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

Good day, ladies and gentlemen, and welcome to the Progyny, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to your host, James Hart. James, the floor is yours.

Thank you, Tom, and good afternoon, everyone. Welcome to our second quarter conference call. With me today are Pete Anevski, CEO of Progyny 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 2026 and the assumptions and drivers underlying such guidance, the demand for our solutions, our expectations for our selling season for 2027 launches, anticipated employment levels of our clients and the industries that we serve, the timing of client decisions, our expected utilization rates and mix, the potential benefits of our solution, our ability to acquire new clients and retain and upsell existing clients, our market opportunity, and our business strategy, plans, goals and expectations concerning our market position, future operations and other financial and operating information, which are forward-looking statements under the federal securities law. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business as well as other important factors. For a discussion of the material risks, uncertainties, assumptions and other important factors that could impact our actual results, please refer to our SEC filings and today's press release, both of which can be found on our Investor Relations website. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During the call, we will also refer to non-GAAP financial measures such as adjusted EBITDA. More information about these non-GAAP financial measures, including reconciliations with the most comparable GAAP measures are available in the press release, which is available at investors.progyny.com. I would now like to turn the call over to Pete.

Thanks, Jamie, and thanks, everyone, for joining us this afternoon. We're pleased to report a strong second quarter highlighted by solid growth over the prior year period, resulting in record quarterly revenue, gross profit and adjusted EBITDA, as well as further gross margin expansion and the continued generation of significant cash flow. Fueled by the strength and consistency of this performance, not just in the most recent quarter, but really over the past several years, we've created flexibility, both to invest in the business by laying a foundation for future growth through the expansion of our platform, while also returning value to shareholders through significant share repurchases. Mark will take you through the details of both that and the quarter shortly. But before that, I'd like to give you some color on how our latest sales season is progressing because, as you know, new sales in any year have the largest impact on our growth trajectory. I'm pleased to report our momentum from last quarter has continued, and we enter our most critical time of the year for closing new clients in a favorable position. Strong momentum is driven by an acceleration in both early commitments for new sales as well as retention across our existing book of business, led by our largest clients, which has largely derisked client turnover for 2027 and positioned us for another year of strong retention. In short, we're seeing meaningful momentum in the market and I think it would be useful to help you understand why we believe our solutions continue to resonate so strongly with employers. It starts with the reality that family building and women's health solutions continue to be a priority for employers of all sizes and across all industries. We're addressing a very real and highly prevalent medical need, and one that can be costly to employers when it's not managed well or not managed at all. Employers are also experiencing high cost trends in their traditional medical and pharmacy coverage with increases of 10% or more and projecting further increases next year. In response, they're turning to solutions and benefit managers with a proven record of not only controlling trend, but helping to bend that curve. The buying criteria for employers evaluating options in the market continues to hone in on cost, quality and member satisfaction with a heightened focus on accountability within each area. They want to see a track record in achieving total cost and quality management with a high-quality member experience consistently. And success is measured on the strength of hard ROI savings back to the employer and members yielding short- and long-term trend control. While the competitive environment remains active as we look across the landscape, we see the other solutions falling short in one or many of these categories. By contrast, Progyny on the strength of our detailed transparent reporting remains the only solution in our opinion that has consistently demonstrated the ability to deliver across every one of them. And we've done this over a prolonged period giving buyers confidence that we have the right solution that has been proven to work over the longest period of time. This is why we feel uniquely well positioned to compete and win, whether it's a buy with an existing solution or one who is adding coverage for the first time. The result of this enhanced focus from employers has us well positioned across our 3 areas for growth, adding new logos, maintaining high client retention and expanding new partners to enhance our position and extend our reach. Looking a bit deeper within each area, on new client acquisition, early commitments are pacing meaningfully ahead of this time last year. While the sales season won't conclude until November, we have seen a meaningful number of early decisions more than we'd expect at this point in the year. I'm at strength, we are confident we will meet our annual target of adding 1 million or more new lives. On client retention, based on current conversations and commitments, we believe we've removed the vast majority of retention risk which is also earlier than usual at this point in the year. I think it isn't a coincidence that employers have been able to come to their decisions earlier this year and have chosen Progyny at the point when managing their escalating medical cost trend is a top priority. The wins thus far represent the typical diverse cross-section of the economy, including employers in energy, construction, manufacturing, aerospace, health care, labor, financial services and education. This includes one of the oldest and most prestigious universities in the country. The early commitments have also been diverse in terms of size, spanning from 1,000 covered lives to the jumbos we see every year. Turning to retention. In any season, roughly 1/3 of the book is up for renewal. As discussed last quarter, when we described the comprehensive review, one of our longer-standing clients had recently done to measure and validate the efficacy of our program over many years. Existing clients are often in the strongest position to directly see the cost control and sustain savings our solutions deliver. That not only yields positive renewal activity, but also an opportunity for expansions, which is when a client adds more services with us beyond core fertility. And we take that business away from the competitors who have been previously providing some of those services. For those same reasons, our newest clients are selecting the typical level of coverage that we've historically seen. And we aren't seeing existing clients look to reduce their benefit with us for the next year either. Lastly, we're satisfied with our momentum at this point in the year amongst our traditional self-insured employers. We're also pleased with the progress we're making across a number of other strategic areas, including health plan partnerships, public sector clients and continuing to advance our new fully insured market offering called Progyny Select. We're seeing good results with our existing partnerships as well as a strong increase in productivity from our health plan partnerships, many of which are now in their second year with us. Additionally, we're pleased with our pipeline of potential new health plan partnerships. We also continue to advance Progyny Select with a focus on building relationships across key distribution areas, like leading general agents and brokers who are focused on the fully insured market. These partnerships are an important step and no different from other relationships we've built and curated. We expect the first year will focus largely on forging those channel partners versus driving meaningful new volume. As we've said previously, we're not expecting Select to be a meaningful contributor in 2027 and instead view this as an important addition to the portfolio and a significant contributor to our medium and longer-term growth. To conclude, we're pleased with our strong performance over the first half of the year. And given the momentum we're seeing in the market, we're comfortable that we positioned ourselves exceptionally well to meet our traditional target of adding 1 million or more lives. Let me turn the call now over to Mark.

Thank you, Pete, and good afternoon, everyone. Before I begin, please note that the 8-K we filed a short while ago includes our customary slide presentation summarizing the results in the quarter while also highlighting some of the longer-term trends that we believe are important in understanding the health and direction of the business. That material has also been posted on our website. Rather than repeating what those slides address, my remarks today will focus on the 4 key themes that impacted both the quarter and how we think about the rest of 2026 and beyond. So let's begin with the first theme. Over the first half of the year, member engagement has remained consistent with our long-established ranges. As it relates to the second quarter specifically, engagement was closer to the higher end of expectations reflected in our May guidance. We believe both data points demonstrate how members are continuing to pursue the care and services they need and when the time is right for them to do so. Likewise, second quarter revenue was also closer to the higher end of our guidance, reflecting a 5.3% increase on a reported basis and 11% when you exclude the contribution from a large former client who is under a transition of care agreement in the second quarter of 2025. I'll remind you that the transition agreement pertaining to this client ended on June 30 of last year. Accordingly, the second quarter is the last quarterly period where you have to take that client's contribution into account when looking at our comparative results. Moving on to our second theme. We continue to maintain healthy margins even as we continue to invest to expand our product platform, enhance features for our members and also lay the foundation to support our future growth. Gross margin expanded 180 basis points from the second quarter last year comparable to the level of expansion we also saw in the first quarter. This is due to the efficiencies we've continued to realize in our care management and service delivery as well as a reduction in stock compensation expense. Adjusted EBITDA margin also expanded from the year ago period, though at a lesser rate than we've seen with gross margin as the platform investments we're making are more concentrated within our operating expense lines. Nonetheless, we're pleased with our ability to consistently maintain a level of overall profitability. As measured on a 12-month -- trailing 12-month basis, adjusted EBITDA margin was 17.2%, consistent with where it's trended throughout this period of increased investment, demonstrating our ability to invest to grow while simultaneously creating efficiencies throughout the business. As it relates to those investments, second quarter CapEx was $6.2 million. This was in line with our first quarter spend as well as a $1 million increase over the prior year period. Although it's premature to offer detailed commentary beyond this year, we continue to expect that this investment program will begin to taper down starting in 2027. Turning now to the third theme. Through the ongoing disciplined and prudent management of the business, we've continued to achieve a high conversion of adjusted EBITDA to operating cash flow. This allowed us to once again meet and somewhat exceed our 75% conversion target, both in the second quarter and over the first half of the year. For the fourth time in the last 5 quarters, we generated more than $50 million in operating cash flow. This yielded $201 million on a trailing 12-month basis, and we've now exceeded $200 million in last trailing -- sorry, last trailing months, 12 months, operating cash flow for 6 consecutive quarters. Through our ongoing focus on managing the revenue to cash process, we drove further improvements in our DSOs, which ended the second quarter more than 7 days lower from where it was in the year ago period. DSO also improved on a sequential basis from March 31 this year, reflecting the typical dynamic we see as the payment flows with our newest clients get up and running. As of June 30, we had approximately $273 million in total working capital, which includes $237 million in cash, cash equivalents and marketable securities. There were no borrowings against our $200 million revolving credit facility and no debt of any kind, and we have no planned use for the facility at this time. And finally, our fourth theme is how our strong and consistent financial performance has provided us with the flexibility to both invest in the business while simultaneously returning value to our shareholders through ongoing share repurchases. In late May, we announced our latest share repurchase program through a $200 million authorization, which permits us to acquire shares via open market purchases as well as under structured plans. Under this latest program, which was in effect for a little over a month during the second quarter, we purchased nearly 1.2 million shares by June 30 for $31.5 million. Including the activity that's happened subsequent to June 30, we have now purchased a cumulative 2 million shares to date under the most recent program and approximately $142.5 million remains available under the existing authorization. On an aggregate basis, combining this current program as well as our prior $200 million program, which concluded earlier this year, we have now purchased an aggregate 10.8 million shares overall since November. This has reduced our overall shares outstanding by approximately 12.5%. Turning now to our expectations for the third quarter and the remainder of 2026. As the third quarter begins, encompassing the peak of the summer, a seasonally less active time for members, we've seen a slightly more pronounced seasonal impact and have reflected that in our third quarter guidance. We view this to be the ordinary rhythm of activity and not an indication of a new macro trend or a change in the overall trajectory of engagement. Although our view into September is inherently limited at this point, we aren't seeing this seasonality extend beyond the summer. Accordingly, we continue to expect that our engagement metrics for the full year will remain consistent with our long-established historical ranges with the low end of our range consistent with our 5-year low for annual utilization. The table at the back of today's press release outlines our assumptions at both ends of the full year guidance ranges. On the basis of these assumptions, we're projecting revenue in 2026 of between $1.36 billion to $1.385 billion, reflecting growth of between 5.5% to 7.5%. If we exclude the $48.5 million in revenue from the client who is under a transition of care agreement over the first half of 2025, our full year revenue growth is projected to be between 9.7% to 11.7%. With respect to profitability, we expect a range of $233 million to $240 million in adjusted EBITDA with net income of $104.8 million to $109.9 million. This equates to $1.26 and $1.32 and earnings per diluted share and $2.04 and $2.10 of adjusted EPS on the basis of approximately 83 million fully diluted shares. As it relates to the third quarter, we expect between $335 million to $345 million in revenue, reflecting growth of 6.9% to 10.1%, with the sequential change in second quarter revenue, reflecting the slightly more pronounced seasonality in activity this year. On profitability, we expect between $56 million to $59 million in adjusted EBITDA in the quarter along with net income of between $24.5 million to $26.7 million. This equates to $0.30 and $0.33 of earnings per diluted share or $0.50 and $0.52 of adjusted EPS on the basis of approximately 82 million fully diluted shares. At the midpoints of the ranges for both the quarter and the year, you can see we expect to maintain a consistent EBITDA -- adjusted EBITDA margin even with the investment to grow the business. And with that, we'd like to open the call for questions. Operator, can you please provide instructions?

[Operator Instructions] And our first question today is coming from Brian Tanquilut from Jefferies.

Maybe just on the comments on ART cycle seasonality. Just curious if you can expand further on that slowdown that you're seeing this summer. And if you have any thoughts on what drove this increased seasonality? And when do you think this peaks and when do we get back to more normal trends?

I think what's important, Brian, is to also look at what we've done here for the first half of the year, although we've had a good strong Q1 and Q2. We haven't hit the high end of our ranges. And so part of what we're doing here is recalibrating and narrowing the year just in recognition of where we're at here 6 months in. As far as the third quarter comments around the slightly more pronounced seasonality, it's really limited to just this middle part of the summer here. And we do have some visibility as we get into September as the appointment scheduling builds there. So look, we don't see it as anything that is prolonged or any kind of change in trend. And so our guidance reflects really more of a stable utilization and consumption pattern consistent with what we've seen in other years.

Got it. And then when I think about the sequential improvement in fertility revs per cycle, what is driving that? Is that the ancillary? So then maybe another part of that question would just be any comment you can share on pricing both on the PBM side and on the services side?

Yes. So on the -- on fertility pricing, we do have the ability to modestly increase pricing based on CPI. So on the fertility side, that's something that we've done over the last couple of years. So that contributes. But we're talking low single-digit percentages. And then on the pharmacy side, we've looked to absorb some of the cost increases that we see in order to keep our clients whole.

I think if you're focused on sequential, sequential is impacted by a lower proportion of cycles in the ART cycles in the first quarter and a higher proportion of initial consults but the average is calculated in terms of revenue per cycle. Second quarter seasonally has a bump up in cycles in ART cycles versus the first quarter. And so -- and a lower proportion of initial consults, that's normal every year. So as you talk about sequential revenue per cycle, that's what impacts that.

Your next question is coming from Jailendra Singh from Truist Securities.

So I want to go back to the seasonality point you raised. I know it's only 1 month of data, but given the experience the company has had in the past couple of years back, what additional data points or observations you have, which makes you believe this is really more of a seasonal softness you're seeing outside of being prudent in your guidance approach. Anything else you're doing proactively to make sure you don't get caught off guard once you get out of this seasonal weak period?

Just to answer your first question, in terms of data points, every year, we see seasonality this -- in the summer, in the middle of the summer. This year is a little bit more pronounced. If you recall, I think, 3 or 4 years ago, we saw the same thing and then exiting the quarter, we saw the same thing in terms of engagement returning to normal levels. of the visibility we have so far for September, that appears to be the case for this year as well. And so that's why we added the color and commentary relative to what we're seeing not only this year, but in periods past, we do see that seasonality as more pronounced in this quarter and then coming back to normal engagement levels in the balance of the year, it's just a little bit more pronounced this year than normal.

Okay. And then my follow-up, and thanks for the color on the selling season, Pete. It's good to see you feel good about meeting or exceeding annual target of 1 million lives. A quick follow-up there. As you look at these type of lives, industries these lives are coming from expected utilization or number of offerings they might have access to. How do you think about the revenue attached to these lives? Do you think it's similar to this year or better or worse? Any color that would be helpful.

Obviously, we're not going to quantify it. But I think my commentary spoke to not only the commitments, but the contribution from them, which is sort of what you're alluding to being meaningfully ahead of last year at this point.

Your next question is coming from Michael Cherny from Leerink.

Sorry to harp on the same topic, but this is not the first time, obviously, we've seen summer seasonality, as you've alluded to, maybe a bit more than before. When you think about the visibility you had at this point last quarter, you talked about utilization improving. But I guess, how much was this on the foresight given that, again, you're seeing already an uptick in September, like as the work you've done over the years to improve your visibility has been significant, like how did that play out specifically tied to ending the quarter and into the print.

The visibility, Mike, hasn't changed. The algorithms that we use have improved, which is what you're referring to in terms of the work we have done. But the visibility is still the same, right? We have visibility, good visibility into the month ahead and a little less visibility into the month after that. That's not new. That's generally how far ahead people are scheduling appointments and then we look at a lot of things underlying that data. And so -- and that's what we use when we guide always, and that's what we used last quarter when we reported in May, and that's what we're using now as we report Q2 and what we're seeing so far exiting the quarter and then also looking at past history relative to that being normal in terms of normalizing back to normal levels of engagement for the remainder of the year.

Got it. And just one more additional question. I mean the cash flow build has been very strong. You obviously have Select going on. You have some of the other ancillary programs. How do you think about the future usage of capital deployment for both internal, external investments as you continue to broaden your lead in the market?

Well, like I mentioned in my remarks, the good news is we have strong enough cash flow to continue to invest if we need to, the level of investment will come down, as we had mentioned a couple of times in the last couple of calls next year and in the future based on what we have planned. Our large investments happened over the last 2 years finish out in terms of incremental investments through the end of this year. But as you mentioned, we had the capital to make decisions, whether there are any opportunities around M&A, whether they're tuck-ins or otherwise, whether there's additional repurchases that we're going to do or any other additional investments, we have the cash flow to do all 3.

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

On the improved algorithm that you were talking about, can you give us an idea of what the slope of level of confidence looks like? So how is your confidence in your 2-week out forecast versus 4 versus 6. What does that look like for you now?

Well, given the actual visibility we have and given that it's a consumption model, right? Obviously, any periods further out inherently are going to have less. But again, the algorithms have improved significantly. They've proven to be pretty predictable. But things like, you know, a more pronounced seasonality than you otherwise didn't have visibility into can't happen, and that's what we're experiencing. And by the way, I mean, overall, it's -- if you look at sort of the midpoint, it's a 1% adjustment. So we're not talking about a large adjustment and change in consumption. But either way, it's a fair question.

And then you mentioned also the growing pipeline of your broker relationships. Can you talk about how material that channel is now to your business and where you think it could go over time?

Sure. It's not material today. And as I mentioned in my prepared remarks, not expected to be material at all relative to what it's going to contribute in terms of new lives next year. That's consistent with the comments we've been making. That -- those channel partners will take time, both in terms of signing up as we've been successful in doing so far. But more importantly, in getting throughput from them relative to the reality of when the renewals happen, the majority of which are for 1/1, the reality of getting through those organizations because many of them are inherently roll-offs of a lot of small companies, and it's a little bit more of a grassroots effort in terms of getting the message through to all their brokers, et cetera. And so it's just -- it will -- the relationships we've built so far are positive, and they are inclined to work with us and work with their people to do that. But that's why it's more of a medium to long-term strategy. So I would say it's more important to the medium and long term in terms of being additive as opposed to looking for something for 2027.

Your next question is coming from Scott Schoenhaus from KeyBanc.