and $0.09 based on 33.5 million basic shares outstanding. As a reminder, we had seasonally high platform revenue in first quarter of 2021.
We are expecting in 2022 a return to normal seasonality for platform revenue. As we look ahead to 2023, we believe execution of our strategy will result in a growth rate in the low single digits.
Our 2023 outlook is predicated on three factors: one, momentum in our employer market, having reestablished our industry credibility with our brokers and third-party evaluators. Two, an increase in demand from health plan customers which is consistent with the early indications we are seeing.
And three, the strong open enrollment season we just delivered, leading to improved levels of software revenue retention. We plan to provide additional details on our full, mid- and long-term financial targets and key metrics during our Investor Day in May.
Before turning it over to Q&A, let me say how pleased I am that our team delivered the strongest enrollment season in our company's history. We have laid the foundation for sustainable growth and I'm excited about the opportunity we have to unlock substantial shareholder value.
With that, Matt and I are happy to take your questions. Operator?
Operator
[Operator Instructions] And our first question comes from the line of Matthew Shea with Piper Sandler. Please proceed with your question.
Matthew Shea
I appreciate all the color today. Wanted to ask on Tango Health.
I know in the past, you've mentioned it taking you from having ACA capabilities to now being able to deliver the full credit answer. Wondering what opportunities specifically does this open up for you that the legacy offering ultimately couldn't?
MattLevin
Yes. Thanks for the question.
So as we talked about in the prepared remarks, we're really excited about the acquisition. I'm really proud of the team in identifying it.
We've done a really nice job of integrating our associates in Austin and throughout the country. And right now, we're in the middle of ACA season and so far so good in terms of reporting, et cetera.
In terms of why we did the deal, it's on a couple of different dimensions. First, their ability to assimilate data and reporting and the accuracy of that we thought was really best-in-class.
And we're already seeing evidence of that based on SAT scores and new customers being, both within our base and prospective customers being interested in it. And it also enables us to go more upmarket.
So as you have bigger populations and more complexity with those populations, they can just handle larger and more complex cases. As you probably know, some of our historic services in that area were using third-party platforms, and this is just something we wanted to own as part of our core bundle to serve our existing base and like I said, add new customers and so far so good.
Matthew Shea
Got it. That is super helpful.
And then curious, within that business, did the delay in Medicaid redeterminations caused any headwinds for Tango Health? And then as those Medicaid beneficiaries seemingly roll off and would now be seeking an ACA plan, is that a potential tailwind going forward?
MattLevin
That is a great question. I will have to follow up with you.
I think the answer is no, but let us get back to you on that.
Operator
[Operator Instructions] Our next question comes from the line of Pinjalim Bora with JPMorgan. Please proceed with your question.
Pinjalim Bora
Congrats on the quarter. And also good to see the strong open enrollment season that seems like driving a good acceleration on the platform side of the business.
But I wanted to ask you on the recurring revenue side, the subscription side. Help us understand what are you seeing in terms of demand from health plans and others going into 2022?
Kind of - what has been your conversations with prospective customers? Any color would be helpful.
MattLevin
Yes. So you want more of just sort of a market read of what's going on?
Pinjalim Bora
Right.
MattLevin
Yes, sure. So why don't we take it in both divisions and Alpana can pile on in case I missed some stuff.
But first, on health plan, as we talked about last year or in prior earnings calls, health plans, if you put yourself in the seat of a health plan CEO, they got to get through COVID, SCOTUS decision and then obviously shifting demographics in the U.S. like retiree markets, et cetera.
In our discussions with our health plan customers, they're very - and we referenced it in the earnings call, we have incredibly high customer SAT. This is where the company was founded 21 years ago.
We have really privileged relationships with those customers, which, to your point, allows us to have dialogues with them around current needs and prospective needs. I say that in our core business around enrollment, quoting, et cetera, we're still seeing the renewals feel really good to us.
That is not a business segment that they are shying away from, but the growth areas we're finding are in new areas that we're excited about. So we spent some time talking to you in the past around some quoting things that we're bringing to market, which will allow our health plan customers to particularly like single-state Blue plans to compete more effectively by bundling their health and welfare programs with other ancillary benefits from other providers and to provide that in a bundled quote that they can offer side-by-side to a broker with some of the national payers.
And that's gaining real traction. It's a product that we put in market today and so far, so good.
Other similar plans are sharing interest in it, and we're pretty excited about it. I'd say prospectively, the opportunity that we have is on a couple of different dimensions.
And we're doing what I have done earlier in my career, which is really having these customers talk to us about our product road maps and what we want to build going forward. And in those regards, we see tons of opportunities too.
I'll give you a couple of quick examples. A big issue for our customers are what we call age-ins.
So that's - when we do enrollment for a customer, let's imagine that the enrollee is 64 years old. Over the course of the year, they will be retiree eligible and those health plans want to be able to retain that member without them going outside of plan or at least being able to interact with them effectively.
We are seeing other opportunities in non-ACA individual markets. So for example, there, how can you have a non-ACA plan bundled with other ancillary benefits and create a more customized or catered product for that member.
The opportunity for us going forward is, as we talked about in our prepared remarks, how do we continue on our product road maps today around enrollment, quoting, et cetera, and then layer in some of these other offerings. But I'd say that the real opportunity on health plan, I would say a lot of sort of the COVID headwinds, et cetera, I believe, are largely behind us, and they are very focused on some of these growth sectors and want to work with us on that.
On the employer side, it has - if you put yourself in the seat of a benefits manager and what you've had to live through over the past couple of years, everything from COVID to now great resignation, mobile workforce, et cetera, and we made comments around this before. We saw slower buying decisions, particularly upmarket last year.
I am cautiously optimistic, and this is not just based on our own experience in talking with our customers and prospects, but also talking with brokers and third-party evaluators, et cetera, others who influence buying decisions in the market and we're seeing the velocity of meetings and discussions around benefits lineups increasing. So I think for us, and we talked about this a little bit in our prepared remarks, I'm really glad we made the investments we did in some of our service programs.
So in our dialogues with customers now, it's much less around service, and it's much more around how we can serve prospects, et cetera, with our technology and increasing ancillary services. And I'm - and Alpana talked about it in her comments, I am very excited about the upcoming sales season and I feel really bullish about the future.
I do think most of the headwinds that we had over the past couple of years are largely behind us from a market perspective. So like I said in my remarks, we just got to stay the course.
I feel like we're going to get our at-bats at a much greater velocity than we had in the past. And if we get our at-bats and we get our fair share of conversions, I really feel good about how we're going to finish the year and what next year is going to shape up to look like.
Pinjalim Bora
And also, thank you for giving us the contribution from Tango Health for next - for 2022. Was there any contribution for Q4?
Or how do we think about the contribution for Q1 as well?
Alpana Wegner
Yes. I'll give you a little bit of both from Q4 and Q1.
Very little contribution from a Q4 perspective. We closed on that transaction mid-quarter.
And so there's a fraction of the quarter that's included. And then what I would say from a full year perspective, as I mentioned in my comments, to give you some sizing, it's about three points of contribution year-over-year.
And I would just think of that as a very - a subscription business that you're going to see kind of evenly spread, not a lot of seasonality to that revenue.
Operator
And we have reached the end of the question-and-answer session, and I'll now turn the call back over to President and CEO, Matt Levin, for closing remarks.
Matt Levin
Thank you, and thanks, everybody, for the questions today. Before closing out the call, I'd like to quickly summarize a couple of things around the road map and how we are - how we plan to continue to deliver value to our shareholders.
Over the past eight months, we quickly addressed many of the underlying issues that impacted our past performance with a priority on achieving service excellence. I'm incredibly proud of our team and what they have accomplished in a short period of time.
We are already seeing the green shoots of that work, best exemplified by our strong open enrollment and the upcoming selection on these benefits panels that we talked about. With the stronger foundation in place, we are entering a new phase.
We're getting more at-bats in the selling season, more referrals and our reputation in the market is becoming stronger. As a result, we are confident we are on track to return to growth by the fourth quarter.
As we stay the course on service excellence, our momentum will continue. Building on this, we know that we need to do to drive further differentiation and accelerate our progress.
We know what capabilities we need to build, and we know what we need to buy. We are already starting to put these pieces in place for this phase, and we are already seeing early signs of client demand.
We also know we have a lot of work to do, but we are confident that we have the right team and the right strategy to get there. With that, thank you for your time today.
We look forward to our next call and the Investor Day in May. Thank you.
Operator
And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.