Progyny, Inc. (NASDAQ:PGNY) Q2 2024 Earnings Call Transcript

Progyny, Inc. (NASDAQ:PGNY) Q2 2024 Earnings Call Transcript August 6, 2024

Progyny, Inc. beats earnings expectations. Reported EPS is $0.43, expectations were $0.36.

Operator: Good afternoon, everyone and welcome the Progeny Inc. Second Quarter 2024 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, James Hart. Sir, the floor is yours.

James Hart: Thank you, Matt and good afternoon everyone. Welcome to our second quarter conference call. With me today are Pete Anevski, CEO of Progeny; Michael Sturmer, President; 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 2024 and the assumptions and drivers underlying such guidance, the demand for our solutions, our expectations for our selling season for 2025 launches, the timing of client decisions, our expected utilization rates and mix, the expected benefits of our pharmacy program partner agreements, including future conversion of adjusted EBITDA to operating cash flow, 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 and adjusted EBITDA margin on incremental revenue.

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.progeny.com. I would now like to turn the call over to Pete.

Pete Anevski: Thanks, Jamie, and thanks, everyone, for joining us afternoon. During the second quarter, we continued to make significant progress in many of the areas that are most impactful are building the long-term value of our business and laying foundation for our future growth in women’s health. This includes our early success in the most recent selling season, the enthusiasm we’re seeing for our newest services amongst existing clients, the advancement of new channel partner relationships and the investments we’re making to further enhance our already leading solutions in women’s health and address even more of our clients and members’ needs. As it relates to our second quarter results, while the rate of utilization ticked up modestly from the first quarter, consistent with our prior assumptions and our second quarter revenue and adjusted EBITDA within our guidance based on our current visibility to the remainder of the year, we now believe the second half will unfold differently than expected.

Accordingly, we are adjusting our revenue guidance lower by approximately 5% at the midpoint, with corresponding reductions to adjusted EBITDA as well. Given the year has continued to unfold differently than we had originally expected, we recognize there is frustration and disappointment and we share in those sentiments. The transparency we provide to the market as to what we’re seeing and how that informs our financial guidance carries the highest level of importance to us. And the planning models we build leverage a vast data set of past activity capturing appointment scheduling to care consumption so that we can provide what we believe to be the best, most predictive view of the future given the limited amount of actual visibility we have around care consumption at any given time.

Unfortunately, given the inherent variability in any business that doesn’t have an annuitized revenue stream, redone on whose revenue is driven by utilization in an area where the timing and pursuit of care is so deeply specific to the individual, we can and are seeing variability more than expected from historical trends. In 2023, we saw this dynamic play out, albeit with a positive effect where a relatively small portion of the base was engaging more favorably than the historical pattern indicated. And as a result, we were able to raise our guidance multiple times last year. In 2024, we’re seeing the opposite effect. I’ll take a moment to walk you through what we’re seeing. To be clear, member engagement has been healthy in 2024 at levels that are well within our historical norms, and that continues to be the case in Q3.

However, where we’re seeing a deviation from historical pattern is in the art cycles for female utilizing member, resulting in a negative impact to our previous outlook. We added a table in our press release this quarter to illustrate this dynamic more clearly for you. And the table shows how historically we see an increase in the average number of our cycles per utilizer over the course of the year, reflecting the progression of our members collectively as they move through their fertility journeys. And while utilization as a percentage is thus far level with Q2, you can see from the table that we would ordinarily expect for average cycles per utilizer to increase to something like 0.56 in Q3 and then tick up a bit higher in Q4 as well. While it has increased over the first half of the year, we’re anticipating a lower rate of increase than what we ordinarily would expect or none at all over the second half of the year, and this is driving approximately 7% lower revenue per utilizing member.

The obvious question then is why aren’t we seeing the customary pattern in ‘24. There are a number of factors that could be causing this such as higher clinical success rates which will result in fewer treatments per utilizer, different treatment paths based on the members’ medical need or different timing of the treatment journey based on the member’s preference. As paywall highlights, we aren’t seeing or expecting a decrease in cycles per utilizer and because the rate of utilization is also expected to remain consistent with past patterns, we aren’t viewing this as an indicator of a lesser demand odd. We also can’t predict how long this lower average will last. So accordingly, we believe an outlook on the high end, showing we’ve consistently seen throughout the year and the low end showing a decline in both utilization rate and ART cycles for female utilizing member.

At the midpoint, we estimate the impact of this to be approximately $55 million headwind to the revenue from our previous guidance. We’re also making an adjustment to our forecast to reflect that a small number of clients reported well recovered lives this quarter, either from recent reductions or as employees from previous rounds of productions may be coming off of their core cover. To be clear, we aren’t seeing any large-scale workforce reduction programs reported by any client. However, the collective impact across our full base this quarter was approximately 100,000 covered lives or approximately $10 million of headwind to the top line. While reductions aren’t new, there are always some clients following headcount in any given year, we’ve historically seen growth from other clients act as an offset.

Though a meaningful number of clients have increased their headcount this year, it hasn’t been enough to fully mitigate the reductions. Mark will walk you through the details of our guidance shortly, but I want to reemphasize that while the factors affecting our outlook today are beyond our ability to influence our control and we can never have perfect visibility into cap consumption within the utilization model. What is within our control is the transparency we provide to the market regarding the drivers of our business. Our hope is that doing so will allow investors to turn their focus back towards those areas that are within our control, where we continue to successfully execute against our strategic priorities and why we believe in the long-term strength and trajectory of the business is in any way affected.

Those areas include building the long-term value of the business and positioning Progyny as both an industry leader and a catalyst in raising the bar in the delivery of solutions for women’s health care. So, turning now to those areas, beginning with our latest selling season since that has the greatest impact to our long-term growth, also demonstrating our leading industry position. Our goals are clear each season. First, we want to expand our market share through new client acquisition. Second, we seek not only to maintain our high rate of retention, but also to grow our relationships with existing clients through expansions and upsells. And lastly, we look to develop new partnerships to enhance our market presence and create efficiencies in our sales efforts.

At this point of the season, we’re pleased with our progress across all these areas. With respect to the first priority, adding new clients, we’re now in the heart of the selling season, Employer demand remained strong with a consistent pipeline of opportunities compared to last year’s selling season. We’re also continuing to add to our new sales pipeline as companies are evaluating their benefit offering throughout the year. As usual, we anticipate that the majority of client decisions will be later this summer and early fall, as most companies look to finalize their benefits ahead of their open enrollment activities in Q4. I’m pleased to report that at this point in the season commitments received to-date are pacing ahead of where we were at this time last year.

And although this is just one indicator of demand, we believe these early commitments demonstrate that the appetite for family building and women’s health solutions remain robust. As usual, we’ll provide you with a recap of the complete selling season on our next call in November. But at this point in the season, we are pleased with where we are. In any selling season, our goal is to meet or exceed the number of covered lives from the prior season. And although the majority of commitments for sales seasons are still ahead of us, we believe we’re on pace to meet this objective. Consistent with our most recent seasons, our earliest wins for 2025 are coming from a wide range of industries, including financial services, hospitality, media, state and local government and labor unions just to name a few, which we continue to believe speaks both to the broad appeal for our solutions as well as our differentiation in the market.

Our wins so far this season are broadly diverse in terms of size, ranging from 1,000 lives to in excess of $100,000. We’re also continuing to see from our commitments to date, a high take rate on Progyny Rx, further validating the significance of our differentiation in terms of cost and member experience with that product. And from my perspective, a very promising development this year is that a meaningful number of wins are also choosing to take 1 or more of the newest products in our solution such as menopause, maternity and postpartum support. Equally encouraging is that we’re seeing the same dynamic with existing clients. At this point in the season, accounts representing approximately 1 million of our existing covered lives have chosen to offer one or more of these products to their employees in 2025.

And while we’ve always had multiple pathways to grow with existing clients, our newest products represent an exciting addition to our upsell and expansion activities. And while we don’t expect meaningful revenue contribution from these products in 2025, we’re encouraged by the interest and adoption rate for employers that we’ve seen to date. In terms of renewals more broadly, activity thus far has been consistent with our typical rate of near 100% retention. We’re also not seeing any clients looking to reduce their benefit for next year, reflecting the value they’re continuing to see as we improve the efficiency of their overall health care spend while also helping their workforce realize their family building roles. And lastly, with respect to our business development priorities, we continue to see significant opportunities for ongoing expansion through the development of additional channel partner relationships.

Last quarter, we told you that we were advancing several new partner relationships, and we recently became the preferred partner to Meritene Health, a subsidiary of Aetna and the second largest TPA in the country with 1.5 million members adding to our existing agreements with CVS Health, Evernorth and Vision. In addition, we are progressing other channel partner opportunities and hope to be able to provide additional detail on future calls. We believe continuing to add these channel partnerships are an important part of the go-to-market strategy since they act both as validation for our market-leading solutions as well as provide an alternative way to reach and contract with new prospects. This quarter, we also enhanced our global offering through the acquisition of April, a Berlin-based facility benefits platform, expanding the scope of services we can provide to multinational employers and their employee populations in over 100 countries.

April has created a platform customizable by country, totally sensitive education, support care navigation and we’re excited about the opportunities to broaden our support on a global scale. Let me now turn the call over to Mark to review the quarterly results before I come back with some closing remarks. Mark?

Mark Livingston: Thank you, Pete, and good afternoon, everyone. I’ll begin with the second quarter results and then provide our expectations for the third quarter and the full year. Second quarter revenue grew 9% over the prior year to $304.1 million, making this our first quarter to exceed $300 million in revenue, less than 2 years since we crossed the $200 million milestone. Put this into perspective, after we launched our solution in 2015, it took us 5 years to reach our first $100 million quarter, while it’s taken us less than 2 years to meet each of the next 100 million plateaus. This illustrates both the momentum that we see in the market as well as our ability to rapidly scale our operations while increasing margins and profitability at the same time.

Revenue growth in the quarter was primarily due to an increase in the number of clients and covered lives as compared to a year ago. As of June 30, we had 463 clients with at least 1,000 lives, representing an average of 6.4 million covered lives. This compared to 384 clients and an average of 5.3 million covered lives a year ago, reflecting an approximately 20% growth in lives over the prior year. As expected, a handful of clients launched during the second quarter, adding approximately 100,000 new covered lives. However, as Pete mentioned, we also saw a number of our existing clients report lower lives as compared to March 31, which is likely due to recent turnover or from the lapsing of benefits coverage following prior workforce reductions.

This is not at all a new dynamic. With a base as large as ours, in any given quarter, we’ve always seen a certain number of clients reporting lives – with a number of clients also increasing their lives. This really speaks to the advantage of having a diverse base that touches nearly every corner of the U.S. economy. While we continue to see both pluses and minuses in this quarter, as usual, the net impact was a slight reduction within the existing base, and that moderated our sequential growth in members during the quarter. Following the close of the quarter, several additional clients representing the last handful of clients from the 2023 selling season launched their Progyny benefit, contributing an additional 75,000 lives. Taking into account the launches that took place in July and over these first few days of August, we have nearly 470 clients today representing approximately 6.5 million covered lives.

We expect to end the year with between 6.5 million and 6.6 million covered lives. Looking at the components of the top line. Medical revenue increased 12% over the second quarter last year to $194 million, due again to the growth in our clients in covered lives, while pharmacy revenue increased 4% in the quarter to $110 million. The lower growth in pharmacy is a reflection of the lower art cycles per utilizing member, which Pete described earlier, as well as the benefit in the year-ago period from manufacturer-driven drug price increases, which did not occur over the first half of this year. Turning now to our member engagement metrics. Approximately 15,600 ART cycles were performed in the second quarter, reflecting a 5% increase versus the second quarter last year.

The female utilization rate was 0.47%, a decrease as expected from the record 0.50% that we reported a year ago. and a modest increase sequentially from the 0.46% in the first quarter of this year, reinforcing that the slight variability we saw earlier in the year was not indicative of a new macro trend. Over the back half of the year, we continue to expect that the rate of utilization will be consistent with historical levels, albeit somewhat lower than what we saw in 2023. Turning now to our margins. Gross profit increased 13% from the second quarter last year to $68.3 million, yielding a 22.5% gross margin, an increase of 80 basis points as compared to the year ago period as we continue to realize efficiencies in our care management resources even as we deliver cost containment for our clients.

Sales and marketing expense was 5.4% of revenue in the second quarter, a slight improvement from the year ago period as the investments we’ve made to expand our go-to-market resources were more than offset by the leverage we continue to gain through client acquisition and retention. G&A costs were 10.3% of revenue this quarter as compared to 10.8% in the year ago period. The 50 basis point improvement is primarily due to ongoing efficiencies in our back office operations, reflecting the inherent nature of our expanding margins on G&A as we grow revenue and lower non-cash stock-based compensation. With the operating efficiencies we’ve realized, adjusted EBITDA grew 15% this quarter to $54.5 million. Adjusted EBITDA margin of 17.9% this quarter was up 90 basis points from the year ago period.

Net income was $16.5 million in the second quarter or $0.17 per diluted share. This compared to net income of $15 million or $0.15 per diluted share in the year ago period. Adjusted earnings per diluted share for earnings, excluding the impact of stock-based compensation, taking into account any associated tax impacts, was $0.43 in the current period as compared to $0.36 in the second quarter of last year. Turning now to our cash flow and balance sheet. Operating cash flow during the quarter was $56.7 million, which compares to $76 million generated in the year ago period. The decrease is due to the previously disclosed impact of certain favorable working capital items in the prior year period as well as higher cash taxes in the current quarter.

Over the first 6 months of the year, we’ve generated $82.4 million in operating cash flow, representing a 79% conversion of our adjusted EBITDA over the same period. As of June 30, we had total working capital of approximately $357 million, including $262 million in cash, cash equivalents and marketable securities and no debt. The decrease in our cash position as compared to March 31 reflects our stock repurchasing activity during the quarter. In 2Q, we repurchased 5.6 million shares for approximately $160 million. Since launching the buyback program in February, we’ve returned value to our shareholders through the repurchase of 6.8 million shares, completing the previous authorizations and reducing our shares outstanding by 6% since the start of the year.

We’re pleased to announce today that our Board has approved an additional $100 million program, giving us further flexibility to reduce shares outstanding and deploying our cash to what we believe provides a very attractive return. Turning now to our expectations for the third quarter and full year 2024. Taking into account the dynamics Pete described earlier, with a lower average number of art cycles per female utilizer we expect revenue of $290 million to $303 million for the third quarter. For the full year, we now expect revenue of between $1.165 billion to $1.2 billion reflecting growth of 9% at the midpoint. As you can see in the table at the back of today’s press release, our range for the full year assumes that the rate of utilization will be 1.05% at the low end and 1.08% at the high end, consistent with historical levels.

We are also assuming ART cycles per unique female utilizer of 0.95 at the low end and 0.96 at the high end as compared to 0.99 in the prior year. Turning to our profitability. We expect adjusted EBITDA of $47.5 million to $51 million in the third quarter and net income of $10.7 million to $13.2 million. This equates to $0.11 and $0.14 earnings per diluted share or $0.35 and $0.38 of adjusted EPS on the basis of approximately 96 million fully diluted shares. For the year, we now expect adjusted EBITDA of $199 million to $209 million, along with net income of $55.4 million to $62.4 million. This equates to $0.57 and $0.64 earnings per diluted share or $1.53 and $1.61 of adjusted EPS on the basis of approximately 98 million fully diluted shares.

I’ll remind you that our net income projections do not contemplate any discrete income tax items nor does it consider any impacts associated with the share repurchase program we announced today. At the midpoint of this guidance, we are expecting to see the continued expansion of our margins in 2024 with adjusted EBITDA margin on incremental revenue of over 18%. The I’ll now turn the call back over to Pete.

Pete Anevski: Thanks, Mark. Today’s remarks and the upcoming Q&A give you a clear perspective about the strong state of our business overall, even with the change in our forecast, driven by the lesser-than-expected ART cycles per female utilizer, which is not material to the health of the business. If you aren’t aware, we’re hosting an Investor Day next week on Monday, August 12 here in New York City. We put together an exciting agenda, featuring a lot of Progyny team that you don’t normally get to meet at investor events. Our goal is to give you looking to how we think about capitalizing on our market opportunities and what gets us excited about the future. Several clients are participating, and we’ve created panels from the point of view from both providers and members.

If you’re interested in joining us, please send a note to James as registration is required and Spaces Limited. With that, we’ll open the call for your questions. Operator, can you please provide instructions.

Q&A Session

Operator: [Operator Instructions] Your first question is coming from Anne Samuel from JPMorgan. Your line is live.

Anne Samuel: Hi, thanks for taking the question. And thanks for the incremental disclosure in the release. Really helpful. I was hoping perhaps you could help us understand what might be driving some of this volatility in mix and utilization. Just wondering like has anything changed within the benefit structure or coverage that might be leading to this shift have any best practices changed the fertility clinics that might be leading to better outcomes or perhaps less prevalent, given the adoption of GLP-1. Just curious if you have any thoughts on what might be driving that?

Pete Anevski: Sure, Anney. Thanks for the question. And the last part of your question, you came in and out, so I didn’t catch it, but I got the spirit of the question, so…

Anne Samuel: Sorry, it was – is there maybe higher success rates driven by perhaps less prevalence of PCS from GLP-1s.

Pete Anevski: Yes. So right now, as I mentioned in my prepared remarks, we don’t know exactly what’s driving this. It’s not a mix issue. It’s a cycles per female utilizer and it’s not that it’s a decline, but it’s the rate of growth that you would normally see seasonally as the year progresses is not what it has been traditionally, which is why we broke out not only the sort of full year expectations, but the quarterly trends historically to give you some insight into that. And so as we sit here now, we don’t know exactly what may be driving that. We also don’t know whether or not it will persist. It’s just that we’re seeing it right now for Q3 as well as what we saw in and where our forecast is, therefore, continuing to project what we’re seeing in terms of that lower rate of growth.

But we don’t know exactly why, and certainly, we’ll do our best to continue to find out why to the extent that we can. But as we sit here now, we don’t exactly know what

Anne Samuel: Great. Thanks. And then I was just wondering if perhaps you could just provide a little bit more color what are you seeing around lives? How are you thinking about the backdrop just going forward, just kind of given some of the more elevated unemployment and some of the more recent calls for recession.

Pete Anevski: Yes. The – I think as Mark talked about in his comments, the net adjustment in lives, I think it just happens to be one quarter or more net down than up true-up lack of a better term that we normally get from our clients every quarter. They’re reporting lives to us and lives go up and down, and they usually net out to either the same or plus or minus for the book of business. It just so happens this quarter that they netted out to a slightly fewer lines. But as we also talked about, we’ve heard of no actions of any kind from anybody that would be driving this. I think it’s just normal – it’s just sort of normal activity. And I think overall continued, albeit most recent report, slower growth in job growth. reported by the government, I think, should support any concerns anybody may have that there’s further degradation in the base as we don’t believe we’ll have.

Anne Samuel: Okay, thank you.

Operator: Thank you. Your next question is coming from Michael Cherny from Leerink Partners. Your line is live.

Michael Cherny: Good afternoon. Thanks for taking the question. So we started the year with guidance that was below what you guys had hoped for. This is now the second tie-down that we’ve seen. Pete, I understand that some of the stuff is out of your control, but as you sit here at this point in time, what’s your comfort level that the low end called $1.165 billion of revenue is the last cost that you need to make?

Pete Anevski: It’s why, Mike, we share the assumptions that are inherent in that low end. There’s hopefully no more surprises this year. And therefore, I have a lot of comfort in that number. That said, it’s very difficult to predict the unknown or even size of the unknown. Unfortunately, this is a year where we’ve had some surprises that are to the negative two of them sort of were short-lived and didn’t continue. This third one is right now persisting. So it’s the best answer I can give you without other unknown surprises that I can’t predict, I feel really comfortable.

Michael Cherny: And I mean, I know so much of your model is built on new member adds. It’s very early for this, but as we think about heading into the end of the year, and you’re obviously seeing a big difference between membership growth and ART cycle growth. How should we think about where your normalized revenue growth rates should be – are you exiting the year at a run rate that is the new normal for this business? Where are you seeing the various different moving pieces beyond obviously, the additional services, which are a nice uptick, but to get back, I don’t know if you want to call it growth acceleration, the growth normalization or whatever the new normal for this business should be? I’m taking away from next week, I apologize. But – just trying to get down to the bottom of the growth opportunities.

Pete Anevski: No, it’s a fair question. So the biggest driver of growth is and will continue to be adding logos and lives. I’m happy to have Michael expand on where we’re at. So far, I talked in my prepared remarks that we’re pleased with where we are relative to adding logos and lives versus where we were at this time last year, but nonetheless, happy to give more color. Beyond that, barring again any surprises or changes relative to volume and utilization, if you will, per unique member, that will still remain the single largest driver of growth for us as it has in the past.

Michael Cherny: Okay, thank you.

Operator: Your next question is coming from Jailendra Singh from Truist Securities. Your line is live.

Jailendra Singh: Thanks, everyone. Thanks for taking my question. Actually, I want to follow-up on the last question from Michael about this long-term growth in the business. I know we are seeing three different issues this year in the first 7 months of these two issues, we still don’t know why those happened. And I understand the strong demand among employees and employees. But based on your experience thus far, does that change in terms of how you think about your approach to guidance in future and also related to that, have you guys thought about any changes you can do in your business model, either in terms of provider contracting or per contracting, which can result in less variability in your results?

Pete Anevski: Regarding the first part, we’re certainly going to do a couple of things. One is continue to get as much additional information as we can to inform our models and guidance and also to the extent that we can get more real-time information through our providers and prove the data that we get that will inform us, that will be something that we’re going to continue to work to enhance versus our current algorithms and models. And considering the couple of surprises we had this year, in the future, our ranges will definitely get wider, right, to sort of capture some of that. Regarding changing how we do business, it is a care consumption model and without putting in some sort of minimums by client or anything else like that, it’s hard to sort of mitigate the variability in actual consumption. So there isn’t thinking around that as we sit here now. That doesn’t mean things may not evolve. But as we sit here now, that’s not the plan.

Jailendra Singh: Okay. And my follow-up on the 2025 selling season commentary. Last year, you guys called out several not now employers. Have you seen them coming back this year and additionally, are you seeing any change in their behavior or the approach, either in terms of scope of coverage or benefits with respect to the benefit

Pete Anevski: So he’s – so relative to coverage, we’re not seeing any change what employers are adopting in terms of the early commitments is consistent with prior year, where there’s number of cycles, whether it’s facility preservation in the form of egg freezing, whether it’s Rx, I made the comment in my prepared remarks at the take rate Rx for new clients is really high as it has been in the past. All of that is positive. There’s also positive results relative to the take rate of some of the newer products that we have out there. So that’s also positive. As it relates to the not-nows, the majority of the early commitments are not nows. And so yes, they do come back, they come back and they come back every year and they’re the head start for lack of a better term for the sales season because they’ve looked at the benefit in prior years and are making the decision earlier in the year.

Jailendra Singh: Great. Thank you.

Operator: Thank you. Your next question is coming from Stephanie Davis from Barclays. Your line is live.

Stephanie Davis: Hey, guys. Thank you for taking my question. I was hoping to follow-up on some of the prior questions. Can you just dig in one level deeper as to what data you thought that maybe you anticipate this lower level of cycles per user in the back half of the year? And given that you do have cohort level data, what gives you confidence that this isn’t a cohort maturation issue?

Pete Anevski: So the first part of the question, we look at where we’re at this time in the quarter versus where we’re at this time in the previous quarter and in the first quarter. And the reduction or the slower rate of growth in cycles per e-mail utilizing member is consistent with what we saw in Q2, which was a slower rate of growth than what we would normally expect off of Q1. As it relates to maturation, I think it’s really early, considering this is right now a new trend to conclude that. And I think we sort of do the math overall in terms of the impact there’s still cycles per utilizer growth. It’s just not at the rate that we would expect with this normal seasonality that we see in the business.

Stephanie Davis: Understood there. And then when you think about the bullishness on the selling season to date and kind of how it’s coming ahead, do you have any thoughts on how government lives could contribute in this upcoming selling season now that you have a hunting license? Or how that mix of commercial versus government opportunities is shaping up in the pipeline?

Michael Sturmer: Yes. So this is Michael. First, as Pete said in the remarks, it’s – certainly, we still have lots of decisions still to come. But as it relates to both commitments to date as well as what remains in that active pipeline, we certainly feel good about. And then to the partners question, yes, I mean, what the partnerships allow us to do is really the value prop stays the same as it relates to the partners and the areas where we consistently differentiate remains the same in those partners. But it really – the partnerships really provide us two things. One is another reference point for our differentiation and our leading solutions. The second part is it provides additional paths towards bringing employers on.

And in particular, around the contracting process and the decision to sort of change, our partnerships really helped ease that last mile, if you want to think about it that way. So our prior partnerships continue to be valuable to us and great levers. And that’s how we look at as we add partnerships going into the future and look for that same sort of impact and effect on new business.

Stephanie Davis: helpful, thank you.

Operator: Thank you. Your next question is coming from Allen Lutz from Bank of America. Your line is live.

Allen Lutz: Good afternoon. Thanks for taking the questions. Pete, last quarter, you mentioned the Alabama Supreme Court ruling as a potential driver of utilization. Can you just provide an update on what you saw there in 2Q? Is there anything to call out on a state-by-state basis? Thanks.

Pete Anevski: Yes. So we surmised last quarter that the short-term dip in utilization was caused by that. If you recall, we also talked about the fact that it returned back to normal levels, and that’s consistent with what we reported for the full quarter for Q2 and also what we’re seeing right now for Q3. So the good news is that it was a short-term dip and not something that persisted. We’re not seeing anything today on a state-by-state basis that is of any meaning to call out.

Allen Lutz: Okay. Great. And then I want to follow up on some of the comments around the selling season a little bit stronger than last year. Can you talk about how quickly you think the fertility market is growing in 2024? Do you think it’s changed at all relative to 2023? And do you think Progyny is taking share? Thanks.

Pete Anevski: So the first thing is I do think we continue to take share based on the rate of lives growth that we have every year versus the growth in the market. And relative to the – how much the industry is growing in ‘24, it’s hard to say it’s anecdotal because when I say that, as companies take coverage, whether it’s through carriers or through us or any of the other competitors that we have, the coverage is very different with different benefit plans, right? The carriers have generally plans that are dollar maximums. So therefore, limited coverage and not comprehensive coverage and many companies sort of depending on the dollar maximums or what they offer don’t offer coverage across the board or coverage for a number of cycles ultimately get successfully just based on the math of live success rates and the cost of IVF.

So coverage comes in two forms. Overall, the thing I always point to is that if you look at the CDC data around art cycles that are reported every year, and I think the last year has reported is ‘21 or ‘22? ‘21 is the last year has – the rate of growth over the last 10 years is roughly 10% a year compounded annual growth rate, juxtaposed against what’s happening with live births, which are – have been on a decline. We sort of look at that data point as what’s happening in overall growth in terms of access to coverage.

Allen Lutz: Got it. Thank you.

Operator: Thank you. Your next question is coming from Glen Santangelo from Jefferies. Your line is live.

Glen Santangelo: Hi. Good evening. Thanks. Thanks for taking my question. Hey Pete, I hate to beat the dead horse here. But as you sort of pointed out, in some of the other answers we have had different issues, whether it would be the 4Q call, the 1Q call and now tonight. And so I guess listening to your answers, it kind of sounds like each quarter, the issue was a little bit different, but one thing that we get questions about is it seems like the common thread throughout this year is that all the economic indicators are sort of trending down. And so I guess the question is, why is it unreasonable to think that it’s at least not in part to a weakening consumer. I mean you seem pretty confident that you are not seeing any weakness in demand. And I am just kind of curious as to what gives you the confidence to sort of say that when it seems like it could be a logical answer.

Pete Anevski: Yes. Look, certainly, that could be one answer, right. So, I am not saying that’s impossible. Here is what I am saying. When I say demand is still there, if you look at the top of the funnel, i.e., unique utilizers and utilization rate, we are closer to the high end of historical utilization rates as opposed to the lower end of historical utilization rates. And to me, that’s a positive, especially when last year, we had – was a record year, if you will, in terms of utilization rate, right. So, that’s sort of why I make that first comment. Other than that, over – right now, what we are seeing it, when we talk about the other issues, the other issues were mix, which was first half of Q1 that resolved itself.

We called that out for one reason to talk about why the utilization rate versus the revenue that came with it in Q1, why that was lower, and that’s why we called it out. The second issue around the utilization rate in dip was temporary. And as I have answered on the previous question, was already resolved. And so far, as we continue into Q3, doesn’t appear to be a persistent issue. It appeared to be a short-term issue. This one is new and it is a – as a percent, a small drop in cycles per utilizer, but the utilizers are still utilizing. It just happens to be impacting the future outlook. And because we are not seeing that correct itself yet. If it does correct itself, we are guiding to it, and that’s why we are explaining it. So, I could understand the perspective that, that could be – all of it could be looked at collectively as a softening a little bit around consumer demand.

But I look at the top of the funnel and how many people are utilizing the benefit and is that changing as a starting point, an indication of demand. And then on top of it, the sales season and the demand from clients, the overall active pipeline, etcetera, and all of those comments that I made, it tells me that there is demand from employees to their benefit offices, and that’s why that demand continues.

Glen Santangelo: Okay. Maybe if I could just ask a quick follow-up to maybe tighten up our model. I thought, Mark, when we started the year at 5.4 million members we added 1.3 million. I thought we were supposed to finish the year at around 6.7 million. And now it sounds like we are going to finish the year 6.5 million to 6.6 million. Did we lose – is there a difference of 150,000 members that seem to have fallen off somewhere, or am I misremembering that? I am just kind of wondering if you can sort of walk us through what the expectation was versus what it is now.

Mark Livingston: Yes. So, you are right in that, we were saying, we were going to be approaching 6.7 million. We talked about it even in our prepared comments today that we did have an unexpected net reduction in members this quarter. We put that at about 100,000. I think that’s part of what you are seeing right there. Again, the clients that we expected to launch and we announced that we are going to launch, have all launched actually now that we are into the early part of August. So, that isn’t the factor. And to the extent that there is any type of organic growth across the balance of the year is sort of the difference between maybe it’s 6.5 million or rounding up to 6.6 million or 6.6 million neighborhood. But it’s really just what we have seen in this last quarter that’s impacted that number you are looking at.

Glen Santangelo: Perfect. Thanks for the color guys.

Operator: Thank you. Your next question is coming from Sarah James from Cantor Fitzgerald. Your line is live.

Sarah James: Thank you. I wanted to ask about quarterly progression. And then if I could, afterwards come back on for a clarification of something in the release. But when I look at your unique female utilizer guidance chart here, so you have got flat from 2Q to 3Q. I was wondering if you could help us understand some of the moving pieces in that assumption because you have got a full quarter of the in account shrinkage now, but you also have a bunch of new accounts starting in 3Q, which is great, but usually comes with some utilization headwind and then there is a different number of weekdays, which I am not sure is material or not for your business model. So, could you help us think through the scale of those moving pieces as you come to your guidance?

Pete Anevski: Sure. Do you want it Mark or let me…?

Mark Livingston: Yes, I will do it and then, Pete, if you have color. So, I think the important thing maybe is just to understand what the charts are. There is the lower chart, which is the one I think you are referencing is showing the quarterly progressions of ART cycles per unique female utilizers. So, this is the component of what our utilizers are doing, how many ART cycles will they complete in any one quarter. And if you look at ‘22 and ‘23, you see them progress from 0.50, 0.51, into the second quarter, a higher level at 0.55 and then continue to progress through the balance of the year. And that – the dynamic there is people who begin with utilizers that aren’t actually seeking ART in the – sorry, I apologize, we have a fire alarm going off.

So, you are seeing a higher mix of initial consults in the first quarter of the year, which then progresses as the year goes on. What we have seen this year, and this is what we are highlighting is – and you can see also the ART cycles per female utilizer actually does sort of increase a bit year-after-year. What we saw in Q2 is a much – it’s still an increase from 0.53 to 0.54, but a much lower increase than you can obviously see and perceive in prior years. And further, the reason that we are estimating a 0.54 here for the third quarter is because it’s effectively what we are seeing at similar rates. So, we have thought it was most prudent again, and it’s always been our guidance philosophy to show and to base our estimates on what we are seeing.

And you can see so from the low end of the guidance range, we have that stepping down a bit in Q4 to reflect the fact that there – perhaps there may be other unforeseen factors that may continue to bring that down as the year goes on. And the high end of the range where we do allow for it to increase a little bit, there is of course, as you can see versus ‘22 and ‘23, not as much as you would typically expect. So, hopefully, that’s helping.

Sarah James: Sure. And then just to clarify, I guess a pretty good sized recast in that chart versus how you report the ART cycles per unique female utilizer higher up. And I just wanted to clarify, that’s only the 300,000 member account. There is no other difference because the seasonality is quite different. One historically goes up in 4Q and other seems to come down. I wanted to make sure I understand that.

Mark Livingston: So, yes, in the upper chart, the numbers that we have excluded from average members, and really, it’s only for 2024, remember, that is associated with, and that’s a full year average now. And that’s only the members associated with the Federal plan which has a different rate of utilization based on how they chose to – I think we have talked about this, how they have chosen to design their benefit. The rate is – the average members is a little bit lower than the 6.5 million to 6.6 million because it does factor in the full year averages, including Q1 and Q2, which didn’t have those earlier launches.

Sarah James: Got it. Is that what drove the recast for ‘23, or is that something different?

Mark Livingston: I don’t think we are recasting ‘23. Oh no, I think if you look, the ART cycles per unique female utilizer, if you look at in the upper chart, ‘22 is 0.96, that’s the far right row on the lower chart, same 0.96, and then 2023 is 0.99 for the full year same is on the chart below 0.99.

Pete Anevski: Full year versus quarterly on the bottom chart and the full year is all the way to the right.

Sarah James: Got it. Maybe we can follow-up a little bit more offline because I am still getting some quarterly differences, but we can handle that later. Thank you.

Operator: Thank you. Your next question is coming from Richard Close from Canaccord Genuity. Your line is live.

Richard Close: Yes. Thanks for the questions. Maybe just to expand on Sarah’s line of questioning here. Just looking at the bottom chart, and if you go back in time, I know you are only showing us ‘22 and ‘23 and so far in ‘24. But if you go back to earlier years, have you guys ever experienced anything like this where you have seen decreases in any quarters or I guess that’s the first question.

Pete Anevski: Yes. There is – if you look back, depending on the year you look at, if you look at 2020, it was the first year of the COVID year. 2021 was a year that had a lot of variability because it was sort of the first still in COVID, but sort of coming out of it during the year. The last two full years, were more indicative of pre-IPO activity versus sort of those two COVID years in terms of the seasonality and sequential improvement.

Richard Close: Okay. And then I know you don’t have reasons to explain the variance here or the decline. But is there – if you can expand upon what you said earlier in terms of trying to find out, I mean just what’s the process in terms of trying to figure out what the change is. It seems like you had really want to know that.

Pete Anevski: It’s a combination of creating tools that could aggregate what our conversations with 30,000 people, utilizing the benefit in the quarter and start to understand whether or not that will tell you anything. It’s a combination of analyzing the significant different volume of journeys and whether or not that was haunting combination of do you see anything in any different area in the country or whether or not you see anything that in any clinics and see if that will tell you anything. It’s also a combination of as the outcomes come in, which we don’t have today for these cycles in Q2, and that will tell you anything. So, it’s sort of all of the above, but will take time because in real time, you don’t know what’s happening.

Richard Close: Okay. Thank you.

Operator: Thank you. Your next question is coming from Scott Schoenhaus from KeyBanc. Your line is live.

Scott Schoenhaus: Hi team. Thanks for taking my question. My first question is on, if we look at fertility benefit services average revenue per ART cycle, it really accelerated and spiked to levels we haven’t seen in a few years. Can you give us some color on what’s driving that?

Mark Livingston: Sorry, the average per ART, yes, I think what you are seeing there is if you have a – again, for the number of people that are utilizing the service, versus the number that are completing ART cycles, it’s a greater proportion. There are – there is revenue associated with that. So, you are seeing a higher proportion of revenue for non-ART revenue to the cycles themselves, and that’s going to push your average up. It is a factor of this ART cycle per utilizer.

Scott Schoenhaus: Got it. My follow-up question is on this revenue mix. If we look at the state-by-state revenue mix declines, is there any states or regions that are a clear glaring signal or discrepancies between what you did a year ago or if we can even drill it down more simply like the pharmacy benefit services revenue, are the declines in that part of the business – is it – can you see big discrepancies state-by-state versus a year ago? Thank you.

Pete Anevski: Yes. As I mentioned before, I think somebody else asked us the same question. There isn’t a state-by-state significant variance right now that we can see in call out. And Mark had talked about in his prepared remarks, what drove the difference in growth rate in pharmacy revenue versus medical revenue. And it’s really tied to the revenue per cycle, that didn’t grow as much sequentially as Q1 to Q2, as I had in the past. And therefore, in prior year did, and so you are going to comp-off of a year that had more growth and then on top of it, manufacturer rate increases were in last year’s were done by Q2 last year, weren’t by Q2 – by the end of Q2 of this year. So, a combination would impact it. But no, there isn’t anything to call out state-by-state right now.

Operator: Thank you. Your next question is coming from David Larsen from BTIG. Your line is live.

David Larsen: Hi. Can you maybe talk a little bit about your conversations with benefits consultants? Like we have had some discussions with a handful of them over the past 2 years and they highlighted to us that DEI, diversity equity inclusion was an important consideration when companies and plans would sign up for these benefits and that was a driver of growth, we are now heading into an election cycle. It’s possible, obviously, that perhaps a more conservative leading administration will take power. I mean has that entered into the conversations at all or not, it gets back to the sort of this red-blue discussion? Thanks.

Pete Anevski: Regarding the last piece, even though – even if the more conservative party takes power, the former President Trump, the Republican nominee has already said, he supports facility in IVF. And on both sides of the aisle, there has been enough statements out there, there is support for IVF. So, I don’t think that will create an issue for the industry. Regarding conversations with the benefit consoles, I think the trend is positive relative to what’s happening at the consultants. Over the last couple of years, they have effectively all created a center of excellence around and rebuilding benefits that wasn’t in place before. That’s an indication of the overall demand and how often the conversations are happening with existing clients or prospective clients of theirs. And for them to be equipped to be an advisor to these clients, we see that as a positive. Michael, I don’t know if want to add anything.

Michael Sturmer: Yes. No. And then just also just from a sort of what’s happening and how that plays itself out, I would point back to Pete’s comments in the prepared remarks, and e are not seeing – we are the active pipelines comparable to last year. To-date, again, the closes are good. Obviously, lots more to go, but you would start to see those things to play out. And again, we are not seeing those things.

David Larsen: Okay. And then just one quick follow-up. The revenue per ART cycle increased a good amount sequentially. Is the mix back to where you thought it would be, meaning the revenue coming in per cycle and for each service is now high again, and it’s simply the overall utilization in membership that’s lower than sort of what was expected? Thank you.

Pete Anevski: The revenue for ART cycle and the increase in Q2 is a function of the fact that utilizes, who utilize services that are in ART cycles, right, are using other stuff that drives the math, that makes it seem higher, right. So, if there is fewer cycles, but other services and other utilization is done, but they are not ART cycles, right, that will drive the overall math because we are not really breaking out the two separately, right. That’s what’s driving that. Mix is normal, if you will, for lack of a better term. There isn’t a significant mix change. We had that mix anomaly in the first six weeks of the year and other than that, it’s been relatively consistent with what we would expect at different times of the year.

So, that is normal. But I just want to make sure you don’t take away from that comment that the jump up is only around that. It’s also around this other item, which is revenue per ART cycle – I am sorry, utilization by female utilizers of the number of ART cycles per unique utilizer is down, therefore, other services because they are utilizing the benefit they are utilizing it goes into the same map of a lower volume of our cycle, so if that makes sense.

David Larsen: Yes. Thanks so much.

Operator: Thank you. There are no further questions in the queue.

James Hart: Okay. Thanks everybody for joining us this afternoon. As always, please feel free to reach out to me if you have any questions or follow-ups, happy to assist in any way that we can. And again, if you are interested in coming to the Investor Day next week, send me an e-mail, and I will confirm your registration.

Operator: Thank you. This concludes today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.