Progyny, Inc. (PGNY) Earnings Call Transcript & Summary

All right. Good morning, everyone. Thanks for joining us at the Jefferies conference. It's great to be back in person. For our next presentation, we're obviously very excited to have the management team from Progyny here with us. To my right is Pete Anevski, who's the CEO of the company; and his right is Mark Livingston, the CFO of the company; and there in the third row is James Hart, who heads the Investor Relations function for the company, who I think maybe most of you know from dealing with him. All right. Our presentation is going to be 25 minutes. It's going to be a fireside chat. Hopefully, we'll leave some time for maybe a question or two from the audience at the end if we have some time. So in the interest of time, why don't we just get started? I thought we'd start the presentation with just one general question before kind of going into some of the specific issues just in case there are some people that are new to the story. I want to ask Pete, maybe to just give a quick business model overview. Maybe give us some industry statistics. For example, how many companies offer fertility services, how your model is kind of differentiated from what maybe the major carriers are offering and how you're able to drive those differentiated results that Progyny has been able to generate.

Sure, sure. Thank you so much, by the way, for having us. So Progyny was the first and is still the only fully managed fertility benefit solution where we manage everything that happens for the members and for our clients. We're unique because we are focused squarely on outcomes. We're one of the only companies, again, in fertility particularly that is a value-based care company, delivering on that versus sort of a lot of what carriers and people talk about in health care. And with that focus, we've been demonstrating significant favorable outcomes in the forms of better live birth rates, in the forms of higher healthier pregnancies, in the form of higher singleton rates and lower twins or higher order multiples. We've been doing that successful year after year since our first year in business, with the plan was out there in 2016. Related to our model, we have a model that we've built that's a scalable model. That has delivered 81-plus NPS scores and high NPS scores, again, consistently over the years despite our growth. Our growth has been significant. We've been -- our first year in market, we had 5 clients with 110,000 covered lives. Today, we are 265 large self-insured clients with 4 million covered lives and have been demonstrating year after year not only top line revenue growth that's significant. So back in '16, roughly $20 million. Today, we are at the midpoint of guidance, roughly $755 million top line and profitable. So Mark, I don't know if you want to go through those percentages.

Yes. So we've continued to expand our margins year after year. In 2021, we were 13.5% adjusted EBITDA margin. And that was actually on incremental margin versus the prior year, represented about 22% margin on incremental revenue. So we continue to drive that as we've gone forward. The model is set up to leverage year after year as we grow really at every line of the P&L.

And I'll hit a couple of high-level stats in terms of the industry and coverage. So although infertility is a recognized disease both by the AMA and by the World Health Organization, infertility is still not broadly covered in the U.S. The largest employers based on Mercer's latest study, 20,000 employees or more has coverage of around 42%. Smaller employers than that are covered, the benefit around 27% of companies. And here's the reality of that coverage, it varies significantly. So when I say coverage, some form of coverage. Does it mean fully covered? Does it mean broadly covered? Does it mean covers everything? The good news is that trend -- the trend of coverage is favorable. So since our inception, we've been a big part of creating awareness around the need. But all the other dynamics out there, whether it's couples choosing later and later in life, the decidable trend of having babies later and later in life are part of that growing demand, whether it's this being one of the top things that millennials look for when they are picking where to work, whether it's the tight labor market, et cetera. When we started in 2016, the sales process was a 2-step process. A lot of it was around educating employers as to why they should be covering it and then it was why with us. More and more so now, it's about why we offer a better solution and less and less their awareness around that they should be covering it. And the last point I'll make so just in the high-level stats is in the U.S., only 2% of babies come from fertility services, right? So because it's a very expensive service and because it's still primarily cash pay, the reality is 1 in 8 couples suffer from infertility. And so there's a huge unmet need still in the U.S. It's the reason why even though natural fertility rates have been declining in the U.S., in the U.S., the fertility industry has been growing at a compounded annual growth rate of 10% over the last 10 years.

Right. So maybe let's just follow up on that growth, right? So to your point, Pete, less than half of the companies in the United States are offering fertility services. So you have this natural tailwind in your business. So maybe Mark, if you could just give a quick update to the audience about what happened in last year's selling season and the type of growth you're seeing this year. And probably on top of that, the financial profile, the gross, and you mentioned operating margins a little bit of the company, just so you can frame fiscal '22 for Progyny.

You want to do selling season? I'll do the...

Yes, yes. So last year was our most successful selling season by far. We sold 85 large self-insured companies representing 1.2 million covered lives. To put that in perspective, we sold almost as many new covered lives as when we went public in October of '19. This year's selling season so far as compared to last year by every indicator is positive. So whether you take sales commitments to date versus a year ago this time, we're favorable. Whether you take overall active pipeline today versus a year ago, we're favorable. Whether you take average size of client, it's comparable to last year, which was one of the best years that we had relative to average size of client that we brought on. Whether you take a number of RFPs that we're getting versus a year ago this time, favorable. So whether you take the early commitments that we've already gotten that want to start the benefit early, smaller companies, generally, that's what happens, those that start the benefit earlier are smaller companies, another indicator that things are favorable. So for us, the way we see it, the macro trend around the demand for a fertility benefit continues as we compare to our record sales here last year.

Yes. And from a financial profile, so we grow our revenues by adding on additional services for the existing clients that we have. And we also benefit from their growth organically. The more their employee counts or member accounts grow, the utilization rate is there within their base. And naturally, the more people will come. But the single largest factor in our revenue growth is new sales, which is why we highlighted so significantly. And for us, it's an element that happens right around January 1 each year. We do have some clients that will launch throughout the year. In fact, this year, we had about $40 million to $45 million worth of clients' contribution to this year's revenue starting in Q2. But generally speaking, that all happens on January 1. So you'll see a significant change from 1 year to the next as we bring on all of those clients in January 1. And that just plays itself out below the revenue line in gross margins, where we leverage the cost that we have for our care management service teams. We like to say, like we run them like call centers, very efficiently. We don't have to add as many folks as we do proportionally to revenues. But we don't run it like a call center and that we encourage them to spend all the time they need with their clients to maintain the NPS scores that we have. Sales and marketing and G&A as well, we leverage each year as our scale grows and as we retain the clients that we have year after year. Again, we have a virtually 100% client retention rate. So all of those things play across the P&L, and you'll see that step up as you get into Q1 and then into Q2 and the rest of the year. And it's reflected in our guidance.

Okay. Well, Pete, Mark, we have 16 minutes left. And in that time, I want to address what I think are the key issues that everybody wants to talk about here. I mean the stock had held up reasonably well through the first quarter. And then in the last sort of 2 months, it's come under a little bit of pressure. And I attribute that to 4 things in no particular order. We can talk about the lasting impact of COVID on utilization. We'll talk about fears of recession. We're going to talk about the competitive landscape. And then lastly, Roe versus Wade. So if we could just hit those 4 topics for people, I think they would find it incredibly valuable. So first, let's talk about the first quarter in terms of what we saw coming out of Omicron. It seemed like utilization was sort of getting back on track consistent with maybe pre-COVID levels. Could you give us an update now that we seem to be coming out of the pandemic, where the company sits with utilization levels? Because for those who may not be modeling the company specifically, right there is the membership component, but then there's also the utilization component within the membership, right? And so that's the other piece that I think is important for people understand. So any comments coming out of COVID utilization?

Yes, sure. So the comments we made back when we released Q1 were that as we got to the midpoint of Q1, the overhang or impact on utilization from Omicron was essentially over. Utilization levels were back to normal since the middle of Q1. That continues through today. And so from what we are seeing whereas, we had marginal impact. But nonetheless, people are sensitive to it, through some of the waves of Omicron and in particular, last year and at the end of the year because Omicron hit sort of in the U.S. and spread quickly in December, had a little bit bigger of an impact just in Q4, the reality is that the impact is low single digits as a percent even when it happens. But the waves and the timing are sort of what causes some of the concern around it. But nonetheless, we're at normal levels of utilization now. We have been at normal levels since the middle of Q1. And from what we see essentially, the impact of COVID from the impact on utilization seems to be behind us.

Okay. Perfect. All right. Let's move on to the second issue, which I want to talk about is the fears of a pending recession, right? And that could factor into your business in a number of different ways, right? First of all, it could cause companies to maybe be a little bit more hesitant about taking on a new benefit. It could cause family planning to be put on hold in this inflationary environment. Finances are starting to get tight in the household. I'm just kind of curious if you could just sort of -- you answered part of it talking about the selling season this year in terms of what you're seeing and that the sales commitment to date are up. You said the pipeline was up, early commitments, all that seemed to be favorable versus last year. But as we're potentially considering the potential for a recession over 6 to 12 months, how do you think that plays into your business in a couple of different ways, if at all?

Yes. So I'll point back to some historical facts as an indicator. So including the comments I made that we're not seeing any yet, right, or we're not seeing any, I don't believe there'll be any. Reminder, infertility is a real disease. And if you want to build a family, deferring the decision to build a family creates risk for you that you might not get there because your probability of success is lower each and not a little lower, it's significantly lower. If you look back at the financial crisis, the Great Recession 2008, 2009, way back then, coverage was a lot lower. And back then, it was primarily -- significantly majority cash pay, the industry still grew. Even though it grew -- the rate of growth slowed down, it still grew. So people still chose to use fertility services because they have a dream of building a family and had a need, and it's a real medical need. Regarding whether or not sort of companies may do anything different, companies generally don't carve back their medical benefit. This is a medical benefit and a part of the medical benefit. And north of 60% of our clients that we win were companies that already offer fertility benefits, they just found a better way of doing it and a more efficient way to spend their money and a better member experience relative to favorable outcomes. And so even if there was the extreme where any new companies that never offer the benefit slowed down, the reality is that you could see acceleration for existing companies that offer the benefit that may have financial concern and we could save them money. So those are all the factors driven primarily by what we call the primordial need to build a family which is much greater than any short-term concerns any individuals may have relative to current inflationary market or anything else. Because again, if you look back to sort of the financial crisis, demand didn't -- demand for -- in the fertility industry itself when people were paying out of pocket didn't slow it down.

And Mark, maybe just a quick financial question. I don't know what your plans are, but would you expect to give us an update on the selling season on the 2Q call? Or do you think we'll have to wait until the 3Q call for more substantive sort of update?

Yes. I think we -- for the last couple of years now, we've given qualitative comments around the selling season on our Q2 call in August. Typically, we were still right in the middle of the selling season at that point. So a significant number of the decisions will come between really the middle part of August, and maybe to a larger degree, towards October. So again, it's more a pipeline commentary and whatnot. And then again, when we get to Q4 -- sorry, into November on our Q3 call, that's when we provide a little bit more sort of hard data on the outcomes of the season itself.

Okay. Maybe if we could just shift gears to the competitive landscape because this is maybe the most frequent question we get at this point in time. People are looking at companies like Kindbody, Carrot Fertility, Maven, and they say imitation is the best form of flattery. And so maybe a few years ago, you had this differentiated offering in the marketplace and might have been the only voice in the marketplace maybe competing against the carriers. And now there are a number of private companies. There's been a reasonable amount of funding in the space. Could you maybe just give us an update on the competitive landscape in terms of what you're seeing?

Sure. Not surprising if you're getting that question a lot. Those companies are out there trying to raise money. So they're out there talking to investors and then sort of becomes an echo chamber, right, making claims that -- what they can do. The reality is they don't publish any of their results. Their results aren't posted on any of their websites, right? So their claims are just that verbal claims, right? All of our claims and outcomes are published in our SEC filings and are out there, right? And so we're confident that we're actually delivering what they aspire to be one day. But that said, the majority of time that we see them is when there are RFPs. The majority of prospects that were -- that each year, including this year, that we talk to and win are actually not through an RFP process. So although RFPs are up, good indicator overall, the reality is that we don't run into them often collectively -- individually or collectively. That's no different than every other year and the prior year, right? We are still primarily competing against your other most common alternative, which is your carrier, right? And you said it the best. It's a hot space. It's a good space. It's not surprising that VCs are investing. And I'll go back to my WebMD days when WebMD was the leader in the space. When I ran WebMD and Everyday Health was a similar sort of new entrant competitor, we made a lot of noise, nipped their heels and never sort of caught up. It's a significant advantage relative to the solution that you've built that we put changes into every year, now 7 years in a row, they're not catching up. So the bottom line is, although there's more noise around them competitively, our primary competitor still remains the traditional carrier and the traditional carrier has really done nothing materially different around focusing on this area simply because at the end of the day, they're dealing with many different areas of health care, and this is a small niche for them and so they're not focused on.

But that's interesting you say that, right, because it just seems logical that given your success at some point, right, they would maybe want to mimic what you're doing. But to this point, you're not seeing the major carriers change their -- the structure of their benefits or their benefit plan designs in any way?

Look, the answer is we're not and here's why we're not. I believe, from year 1, I believe this, and so far, this is still the case. They're on an ASO model. An ASO model, they charge on a PE/PM basis for all the lives -- for all the conditions that they take care of. They don't have a model that says, "Let me carve out this niche benefit and charge you extra." It costs money to do what we do, it costs money to focus on delivering favorable outcomes. It's the reason why they're not changing their approach. Because if they change their approach in this part of health care, they actually have to start changing their approach everywhere. They're not organizing their business model, isn't set up to address this area of health care like we are. And so that's why they haven't. The most they've done that I've seen is they've tried to create some marketing, some of the larger ones, try to create some marketing. And even those like Anthem's -- RSS within Anthem that's had a fertility solution even before we existed has changed nothing relative to what they actually do in terms of their approach. And so at the end of the day, we are not seeing any change of any material kind vis-a-vis the carriers but for some market positioning and marketing where we're still winning against.

And just to tag on to what Pete said and back to what you said, Glen, it's -- to be successful, it's not just sort of one component of what we do. So changing a plan design isn't going to solve the problem. It's having the right plan design, having the care management teams in place to provide the incredible level of support that we do, it's having the provider network in place and managing them as closely as we do on a regular basis to achieve all of those outcomes. And it requires cost and investment and a different change in focus. And we've just not seen the carriers have any interest in going that far in.

Right. Maybe there's -- in the interest of time, there's just one other issue that I did want to talk about, which surprising in 2022, we're actually going to discuss Roe versus Wade, right? But it's been in the news a lot lately, the potential for it to be overturned. I think people are struggling to really try to understand if this could impact your business in any way. So maybe Pete a good place to start is if you could sort of frame the issue and how it may relate to your business, and then I may have a follow-up question or two. And then hopefully, if time permits, we can take 1 or 2 questions from the audience.

Sure. So the concern that's been raised around the impact of overturning Roe v. Wade vis-a-vis fertility services is that 13 states today in the U.S. have what they call trigger bans. So there are laws that they pass that become effective if Roe v. Wade ever gets overturned, they will become effective immediately. The laws are written differently in each state. And they're written broadly and don't actually specifically carve out or clearly define when life begins. The debate is always when life begins. And so is there an embryo? Or is it a fetus implanted in a woman? So -- and I'll give you sort of a good example of where it is clearly defined. So one of the states that has a trigger ban, the largest state is Texas. Texas is clear that for them, abortion doesn't include embryos that are implanted in a women, right? And so -- and it's clear that fertility is not part of that definition. So therefore, no fear in Texas relative to getting caught up -- fertility getting caught up in these trigger bans, right? Texas is also interesting and a good state to point to because Texas is 1 of 4 states out of the 13 states that also has a fertility mandate. So politically, if you think about it, it's been addressed in the state where they have a mandate for fully insured employers to offer fertility to their employees, right? So the combination of carving it out for Texas specifically and the mandate, right, takes Texas out of the game. The other 12 states aren't clear one way or another as to whether or not this is included, meaning fertility services and embryos and any potential destruction of an embryo is included in the definition of abortion, right? That's where the concern is coming from, right? For us, as an exposure, those other 12 states are small populous states. And for our business, roughly 3% of our business today, right?

In all 12 combined?

In all 12 combined. If they all went extreme with that definition or with that interpretation of the law, right, still not yet -- where the gate is still not yet defined, so not yet even addressed. So the industry rightly so and folks out there in some of those states rightly so are raising the question to get ahead of the issue as opposed to waiting for it to sort of become defined and included in the law, and that's what they're doing, and that's the noise that people are hearing. But if you think about the states that don't have a risk around trigger bans or writing the law down the road similar to the ones that have already been written, those states are where most of the population in the U.S. is. Now for the states that even if they do interpret it that way, here's the reality of how it would be addressed. Companies already have come to us and said, if, in fact, those states interpret the ban as including fertility services, and in those states, we have members that can't get fertility services, are you prepared to provide within the benefit a travel reimbursement because we want people to be able to travel to states where they can get the service. Medical tourism in fertility today is already very common, right? And additionally, if you have embryos stored in those states, you can transfer those embryos. Tissue transfer happens every day in medicine, every day in fertility. You could transfer those embryos to another state and deal with that as well. And so you don't have to worry about the embryos that you may have that are cryopreserved that you may not be able to use because you could take them and transfer them to a state where you don't have an issue. So at the end of the day, not surprising that those that want to make sure that this doesn't swept up in this potential overturning of Roe v. Wade have created some concern so that -- of unintended potential consequence so that they may get ahead of it. But the reality is that relative to exposure to us or even the industry where the populous is versus the states at risk, not a significant issue.

I feel bad, Pete and Mark. The business has so much fundamental momentum behind it that I feel like we spent a disproportionate amount of time talking about some of the issues that I know are on people's minds, which is maybe an unfortunate use of time on my part. But we maybe have 1 minute, I don't know if there's a quick one, I'm showing 0 here on the clock. So if we don't have a quick one, I don't know if you guys would be outside and can maybe just speak to me for a couple of minutes aside if they have follow-up questions. But...

We're happy to do that. I'll just make one last sentence though, based on what you just said. Everything that has made us successful, including the macro environment, for us despite what you're hearing hasn't changed. We don't see it, we don't hear it. So at the end of the day, all the things that have made us successful, we expect to continue.

Okay. We'll leave it there. Pete and Mark, thank you very much. We really appreciate it. Thanks, everyone.

Thanks, everyone.