Benefitfocus, Inc. (NASDAQ:BNFT) is an industry-leading, cloud-based benefits administration technology company serving employers and health plans. The company has established itself as a key player in simplifying the complexities of benefits administration while engaging people in the right healthcare and benefit programs.

Business Overview

Benefitfocus' comprehensive platform supports a broad line-up of benefits, including core medical, ancillary, and voluntary benefits. The company's multi-tenant architecture and user-friendly interface allow customers to access all their benefits in one place. Benefitfocus' solutions are designed to help organizations reduce administrative burden and costs while providing valuable insights to maximize the return on healthcare investments.

The company's revenue model consists of three main streams: subscription, platform, and professional services. Subscription revenue, which accounted for 73% of total revenue in the first nine months of 2022, is generated from monthly fees paid by employers and health plans for access to Benefitfocus' cloud-based software solutions. Platform revenue, 11% of total revenue, includes commissions from the sale of voluntary and ancillary benefits policies, as well as transaction revenue from insurance carriers and specialty providers. Professional services revenue, 17% of total revenue, is primarily derived from the implementation of Benefitfocus' solutions for customers.

Financial Performance

For the full year 2022, Benefitfocus reported annual revenue of $263,097,000, a decrease of 7.4% compared to the prior year. This decline was driven by lower subscription and platform revenue, partially offset by an increase in professional services revenue. The company's annual net income was -$32,166,000, and its annual operating cash flow and free cash flow were $33,502,000 and $21,726,000, respectively.

In the first nine months of 2022, Benefitfocus generated revenue of $174,002,000, a 7.4% decrease compared to the same period in 2021. Subscription revenue declined 6.2% to $126,320,000, primarily due to attrition from certain health plan customers who reduced the scope of their engagement. Platform revenue decreased 5.1% to $18,786,000, while professional services revenue fell 13.7% to $28,896,000.

Gross profit for the first nine months of 2022 was $85,157,000, a 14.9% decrease from the same period in 2021. Gross margin declined from 53.3% to 48.9%, driven by the revenue declines and an increase in cost of revenue. Operating expenses decreased 8.6% to $101,695,000, primarily due to lower sales and marketing, and general and administrative expenses, partially offset by an increase in research and development costs.

The company reported a net loss of $21,427,000 for the first nine months of 2022, compared to a net loss of $35,171,000 in the same period of 2021. Adjusted EBITDA, a non-GAAP metric, decreased from $31,048,000 to $23,080,000 over the same period.

Liquidity and Capital Resources

As of September 30, 2022, Benefitfocus had $55,124,000 in cash and cash equivalents, and $27,598,000 in net accounts receivable. The company also had access to $15,000,000 in its revolving credit facility and $13,000,000 in its delayed-draw term loan facility, providing ample liquidity to fund operations and strategic initiatives.

During the third quarter of 2022, Benefitfocus repurchased $114,181,000 in principal amount of its outstanding convertible senior notes, using funds from its new delayed-draw term loan facility. This transaction resulted in a gain on extinguishment of debt of $1,930,000.

Operational Highlights

Benefitfocus continues to invest in product innovation and enhancements to its platform. In 2022, the company increased the frequency of new product releases from quarterly to monthly, allowing it to more quickly adapt to changing market conditions and customer needs.

The company's software services revenue retention rate, a key metric reflecting customer loyalty, was approximately 88% and 90% for the three- and nine-month periods ended September 30, 2022, respectively. Excluding certain health plan customers who reduced the scope of their engagements, the software services revenue retention rate exceeded 93% and 95% for the same periods.

As of September 30, 2022, Benefitfocus had 15.1 million net benefit eligible lives on its platform, a decrease from 16.0 million a year earlier, primarily due to the decline in lives from certain health plan customers.

Guidance and Outlook

Benefitfocus has not provided specific financial guidance for the full year 2022. However, the company has indicated that it expects its software services revenue retention rate to return to historical levels for the full year, despite the recent declines from certain health plan customers.

Risks and Challenges

Benefitfocus operates in a highly competitive and rapidly evolving benefits administration market, which presents several risks and challenges. The company faces competition from other cloud-based benefits administration platforms, as well as traditional insurance brokers and consultants. Additionally, Benefitfocus' business is dependent on the continued adoption of cloud-based solutions by employers and health plans, as well as their willingness to outsource benefits administration.

The company's financial performance is also susceptible to changes in the broader healthcare and insurance industries, which can impact customer demand and the pricing of its services. Benefitfocus must continually invest in product development and innovation to maintain its competitive edge and meet the evolving needs of its customers.

Conclusion

Benefitfocus is navigating a challenging period, as evidenced by the declines in subscription and platform revenue in the first nine months of 2022. However, the company's strong liquidity position, continued investment in product innovation, and focus on customer retention provide a solid foundation for weathering the current market conditions.

As the benefits administration landscape continues to evolve, Benefitfocus' comprehensive platform and domain expertise position it well to serve the needs of employers and health plans. Investors will be closely watching the company's ability to stabilize its revenue and return to profitability in the coming quarters.