Prospectus Summary
PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus and is a brief overview of key aspects of the offering. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Some of the statements in this prospectus constitute forward-looking statements. See the section titled “Special Note Regarding Forward-Looking Statements and Industry Data” for more information.CONNECTURE, INC.
Overview
We are a leading web-based consumer shopping, enrollment and retention platform for health insurance distribution. Our solutions support the industry evolution towards a consumer-centric experience that is transforming how health insurance is purchased and distributed. We offer a personalized health insurance shopping experience that recommends the best fit insurance plan based on an individual’s preferences, health status, preferred providers, medications and expected out-of-pocket costs. Our customers are health insurance marketplace operators, such as health plans, brokers and exchange operators, that must distribute health insurance in a cost-effective manner to a growing number of insured consumers. Our solutions automate key functions in the health insurance distribution process, allowing our customers to price and present plan options accurately to consumers and efficiently enroll, renew and manage plan members.
The United States health insurance marketplace is undergoing a tremendous structural change that is fundamentally altering how health insurance is purchased and distributed. More consumers now have access to health insurance with more plan options and places to buy their insurance than ever before. As a result, consumers need effective decision support tools to help them optimize their health insurance choices. Concurrently, health plans and brokers that have traditionally distributed a more limited set of plans to employers through group coverage must now cost-effectively sell insurance in the more fragmented individual market and in public and private exchanges, which are online marketplaces sponsored either by a non-government entity, such as an employer, insurance broker or other distributor (in the case of private exchanges) or by a federal or state government entity (in the case of public exchanges) for health insurance and related products that allow individuals and businesses to compare products and make purchases directly from health plans. These changes are driving significant demand for innovative technology solutions to more effectively help consumers navigate the new health insurance marketplace and for health plans, brokers and other aggregators of covered lives to deploy cost-effective distribution channels.
We have a 15-year history of providing technology-enabled health plan sales automation solutions. In 2013, our solutions were used by plan sponsors, brokers and consumers representing over 20 million lives, or annual shoppers, and facilitated over $130 billion of annual plan premiums. As of June 30, 2014, our expanding customer base included more than 70 health plans, including 20 of the top 25 health plans (based on total enrollment). Our personalized health insurance shopping experience is available to all 52 million Medicare beneficiaries through our enablement of Medicare.gov and 1-800-Medicare call center agents. As of June 30, 2014, our technology powered more than 30 private, state and federal exchanges.
As of December 31, 2013 and June 30, 2014, total stockholders’ deficit was $106.1 million and $119.4 million, respectively. For the year ended December 31, 2013 and the six months ended June 30, 2014, our net loss was $26.4 million and $12.1 million, respectively. Over the same periods, our adjusted EBITDA loss was $17.3 million and $5.6 million, respectively. Please refer to “Consolidated Selected Financial Data—
Adjusted Gross Margin and Adjusted EBITDA” in this prospectus for a discussion of the limitations of adjusted EBITDA and a reconciliation of adjusted EBITDA to net loss, the most comparable generally accepted accounting principles measurement.
Industry Background
The United States health insurance industry is responsible for the administration of healthcare benefits to over 200 million individuals covered by commercial health insurance and is experiencing a structural transformation in which shopping for and enrollment in health insurance products is transitioning from a group-based distribution model to an individual consumer marketplace. This transformation, in conjunction with regulatory and competitive pressure on distribution and overhead costs, places substantial new business and technology requirements on health plans, brokers and aggregators of covered lives and has created an attractive growth opportunity in the markets we serve.
Consumer-centric marketplace. We estimate that approximately 100 million individuals will be shopping for and enrolling in health insurance annually through the individual market and public and private exchanges by 2018. This evolution is being driven by a shift in responsibility for health insurance purchasing from employers to individuals, placing increased importance on better, more informed decision-making, and is changing where these purchases are being made. This trend is evident in several key market segments:
Pressure to manage distribution costs and operating expenses. Health plans and brokers are under increasing pressure to lower distribution costs. Recent federal restrictions on health plan profitability and increased competition for members on exchanges have driven health plans to find ways to better manage areas of non-medical cost structure, such as sales commissions and internal information technology development. As a result, health plans have undertaken efforts to lower brokerage commissions and to implement innovative third-party technologies to reduce investment in internally-developed software. Similarly, brokers who now face depressed commissions from health plans need to leverage technology-based, automated processes to sell more cost-effectively and to identify product cross-selling opportunities.
Increasing opportunity for technology. As shopping and enrollment in health insurance transitions to an individual, retail-oriented consumer marketplace, there is significant opportunity for intuitive, web-based technologies to automate and lower the cost of health insurance distribution, as well as increase enrollment opportunities and member retention. As of 2012, approximately $25.0 billion was spent to distribute health insurance annually. As technology becomes increasingly critical to support a more consumer-centric shopping and enrollment process, we believe, based on our assumptions and estimates, that $3.4 billion was spent annually on technology to automate health insurance distribution as of 2013 and that this amount will increase to $5.2 billion by 2017.
The Connecture Platform
We are a leading web-based consumer shopping, enrollment and retention platform for health insurance distribution. Our solutions support the industry evolution towards a consumer-centric experience that is transforming how health insurance is purchased and distributed. We simplify the health insurance shopping experience with data-driven, personalized plan comparison and shopping tools that empower individual consumers who are now faced with more decisions to make better health insurance choices. For health plans, brokers and exchange operator customers, we deliver a powerful and unified distribution platform that we believe increases their revenue opportunity as they serve a growing, but fragmented insured population, while also reducing the costs associated with acquiring new and retaining current members. We automate the following key functions of the health insurance distribution process:
We believe the breadth, depth and scale of the Connecture solutions across key functional areas are critical to our success in the complex and changing health insurance marketplace for the following reasons:
Our personalized and data driven shopping experience helps consumers make better purchasing decisions. We believe that our interactive and intuitive health insurance shopping experience offers better decision support for consumers. Our solutions offer personalized health plan recommendations based on the individual’s self-entered preferences, health status, preferred providers, medication and expected out-of-pocket costs. Our data-driven recommendations engine also uses empirical data, a consumer’s actual claims experience and proprietary algorithms to find the best matches among available plan options. We believe that our personalized shopping experience results in a more effective health plan selection that represents the best match given historical and expected levels of healthcare utilization.
Our unified platform across multiple product types is designed to maximize enrollment and member retention. Our platform is designed to deliver a seamless shopping and enrollment mechanism in a marketplace that is characterized by a wide range of potential insurance alternatives and changing insurance eligibility for both currently and previously insured individuals. For brokers that seek to sell the full array of health insurance products, we believe we offer the only unified solution across a broad range of health insurance products, including subsidized and unsubsidized individual plans, group plans, Medicare Advantage, Medicare Supplement and Part D and Medicaid. For health plans that seek to minimize membership churn, our solution enables customers to enroll and retain members as their plan eligibility changes. Our solution integrates with the Federal Health Exchange and allows for calculation of subsidies. For the over-65 population, our solutions integrate Medicare Advantage, Medicare Supplement and Medicare Part D plan data which also allows senior retirees to make informed choices if they transition from a group plan to an individual plan.
Our technology enables rapid deployment of public and private single- and multi-payer exchanges. Our technology allows our health plan, broker and aggregator customers to capitalize on the migration to public and private exchanges. Our exchange solutions allow quick deployment of a customized online marketplace where consumers can shop for a plan of their choice and employers or other plan sponsors can set defined contributions. For brokers that are looking to set up multi-payer exchanges, which are private exchanges generally promoted by third parties such as brokers or benefits consultants that offer a broad range of health plans for individuals to choose from, the breadth of our relationships with health plans and knowledge of locally-regulated insurance products allow us to rapidly implement exchanges. For health plans that are looking to sell single-payer exchanges, which are private exchanges that generally offer only plans sponsored by a single health plan, directly to employers, our ability to offer easy-to-use technology that can handle the broader eligibility needs of employees and their dependents allows them to offer a complete integrated solution. We have an established track record of scalability and reliability with our more than 30 exchange customers.
Our Competitive Strengths
We believe we have the following key competitive strengths:
Health plan shopping and enrollment leadership. We have a 15-year history in the technology-enabled health plan shopping and enrollment market:
Domain and technology development expertise. The health insurance market is characterized by high levels of regulation associated with the many plan types that can be sold to eligible individuals and how information related to these plans is presented and marketed. We believe our knowledge of the complex health insurance market and our proven ability to innovate positions us to be a continued leader in our industry. Further, our technology assists our customers to compete more effectively by allowing them to introduce new products, enter new markets and change pricing and benefit designs dynamically and efficiently.
Configurable and scalable platform to meet customer needs. Our platform is designed to handle both high degrees of configurability and significant growth in users without requiring major software re-engineering or capital expenditures by our customers, allowing us to scale rapidly. We offer a platform that is comprehensive across key sales automation functions and also has individual software applications that can integrate with common existing customer software. We deliver quick deployment solutions in the cloud as well as large scale enterprise solutions. Today, our technology is used by many of the largest health plans and brokers, and we also power the country’s largest multi-payer exchange, Medicare.gov, and successfully handle approximately two million Medicare Advantage and Medicare Part D electronic enrollments.
Large and valuable database of health plan and drug cost information and ancillary products. We believe that our large database of health plan and drug cost information enables us to deliver higher value to our customers and consumers. We are a primary source of health plan and pharmacy data for Medicare products available on Medicare.gov, and the broad range of our health plan relationships makes us a valuable and extensive source of permission-based health plan information. These data are critical for consumers to make difficult decisions about trade-offs between plan premiums vs. out-of-pocket costs, physician network and pharmaceutical formularies. We believe our large dataset of health plan and drug cost information powers our empirically-driven recommendations engine that provides consumers more precise decision-support tools. In addition, our platform also supports many ancillary products such as dental, life insurance, critical illness and wellness.
Tenured, experienced management team. Our management team has significant experience in high growth healthcare, technology and consulting companies, including Truven Health Analytics (formerly Thomson Reuters Healthcare), Optum (part of UnitedHealth Group), Ernst & Young, PricewaterhouseCoopers and Accenture. Our management team has been responsible for driving innovation in the healthcare information technology industry. We believe we have the management team in place to continue developing and marketing innovative solutions that meet the needs of our customers.
Visible, recurring software and technology services revenue model. Our business is characterized by high customer retention rates and recurring revenue. Most of our revenue is derived from multi-year contracts for software and services. In the past two years, our customer revenue retention rate has exceeded 95% and recurring revenue has grown to over 70% of revenue. As a result, we have significant visibility into future financial performance. As of June 30, 2014, we had $87.7 million of business in contracted backlog and a deferred revenue balance of $78.1 million that we expect to recognize in subsequent years.
Our Growth Strategy
Key elements of our growth strategy include the following:
Add new customers and expand covered lives within our existing base of health plans and brokers. We believe our market leadership positions us to take advantage of key industry trends. We intend to continue engaging additional top national and regional health plans and brokers as they seek innovative solutions to maximize enrollment and retention while minimizing costs as they capitalize on the opportunity to serve the over 100 million expected members in individual and exchange markets. We also believe new market entrants such as retailers and Accountable Care Organizations, or ACOs, present new customer categories for us.
Leverage core technology to establish leadership in the private health plan exchange business. As more small and medium sized employers move away from defined benefit plans and towards defined contribution plans, the number of health exchanges, both single- and multi-payer, are expected to significantly increase. Unlike a defined benefit plan, in which employers provide a standard set of health benefits and cover a substantial portion of the health insurance premiums, under a defined contribution plan, employers make cash contributions to health savings accounts that employees can use to purchase insurance products of their choosing. This model allows employers to more accurately predict and limit healthcare costs, while also affording employees a greater number of choices relative to a defined benefit plan. As employers move their employees to defined contribution plans, employers can utilize our software to create private exchanges that allow employees to select their own health benefits. We intend to leverage our technological expertise and our long-lasting relationships with health plans to continue capturing these emerging exchanges, as well as single and multi-payer broker private exchanges. We are currently a leader in the retiree exchange space, an industry providing online private exchanges for both retirees under 65 years old and Medicare beneficiaries that is at the forefront of exchange technology adoption, and we believe that our capabilities there position us for further growth in other exchanges. We believe there is a significant opportunity to provide full service private exchange solutions that integrate call center capabilities.
Further penetrate our existing customer base. We believe there is a significant opportunity in our existing customer base to cross-sell our full set of applications, as most of our customers utilize less than half of what we are able to offer. Additionally, many of our customers could utilize our solutions across other products within their overall set of offerings, such as a health plan expanding from individual to group product offerings. For example, we initially provided limited solutions to a regional subsidiary of a national customer and then were asked to add a full solution across the entire enterprise based on our initial performance. We also believe our development of new products and capabilities will continue to address evolving customer needs and facilitate additional cross-selling of software applications and solutions.
Expand new products and distribution channels. We plan to expand into new products and distribution channels by leveraging our current technology and innovation expertise. We believe there are significant growth opportunities in private exchanges in partnership with health plans, data analytics and ancillary product offerings to broaden our value proposition to customers. We maintain a robust pipeline of new software applications and solutions and believe our analytical capabilities differentiate our solutions in the marketplace by improving shopping recommendations, enhancing the customer shopping experience and integrating into customer relationship management, or CRM, solutions. We are also broadening our targeted customers to include retailers and other aggregators of covered lives.
Monetize the shift to the individual market. PPACA is expected to drive growth in the under-65 individual market from 20 million lives in 2012 to 57 million in 2017, representing an increase in annual commission spend of $4.2 billion. Given our leadership in the individual market and with exchanges, we believe that we are well positioned to capitalize on the ongoing shift from the traditional group distribution model to an individual, retail-oriented marketplace. We also believe we can capture a greater share of commission spend by offering more comprehensive exchange solutions, including full service support, to our customers.
Summary Risk Factors
Our business is subject to a number of risks that you should understand before making an investment decision. These risks are discussed more fully in the section titled “Risk Factors” following this prospectus summary. Some of these risks are:
Corporate Information
We were organized in 1999 under the name Healthplanet.com, Inc., which subsequently changed to SimplyHealth.com, Inc. later that year, and in 2002 changed our name to Connecture, Inc. We are headquartered in Brookfield, Wisconsin and our principal executive offices are located at 18500 West Corporate Drive, Suite 250, Brookfield, Wisconsin 53045. Our telephone number is (262) 432-8282. Our corporate website address is www.connecture.com. The information contained in, or that can be accessed through, our website is not part of this prospectus.
“Connecture,” “DRX,” “Destination RX” and “InsureAdvantage” are trademarks or logos appearing in this prospectus owned by Connecture, Inc. or one of its subsidiaries. Through claimed common law trademark protection, we also protect other marks which identify our services, such as RxHealth, and we have registered numerous domain names including “connecture.com.” All other trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we become a large accelerated filer, which means that we have been public for at least 12 months, have filed at least one annual report and the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last day of our then most recently completed second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We refer to the Jumpstart Our Business Startups Act of 2012 herein as the “JOBS Act,” and references herein to “emerging growth company” shall have the meaning associated with such term in the JOBS Act.