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

Good afternoon. My name is Allen Lutz. I'm the health care tech and distribution analyst here at BofA. We are very excited to have Progyny with us. We have the CEO, Pete Anevski; CFO, Mark Livingston; and the President, Mike Sturmer. Thank you, the three of you, for joining us.

Thanks for having us.

I guess it's no surprise where we're going to start here. On utilization, clearly, this is the biggest focal point for investors in addition to the treatment mix shift we saw in early 1Q and then the impact from the Alabama Supreme Court decision. I guess taking a step back from all of that, can you just speak to the utilization rate that you've observed in your business since 2018 or 2019? And maybe skip over COVID, and then talk about what you've seen 2022, 2023. We're just trying to get a broader picture of what's going on and what has gone on in the life of the business.

Sure. So if I go back to 2019, because it's the year we went public, utilization rate in that year was 1.09% female utilizers. We focus on female utilizers because they're the biggest driver for revenue. 2020, we'll skip because that was the first year of COVID. 2021, we were at 1.07%. 2022, we were at 1.03%. And 2023, were again at 1.09%. It's a relatively tight range. And even though each year, we're adding a cohort of new clients and the lives that they bring, and in all those years, the lives were substantial in terms of new client adds and covered lives, the rates stayed relatively in a tight range because the overall demand is still there. And even with variations by industry and even with the fact that every new cohort year, in the first year, the utilization rate for them is slightly lower than the book of business, and that's normal every year, the overall book of business continues to ratchet up over time the utilization rate, and it all balances out to that tight range.

You made some comments about utilization in April on the call. I'm curious, can you speak to what you've seen so far through early May? And how should we think about utilization rate differences in Red states versus Blue states? Is the utilization rate that you're seeing in Red states consistent with 2023? Is it also impacted? And if it is, can you kind of discuss how much it's impacted?

Yes, so the comments I made relative to April, on our most recent call, were all in context of the comments we made when we reported at year-end. So end of February, we reported that our overall utilization rate, including across the book of business, was consistent with the first quarter of 2023, which was, again, similar to 2019, one of the best years in terms of the utilization rate over the last period back to 2019. Then what we saw after that, and we didn't start getting visibility into it until the middle of March but just started to and then really got visibility in April, is the tuition rate diverged from what we were seeing when we reported in guidance. And the divergence was more announced in the Red states, in those states that either have an anti-abortion law and/or are moving in that direction. A good example is the state of Florida. And so they had a much more pronounced divergence from the prior utilization rate than the Blue states, if you will.

And one thing, just to add to it, so when Roe v. Wade was first overturned, we talked about it having and then seeing it as more of a limited impact for the business. At that time, it was more centered around abortion and less so around fertility, and so again, a little bit less impact. This year, as the conversation turned a little bit more around fertility, admittedly, Alabama is still a very small state for us, but it was a broader discussion. Those Red states are the states that have more of an anti-stance around abortion. It represents about 35% of the population and about 35% of our business. So that was more of a substantial impact again in that month of March than just that one small state. I think folks have sort of conflated that a little bit.

So to answer the first part of your question, when I referred to them, what we're seeing in April, there was in comparison to the trough of utilization that we saw in March. And now what we're seeing for April, including in those Red states, we're seeing a reversion back to where we started, seeing utilization for January and February at the beginning of the year.

Very helpful. As we think about the utilization range among the different types of customers that you have, I think there's a couple of different ways you can think about it. One would be cohort, so a 2018 cohort versus a 2023 cohort business type technology versus manufacturing, something like that, and then company size, a smaller company versus a larger company. Are there any meaningful trends that you've seen or differences in those types of cohorts where some have higher utilization, maybe more structurally than others?

So I don't know if your question is in relation to what we saw versus what we guided recently?

More conceptual.

So yes, there is. So the biggest driver of utilization difference is demographics, and industries usually represent demographics. So the example I'd like to give all the time is a tech company is generally going to have a much higher concentration of younger employees in childbearing years as a percent of total, and therefore, they are going to end up needing the benefit at some point potentially versus an old economy company, like an oil and gas company or a telecom company, that's going to have employees across the board in ages but, on average, higher. And so a smaller portion of their population is going to be in childbearing years. Yes, really small companies are going to have utilization that fluctuates. But either way, for the overall trend and book of business, that doesn't matter because it's the bigger companies likely that represent the overall lives. They're predictable after that, once you get to sort of the industry level. So as we look at all of our activity and all of our expectations, we do take into account the initiatives we're selling into in terms of expectations going forward.

And just to get to your point around sort of the age of them, like the 2018 book of business that launched in the 2019 and the 2020, they have sort of an established level once they start. They've been relatively similar over these last few years because we've had sizable cohorts with a broad mix of industries in them. But the other trend that we see as opposed to differences is the similarities that they tend to stay stable and/or increase slightly over time. And we've seen that literally with every cohort, going all the way back to the beginning of the company and the benefit that we've been offering. So there's a stability here that we've seen that's lasted now into the ninth year for the earliest cohort.

That makes sense. Pete, you said the range of utilization has been between 1.03% and 1.09%, over the past several years about, call it, a 5% to 6% delta, I guess a question for Mark. As you think about the guidance framework, if you assume the midpoint of the average utilization, 50% of the time, you're going to come in worse than that, 50% better. Why not, from a guidance perspective, assume the low end every time and then you'll beat that? I'm just curious, sort of how do you think about the methodology of the guidance? Is there something that's changed over the course of the business where you would expect utilization to be kind of structurally higher than the average or higher than the low end where that typically wouldn't be a risk?

So again, for us, and I almost started to answer it there before, is that we see that once a cohort of clients has started, they sort of begin to form a range of utilization that lasts over long periods of time. And so as we build more and more cohorts on top of them, there's sort of a stability there. So one of the things that we do, especially when we're doing our first annual guidance for the year, is that we're looking at the utilization rates not only of the new cohorts but of the existing ones to reconfirm that they're still at that level. So this year, when we did our guidance, and Pete has already said it, all the way up until the day that we gave guidance, that whole group together was tracking virtually identically to the same utilization pattern and build that we saw from 2023, which is why we pointed towards it. And we said this really consistently since we've gone public, what we want to do is we wanted to frame our guidance around what we're seeing, what is happening in this group. So now our guidance reflects that, which is what we're seeing for Q2. And then we've frame the upper and lower bounds based on what we saw last year, for the second half of the year, which is closer to the high end of our range; and the second half of '22, which is closer to our lower end of the range, again, just to give folks a sense of sort of where that variation could be.

And then Mark, sticking with you on the updated revenue guidance, other than utilization, is there any other factor of the guidance that was impacted in the quarter? And what would be the largest non-utilization swing factor to the top and bottom end of guidance for the remainder of the year?

So if you're just looking exclusively at Q1, you do need to adjust for the notion of the mix issue that we saw just at the very beginning of the quarter which, again, we said on our Q4 call, had been resolved. It was short-lived. And we reiterated that the other day that we've not seen that, and we're continuing not to see it in anything that's being scheduled today. So you do need to keep that in mind. We do have a couple of hundred thousand lives that are coming onboard here, some in Q2, later in Q2, and some in Q3 and for the balance of the year. So there is a step-up that will happen naturally. And that's also in the guidance that you need to understand. I think people are looking at growth rates year-over-year. So a high single-digit growth rate for Q1, a high single-digit growth rate for Q2, and then our guidance implies double-digit growth rates in the back end, and they're sort of trying to query that. I think the one thing we do need to keep in mind is we did have a very strong year last year and in particular, the comps for Q1 and Q2 are significantly stronger. Q2 last year was 1.50%. That was our highest ever utilization rate quarter. So that's part of what's factoring in on why, just from a growth rate perspective, it looks like the back half is maybe a bit stronger. But if you try to normalize those out, that's where we see the rest of the year.

Got it. Switching gears to the selling season and pipeline. Pete, you mentioned on the call, a goal to meet or exceed the 1.3 million lives that you added last year in the 2025 selling season. I think you talked about the average deal size now is larger. Can you unpack what's driving that? Is that the average employer is larger? Are they utilizing more services? You kind of tapped out on the pharmacy benefit side, so if it's not larger employer size, what else is driving that?

Yes, it is a larger employer size. So when I referred to the average prospect being larger than a year ago this time, it relates to the lives, the average lives that come with it. We guesstimate based on sort of our history, but we wouldn't know what their utilization is yet. They'd haven't started yet, right, but it is our expectation. But it's about the lives and the average life within our active pipeline right now versus a year ago, it's bigger than it was a year ago. But it's also the overall pipeline is larger. And when we say active, it's very specific relative to sales progression and sales milestones that they're hitting with certain clients to be called an active prospect in the pipeline. And so these are already in different forms of discussion with different sales collateral and financial analysis, et cetera, going back and forth. And then we also talked about just overall the sales progression. And its commitment to date, again, is favorable versus a year ago. So just on an overall basis, we feel pretty good about the sales progression so far.

You mentioned a bunch of different prospect types, different industries, health care, auto manufacturing, travel and leisure, media, government. As you think about maybe the intermediate term outlook and the pipeline, how long should investors expect that average deal size to go up? As you think about the addressable market, I think you mentioned during the IPO road show, 8,000 potential employers. How does that look today versus then? Are there still a greater number of larger employers versus your average customer size today? Just trying to get a sense of what the pipeline looks like and what the opportunity looks like over maybe a 3- to 5-year period.

Sure. So the biggest difference between when we went public to today is the TAM increase to add labor and union type companies, right? On average, though, and we did an analysis of what we stratify our customer base in terms of origins small clients and the lives they represent, and we put that in our public filings. If we looked the distribution in terms of size of client back in 2018 that we compare, right, 2018 versus today, it's virtually identical as a percent, right? We're still only penetrated in the single-digit percent against the overall TAM, which is now 105 million lives, versus when we went public, it was 75 million lives. And the other sort of data point that we put out there is we only have 17% of the Fortune 500 as clients today, 7 of which we added in the last selling season. So we're still early in our addressable market in terms of capturing market share. And we're not anywhere near sort of the inflection of worrying about do we have all big companies, if you will, and the average size is going to somehow go down.