Progyny, Inc. Q2 FY2024 Earnings Call

Good afternoon, everyone, and welcome to the Progeny Inc. Second Quarter 2024 Earnings Conference Call. It is now my pleasure to turn the floor over to your host, James Hart. The floor is yours.

Thank you, Matt and good afternoon everyone. Welcome to our second quarter conference call. With me today are Pete Anevski, CEO of Progeny; 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 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 third 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, the timing of client decisions, our expected utilization rates and mix, the expected benefits of our pharmacy program partner agreements, including future conversion of adjusted EBITDA to operating cash flow, 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 and adjusted EBITDA margin on incremental revenue. 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.progeny.com. I would now like to turn the call over to Pete.

Thanks, Jamie, and thanks everyone for joining us this afternoon. During the second quarter, we continued to make significant progress in many of the areas that are most impactful for building the long-term value of our business and laying the foundation for our future growth in women’s health. This includes our early success in the most recent selling season, the enthusiasm we’re seeing for our newest services among existing clients, the advancement of new channel partner relationships and the investments we’re making to further enhance our already leading solutions in women’s health and address even more of our clients and members’ needs. As it relates to our second quarter results, while the rate of utilization ticked up modestly from the first quarter, consistent with our prior assumptions and our second quarter revenue and adjusted EBITDA were within our guidance based on our current visibility to the remainder of the year, we now believe the second half will unfold differently than expected. Accordingly, we are adjusting our revenue guidance lower by approximately 5% at the midpoint, with corresponding reductions to adjusted EBITDA as well. Given the year has continued to unfold differently than we had originally expected, we recognize there is frustration and disappointment, and we share in those sentiments. The transparency we provide to the market as to what we’re seeing and how that informs our financial guidance carries the highest level of importance to us. The planning models we build leverage a vast data set of past activity capturing appointment scheduling to care consumption so that we can provide what we believe to be the best, most predictive view of the future given the limited amount of actual visibility we have around care consumption at any given time. Unfortunately, given the inherent variability in any business that doesn’t have an annuitized revenue stream, driven by utilization in an area where the timing and pursuit of care is so deeply specific to the individual, we can and are seeing variability more than expected from historical trends. In 2023, we saw this dynamic play out, albeit with a positive effect where a relatively small portion of the base was engaging more favorably than the historical pattern indicated. As a result, we were able to raise our guidance multiple times last year. In 2024, we’re seeing the opposite effect. I’ll take a moment to walk you through what we’re seeing. To be clear, member engagement has been healthy in 2024 at levels that are well within our historical norms, and that continues to be the case in Q3. However, where we’re seeing a deviation from the historical pattern is in the ART cycles for female utilizers, resulting in a negative impact to our previous outlook. We added a table in our press release this quarter to illustrate this dynamic more clearly for you. The table shows how historically we see an increase in the average number of our cycles per utilizer over the course of the year, reflecting the progression of our members collectively as they move through their fertility journeys. While utilization as a percentage is thus far level with Q2, you can see from the table that we would ordinarily expect for average cycles per utilizer to increase to something like 0.56 in Q3 and then tick up a bit higher in Q4 as well. While it has increased over the first half of the year, we’re anticipating a lower rate of increase than what we ordinarily would expect or none at all over the second half of the year, and this is driving approximately 7% lower revenue per utilizing member. The obvious question then is why aren’t we seeing the customary pattern in ‘24? There are a number of factors that could be causing this, such as higher clinical success rates which will result in fewer treatments per utilizer, different treatment paths based on the members’ medical need or different timing of the treatment journey based on the member’s preference. As we highlight, we aren’t seeing or expecting a decrease in cycles per utilizer and because the rate of utilization is also expected to remain consistent with past patterns, we aren’t viewing this as an indicator of lesser demand. We also can’t predict how long this lower average will last. Accordingly, we believe an outlook on the high end showing we’ve consistently seen throughout the year and the low end showing a decline in both utilization rate and ART cycles for female utilizers. At the midpoint, we estimate the impact of this to be approximately a $55 million headwind to the revenue from our previous guidance. We’re also making an adjustment to our forecast to reflect that a small number of clients reported well-recovered lives this quarter, either from recent reductions or as employees from previous rounds of reductions may be coming off of their core coverage. To be clear, we aren’t seeing any large-scale workforce reduction programs reported by any client. However, the collective impact across our full base this quarter was approximately 100,000 covered lives or approximately a $10 million headwind to the top line. While reductions aren’t new, there are always some clients following headcount in any given year, we’ve historically seen growth from other clients act as an offset. Though a meaningful number of clients have increased their headcount this year, it hasn’t been enough to fully mitigate the reductions. Mark will walk you through the details of our guidance shortly, but I want to reemphasize that while the factors affecting our outlook today are beyond our ability to influence or control and we can never have perfect visibility into consumption within the utilization model, what is within our control is the transparency we provide to the market regarding the drivers of our business. Our hope is that doing so will allow investors to turn their focus back towards those areas that are within our control, where we continue to successfully execute against our strategic priorities and why we believe in the long-term strength and trajectory of the business is in any way affected. Those areas include building the long-term value of the business and positioning Progyny as both an industry leader and a catalyst in raising the bar in the delivery of solutions for women’s health care. So, turning now to those areas, beginning with our latest selling season since that has the greatest impact on our long-term growth, also demonstrating our leading industry position. Our goals are clear each season. First, we want to expand our market share through new client acquisition. Second, we seek not only to maintain our high rate of retention but also to grow our relationships with existing clients through expansions and upsells. And lastly, we look to develop new partnerships to enhance our market presence and create efficiencies in our sales efforts. At this point in the season, we’re pleased with our progress across all these areas. With respect to the first priority, adding new clients, we’re now in the heart of the selling season, employer demand remains strong with a consistent pipeline of opportunities compared to last year’s selling season. We’re also continuing to add to our new sales pipeline as companies are evaluating their benefit offerings throughout the year. As usual, we anticipate that the majority of client decisions will be later this summer and early fall, as most companies look to finalize their benefits ahead of their open enrollment activities in Q4. I’m pleased to report that at this point in the season, commitments received to date are pacing ahead of where we were at this time last year. And although this is just one indicator of demand, we believe these early commitments demonstrate that the appetite for family building and women’s health solutions remain robust. As usual, we’ll provide you with a recap of the complete selling season on our next call in November. But at this point in the season, we are pleased with where we are. In any selling season, our goal is to meet or exceed the number of covered lives from the prior season. And although the majority of commitments for sales seasons are still ahead of us, we believe we’re on pace to meet this objective. Consistent with our most recent seasons, our earliest wins for 2025 are coming from a wide range of industries, including financial services, hospitality, media, state and local government, and labor unions just to name a few, which we continue to believe speaks both to the broad appeal for our solutions as well as our differentiation in the market. Our wins so far this season are broadly diverse in terms of size, ranging from 1,000 lives to in excess of 100,000. We’re also continuing to see from our commitments to date a high take rate on Progyny Rx, further validating the significance of our differentiation in terms of cost and member experience with that product. From my perspective, a very promising development this year is that a meaningful number of wins are also choosing to take one or more of the newest products in our solution such as menopause, maternity, and postpartum support. Equally encouraging is that we’re seeing the same dynamic with existing clients. At this point in the season, accounts representing approximately 1 million of our existing covered lives have chosen to offer one or more of these products to their employees in 2025. While we’ve always had multiple pathways to grow with existing clients, our newest products represent an exciting addition to our upsell and expansion activities. While we don’t expect meaningful revenue contribution from these products in 2025, we’re encouraged by the interest and adoption rate for employers that we’ve seen to date. In terms of renewals more broadly, activity thus far has been consistent with our typical rate of near 100% retention. We’re also not seeing any clients looking to reduce their benefit for next year, reflecting the value they’re continuing to see as we improve the efficiency of their overall health care spend while also helping their workforce realize their family building goals. Lastly, with respect to our business development priorities, we continue to see significant opportunities for ongoing expansion through the development of additional channel partner relationships. Last quarter, we told you that we were advancing several new partner relationships, and we recently became the preferred partner to Meritene Health, a subsidiary of Aetna, and the second-largest TPA in the country with 1.5 million members, adding to our existing agreements with CVS Health, Evernorth, and Vision. In addition, we are progressing other channel partner opportunities and hope to be able to provide additional detail on future calls. We believe continuing to add these channel partnerships is an important part of the go-to-market strategy since they act both as validation for our market-leading solutions as well as provide an alternative way to reach and contract with new prospects. This quarter, we also enhanced our global offering through the acquisition of April, a Berlin-based facility benefits platform, expanding the scope of services we can provide to multinational employers and their employee populations in over 100 countries. April has created a platform customizable by country, totally sensitive education, support, care navigation, and we’re excited about the opportunities to broaden our support on a global scale. Let me now turn the call over to Mark to review the quarterly results before I come back with some closing remarks.

Thank you, Pete, and good afternoon, everyone. I’ll begin with the second quarter results and then provide our expectations for the third quarter and the full year. Second quarter revenue grew 9% over the prior year to $304.1 million, making this our first quarter to exceed $300 million in revenue, less than two years since we crossed the $200 million milestone. To put this into perspective, after we launched our solution in 2015, it took us five years to reach our first $100 million quarter, while it’s taken us less than two years to meet each of the next $100 million plateaus. This illustrates both the momentum that we see in the market as well as our ability to rapidly scale our operations while increasing margins and profitability at the same time. Revenue growth in the quarter was primarily due to an increase in the number of clients and covered lives as compared to a year ago. As of June 30, we had 463 clients with at least 1,000 lives, representing an average of 6.4 million covered lives. This compared to 384 clients and an average of 5.3 million covered lives a year ago, reflecting approximately 20% growth in lives over the prior year. As expected, a handful of clients launched during the second quarter, adding approximately 100,000 new covered lives. However, as Pete mentioned, we also saw a number of our existing clients report lower lives as compared to March 31, which is likely due to recent turnover or from the lapsing of benefits coverage following prior workforce reductions. This is not at all a new dynamic. With a base as large as ours, in any given quarter, we’ve always seen a certain number of clients reporting lives – with a number of clients also increasing their lives. This really speaks to the advantage of having a diverse base that touches nearly every corner of the U.S. economy. While we continue to see both pluses and minuses in this quarter, as usual, the net impact was a slight reduction within the existing base, and that moderated our sequential growth in members during the quarter. Following the close of the quarter, several additional clients representing the last handful of clients from the 2023 selling season launched their Progyny benefit, contributing an additional 75,000 lives. Taking into account the launches that took place in July and over these first few days of August, we have nearly 470 clients today representing approximately 6.5 million covered lives. We expect to end the year with between 6.5 million and 6.6 million covered lives. Looking at the components of the top line, medical revenue increased 12% over the second quarter last year to $194 million, due again to the growth in our clients and covered lives, while pharmacy revenue increased 4% in the quarter to $110 million. The lower growth in pharmacy reflects the lower ART cycles per utilizing member, which Pete described earlier, as well as the benefit in the year-ago period from manufacturer-driven drug price increases, which did not occur over the first half of this year. Turning now to our member engagement metrics, approximately 15,600 ART cycles were performed in the second quarter, reflecting a 5% increase versus the second quarter last year. The female utilization rate was 0.47%, a decrease as expected from the record 0.50% that we reported a year ago, and a modest increase sequentially from the 0.46% in the first quarter of this year, reinforcing that the slight variability we saw earlier in the year was not indicative of a new macro trend. Over the back half of the year, we continue to expect that the rate of utilization will be consistent with historical levels, albeit somewhat lower than what we saw in 2023. Turning now to our margins. Gross profit increased 13% from the second quarter last year to $68.3 million, yielding a 22.5% gross margin, an increase of 80 basis points as compared to the year ago period as we continue to realize efficiencies in our care management resources even as we deliver cost containment for our clients. Sales and marketing expense was 5.4% of revenue in the second quarter, a slight improvement from the year ago period as the investments we’ve made to expand our go-to-market resources were more than offset by the leverage we continue to gain through client acquisition and retention. G&A costs were 10.3% of revenue this quarter as compared to 10.8% in the year ago period. The 50 basis point improvement is primarily due to ongoing efficiencies in our back office operations, reflecting the inherent nature of our expanding margins on G&A as we grow revenue and lower non-cash stock-based compensation. With the operating efficiencies we’ve realized, adjusted EBITDA grew 15% this quarter to $54.5 million. Adjusted EBITDA margin of 17.9% this quarter was up 90 basis points from the year ago period. Net income was $16.5 million in the second quarter or $0.17 per diluted share. This compared to net income of $15 million or $0.15 per diluted share in the year ago period. Adjusted earnings per diluted share, excluding the impact of stock-based compensation, taking into account any associated tax impacts, was $0.43 in the current period as compared to $0.36 in the second quarter of last year. Turning now to our cash flow and balance sheet. Operating cash flow during the quarter was $56.7 million, which compares to $76 million generated in the year ago period. The decrease is due to the previously disclosed impact of certain favorable working capital items in the prior year period as well as higher cash taxes in the current quarter. Over the first six months of the year, we’ve generated $82.4 million in operating cash flow, representing a 79% conversion of our adjusted EBITDA over the same period. As of June 30, we had total working capital of approximately $357 million, including $262 million in cash, cash equivalents, and marketable securities and no debt. The decrease in our cash position as compared to March 31 reflects our stock repurchasing activity during the quarter. In Q2, we repurchased 5.6 million shares for approximately $160 million. Since launching the buyback program in February, we’ve returned value to our shareholders through the repurchase of 6.8 million shares, completing the previous authorizations and reducing our shares outstanding by 6% since the start of the year. We’re pleased to announce today that our Board has approved an additional $100 million program, giving us further flexibility to reduce shares outstanding and to deploy our cash to what we believe provides a very attractive return. Turning now to our expectations for the third quarter and full year 2024. Taking into account the dynamics Pete described earlier, with a lower average number of ART cycles per female utilizer, we expect revenue of $290 million to $303 million for the third quarter. For the full year, we now expect revenue of between $1.165 billion to $1.2 billion, reflecting growth of 9% at the midpoint. As you can see in the table at the back of today’s press release, our range for the full year assumes that the rate of utilization will be 1.05% at the low end and 1.08% at the high end, consistent with historical levels. We are also assuming ART cycles per unique female utilizer of 0.95 at the low end and 0.96 at the high end as compared to 0.99 in the prior year. Turning to our profitability, we expect adjusted EBITDA of $47.5 million to $51 million in the third quarter and net income of $10.7 million to $13.2 million. This equates to $0.11 and $0.14 earnings per diluted share or $0.35 and $0.38 of adjusted EPS on the basis of approximately 96 million fully diluted shares. For the year, we now expect adjusted EBITDA of $199 million to $209 million, along with net income of $55.4 million to $62.4 million. This equates to $0.57 and $0.64 earnings per diluted share or $1.53 and $1.61 of adjusted EPS on the basis of approximately 98 million fully diluted shares. I’ll remind you that our net income projections do not contemplate any discrete income tax items nor do they consider any impacts associated with the share repurchase program we announced today. 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 18%. I’ll now turn the call back over to Pete.

Thanks, Mark. Today’s remarks and the upcoming Q&A give you a clear perspective about the strong state of our business overall, even with the change in our forecast, driven by the lesser-than-expected ART cycles per female utilizer, which is not material to the health of the business. If you aren’t aware, we’re hosting an Investor Day next week on Monday, August 12 here in New York City. We put together an exciting agenda, featuring a lot of the Progyny team that you don’t normally get to meet at investor events. Our goal is to give you insight into how we think about capitalizing on our market opportunities and what gets us excited about the future. Several clients are participating, and we’ve created panels from the point of view of both providers and members. If you’re interested in joining us, please send a note to James as registration is required and space is limited. With that, we’ll open the call for your questions. Operator, can you please provide instructions?

Your first question is coming from Anne Samuel from JPMorgan. Your line is live.

Hi, thanks for taking the question. And thanks for the incremental disclosure in the release. Really helpful. I was hoping perhaps you could help us understand what might be driving some of this volatility in mix and utilization. Just wondering, has anything changed within the benefit structure or coverage that might be leading to this shift? Have any best practices changed at the fertility clinics that might be leading to better outcomes or perhaps less prevalent, given the adoption of GLP-1? Just curious if you have any thoughts on what might be driving that?

Sure, Anne. Thanks for the question. The last part of your question, you came in and out, so I didn’t catch it, but I got the spirit of the question. So…

Sorry, it was – is there maybe higher success rates driven by perhaps less prevalence of PCS from GLP-1s?

Yes. So right now, as I mentioned in my prepared remarks, we don’t know exactly what’s driving this. It’s not a mix issue. It’s the cycles per female utilizer, and it’s not that it’s a decline, but it’s the rate of growth that you would normally see seasonally as the year progresses is not what it has been traditionally, which is why we broke out not only the full-year expectations but the quarterly trends historically to give you some insight into that. So as we sit here now, we don’t know exactly what may be driving that. We also don’t know whether or not it will persist. It’s just that we’re seeing it right now for Q3 as well as what we saw in and where our forecast is, therefore, continuing to project what we’re seeing in terms of that lower rate of growth. But we don’t know exactly why, and certainly, we’ll do our best to continue to find out why to the extent that we can. But as we sit here now, that’s not something we can conclude.

Great. Thanks. And then, I was just wondering if perhaps you could just provide a little bit more color on what you are seeing around lives? How are you thinking about the backdrop going forward, just kind of given some of the more elevated unemployment and some of the more recent calls for recession?

Yes. The – I think as Mark talked about in his comments, the net adjustment in lives, I think it just happens to be one quarter or more net down than up, for lack of a better term that we normally get from our clients every quarter. They’re reporting lives to us and lives go up and down, and they usually net out to either the same or plus or minus for the book of business. It just so happens this quarter that they netted out to a slightly fewer lives. But as we also talked about, we’ve heard of no actions of any kind from anybody that would be driving this. I think it’s just normal – it’s just sort of normal activity. And I think overall continued, albeit most recent report, slower growth in job growth reported by the government, I think, should support any concerns anybody may have that there’s further degradation in the base as we don’t believe we’ll have.

Good afternoon. Thanks for taking the question. So we started the year with guidance that was below what you guys had hoped for. This is now the second tie-down that we’ve seen. Pete, I understand that some of the stuff is out of your control, but as you sit here at this point in time, what’s your comfort level that the low end called $1.165 billion of revenue is the last cost that you need to make?

It’s why, Mike, we share the assumptions that are inherent in that low end. There’s hopefully no more surprises this year. Therefore, I have a lot of comfort in that number. That said, it’s very difficult to predict the unknown or even the size of the unknown. Unfortunately, this is a year where we’ve had some surprises that are to the negative; two of them sort of were short-lived and didn’t continue. This third one is right now persisting. It’s the best answer I can give you. Without other unknown surprises that I can’t predict, I feel really comfortable.

And I mean, I know so much of your model is built on new member adds. It’s very early for this, but as we think about heading into the end of the year, and you’re obviously seeing a big difference between membership growth and ART cycle growth. How should we think about where your normalized revenue growth rates should be? Are you exiting the year at a run rate that is the new normal for this business? Where are you seeing the various different moving pieces beyond obviously, the additional services, which are a nice uptick, but to get back, I don’t know if you want to call it growth acceleration, normal growth, or whatever the new normal for this business should be? I’m taking away from next week, I apologize. But – just trying to get down to the bottom of the growth opportunities.

No, it’s a fair question. So the biggest driver of growth is and will continue to be adding logos and lives. I’m happy to have Michael expand on where we’re at. So far, I talked in my prepared remarks that we’re pleased with where we are relative to adding logos and lives versus where we were at this time last year, but nonetheless, happy to give more color. Beyond that, barring again any surprises or changes relative to volume and utilization, if you will, per unique member, that will still remain the single largest driver of growth for us as it has in the past.

Thanks, everyone. Thanks for taking my question. Actually, I want to follow up on the last question from Michael about this long-term growth in the business. I know we are seeing three different issues this year in the first seven months of these two issues, we still don’t know why those happened. And I understand the strong demand among employees and employers. But based on your experience thus far, does that change in terms of how you think about your approach to guidance in the future? And also related to that, have you guys thought about any changes you can do in your business model, either in terms of provider contracting or per contracting, which can result in less variability in your results?

Regarding the first part, we’re certainly going to do a couple of things. One is continue to get as much additional information as we can to inform our models and guidance, and also to the extent that we can get more real-time information through our providers and improve the data that we get that will inform us, that will be something that we’re going to continue to work to enhance relative to our current algorithms and models. Considering the couple of surprises we had this year, in the future, our ranges will definitely get wider, right, to sort of capture some of that. Regarding changing how we do business, it is a care consumption model, and without putting in some sort of minimums by client or anything else like that, it’s hard to mitigate the variability in actual consumption. So there isn’t thinking around that as we sit here now. That doesn’t mean things may not evolve. But as we sit here now, that’s not the plan.

Okay. And my follow-up on the 2025 selling season commentary. Last year, you guys called out several not-now employers. Have you seen them coming back this year and additionally, are you seeing any change in their behavior or the approach, either in terms of scope of coverage or benefits?

So he’s – so relative to coverage, we’re not seeing any change in what employers are adopting in terms of the early commitments. This is consistent with the prior year, where there’s a number of cycles, whether it’s facility preservation in the form of egg freezing, whether it’s Rx. I made the comment in my prepared remarks that the take rate Rx for new clients is really high as it has been in the past. All of that is positive. There’s also positive results relative to the take rate of some of the newer products that we have out there. So that’s also positive. As it relates to the not-nows, the majority of the early commitments are from not-nows. Yes, they do come back every year, and they’re the head start, for lack of a better term for the sales season because they’ve looked at the benefits in prior years and are making the decision earlier in the year.

Hey, guys. Thank you for taking my question. I was hoping to follow up on some of the prior questions. Can you just dig in one level deeper as to what data you thought that maybe you anticipate this lower level of cycles per user in the back half of the year? Given that you do have cohort-level data, what gives you confidence that this isn’t a cohort maturation issue?

The first part of the question, we look at where we’re at this time in the quarter versus where we were at this time in the previous quarter and in the first quarter. The reduction or the slower rate of growth in cycles per female utilizing member is consistent with what we saw in Q2, which was a slower rate of growth than what we would normally expect off of Q1. As it relates to maturation, I think it’s really early, considering this is right now a new trend to conclude that. I think we sort of do the math overall in terms of the impact; there’s still cycles per utilizer growth. It’s just not at the rate that we would expect with this normal seasonality we see in the business.

Yes. So this is Michael. First, as Pete said in the remarks, it’s – certainly, we still have lots of decisions still to come. But as it relates to both commitments to date and what remains in that active pipeline, we certainly feel good about. The partnerships allow us to bring more employers on board, providing additional paths and easing decision-making.

Good afternoon. Thanks for taking the questions. Pete, last quarter, you mentioned the Alabama Supreme Court ruling as a potential driver of utilization. Can you just provide an update on what you saw there in Q2? Is there anything to call out on a state-by-state basis? Thanks.

Yes. We surmised last quarter that the short-term dip in utilization was caused by that. If you recall, we also talked about the fact that it returned to normal levels, and that’s consistent with what we reported for the full quarter for Q2 and also what we’re seeing right now for Q3. So the good news is that it was a short-term dip and not something that persisted. We’re not seeing anything today on a state-by-state basis that is of any meaning to call out.

Okay. Great. And then I want to follow up on some of the comments around the selling season being a little bit stronger than last year. Can you talk about how quickly you think the fertility market is growing in 2024? Do you think it’s changed at all relative to 2023? And do you think Progyny is taking market share? Thanks.

The first thing is I do think we continue to take share based on the rate of lives growth that we have every year versus the growth in the market. It’s hard to say how much the industry is growing in ‘24, it’s anecdotal because when I say that, as companies take coverage through carriers or through us or any of the other competitors, the coverage is very different with different benefit plans. The carriers generally have plans that are dollar maximums, thus limited coverage and not comprehensive coverage. The coverage comes in two forms. Overall, the thing I always point to is that if you look at the CDC data around ART cycles that are reported every year, the last year reported is ‘21 or ‘22? I think the last reported is ‘21, and the rate of growth over the last 10 years is roughly 10% a year compounded annual growth rate, juxtaposed against what’s happening with live births, which have been on a decline.

Hi. Good evening. Thanks for taking my question. Hey Pete, I hate to keep repeating the question, but it seems like the common thread throughout this year is that all the economic indicators are sort of trending down. It seems reasonable to think that it’s at least not in part due to a weakening consumer. I am kind of curious as to what gives you the confidence to say when it seems like it could be a logical answer.

Yes. Look, certainly, that could be one answer. I’m not saying that’s impossible. Here is what I am saying. When I say demand is still there, if you look at the top of the funnel, i.e., unique utilizers and utilization rate, we are closer to the high end of historical utilization rates as opposed to the lower end. And to me, that’s a positive, especially when last year was a record year in terms of utilization rate. The other issues we had were mix and we called that out. The second issue around the dip in utilization was temporary, and as I have answered on the previous question, that was already resolved. So far, as we continue into Q3, it doesn’t appear to be a persistent issue. This one is new and it is a small drop in cycles per utilizers, but the utilizers are still utilizing. It just happens to be impacting the future outlook. Because we are not seeing that correct itself yet, we are guiding to it and explaining it. I could understand the perspective that could be – all of it could be looked at collectively as softening consumer demand. But I look at the top of the funnel and how many people are utilizing the benefit and whether that is changing as a starting point an indication of demand.

Okay. Maybe if I could just ask a quick follow-up to tighten up our model. I thought, Mark, when we started the year at 5.4 million members we added 1.3 million. I thought we were supposed to finish the year at around 6.7 million, and now it sounds like we’re going to finish at 6.5 million to 6.6 million. Did we lose – is there a difference of 150,000 members that seem to have fallen off somewhere, or am I misremembering that? I’m just kind of wondering if you can sort of walk us through what the expectation was versus what it is now.

Yes. You’re right in that we were saying we were going to be approaching 6.7 million. We talked about it even in our prepared comments today that we did have an unexpected net reduction in members this quarter. We put that at about 100,000. I think that’s part of what you are seeing right there. Again, the clients that we expected to launch and we announced that we were going to launch have all launched, actually; now that we are into the early part of August. So that isn’t the factor. And to the extent that there is any type of organic growth across the balance of the year is sort of the difference between maybe it’s 6.5 million or rounding up to 6.6 million or 6.6 million neighborhood. But it’s really just what we have seen in this last quarter that has impacted that number you are looking at.

Thank you. I wanted to ask about quarterly progression. And then if I could, afterwards come back on for a clarification of something in the release. But when I look at your unique female utilizers guidance chart here, so you have got flat from 2Q to 3Q. I was wondering if you could help us understand some of the moving pieces in that assumption because you have got a full quarter of the account shrinkage now, but you also have a bunch of new accounts starting in 3Q, which is great, but usually comes with some utilization headwind and then there are different number of weekdays, which I am not sure is material or not for your business model. So, could you help us think through the scale of those moving pieces as you come to your guidance?

Sure. Do you want it, Mark, or let me…? Yes, I’ll do it, and then Pete, if you have color. The important thing maybe is just to understand what the charts are. The lower chart, I think you are referencing shows the quarterly progressions of ART cycles per unique female utilizers. This is the component of what our utilizers are doing, how many ART cycles will they complete in any one quarter. The dynamic there is people who begin with utilizers in the first quarter of the year, and that progresses as the year goes on. What we have seen this year, and this is what we are highlighting, is a much - it’s still an increase from 0.53 to 0.54 but a much lower increase than you can see and perceive in prior years. Further, the reason we are estimating a 0.54 for the third quarter is because it’s effectively what we’re seeing at similar rates. We have thought it was most prudent again, and it’s always been our guidance philosophy to show and base our estimates on what we are seeing.

Yes. Thanks for the questions. Maybe just to expand on Sarah’s line of questioning here. Just looking at the bottom chart, and if you go back in time, I know you are only showing us ‘22 and ‘23 and so far in ‘24. But if you go back to earlier years, have you guys ever experienced anything like this where you have seen decreases in any quarters or I guess that’s the first question.

Yes. If you look back, depending on the year you look at, if you look at 2020, it was the first year of the COVID year. 2021 was a year that had a lot of variability because it was sort of the first still in COVID, but sort of coming out of it during the year. The last two full years were more indicative of pre-IPO activity versus those two COVID years in terms of the seasonality and sequential improvement.

Hi team. Thanks for taking my question. My first question is, if we look at fertility benefit services average revenue per ART cycle, it really accelerated and spiked to levels we haven’t seen in a few years. Can you give us some color on what’s driving that?

Sorry, the average per ART, yes, I think what you are seeing there is if you have a – again, for the number of people that are utilizing the service versus the number that are completing ART cycles, it’s a greater proportion. There is revenue associated with that. So, you are seeing a higher proportion of revenue for non-ART revenue to the cycles themselves, and that’s going to push your average up. It is a factor of this ART cycle per utilizer.

Yes. As I mentioned before, I think somebody else asked us the same question. There isn’t a state-by-state significant variance right now that we can see in call out. And Mark had talked about in his prepared remarks, what drove the difference in growth rate in pharmacy revenue versus medical revenue. It’s really tied to the revenue per cycle that didn’t grow as much sequentially from Q1 to Q2 as I had in the past. And therefore, in the prior year did, so you are going to comp-off of a year that had more growth, and then on top of it, manufacturer rate increases were in last year’s were done by Q2 last year, weren’t by the end of Q2 of this year.

Hi. Can you maybe talk a little bit about your conversations with benefits consultants? Like we have had some discussions with a handful of them over the past 2 years and they highlighted to us that DEI, diversity equity inclusion was an important consideration when companies and plans would sign up for these benefits and that was a driver of growth. We are now heading into an election cycle. It’s possible, obviously, that perhaps a more conservative leading administration will take power. I mean, has that entered into the conversations at all or not?

Regarding the last piece, even if a more conservative party takes power, the former President Trump, the Republican nominee has already said he supports fertility and IVF. On both sides of the aisle, there have been enough statements out there; there is support for IVF. I don’t think that will create an issue for the industry. Regarding conversations with the benefit consoles, I think the trend is positive relative to what’s happening at the consultants. They have effectively all created a center of excellence around rebuilding benefits that wasn’t in place before. That’s an indication of the overall demand and how often the conversations are happening with existing clients or prospective clients of theirs. For them to be equipped to be an advisor to these clients, we see that as a positive.

Okay. And then just one quick follow-up. The revenue per ART cycle increased a good amount sequentially. Is the mix back to where you thought it would be, meaning the revenue coming in per cycle and for each service is now high again, and it’s simply the overall utilization in membership that’s lower than sort of what was expected? Thank you.

The revenue for ART cycle and the increase in Q2 is a function of the fact that utilizers who utilize services that are in ART cycles are using other stuff that drives the math, making it seem higher. If there are fewer cycles, but other services and other utilization is done but are not ART cycles, that will drive the overall math because we are not really breaking out the two separately. That’s what’s driving that. The mix is normal, if you will, for lack of a better term. There isn’t a significant mix change. We had that mix anomaly in the first six weeks of the year, and other than that, it’s been relatively consistent with what we would expect at different times of the year.

Okay. Thanks everybody for joining us this afternoon. As always, please feel free to reach out to me if you have any questions or follow-ups, happy to assist in any way that we can. And again, if you are interested in coming to the Investor Day next week, send me an email, and I will confirm your registration.

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