Richard Close in equity research covering digital and tech enabled health excited to close my day of presentations with progeny we've covered them for three years now I think it's a really interesting story really was unique in terms of carving out fertility benefits addressing a significant problem for people, you know, carving that out from the health plan and has been super successful. So glad to have CEO Pete Aneski with us here today to tell the story, you know, the growth opportunities going forward and, you know, coming off of a decent second quarter and some questions that have arised out of that so we'll get those answered so Pete thank you for coming and James Hart of IR here as well so Pete maybe just on the second quarter results to start you know I think it's really more the third quarter and the second half of the year you know you talked about a meaningful step up in season And I just want to go over that, better understand that. I think there was some decent amount of questions surrounding that and the utilization. So just walk us through what you're seeing on member activity and claims patterns.

First of all, thanks for having us. We appreciate it. So, yeah, we just reported Q2 earnings, and we also talked about what we're seeing so far in engagement and utilization from members. in in the summer which is sort of the visibility we have right now we have visibility of about the actual scheduled appointments over the next six weeks and then we and as the weeks go out further out you know a little less visibility and then we use you know models and algorithms to predict utilization for the balance of the year every year we see seasonality in the summer relative to the heart of the summer months so so think you know back half of July and August we see some seasonality this year it's more pronounced than what we've seen in a number of years it's more akin to sort of what we saw in 2022 where we saw a sharper seasonality that came back I'm gonna say came back visibility for September is showing utilization and engagement at the levels that we saw in the first half of the year I mean the expectation is that'll continue through balance a year not unlike what we've seen again in 22 when it was the sharpest sort of seasonality that we saw but also excuse me every year we see a little bit of seasonality um it comes back on that pattern because the reality is that the reason why there's seasonality is people choose to even if they're ready to do treatment some portion of people choose to wait a little longer to start doing it because they have summer plans or weddings or whatever they have to go to and and they're not looking to get pregnant in that moment, they're going to wait a little longer, and that's the nature of the season now.

So you're feeling pretty comfortable. I believe you said you thought this was temporary. You're feeling pretty comfortable on that?

Yeah, yeah. We wouldn't put out guidance and expectations if we weren't. And again, it's based on what we're already seeing for September, limited but still good. And again, that, what we're seeing already for September, consistent with what we saw in the first half of the year.

Okay, great. You know, you were pretty upbeat with respect to the sales pipeline and the selling season. And maybe go over those dynamics. You know, renewals, that was pretty positive so far. And then the new business remains on track. You have a million-member goal that you're looking to add. So talk a little bit about the momentum you're seeing and early commitments and the pipeline as we enter the heavy closing season.

Every year we give color on our sales season. There's a couple of important distinctions this year relative to that color. You started with the renewal, so I'll talk about that first. So each year we go through a process. About a third of our clients are up for renewal every year. They're generally on three-year contracts. And they all renew in different ways, but nonetheless they're up. Some of them renew. It's an easy renewal process. Some of them renew with an RFP process, market check, company policies, that kind of thing. So the long short of it is the amount of commitments that we've gotten for renewal have essentially de-risked, you know, renewal rates for us going into next year way earlier than what we normally would see in a given year. Part of what we believe is driving that is medical cost trends that are out there are real and significant. And a lot of these employers are dealing with sort of other issues there. They're not seeing a problem in us. we give them a ton of transparency and reporting, they have no concerns, it's a good member experience, etc. And so even of those that did RFPs, they did them earlier, came to their conclusions that they're going to continue with us, and we were able to get to a place where we can make the statement that we're making, which is we've essentially de-risked, you know, from a renewal standpoint, our book of business, which is significant because it's a lot earlier. As it relates to new sales activity, we are also seeing meaningfully better commitments earlier, both in lives and in contribution in those lives, than we did this time last year, you know, I say this time, as of when we reported earnings last week. And that's important because obviously it takes a little bit of risk of how much you have to predict remaining to close to sort of hit your sales target. Our sales target is generally a million lives or more each year, and we talked about that. We have an expectation that we'll be able to hit that target this year, given the activity we're seeing so far.

We also still have a healthy pipeline for the remainder of the sales year, also part of what's considered when we talk about sort of that expectation of us hitting our target. maybe it's a follow-up on the renewals how are you thinking about expansions you've given data in the past in terms of upselling or clients expanding as they come up for renewal can talk a little bit about that how it's trending as compared to past years and what exactly is in those expansions?

Yeah, I'll take the second part first. So when people take the benefit, whether it's the initial year or over the years as they adjust the benefit, they're generally going to add something to the benefit versus their first year. So maybe their first year, they took two smart cycles, and on top of it, pharmacy, for example, but they didn't take egg freezing, they didn't take adoption and surrogacy, they may have a global population, and they didn't take it, or there's also opportunities around our ancillary products, postpartum maternity and menopause, right? So all of these are opportunities for upsells, and the upsells take the form of, now I will add the egg freezing benefit. I'll go from a two-cycle benefit to a three-cycle, or an unlimited. I will add adoption and surrogacy, et cetera, right? And that's the upsells that we talk about. It's early to, you know, that process is later in terms of the actual plan design for renewal. So it's early to say that, you know, what that activity looks like right now, it's a little too early to say, but it's positive. And every year we generally have, you know, something in the 20% to 30% of clients adding something to the benefit. The good news is we're getting no indications of anybody reducing the benefit. That's not consistent with prior years, but, you know, with medical cost inflation, again that's happening in the country, it's something that we get as a question regularly, and so I like to say it out loud ahead of time.

Okay. With respect to the new business, you've talked about this in the past, like greenfield opportunities versus competitive takeaways, and it seemed like maybe on the call last week there was more on competitive takeaways. Maybe I'm misreading that, But talk about the difference between the Greenfield opportunities and those takeaways.

Sure, sure. And I want to define takeaways. The takeaways are everything from somebody may have this covered through their health plan or somebody may have this carved out with a VC back competitor in the space, not doing sort of trying to do what we do. This year, in terms of the early commitments, we're seeing a higher proportion of brownfield versus greenfield. And that's because, again, I think for the same reason, when you consider medical cost inflation and what's happening in the trends, a lot of these employers are trying to manage their benefit. We've proven our ability to not only manage from a unit cost perspective but also manage from a total program management perspective. So your average cost per utilizer over years has been relatively modest in terms of increases, especially as compared to what's happening again with medical cost inflation where it's in the high single, low double digit and predicted to be the same for next year rate. So if you're already spending money in this area and you can save money and actually have your money be spent more officially and actually help more people out, that's what you're doing and that's why you're getting a higher proportion of those decisions earlier in terms of our new client commitments.

One of the questions we often received since covering the stock has been exposure to, like, one industry, right? So, you know, you were really successful in technology at first, but now I think you're in, like, 45 different industries, also serving government in some cases. You know, talk about that evolution in terms of adding new industries, health care, health systems, hospitals has been an area of growth over the last couple of years. But really, how you think about employment trends and, you know, the diversification of the client list now?

It's a great question. I think the evidence that this is a benefit that's a human need and not specific to any industry is exactly that data point. When we first started out in our first year with the benefit, we just hit 10 years, we were four clients in tech and one client not in tech, we were in two industries. We've grown to over 45 different industries, and what generally has happened over the years is that you'll get one of the top one or two companies that'll take the benefit first in that industry where they haven't taken it before, and then everybody becomes a fast follower soon thereafter, right? Every year when we sell, we generally sell to at least two-thirds of the industries that we have. Another company will come in and buy. Now, it's not the same two-thirds. Every year it's a different two-thirds, but about two-thirds, so it's constantly penetrating each industry each and every year, you know, that flywheel effect. It's really important if you think about it because a lot of times these industries are competing for talent. And when your leaders in that industry are adopting the benefit, you don't have it. Even if you were putting it off, maybe you didn't focus on it. Whatever the reason is, you've got to stare at it and say, okay, if I want to compete for talent, this is a one in five benefit that millennials are looking for. Millennials are the sweet spot of those who use our benefit. Average age of a woman going through IVF is 36 years old. So 32 to 40 is sort of the range of those that are using the benefit. So it's a very important part of the population, and you have to make sure you are covering what is a very real need. The incidence and prevalence of infertility is one in five in the U.S.

It's a huge need, more prevalent than diabetes, but nonetheless still not broadly covered. maybe pivoting back to renewals one of the items that has come up on the last couple calls or that you've talked about and you mentioned this a little bit earlier as with respect to the medical cost trends but like the ROI that the company delivers I'm just curious in terms of how big of a factor or how big of a factor that is in the decision-making process on renewals or even in greenfield opportunities, someone new to it. And then, you know, as we take a step back and think about layoffs and unemployment, and sometimes your stock has, you know, reacted to that, when you've reported. I'm just curious, how do customers think about it in terms of, I think in the past, wellness, certain wellness benefit type of programs. It's like, that's the first thing on the chopping block. So talk about the ROI that you deliver and why that may not be the case in terms of this is the first thing to get cut.

It's such a great question. And so I'm formerly the CFO of WebMD. WebMD had a wellness business, and in particular during the financial crisis, that business got shredded, right, for the reasons that you say. In the wellness business, a lot of your measurement of ROI are soft measures, a lot of leaps of faith in terms of, you know, whether or not you are or aren't really sort of impacting in cost savings, et cetera. In our world, our savings, our hard dollar savings that we report to our clients each quarter in terms of what they're saving and literally the details of all the calculations that go with it, right? It's a really important component of the reporting because it says two things. One, we're literally managing this benefit at every level. And two, we're willing to show you all the detailed transparency in our homework, if you will, that goes with it so that your benefit consultants, your actuaries, anybody else who sort of wants to go through it, we go through it regularly. This is regular reporting that we do for everybody, and so it's not just us making claims. It is, in my opinion, the reason that we have 99% retention for 10 years in a row, because that 99% retention comes from the fact that you're constantly reporting and showing your clients that you're not only delivering an unparalleled member experience and outcomes that are second to none in terms of people getting pregnant faster with a live birth and a healthier pregnancy, but you're also saving them money in the process and you give them a no-brainer in terms of whether or not they'll think about sort of making a move. And that's why even though they do do market checks, some every renewal, some every other renewal, based again on company policy, and those market checks aren't just economics, they're also med econ teams, they're chief medical officer, and a whole bunch of folks that are part of the process, we continue to retain that level of clients. It's always, you know, the proof is in the pudding, as they say.

Maybe going back or going to the competitive landscape, you know, if I go back two or three years in covering you, talking about competition, generally speaking, you said it's the health plans. And I know our insurance, our fertility benefits are through our health plan. So we're a potential client for you, I guess. But, you know, talk about why health plans haven't done this well. And then are they making any changes, you know, investing more and specializing in this at all? Do you see any difference in how they're acting?

Well, the easiest part of that question first is the health plans don't make any more or less money if they covered the benefit for you or not, or if you covered that. They're an ASO model, administrative services. They get a PPM, regardless of whether or not you click on or off the diagnostics of infertility and then the network that they have that goes with that. Their plan design is one size fits all for everybody. They slap a dollar maximum on top of it, and away you go. There's no network management of any kind. There's no care advocates that help you through the journey. and there's no attempt at even tracking, never mind impacting outcomes for the purposes of savings and better member experience, right? The reason why they haven't invested in it is because it's just not big enough for them, right, to worry about. And because they don't make any more or less money, because their model is an ASO model, they have other fish to fry. You know, again, think about what's happening with medical cost inflation. They have way more areas to manage and deal with that this isn't one of their focuses. What's been happening, though, in terms of what they're doing, is they've been partnering with us, essentially. We have a number of health plan partnerships. The biggest one is Cigna. It's a really good partnership. It went into effect effectively September of last year. This is the first full sales season that we're having with it. And that gives us the ability to work with Cigna, work with their account executives, and get to as many of their existing clients that have the benefit or any of their existing clients that don't and want to add the benefit, and now they get the best of both worlds. They get a partnership that has a great medical plan as well as the best fertility and family-building solution out there. That's really what they're doing. In the past, a few of them have sort of done a little bit of marketing spin trying to create the perception that they're doing something, but the reality is they didn't do anything different, and we won, you know, against them sort of every time. So, you know, and we do generally every year win against all competitors. We win the majority of our deals against all competitors collectively every year.

So should I think of the mindset changing at health plans that this might be the beginning of something that, you know, sort of snowballs in terms of knocking down additional health plans as clients?

Yeah, we're having more conversations with other health clients for similar kind of partnerships, like the ones we have already, like the one we have with Cigna. And, yeah, there is an opportunity because at the end of the day, you know, they could also be uniquely, you know, have a partnership with the best solution out there. So they're open to it. There's a lot of other reasons why they should do it, but ultimately it's that they're providing to their clients the best services out there.

You've mentioned medical cost inflation several times. Look at your income statement. Your margins have been pretty healthy, and you've kept costs down. How have you been able to achieve that when all other medical cost inflation has skyrocketed?

The biggest reason is our scale and our size. So we have our network. It's a proprietary network. And that network we've been able to contain costs with because of our growth. And so for them, we're a big part of their overall patient volume. Not only is it coverage, but it's also comprehensive coverage when it's progeny, as opposed to limited coverage many times when it's through your health plan or other partners. So it's a more valuable patient every time because they're getting way more benefit coverage than they otherwise would see. So that's given us the ability to keep rates essentially flat to even down, depending on sort of who the clinics are over the years, and be able to achieve that savings, you know, given the environment that they're dealing with for all of our clients. That's a big part of it. The other part of it is we're constantly improving what we do and how we work with those providers, and our outcomes continue to get better and better. They've been way better than the industry already, but better and better incrementally over time, and that also adds to savings dollars for our clients.

Okay. And one of the things with respect to expansion has been additional services that you've rolled out over the last several years. And I think at your analyst day, was that two years ago, James, you talked about like 8% to 10% of revenue coming from these ancillary services. Any update there in terms of the magnitude of that and how is that ramped?

Yeah, so I'll start with the ramp first. So across the expanded products that we have out there now, there's roughly 2.7 million of our 7 million covered lives have one or more of the expanded products. We had talked about that those products plus other products that are on the come at that point, Progeny Select is one of them, are going to be part of what gives it the ability to grow beyond our existing TAM and our existing products. So far, the take rate is good relative to client adoption. Engagement continues to grow across those products, and Progeny Select is new in the market this year. We're signing up a lot of great partners in that ecosystem so that we can start to get pulled through next year and the years to come.

Okay, and last question here, not surprising. I've run out of time, but Progeny Select is a new, I guess, new model that you rolled out last year. This is the first full year selling season, I believe. Can you talk a little bit about the differences in Progeny Select from the traditional model and how that's tracking here so far this first year?

Yeah, the biggest difference is that this is a product designed for those who, smaller employers down to 100 employees, that generally buy on a fully insured premium basis. Gives them predictability in terms of costs, and for us, you know, puts them in a larger pool so that even though we're taking risk technically, it's not significant risk. We have more data than anybody relative to underwriting the product. It's a really important aspect of what we do because at the end of the day, our goal is to help anybody who wants to have a baby to be able to do so, and this population is no different than if you work at a large employer. It's, again, a human need, and the incidence and prevalence of infertility is the same whether you work at a 100-employee company or whether you work at a 100,000-employee company. So far, the progress from a sales perspective has been, again, with the channel partners, the general agents, and the PEOs. and getting them signed up, and then beginning to work with them to evangelize across their broker networks, et cetera, to have this supplemental plan included in their renewals out in the future.

And just as a follow-up on that, since we're running out of time, but does that expand the TAM from what you previously talked about?

Yeah, it's a great question. And so our TAM, before the announcement of Progeny Select, was 105 lives, 105 million lives. That adds 50 million lives to the TAM overall.

OK. I had a couple more that we're not going to get to. So thanks for being with us today.

Thank you again. I really appreciate it. Thank you.