Progyny, Inc. Q1 FY2024 Earnings Call

Good day, everyone, and welcome to the Progyny Inc. First Quarter 2024 earnings call. It's now my pleasure to turn the floor over to your host, James Hart. James, the floor is yours.

Thank you, Tom, and good afternoon, everyone. Welcome to our first 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 would like to remind you that our comments and responses to your questions today reflect management's views as of today only and will include statements related to our financial outlook for both the second quarter and full year 2024, and the assumptions and drivers underlying such guidance. The demand for our solutions, our expectations for our selling season for 2025 launches, anticipated employment levels of our clients and the industries that we serve, the timing of client decisions, our expected utilization rates and mix, the potential benefits of our solution, our ability to acquire new clients and retain and upsell existing clients, our market opportunity and our business strategy, plans, goals and expectations concerning our market position, future operations and other financial and operating information, which are forward-looking statements under the federal securities law. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business as well as other important factors. For a discussion of the material risks, uncertainties, assumptions and other important factors that could impact our actual results, please refer to our SEC filings and today's press release, both of which can be found on our Investor Relations website. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During the call, we will also refer to non-GAAP financial measures, such as adjusted EBITDA, adjusted EBITDA margin on incremental revenue and adjusted earnings per share. More information about these non-GAAP financial measures, including reconciliations with the most comparable GAAP measures, are available in the press release, which is available at investors.progyny.com. I would now like to turn the call over to Pete.

Thanks, Jamie. Thanks, everyone, for joining us. We had a strong first quarter overall, making meaningful progress in the areas that are most impactful to our long-term growth. This includes a strong start to our most recent selling season and the advancement of new strategic partnerships, both of which I'll address in a few moments. In the first quarter, our continued focus on operational excellence allowed us to expand our adjusted EBITDA margins compared to the first quarter a year ago, and we also produced our best first quarter operating cash flow. Despite these results, you've likely seen from the press release that the quarter unfolded differently than we had expected on the topline as utilization for the first quarter came in modestly lower than we had expected. This coincided with the national conversations about fertility treatment and access to maternal health care that were sparked by the Alabama Supreme Court decision in February. I'll spend a few minutes walking you through this dynamic to help you appreciate why this doesn't alter our view of the long-term trajectory of the business, particularly since we're seeing Q2 utilization that is consistent with or better than prior years, although not quite as strong as it was in 2023. As a quick refresher on what informed our first quarter expectations, a year ago, utilization started strong in January and then continued to climb to record levels that persisted for much of 2023. This year, at the time of our February call, utilization for Q1 was pacing on a virtually identical track as it had been in the prior year period. However, unlike last year, we began to see the ramp in member activity leveling off slightly in March coinciding with the national conversations about women's access to reproductive health care, sparked by the Alabama Supreme Court ruling. Even so, utilization remained quite healthy at 0.46%, in fact, higher than our utilization from the first quarter two years ago, but modestly lower than the 0.48% it was a year ago, which had formed the basis for our expectations. As our guidance has always been informed by what we're seeing at that time, with the unexpected leveling off and the ramp of activity, revenue this quarter was less than what we had expected. While we can't be certain why members don't take action, as no one contacts us to say why they're not doing something, we examined the Q1 activity by client, by industry, by region and by clinical partner. And only one noticeable pattern emerged. The modest dip in activity that we saw across the country was more pronounced in the states with the most restrictive laws for women's reproductive health care, suggesting that a relatively small number of members were proceeding with a greater degree of caution before commencing their fertility journey. As the second quarter begins, utilization has remained healthy at levels that remain above 2022 and below 2023, which further reinforces the confidence we have about all the long-term trends remaining intact. The market data reveals how the macro trends remain highly supportive for our continued long-term growth. The incidence and prevalence of infertility continues to rise as people increasingly defer family building until later in life. Family building continues to be a high priority, particularly amongst people over 30 who are medically most likely to need fertility care as natural conception becomes more challenging as we age. And while overall birth rates are declining in the U.S., that's really being driven by women under 34 who, in making the decision to defer family building, are actually reinforcing the longer-term tailwind for the fertility industry as they will be the ones expanding the cohort of patients needing care once they approach their mid-30s. With the macro trends remaining very favorable, the modest variations we can see in utilization from period to period, where it's sometimes a bit higher, sometimes a bit lower, are far less indicative of our long-term success than the overall trend line is. And like any company, there are many drivers to our business. Of the areas that are within our control, which spans everything from member experience to clinical outcomes to client satisfaction and more, we set rigorous goals that we continue to meet or exceed, and we're extremely pleased with how 2024 has begun in each of these areas as well. And also in any year, the most impactful driver to growth is our go-to-market success which includes new sales, renewals and upsells. So let's turn to the progress we're making in the current selling season. Though this season is just getting underway, we're extremely pleased with our active pipeline, which is favorable to what it was this time last year. And in November, we told you about the robust pipeline of not now opportunities that we're carrying over into 2024. As in every year, there are certain prospects who, for a variety of reasons, weren't in a position at the time to add a fertility benefit or change their existing provider. We begin each season by reengaging with the not now as they may now be in a better position to make a decision. Traditionally, the not nows represent the majority of the early commitments we received in 2024 and is proving to be no different, with strong early commitments from leading brands in health care, auto manufacturing, travel and leisure, and media as well as multiple state and local government populations. This is a further demonstration of the flywheel effect where our presence in the industry deepens once we win an initial account, and we see others in that industry look to maintain benefits parity by adding or improving their coverage. The season is also off to a strong start in terms of new pipeline built, including the average size of opportunities versus the prior year. We're generating additional pipeline through all the typical channels, including through our partnerships, conferences, targeted events, inbounds, introductions from the network, and direct outreach. Now turning to upsell, the activity thus far is also very positive. There are a number of pathways to expand our relationship; we've seen historically 20% to 25% of the base take additional services each year. This year, our upsell cadence includes our newer services in menopause, maternity, and postpartum care, and we're pleased with the response we've seen thus far. We expect these new services to represent a smaller contribution to our results than our fertility offering as they are case rates, not medical claims, but will increase the diversity in our portfolio and broaden our reach to more members. And as usual, clients may also look to expand by adding to their existing fertility coverage with more smart cycles or other services such as preservation. In November, we told you about our first federal government population, which represents about 300,000 covered lives. Although that benefit is narrower than our usual offering and its contribution to our financial results is nominal, we continue to look at this as a beachhead opportunity as conversations of expanding coverage are encouraging at this point. We're also advancing several new channel partner relationships, including some of the most prominent health plans in the U.S., which, upon completion, would add to our existing agreements with CVS Health, Evernorth, Vistia Health and further expand our go-to-market reach. These partnerships will help lay the groundwork to both accelerate our current market focus and offer opportunities into new segments. To conclude, we believe the engagement we're seeing in our current selling season demonstrates both the strong demand in the market as well as our position as the provider of choice for fertility and family building solutions. In every sales year, we look to grow the incremental covered lives as compared to the prior year. Although it's very early, given the strength we're seeing in the sales season thus far, we believe we're on track to meet that objective. We believe the momentum we're seeing across many areas of our business demonstrates that our market opportunity remains vast, and we are in our strongest ever competitive position relative to other solutions in the market.

Thank you, Pete, and good afternoon, everyone. I'll begin with our first quarter results and then provide our expectations for the second quarter and the full year. First quarter revenue was $278.1 million, reflecting growth of approximately 8%, primarily due to an increase in the number of clients and covered lives as compared to a year ago. I'll remind you that first quarter revenue was negatively impacted by a $15 million treatment mix shift that we discussed with you on our February call. As expected, this shift was short-lasting as mix returned to what we would typically expect to see for the balance of Q1 and is trending normally as the second quarter gets underway. However, as Pete discussed, first quarter growth was also impacted by a slightly lower level of utilization as compared to the year ago period. Female utilization in the first quarter was 0.46%, compared to 0.48% in the first quarter a year ago. I'll remind you that the 0.48% was the highest quarterly utilization rate we had ever reported at that time. I'll note that utilization does not include the 300,000 members in the federal population, given that their plan design as it is today doesn't include services that we measure in our utilization rate. In a comparative sense, the utilization rate for the first quarter of 2024 is just 4% below that peak while also comparing favorably to the 0.45% reported in the first quarter of 2022. In fact, we believe the relative consistency in utilization over these past few years, where utilization has persisted within a relatively narrow range in each period, reflects both the prevalence of infertility as a medical condition as well as the importance of family building medical care for our members. The visibility we have thus far into 2Q activity reveals that engagement has persisted at a similar level, namely lower than the record level that we saw in 2023, but higher than what we saw in 2022, which suggests that we aren't seeing the emergence of a new underlying trend. Turning now to our other business metrics in the quarter. Approximately 14,800 ART cycles were performed in Q1, reflecting a 12% increase over the first quarter last year. As of March 31, we had 451 clients with at least 1,000 lives, representing an average of 6.4 million covered lives. This compared to 379 clients and an average of 5.3 million covered lives a year ago, reflecting approximately 20% growth in lives. As we told you last quarter, a number of our newest clients are scheduled to go live in Q2 and Q3. Taking into account the clients who have already launched in the second quarter, we have over 460 clients today who represent approximately 6.5 million covered lives. With the launches scheduled between now until early Q3, as well as a limited amount of organic growth that we expect to see from the existing base, we anticipate an additional 200,000 covered lives this year. This will take us to 6.7 million lives overall, and we have reflected that in the progression of our guidance over the balance of 2024. Taking a deeper look at our financial results. Medical revenue increased 8% in the quarter to $169.8 million, while pharmacy revenue over the same period increased 7% to $108.3 million. The lower rate of pharmacy growth versus medical primarily reflects the impact of the previously disclosed treatment mix shift, which disproportionately impacts pharmacy revenue, given that the more extensive fertility treatments involve a higher level of medication. Turning now to our margins and operating expenses. Gross profit increased 6% from the first quarter last year to $62.4 million, yielding a 22.4% gross margin comparable to the margin from the first quarter of 2023. Sales and marketing expense was 5.6% of revenue in the first quarter, consistent with the year ago period. Our model affords us the flexibility to continue to meaningfully expand our go-to-market resources given the inherent leverage we gained through the success in new client acquisition and from our high rate of client retention. G&A was 10.2% of revenue as compared to 11.4% in the first quarter a year ago. The 120 basis point improvement is primarily due to efficiencies that we continue to realize in our back-office operations and reflecting our expanding margins on G&A even as we grow revenue. Adjusted EBITDA grew in line with revenue this quarter to $50.3 million, within our guidance despite the lower-than-expected revenue. Adjusted EBITDA margin was 18.1% in the quarter as compared to 17.9% in the year ago period. Because of our continued revenue growth and the operating efficiencies we continue to realize, the adjusted EBITDA margin on incremental revenue, which most clearly highlights the rate of margin capture we realize as we grow, was 20% in the first quarter. This demonstrates the leverage that we continue to realize in our business model. Net income was $16.9 million in the quarter or $0.17 per diluted share. This compared to net income of $17.7 million or $0.18 per share in the year ago period. The decline was primarily due to a provision for income taxes in the current period as compared to a small benefit for taxes in the prior period, which more than offset the 38% increase in income before taxes. Adjusted earnings per diluted share or earnings excluding the impact of stock-based compensation, taking into account any associated tax impacts, was $0.39 in the period, this compared to $0.34 in the first quarter a year ago and exceeded the high end of our guidance. Turning now to our cash flow and balance sheet. Operating cash flow in the first quarter was $25.7 million as compared to $21 million generated in the year ago period. The improvement was due primarily to our higher profitability as well as normal timing items that can impact any given quarter. The modest increase in DSO from year-end is due primarily to the seasonality in cash flow that we typically see at the beginning of each year as we work to establish carrier integrations and payment flows with our newest clients. With the expertise we've gained in managing this process across hundreds of clients, we generally see the flows for these new clients operating normally by the second quarter following their launch. DSO as of March 31 also reflects an increase in working capital due to the situation at Change Healthcare. Although we haven't been notified that any of our member data was exposed, for those providers who submit their claims through Change claims processing, payment and collection cycles were elongated because of the manual processes that were implemented as a workaround solution. As those systems slowly return to normal, those cycles are improving. Looking across the remainder of the year, we continue to expect that we will convert approximately 75% of our full year adjusted EBITDA into operating cash flow in 2024. As of March 31, we had total working capital of approximately $476 million, reflecting $372 million of cash, cash equivalents and marketable securities and no debt. In late February, our Board authorized a $100 million share repurchase program. As of March 31, we had repurchased more than 720,000 shares for approximately $26 million. With the activity thus far in Q2, nearly 2 million shares have been repurchased and approximately $32 million remains under the existing authorization. Turning now to our expectations for the second quarter and the rest of the year. Throughout our history as a public company, our approach has always been to set ranges that are informed by both historical trends and also what we're currently seeing. This is the same approach we followed last year when we were in a position to raise guidance multiple times as utilization continued to trend upward for most of the year. For the second quarter, we are assuming that the utilization rate will be steady, which is what we saw in April and continue to see as compared to the 0.46% rate in Q1, resulting in revenue of $300 million to $310 million. I'll remind you that our utilization in the second quarter a year ago was the highest quarterly rate we've ever reported. Therefore, the 9% revenue growth we're expecting at the midpoint of this range reflects this challenging comparison. For the full year, we now expect revenue of between $1.23 billion to $1.27 billion, reflecting growth of 15% at the midpoint. Our range assumes that utilization in the second half of the year will be near to what we saw in 2022 at the low end and closer to what we saw in 2023 at the high end. Turning to our profitability. We expect adjusted EBITDA of $52 million to $55 million in the second quarter and net income of $15.7 million to $17.8 million. This equates to $0.16 and $0.18 earnings per diluted share or $0.39 and $0.41 of adjusted EPS on the basis of approximately 99 million fully diluted shares. For the year, we now expect adjusted EBITDA of $216 million to $226 million, along with net income of $68.4 million to $75.4 million with the revisions incorporating the drop-through impact of the change in revenue, albeit reflecting the higher level of profitability we're already seeing. This equates to $0.68 and $0.75 earnings per diluted share or $1.61 and $1.68 of adjusted EPS on the basis of approximately 100 million fully diluted shares. I'll remind you that our net income projections do not contemplate any discrete income tax items. At the midpoint of this guidance, we are expecting to see the continued expansion of our margins in 2024 with adjusted EBITDA margin on incremental revenue of over 20%. With that, I'll turn the call back over to Pete for some closing remarks.

Thanks, Mark. As we look into the future, we believe we're well positioned to continue expanding the top line at a strong rate, driven by several factors. First, we remain in the earliest days of penetrating a very significant and growing core market opportunity with large self-insured employers. Second, our expanding roster of channel partners enhances our market presence and broadens our reach. Third, our expansion into additional verticals, including federal and state governments, where we've already had initial success, and eventually, the middle markets adds meaningfully to our addressable market. Lastly, our new products and services to address life's other milestones beyond fertility and family building, which are expected to contribute a higher gross margin as we leverage our existing infrastructure and the delivery of those services. Taking all of those components into account, we believe we'll continue to take market share for the foreseeable future. We look forward to discussing these drivers to our business in greater detail during our first ever Analyst Day, which we expect to hold shortly after the release of our second quarter earnings in August. Details will be released later this summer, and we hope you'll be able to join us. With that, I'd like to open up the call for questions. Operator, can you please provide the instructions.

And the first question today is coming from Anne Samuel from JPMorgan.

Thanks for all the color. Maybe just one on some of the issues that you're seeing around utilization. Given patients are proceeding with caution in some of these states that are affected by more restrictive reproductive regulations. Are you seeing employers in their states being more hesitant to add the benefit as well? Or is it really just kind of limited to utilization at this point?

Yes, this is Michael. It's currently limited to utilization. We haven't heard or seen any hesitation from employers.

That's great to hear. And then maybe just as we look into the back half of the year, just curious if you could talk about what your expectations are around utilization? And maybe just what's kind of giving you confidence in that recovery trajectory?

Yes. Anne, thanks for the question. So I'll actually take the second part first. So we've seen, as we've entered into the second quarter, utilization improved back from the activity that we were seeing in March. So that we're back in a level that's between what we were seeing in '22 and '23, again, based on my prepared comments, albeit not as high as what we saw certainly in Q2 for 2023. So we are seeing that improvement already. So the range contemplates especially for the back half, so the Q2 contemplates what we're seeing today and a continuation of that. For the back half of the year, the range basically reflects a modest increase in utilization versus what we saw in Q1, and we're now seeing in Q2, a few percentage points, which brings us not quite to the same levels that we saw at the second half of 2023, but closer to that. And then conversely, the low end of the range contemplates a slight reduction in the level of utilization that we're seeing today, which actually brings us slightly below what we saw from our utilization rate for 2022. So we've framed it around, again, what our history has been for these last couple of years.

Your next question is coming from Michael Cherny from Leerink.

I guess I have one question but covering 2 different areas, and this is basically diving a bit more into some of the utilization dynamics you're seeing. Obviously, I know a hot topic. But if you can give us a little more cohort information, first on some of the new member base and what you're seeing in the utilization in terms of the lives you've added this year versus previous years? And then second, if you can give us any trending dynamics on what you're seeing on the utilization side in the less restrictive states post the Alabama decision, how that factors into the underlying utilization views for the business as a whole?

Yes. Thanks, Mike. As it relates to the first question, first year utilization for the cohort that launched this year is similar to other cohorts in prior years. The second part of your question, part of the improvement that Mark's referring to off of what we saw in March that we're seeing in April is some of those red states, if you will, that are improving off of the trough in March that we saw with them. And so that is part of the improvement already.

I'll hop back in queue.

Your next question is coming from Glen Santangelo from Jefferies.

Just 2 quick ones for me. I also want to follow up on this utilization question in the back half because Mark, if you look at the guidance, I mean, you're calling for 8.5% revenue growth in the first half. And then to get to the midpoint of your guidance, you're going to need 21% growth in the second half. And you said you're sort of modeling utilization off of somewhere between '22 and '23, what we saw in those 2 years. But isn't the consumer in a different place today versus a year or 2 years ago? And I guess what gives you confidence that we're going to see those historical utilization trends. And then I just had a quick follow-up on the selling season.

Yes. When comparing the first half to the second half, it's important to consider several key factors that will impact the latter. First, we have addressed the mix issue from Q1, which accounted for $15 million, and is now behind us. We expect to normalize for that. Additionally, we anticipate a few hundred thousand new lives engaging with us in the second quarter through Q3, which will contribute positively moving forward. We're already observing an upward trend in utilization. The initial months of this year are tracking similarly to last year's record performance, suggesting that this group of members and patients has the potential to drive utilization as time goes on. Regarding member sentiment, it appears there may have been a shift since February, particularly with a decline in activity in March. While we can’t say for certain, this seems to align with the decision made in Alabama and may have affected people’s willingness to proceed. However, the improvement we've seen in April gives us confidence in our outlook, which indicates we will likely achieve results between the significantly lower levels of 2022 and the record levels of 2023.

I appreciate the details. Pete, I would like to follow up on the selling season. It seems that every year around this time, you mention that you're ahead of where you were the previous year, which has generally been true, except for last year when it may have come in a bit lighter than we anticipated. You usually aim to add at least as many lives as the previous year. So, is your goal this year 1.3 million lives? How are you measuring your progress so far? Are you looking at conversations, commitments to date, or measuring it by lives and clients? Any insights on how you assess the selling season at this point would be appreciated.

Sure. To address the first part of your question, yes, we are aiming to meet or exceed 1.3 million lives. Regarding the second part of your inquiry about our active pipeline, we define it very specifically in terms of sales activities; it’s not just about having conversations but rather involves various milestones related to our progress with potential clients. When we mention that our active pipeline is ahead of last year, that is what we mean. Similarly, when we say the average deal size is larger than last year, we are comparing it to this same time last year. The sales pipeline builds throughout the season, and we consistently evaluate where we stand in relation to the previous year. Last year was somewhat challenging due to macroeconomic conditions, and there was a general sense of an impending recession, which affected overall benefit decisions compared to prior years. We believe this had some impact on last year, though we were pleased with the overall season. When discussing early commitments, yes, we definitely consider those as well, comparing our current progress to a year ago when making these assessments.

Your next question is coming from Jailendra Singh from Truist.

My first question is around the business visibility. So utilization shortfall this quarter combined with the issue of utilization mix shift that does raise the question of visibility in that business, and I understand there could be always some variability in the business. But can you spend some time on how much forward visibility generally you have in your business considering that the company gets involved in very early in a patient's journey. But gist of my question actually is that you called out multiple times, 2023 was a record year. But you still assume that those utilization levels stay at those levels when you issued guidance a few months back only to lower the guidance a quarter later. So help us better understand how we should get comfortable around the visibility of business.

Our business operates by having members contact us to utilize their benefits. They schedule appointments with providers, and there is a designated window for those appointments to be authorized. Typically, this gives us about 4 to 6 weeks of visibility into the volume of scheduled appointments. For instance, at the end of February, I can see the appointments set for that month, but we haven't yet received claims or confirmed that those appointments took place. I'm also looking ahead to March for scheduled appointments, which may change or be rescheduled from other periods. Therefore, we look 4 to 6 weeks ahead while also reviewing the previous 4 weeks to verify the appointments we believe have been scheduled and completed.

So when you issued your reported Q4, you did not have much visibility on March that this was happening? Just to make sure I understand that.

We did not have complete visibility. While we can see into the next month and up to six weeks ahead, it's important to note that appointments are being scheduled throughout March, and not just at the end of February, with many already set for March. This is a key nuance in our data. Our process remains consistent; we compare what is scheduled now versus previous periods, including January and February of last year. These comments form the basis for our guidance. Specifically, we were aligned to last year's figures through the end of February when we reported, with some visibility into March, though not fully complete. More bookings are needed, and this leveling off that we observe now is something we did not experience last year in March, leading to a 4% difference in our guidance.

Reflecting on the past few years, including last year, we shared favorable guidance. We ended up about 4% to 5% better than expected, which is always a positive outcome. However, it’s important to recognize that results can fluctuate. We anticipate variations of approximately 3% to 5% over different time periods, whether monthly, quarterly, or yearly, which are not significant. This level of visibility and accuracy has been consistent with the forecasting system we use. And just to make a simple example of this. So somebody that called up in the middle of February to book an appointment in the first half of March, and have that settled. That doesn't mean they're locked into going into March. So as the latter part of February occurred, people began to think more reflectively about what the Alabama decision meant and what have you, would call up and move that appointment out into April or cancel it altogether. And so that's part of that activity in March where people are either changing their mind or they're just not coming as quickly as we would have anticipated. And that's the activity that we're talking about that happened again, as we got into March and even towards the middle of March, honestly.

Okay. That's helpful color. My quick follow-up on Progyny audits revenue was up 7%, which was actually slower than your fertility benefit service up 8%. I can't recall a quarter where that actually happened. Anything to highlight there?

Currently, our installed base of both medical and Rx services are becoming quite similar. In our earlier comments, we mentioned that the mix issue we observed at the beginning of the quarter has fully resolved. The impact of this issue was felt more by Rx, as the more comprehensive treatments not available in the first quarter require a significantly larger amount of medication compared to the overall. This factor also contributed to the slower growth of Rx compared to medical during the quarter.

Your next question is coming from Sarah James from Cantor Fitzgerald.

It sounded like you guys were seeing some difference between red and blue states. So hoping you can clarify, were you also seeing weakness in March in the blue states after the Alabama decision? Or was it more isolated to the red states? And then how do you get confidence that it was political and psychological as opposed to the number of like weekdays in the quarter because a lot of the providers had a weak March, given the way that Easter and spring break fell. So what gives you confidence that it's more on the political psychological side versus just the calendar?

In our modeling, we consider the number of treatment days in each period, so we continuously adjust for that. Our comments reflect this universally. Regarding the different types of states, we did notice some modest slowing of utilization in certain blue states, although it was not as significant as what we observed in red states. That's essentially the situation. Furthermore, we have mentioned previously that we are seeing some recovery. While we cannot pinpoint the exact cause, we believe that the combination of factors and the ongoing political context might not be completely resolved. However, with recent legislative actions, especially in Alabama, people have had the chance to evaluate how these changes impact them personally and to make their own decisions. This is why we think there's an uptick starting in April.

And your next question is coming from Scott Schoenhaus from KeyBanc.

I want to revisit the dynamic between utilization in red and blue states. How can we be certain that this is genuinely linked to the regulatory environment in Alabama? From what I understand, during the selling season, a wider range of states was represented, which may have diluted the impact of blue states into more red states. Are there underlying trends in structural utilization that you have observed that might continue? How can you be completely confident that this is solely a regulatory issue?

Yes, it's Pete. Thanks, Scott. We never claimed to be absolutely certain. We mentioned it's coincidental, but it's difficult to overlook the timing of the decision and the much more significant impact right after that decision in the red states compared to the blue states. We're now seeing a reversal of that trend, as March marked a low point for those states. So, are we completely sure? Not at all. Are we making inferences based on the data and the timing? Yes, we are, and therefore we can't be definitive. Regarding your question about the sales season, we are discussing overall activity across all covered lives, not just the sales season itself. If I misunderstood your question, please feel free to ask it again.

I'd say just from a structural standpoint, it sounds like your question was, is it possible that there's just a general reduction overall. And I guess, we come back to, again, what we were seeing from all of the activity from January and February, which was, again, tracking virtually identical to the same pacing we saw last year, which was our record year. So again, I think the base, including the new clients, have the capability of delivering at a higher level. There's been some other factor that's obviously changed that direction here for a short period of time.

Your next question is coming from Stephanie Davis of Barclays.

I was hoping we could dig in a little bit on a backward-looking metric and talk about utilization from last year. Is there any analysis you've done around if there was maybe a benefit from some post pandemic dynamics or if they benefit from the prior year's broad-based extension for utility benefits that will make that more of a peak utilization rate versus something you should think of going forward?

Well, if you think about all of our comments when the pandemic happened, it was utilization levels returning back to normal through '20 and by '21, they were effectively back to normal. So I don't know that there's a, in '23, sort of a pandemic overhang or any way for us to know that. But we don't believe that was the case. What was the second part of your question, sorry?

Trust it's also not just the pandemic, but maybe the expansion of fertility benefits in the prior year, if that cohort could have maybe had a higher level of utilization than they were most likely to have during the pandemic?

The expansion of benefits that took place each year continues to be present with every employer, which is what we refer to as upsells. They did not increase and then decrease. We frequently mention our upsell activity and the fact that no clients are reducing their benefits. Therefore, those expansions that were in effect in 2023 are still here in 2024, especially given our nearly 100% client retention rate.

Yes, we don't usually make forward-looking comments. However, I would reiterate that over time, you will see those growth rates either begin to diverge or converge with medical.

Can you provide more details on how the mix will affect the level of utilization for the Rx, considering that for a fresh transfer for an egg-free option, you are still administering the same amount of drug?

If you do a transfer, there's way less drugs in the transfer than there is in a retrieval, right? If you're doing a retrieval only as opposed to a full cycle, which is a retrieval and transfer, there's less drugs. The point is, overall, to the extent that the mix was impacted and the transfer alone would be the best example, is significantly less drugs than a retrieval, any retrieval.

Your next question is coming from Richard Close from Canaccord Genuity.

Great, I'm interested in how you're thinking about potential reaction related to the upcoming federal election. Do you factor that all into your, one, utilization guidance that you just provided for the rest of the year? And two, how do you think it could potentially affect the selling season?

It's not really considered because there seems to be bipartisan support, including from the likely Republican nominee regarding reproductive health. Therefore, we are not predicting any particular reaction related to the upcoming federal election. Everything we've discussed and included in our guidance aligns with Mark's comments, and we did not take the election into account.

Okay. And then as a follow-up, I think I saw an industry survey recently that was taken after everything that happened in Alabama and it seemed to insinuate that there was an uptick in interest in either beginning to offer fertility benefits or if I already had fertility benefits expand them from the employer perspective. Did you see any impact, I guess, in March and here through April of higher interest?

From a market and sales perspective, I would highlight the active pipeline that Pete mentioned, which is in a better position compared to last year. We are also noticing sustained interest in both expanding and covering fertility benefits, as well as services related to our other products like pregnancy, menopause, and postpartum. This interest is reflected in our pipeline and the potential for closing deals as we compare it to last year.

Your next question is coming from David Larsen from BTIG.

Can you please give a little more detail on how we're defining mix? So for example, like last year, like just as an example, like creating a healthy embryo and then freezing it, maybe that was 60% of volume, then with the Supreme Court sort of decision in Alabama, that declined maybe to 40% or 30% and simply freezing eggs and/or perhaps sperm increased, and then I think what you're saying now is the mix has returned to normal. So like freezing a healthy embryo would be back up to 60%. So people may have been worried about actually creating a healthy embryo and then freezing it, that resulted in a decline of that mix, and it's now back up. So can you just confirm, like am I thinking about this correctly? Any more detail on what you mean by mix would be very helpful.

Yes, your example is accurate. The scale of change isn't as significant as you suggest, but it is relevant to the number of individuals who are using the benefit. We consider these users as unique for the entire quarter. Their actions and the percentage of those who opted for treatment versus other options varied enough that we highlighted it in the first half of Q1. This trend has returned to what we expected when we reported our earnings. Currently, for Q2, it has also returned to normal; your understanding is right. While the shift in order of magnitude was not drastic, it was significant enough to influence expectations for revenue in the quarter when examining the users.

But just to be clear, the mix issue that we called out on our last call in Q1, that predated the Alabama decision. And so it was already modifying by the time the Alabama decision had come out. So I wouldn't conflate the utilization decline in March with the rate shift, which was predated that.

Okay. Has there been any changes in coverage that could be impacting that mix shift? So if that mix shift occurred before this Alabama Supreme Court activity, like was it coverage decisions on the part of health plans, where maybe they would cover freezing eggs and sperm more so than a healthy embryo or anything like that? I mean...

All the decisions related to coverage that we previously discussed, both during our November third quarter call and in later remarks, were finalized at the beginning of the calendar year on January 1. The answer to your question is no, and I'll provide some additional context. If it were a matter of coverage, we wouldn't have seen just a temporary shift in mix that has since returned, as that would continue to impact us going forward, which is not the case.

Okay, great. So I'm interested in other areas of growth in the business like there's menopause. What other services could you sort of add to your portfolio? Like how about adoption services, postpartum counseling services? Just any more color there would be very helpful.

Currently, surrogacy adoption programs are part of our services. We are developing additional products and will make announcements about them soon, although there is nothing specific to discuss at the moment. We also see potential in other areas of women's health that are currently underserved and overlooked, where we believe we can have a positive impact.

Our last question today comes from Allen Lutz from Bank of America.

Pete, I have a question on the selling season. In the Q&A, you talked about a goal to meet or exceed 1.3 million lives. I know it's early in the selling season, but is there anything different about the employer conversations this year? I know that managing GLP-1 spend is a big focus for employers. So how do we think about your confidence given some of the other things that are impacting the way that employers are thinking about where they're focusing in 2024 and 2025?

Yes, this is Michael. To start, you're correct that GLP-1s is a significant topic. Every year, there are always a few key topics that employers are focused on. Family building benefits and women's health remain among those important areas. As we've mentioned a few times, the best indication at this point in the year is the status of our active pipeline. We assess the strength of that pipeline and the nature of the early decisions being made. As noted in the prepared remarks, the pipeline is looking strong compared to last year, and the early decisions are also favorable in relation to last year.

Thank you. This does conclude today's question-and-answer session. I would now like to turn the floor back to James Hart for closing remarks.

Well, thank you, everybody, for joining us this afternoon. Please feel free to reach out if you have any additional questions; I am available as needed. And of course, please look for further details on our Analyst Day meeting that we'll hold in August; details will be forthcoming sometime later time.

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