Progyny, Inc. Q4 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Progyny Inc. Fourth Quarter 2021 Earnings Call. At this time, all participants have been in a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, James Hart. Sir, the floor is yours.

Thank you, John, and good afternoon everyone. Welcome to our fourth quarter conference call. With me today are Pete Anevski, CEO of Progyny; Michael Sturmer, President; and Mark Livingston, CFO. We will begin with some prepared remarks before we open the call for your questions. Before we begin, I’d like to remind you that today’s call contains forward-looking statements, including but not limited to statements about our financial outlook for both the first quarter and full year of 2022, including our expected utilization rates and mix, the impact of COVID-19 and variants on our business, clients, member activity, and industry operations, our ability to acquire new clients and retain existing clients, our market opportunity and expectation of long-term growth, our business performance, industry outlook, strategy, future investments, and other nonhistorical statements as further described in our press release that was issued this afternoon. These forward-looking statements are subject to certain risks, uncertainties, and assumptions, and we have based these statements largely on our current expectations and projections about future events. Although we believe these expectations are reasonable, we undertake no obligation to revise any statement to reflect changes that occur after this call. Descriptions of these and other risks that could cause actual results to differ materially from these forward-looking statements are discussed in our periodic and current reports filed with the SEC. I would now like to turn the call over to Pete.

Thank you, Jamie. Thanks everyone for joining us today. Mark will walk you through the details of Q4 and the full year shortly, but before he does, I'll give you some high-level thoughts. In 2021, the Company grew direct levels both revenue, which grew 45% over 2020, and it seems its higher levels of profitability with 13.5% adjusted EBITDA margins. We also maintained our nearly 100% retention rate among our existing clients, driven by our industry-leading clinical outcomes, which we achieved for the sixth year in a row, as well as our exceptional member and client satisfaction, which is evident in our best ever NPS score of plus 81. On top of this, we had our most successful selling season ever, which is one of the most important drivers of our long-term growth by adding a record 85 new clients and 1.2 million new covered lives. We accomplished all of this despite the unexpected COVID-related waves that marginally disrupted member activity from time to time, including the most recent disruption due to Omicron at the end of the fourth quarter. When we issued our guidance in early November, we experienced increased utilization as September, October, and November all had strong sequential growth month over month. When the Omicron variant emerged in early December and spread across the country faster than any other variant, overall member activities slowed sharply, resulting in a negative revenue impact of approximately $9 million for the quarter. This Omicron-related impact continued into January; however, as awareness grew that the variant was generally producing more mild illnesses, member sentiment towards pursuing treatment improved. Based on current visibility, member activity for February and March has rapidly recovered to normal levels, and the Omicron-related impact appears to be behind us. A key theme emerging from the last few years is that most facility patients recognize the time-sensitive nature of their treatment and have continued to be resilient in the pursuit of care even against the pandemic backdrop. This can be seen through the consistency in our quarterly utilization rates over the past two years. Furthermore, unlike other areas of healthcare that may be significantly strained, our overall disruption following the surge of COVID cases has been limited as the majority of fertility clinics are in hospital settings. Clinics have had the resources they need to remain open and available for patient care. Whenever COVID has more acutely impacted member activity, the effects have generally been short-lived and affected only a small proportion of members overall. Although we cannot control a global pandemic and its impact on utilization, the important takeaway is that we perform at the highest levels in the areas we can impact, including member experience with our benefit offering and our industry-leading clinical outcomes. We ended 2021 with over 265 clients under commitment, reflecting 4 million covered lives, which is a 50% increase from a year ago, representing approximately 3% share of the large self-insured employers in our target market. This does not include other employer types such as fully insured companies and governmental agencies. Now let's turn to current sales momentum. While it's still early in our 2022 selling season, our sales momentum from 2021 is continuing into 2022. We are seeing meaningful increases across all metrics we use to monitor sales progress. Early selling season data gives us confidence that the macro trends driving demand for fertility benefits position us well for sustained momentum into 2022. A key factor for our sales success has been a high rate of member satisfaction, and our NPS score increased to plus 81. Given that most healthcare companies score just above zero or in negative digits, we are proud of this result, which reflects our focus on maintaining and improving member services. We launched a positive benefit to our largest cohort of new clients and covered lives in January 2022, and we're focused on expanding support for our male members by addressing male fertility issues. We are also expanding our geographic footprint into the Canadian market, where many existing clients have employee populations. Although universal healthcare covers many needs, comprehensive fertility coverage is generally not included. So, we see significant opportunity in Canada. We aim to educate and enhance member access similar to our achievements in the U.S. We've developed a significant competitive advantage and have the most comprehensive facility dataset in the industry, managing over 20,000 ART cycles in 2021, which is up nearly 50% year-over-year, continuing to enhance our understanding of family building. Let me now turn the call over to Mark, who will provide more details about our results.

Thank you, Pete, and good afternoon, everyone. I'll begin with our fourth quarter and full year 2021 results, and then I will provide our expectations for 2022. In the fourth quarter, revenue grew 27% to $127.6 million, with a meaningful increase sequentially driven by strong utilization in October and November. However, the Omicron variant impacted member activity in December. As Pete mentioned, the sequential monthly decline we experienced in December due to Omicron was nearly twice what we anticipated, resulting in a negative impact to revenue of approximately $9 million. Although Omicron affected activity in January, member utilization has returned to more typical levels in February and we see a similar trend in March. For the full year, revenue grew 45% to $500.6 million. We are pleased to have reached the milestone of over half a billion dollars in annual revenue in just our sixth year of offering benefits. Medical revenue increased 19% in the fourth quarter to $89.2 million, while for the full year, it grew 40% to $355.6 million. Pharmacy revenue increased 50% in the fourth quarter to $38.4 million, with a full year's growth of 59% to $145 million. The growth in pharmacy revenue is primarily due to the increased number of clients who chose Progyny Rx compared to a year ago. We ended the quarter with 191 clients representing an average of 2.9 million covered lives. This is a 25% growth in covered lives over the past year due to new client additions and organic growth within our existing client base. In terms of utilization metrics, we performed 7,623 ART cycles in the quarter, reflecting a 33% increase compared to Q4 2020. Female utilization was 0.46 this quarter, compared to 0.45% last year, and for the full year, it was 1.07%. This figure aligns with what we reported in 2019, reinforcing the essential nature of fertility treatment. Our gross profit increased 22% in Q4 from 2020, with a reported gross margin of 19.7%. Following the exclusion of stock-based compensation, our adjusted gross margin was 23.4%. For the full year, gross profit increased 60% to $112.1 million, with a reported gross margin of 22.4%, reflecting an increase from previous years. Our adjusted EBITDA increased significantly throughout the year, reaching $67.3 million, representing more than double the amount from the previous period. The projected revenue for Q1 2022 is between $165 million to $170 million, while we anticipate full-year revenue of $730 million to $775 million. Adjusted EBITDA for the same period is expected to range between $110 million to $122 million. I encourage everyone to review the press release for detailed reconciliations regarding stock-based compensation impacts. I’ll now hand the call back to Pete.

Thanks, Mark. We believe the increased focus on ESG among leading companies is providing us with additional momentum in our new sales efforts. We begin 2022 as I mentioned before in our strongest competitive position with significant macro trends fueling our rapid growth and a business model built for long-term success. We look forward to providing you with updates on our progress throughout the year. With that, operator, I'd like to open up for questions.

Thank you. The floor is now open for questions. The first question is from Anne Samuel from JPMorgan. Your line is live.

I was wondering if you could provide a little bit of color on what kind of utilization recovery is embedded within the full-year guidance. It seems like the first quarter is only about 70% of where you were expecting, but you said February has recovered back to normal levels. So, that feels a little low, and I would appreciate your insights.

January really reflected the impact of Omicron and how people were perceiving its influence. However, utilization has returned to typical levels in February and March. Our guidance for Q1 and the full year accounts for current insights. Just to give you perspective, typically, the first quarter tends to be lower than the full year overall. The new clients' initial consults typically represent a higher percentage during early months. For instance, when we analyze 2021's data, we see an approximately 4.2:1 ratio between Q1 revenue and the entire year's total. If you extend our guidance for Q1 by that same ratio and add anticipated revenue from clients launching in Q2 and early Q3, that aligns closely with our full-year guidance.

That's really helpful color. Thank you. Regarding the impact of time sensitivity around fertility, how should we think about where these ART cycles are going? Do you expect to see a catch-up effect at some point?

The ART cycles may experience a short-term catch-up as individuals become acutely aware of the challenges they have regarding fertility. Those that deferred treatment may return to seek assistance over time, but it does not all return all at once. Understanding infertility is a journey, and utilization will vary throughout the year as different individuals recognize what they need.

Understood. And I just wanted to squeeze in one more question regarding the margin expansion you've seen in gross margins recently. How much more room is there for expansion and what might some of those drivers be?

The inherent expansion in our business is primarily related to care management services; as we grow, we see more leverage in those services. Also, opportunities may arise around supply chain aspects, enhancing margins as we scale our capabilities. While I can't quantify the future precisely, we believe we can continue to expand margins as we grow.

If I can dive into the revenue growth guidance, what are some of the moving pieces you're looking at to get comfortable with the different areas of low, mid, and high-point guidance?

We currently have good visibility into what has happened in January and February, plus some insight into March. We project the high-end of guidance reflects normal utilization metrics. The year-end reflect potential less favorable utilization and market mix variability. This also incorporates the higher number of clients launching in Q2 and Q3 than we normally see, representing about $40 million to $45 million in revenue that could adjust.

When you mentioned initial consults versus more advanced procedures, how do we look for the turn there, and what are the key factors that will determine that number?

We're noting mix impacts from prior periods, so if treatment progress pauses early in the cycle, it can reflect revenue drops. This holiday season impacted our mix; traditional ART cycles generally lead us to observe those trends negatively affecting revenue.

The variance in rates across different regions of the country complicates our predictions as demand for services diversifies geographically. As we grow, our member base becomes more dispersed, leading to differing revenue experiences.

Do we know exactly when you'll be at the 4 million members mark?

Yes, the majority will be launching in the second quarter, with a smaller number in Q3.

Is it fair to say we need improvement from where utilization currently sits to get to the midpoint of that guidance?

The revenue growth exceeding membership growth can largely be attributed to the broader adoption of Progyny Rx, particularly among existing clients. The increasing awareness of our integrated benefits solution is driving adoption, contributing to revenue as we are seeing an uptick in new clients' interest.

The high-end guidance is based on normal utilization and utilization metrics extended throughout the year. However, we are vigilant in monitoring any unexpected changes in the market that might affect overall outcomes and pricing.

You talked about '22 margins on incremental business being over 19%, which is a step down from the 22.4% in '21. Is that due to conservatism or a different mix going on?

The decrement in margin reflects a favorable comparison in 2021 versus 2020. During 2020, we retained our workforce despite clinic closures. Consequently, our Q2 2020 revenue drop impacts year-over-year comparisons, explaining the current guidance adjustments.

What confidence do you have in creating your '22 guidance? Is there a cushion baked in, or did you find out about the RX attach rates more recently?

Our guidance incorporates various factors affecting both ends of the spectrum, including the RX attach rates, expected member engagement, and other critical metrics. However, we remain cautious about potential market changes as we build our forecasts.

That concludes today's Q&A. Now, I'd like to turn the floor back over to James Hart for closing remarks.

Thank you, everyone, for joining us this afternoon. Please be sure to reach out to me if you have any follow-up questions. Otherwise, we look forward to seeing you at the upcoming conferences and our first quarter earnings call in spring.

Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.