Good day, ladies and gentlemen and welcome to the Progyny Inc. Fourth Quarter 2022 Earnings Call. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, James Hart. The floor is yours..

Thank you, John and good afternoon, everyone. Welcome to our fourth quarter conference call. With me today are Peter Anevski, CEO of Progyny; 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 first quarter and full year 2023 and the assumptions and drivers underlying such guidance, including the impact of our sales season and client launches, our anticipated number of clients and covered lives for 2023, anticipated employment levels of our clients in the industries that we serve, the timing of client decisions, our expected utilization rates and mix, the impact of COVID-19, including variance on our business, clients, member activity and industry operations; our ability to acquire new clients and retain and upsell existing clients, our market opportunity, size and expectation of long-term growth, our plans for the expansion of our business, including expansion into other markets and of services offered our business performance, industry outlook, strategy, future investments, plans and objectives 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, adjusted EBITDA margin 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.progyny.com. I would now like to turn the call over to Pete..

Thanks, Jamie. Thanks, everyone, for joining us this afternoon. We're pleased to report that 2022 was another extraordinary year for Progyny. We achieved record levels of revenue with 57% growth over 2021, profitability with a 16% adjusted EBITDA margin and operating cash flow generating over $80 million in 2022 or more than 3x over 2021.

While we're extremely proud of these results, we're even more excited about how we're positioned at the beginning of 2023 which is coming on the heels of our most successful selling season ever. We added more than 105 new clients, our most ever in any single season, representing 1.2 million new covered lives.

That's an approximately 30% increase in lives from where we were at the start of the selling season a year ago which we believe further demonstrates the continued demand we're seeing in the market. We also maintained for the seventh straight year, a near 100% retention rate amongst our existing clients.

That would be an extraordinary achievement for any business in any year let alone to achieve this each year over the first 7 years in market as we've done. In addition to our strong retention rates, existing clients didn't reduce their Progyny benefit. And in fact, more than 25% of our clients increased their Progyny program in some way for 2023.

We believe the new logo sales success, existing client retention and expansion of services for existing clients are clear indications of the value our solution provides to all of our constituents; our members, employers, consultants and partners.

I'll remind you that the vast majority of these buying and renewal decisions happened in the second half of 2022, despite an environment where high inflation, a potential looming recession interest rate hikes and other macro headwinds were affecting the economy.

Our clients today include many of the most data-driven and sophisticated buyers of health care services in the world. They understand how to evaluate what's in the market and choose the solutions that will best meet their needs and objectives.

We also continue to equally attract companies who are both adding a facility benefit for the first time as well as companies who are leaving their carrier for our expanded solution that's also a more comprehensive inclusive and equitable. Accordingly, we believe our continued commercial success validates several things.

First, the demand for fertility benefits amongst millennials is stronger than ever; second, the increasing relevance and timeliness of family building benefits as employers look to modernize their health benefits and support the needs of their workforce, particularly the female population who have long been underserved.

Third, the resilience of these benefits once the coverage has been added to the employer benefit design as employers tend to be extremely reluctant to take coverage away once it's been offered especially when the member experience and outcomes are so strong while also controlling costs.

And lastly, unlike the many digital point solutions that have sprung up across health care over the last few years, including in the fertility and family building, Progyny has and continues to successfully differentiate ourselves by being an integral part of the medical benefit itself with the unique model outcomes and value.

Ours is a true end-to-end solution that demonstrates real impact through a combination of plan design, an unprecedented level of collaboration across an industry-leading network and an extraordinary level of patient education and support.

In fact, we believe our success in 2022 is the most powerful testament there can be to the unique value we deliver. That value also explains why we have more than doubled our clients, members and revenue over just the past 2 years alone when we were at 135 clients, 2.2 million covered lives and $345 million in revenue in 2020.

We believe this sustained success demonstrates our continued differentiation in the marketplace. As we begin the new year, our focus is on continuing to capitalize on this increasing demand into the 2023 selling season.

The season is in its very earliest stage, so while it's too soon to offer any quantitative commentary, the early activity we're seeing thus far is extremely positive.

We have a very healthy pipeline in place with meaningful increases in active pipeline year-to-date over 2022 partially reflecting the record level of opportunities that were carried over as not now from the 2022 season as well as the addition of new opportunities created through traditional demand gen plus meaningful levels of inbound activity.

We've also already picked up a number of early wins, including an aviation manufacturing company, another union group and one of the largest children's hospitals in the country, extending our recent track record of success across all these verticals.

We've seen how an initial client win in an industry can often translate into continued success and expansion within that vertical. And while each of these early wins are further proof of that dynamic, our momentum in the health care industry is a particularly good example. Just 4 years ago, we won our first health care client.

And today, we have over 30 clients that represent approximately 600,000 covered lives in health care alone. As you might imagine, these are amongst the most sophisticated buyers of a health care solution and these employers are increasingly choosing Progyny.

Perhaps the most exciting thing is that even with all our success, we are still at a very early stage of penetrating not only the health care industry but also every one of the more than 40 other industries we're in today.

In addition to the 2023 selling season, beginning on such a promising note, we're also seeing an increase in activity with other nontraditional channel partners.

For example, Progyny was recently selected by the Children's Hospital Association, or CHA, to be the exclusive preferred partner to its member hospitals for fertility and family building services. If you aren't familiar with CHA, it's a coalition of more than 220 children's hospitals, health systems and related organizations across the country.

Participating members have access to a range of programs and services, including benchmark data, shared best practices and partner bedding programs. Our selection by this prestigious group is due in part to our extensive record of producing tangible results with other hospitals and health care systems, including some who are CHA members.

While coalition members can choose whether or not to follow CHA's recommendations, their approval obviously carries significant weight and we expect to leverage this relationship to further our penetration within this very attractive vertical.

We believe CHA selection of Progyny is an example of the success we're having with other channel partners and we expect to announce other agreements that will help further accelerate the awareness and adoption of this very important benefit.

In conclusion, the early selling season activity gives us confidence that the macro trends driving the high demand for family building benefits combined with our position as the leader in the space, position us well to sustain our momentum from last year's selling season into 2023.

And given the caliber of the companies that we're both partnering with and seeing in our active pipeline, it's become even more evident that Progyny is the provider of choice for fertility solutions amongst the best known and most successful companies in the world. Let me turn the call now over to Mark to walk you through the results in more detail..

Thank you, Pete. Good afternoon, everyone. I'll first walk you through our results for the fourth quarter and full year and then provide our expectations for 2023. Revenue in the fourth quarter was $214.3 million, reflecting growth of 68%.

I'll remind you that this growth rate reflects that revenue in the year ago period included a slight headwind from the Omicron variant which we discussed with you at that time. As we've said previously, once Omicron subsided in early Q1 of this year, we didn't see any meaningful impact from COVID in the remainder of 2022.

For the full year, revenue grew 57% to $786.9 million. With this strong result, we've more than doubled our revenue in just the past 2 years which helps to put our rapid growth into perspective, in addition to validating how robust our opportunities are in the market.

Our revenue growth in both the quarter and year was primarily due to an increase in the number of clients and covered lives as compared to a year ago. We ended the quarter with 288 clients, representing an average of 4.7 million covered lives.

This compared to 191 clients at an average of 2.9 million covered lives a year ago reflecting 60% growth in lives over the prior year. As discussed last quarter, we saw a higher than usual number of clients in covered lives launching their Progyny benefit throughout 2022 as opposed to the more typical January 1 start date.

As expected, there were 6 client launches in the fourth quarter, though these were all relatively smaller clients as compared to some of the larger clients who launched in Q2 and in Q3. Taken together, out of more than the 105 clients that we won in the recent selling season, nearly 2 dozen launched in 2022.

Though we continue to believe most new clients will look to launch consistent with most plan year starts which is 01/01, we view these early launches as a sign of both the conviction that companies have to offer a family-building benefit that their employees want and need as well as employers eagerness to make that coverage available as soon as possible.

As has been the case in the past, our growth in covered lives in 2022 was due not only to new clients but also organic growth within the existing client base as a number of our clients continue to expand their workforce over the course of the year, with many of them doing so in the fourth quarter as well.

We've all seen the headlines where a number of companies, particularly in tech, have announced plans to reduce their workforce but that doesn't tell the whole story.

In fact, the most recent jobs reports have shown that there continues to be significant hiring in industries that are very well represented in our client base, including health care, hospitality and professional services, to name just a few.

And just today, the New York Times reported that there were fewer layoffs in December than in any month during the 2 decades prior to the pandemic and the unemployment rate is at its lowest point since 1969, citing economists who believe employers are reluctant to lose workers now knowing how costly it is to subsequently recruit and train new employees in the future.

I'll remind you that a key aspect of our growth over the past few years has been the significant diversification of our client base. Our clients today represent more than 40 discrete industries with no industry comprising even 20% of our member base.

As it relates to membership growth in our base, we continue to anticipate for the employment levels of our existing clients to be relatively consistent versus how we entered this year with little to no contribution from membership growth expected during 2023. Turning to the components of the top line.

Medical revenue increased 60% in the fourth quarter to $143 million and grew 43% over the full year to $510 million. Our growth in both the quarter and the year was driven by higher number of clients in covered lives. Pharmacy revenue increased 86% in the fourth quarter to $71.2 million and grew 91% over the full year to $277 million.

The growth in both periods was primarily driven by an increase in the number of clients with Progyny Rx. In 2021, 73% of our clients have the pharmacy solution. By the end of 2022, that had increased to 85%.

With 97% of our newest clients choosing the integrated benefit and some upsells from the existing base, we anticipate that Rx penetration will be 90% of our client base in 2023. Turning now to our utilization metrics. During the quarter, a record 12,200 ART cycles were performed which is a 60% increase from the fourth quarter of 2021.

For the full year, ART cycles grew nearly 50%, reflecting the continued high rate of demand we're seeing for fertility care. Female utilization in the quarter which is what principally drives our financial results as it captures the more extensive treatments in a fertility journey was 0.46% consistent with the year ago period.

For the full year, female utilization was 1.03%, slightly lower than the 1.0% in 2021. As a reminder, utilization rates will vary due to a number of factors, including the timing of new client launches as we typically see a ramp period once the newest members gain access to the benefit.

And in 2022, there were a significant number of midyear launches which certainly has an impact on our reported utilization rates. Turning now to our margins and operating expenses. Gross profit increased 77% from the fourth quarter of 2021 to $44.5 million yielding a 20.8% gross margin.

The 110 basis point increase from the year ago period primarily reflects the efficiencies that we continue to realize in the delivery of our care management services as well as the impact of our renewals with providers and pharmacy program partners at more favorable terms. For the full year, gross profit increased 49% to $167 million.

The full year gross margin of 21.3% reflected a decrease of 110 basis points from 2021, primarily due to the impact of noncash stock-based compensation in connection with the grants that we've previously discussed with you.

Gross margin, including the impact of stock -- sorry, excuse me, excluding the impact of stock-based comp, increased 40 basis points from 2021.

Sales and marketing expense was 6.1% of revenue in the fourth quarter, in line with the year ago period as we continue to make investments to capitalize on the continuing growing demand by expanding our go-to-market resources entering 2023. For the full year, sales and marketing was 5.8% of revenue in 2022 as compared to 4% in 2021.

The increase is primarily due to higher noncash stock-based compensation expense. G&A was 13.2% of revenue this quarter as compared to 13.8% in the fourth quarter a year ago. The improvement is primarily due to efficiencies in our back-office operations as we expand the business.

For the full year, G&A was 12.5% of revenue which compared to 11.9% in 2021. Again, the increase was due to higher noncash stock-based compensation. Press release issued today reconciles the impact of noncash stock compensation on our gross margins and operating expenses.

Because our strong top line growth and the efficiencies realized throughout the business, adjusted EBITDA, whether measured in dollars or margin increased significantly in both the quarter and the year. In the fourth quarter, adjusted EBITDA more than doubled to $33 million, yielding a margin of 15.4%.

For the full year, adjusted EBITDA increased 87% to $125.7 million yielding a margin of 16% or 250 basis point expansion from 2021. Adjusted EBITDA margin on incremental revenue was 20.4% for the full year demonstrating the leverage that we continue to achieve on the latest cohort of revenue even as we rapidly grow the business.

Fourth quarter net income was $3.4 million or $0.03 per diluted share. This compared to net income of $15.1 million or $0.15 per share in the fourth quarter of 2021. In 2022, net income was $30.4 million or $0.30 per diluted share. This compared to $65.8 million or $0.66 per share in 2021.

The decrease in both the quarter and year was primarily due to higher stock comp expense. Additionally, we had a provision for income taxes in the current period as compared to a tax benefit for the fourth quarter of 2021. Turning now to our cash flow and balance sheet.

In the fourth quarter, we achieved our highest ever quarterly operating cash flow of $51.5 million. This compared to $8.8 million generated in the year ago period. Due to the strong quarterly performance, we generated a record $80.4 million of operating cash flow over the full year as compared to $26 million in 2021.

For the full year, our operating cash flow reflects a 64% conversion of adjusted EBITDA to operating cash in line with our previous commentary and nearly double our conversion rate from 2021. The improvements in cash flow in both the quarter and the year were due primarily to our higher profitability as well as the timing of billings and collections.

As expected, accrued and unbilled receivables on a DSO basis, improved by more than 12 days from Q3 to Q4 and ended the year in line with where we concluded 2021. As of December 31, we had total working capital of approximately $274 million, reflecting $189 million of cash, cash equivalents and marketable securities and no debt.

Turning now to our expectations for the first quarter and the full year 2023. For revenue, we are projecting between $245 million to $250 million in the first quarter, reflecting growth of between 42% and 45%. For 2023, we project revenue of between $1 billion to $1.03 billion, reflecting growth of between 27% and 31%.

As compared to the first quarter, our full year growth rate reflects how as the year progresses, will start to comp against periods from '22 that include the revenue from the clients who launched throughout 2022 which somewhat moderates the growth rate, particularly over the back half of the year.

Because the significant majority of our newest clients and lives have already launched, we anticipate that revenue will ramp during the year more typically with only a slightly heavier weighting in the back half of the year.

For adjusted EBITDA, we expect between $41.5 million to $44 million in the first quarter, along with net income of between $6.8 million to $8.6 million or between $0.07 and $0.08 earnings per diluted share on the basis of approximately 102 million fully diluted shares.

I'll remind you, our net income projections do not contemplate any discrete income tax items, including the income tax benefit related to equity compensation activity. To the extent the related activity occurs, we will continue to benefit from those discrete tax items throughout 2023.

For the full year, we expect adjusted EBITDA between $166 million to $174 million and for net income of between $27 million to $32.7 million, or between $0.26 and $0.32 earnings per diluted share on the basis of approximately 103 million fully diluted shares.

At the midpoint of this guidance, we are expecting to see the continued expansion of our margins in 2023, with adjusted EBITDA margin on incremental revenue of 19.4%.

As these ranges reveal, we also expect that 2023 will be another year of both strong top line growth and continued margin expansion which in combination with the strong momentum we're seeing in the market, for family building services generally and Progyny solutions specifically gives us confidence for the year ahead.

With that, I'll turn the call back over to Pete..

Thanks, Mark. Hopefully, the call today helps you see why we're excited for the year ahead. When we look at member activity, the engagement we're seeing from our current clients as well as the discussions we're having with respect to clients and new channel partners, we see how the demand for family building benefits is continuing to grow in 2023.

We believe we're also deepening our reputation as the brand of choice in family building benefits. As we look across the marketplace today, we believe we're in the best competitive position that we've ever been in and that we're only widening the distance between ourselves as the leader and other providers in the market.

But the macro trends that have been fueling our growth intact and a business model that was built to achieve scalable success, we look forward to providing you with updates on our progress throughout the year. With that, we'd like to open up the call for your questions.

Operator?.

[Operator Instructions] And the first question comes from Michael Cherny with Bank of America..

Congratulations on the strong end to the year. Mark, maybe a comment you made, I think it was you, Mark, regarding the starts that you saw this year.

Is there anything in the guidance regarding any potential early starts as you think about some of the early wins you have this year? And I guess as we think about the business model going forward, what would or wouldn't determine whether or not there would be a pacing of early starts over the next few years? I guess, was what you saw that last year such an outlier that we'll never see it again? Or is this going to be a slow iterative process where the needs of employers continue to push in that direction?.

Yes. So the guidance -- we've maintained the same posture around our guidance that we always have. So the guidance that we've provided tonight includes only that what we're seeing now and includes any of these early wins to the extent that they would launch during the course of this year. But the reality is that they're not very large.

So you're not going to see sort of an outsized impact. Certainly, nothing like you saw last year..

Yes. And I'll take the second part of your question, Mike. We never planned for early starts. To the extent that they happen, great, we always view them as upside. But we don't plan for them because the majority of companies in the U.S. are, in fact, calendar year companies and it is a benefit. And generally, most companies do start on their plan year.

So it's hard to say whether or not -- it's an anomaly relative to our history last year, it's hard to say whether it's an anomaly relative to the future. But relative to what we've seen in the past, we're not planning for any number of outsized early starts like we saw last year..

Got it. And if I could just ask one more. You've always run on a fairly thin OpEx absent stock-based comp, any different changes you're making on the investment side? I know, Pete, you mentioned about your excitement over the competitive positioning.

Does that change anything relative to how you want to spend your capital either in terms of direct targeted marketing and/or the build-out of additional services and capabilities?.

Within the guidance that we have, we have definitely increased investments across many different areas, many areas around go-to-market, other capabilities that we're creating internally to support the new services that we had talked about, that we're both investing in as well as the ones that we're rolling out.

So that is contemplated in the guidance. But yes, there's significant investment to take advantage of the opportunity that we see vis-a-vis our addressable market. But also to continue to shore up and advance our competitive position relative to any other offering out there..

The next question is coming from Anne Samuel [ph] with JPMorgan..

Congrats on the great results. Maybe just a follow-up to the investment question. At our conference in January, you spoke about rolling out enhancements around preconception and male infertility services and then investing in maternity in women's health.

I was just wondering if maybe you could share a little bit of where you stand with each of those? And maybe what some of those offerings might look like?.

Sure. I'll take the first part of the question and I'll let Michael take the second part. So yes, we did talk about -- thank you, by the way, for the compliment. We did talk about investments in those areas.

Preconception services are effectively available now and being rolled out to male infertility will be rolled out by the end of the first quarter, although in certain parts of the country are already being rolled out. And then the investments in maternity and other areas of women's health are going on during the year.

We'll be piloting certain things during the year but won't be fully rolled out really until end of the year or next year. I'll let Michael talk about some of that..

Yes. So on the preconception front, it's really an enhancement off of services that were -- that we've been providing in that realm. So we're excited to continue down that path. And then on the maternity front, this is something that we've been looking at for a while now.

And given the trust that we've built with our membership as well as our employers, there's a significant opportunity to help support our members after they have successfully become pregnant and continue the services there with a focus towards the high-risk pregnancy and avoiding high-risk maternity cases. So we're excited about the focus there.

And again, looking at a few spots beyond that into postpartum and others but that's where the primary focus is for this year and as Pete had rolling out into next..

The male infertility, we talked about it's creating a separate network of reproductive urologists. In particular, those reproductive urologists that our network of REIs generally tend to work with and like to work with.

So it's a small subset of urologists in the country, addressing the unique needs that affect and create what is known as male factor infertility, to the extent that the male themselves has to be addressed.

And so to make sure that there's no gaps relative to the specific urologists that the REIs like to work with and or any other potential gaps in coverage they may have with their regular health plan..

Exciting. I imagine there's a lot of opportunity there. Maybe just a second question. You talked about the strong starts to the selling season this year with kind of similar momentum to last year.

I was just wondering, are conversations with prospective employers any different this year than last year given the macro? Are they more focused on savings? Or is the pitch of maximizing your fertility dollars?.

This is Michael. Yes. No, nothing really different from the conversations in the prior years. Again, I think each year, the buyers get more educated and sophisticated on fertility and understanding where the differences are and what the differences are in this market or for that population, I should say.

But at the end of the day, it continues and the differentiation and conversation continues to come down to the member experience, providing great outcomes and being able to do that at both a lower cost but at a cost that can be controlled over time..

The next question is coming from Jailendra Singh with Truist Securities..

Congratulations on strong quarter and guidance. I want to again go back to the same comment around strong pipeline for 2024. Just curious if this is driven by like new employers rolling out fertility benefit for the first time? Or are these like employers moving away from their carrier-based programs.

And if you can spend some time around the savings you guys generate for these employers compared to carrier-based program because there's one debate in the marketplace that how long this fertility benefit can be a carve-out benefit or if employees could start moving to the carrier as such?.

There's a couple of things there. One, we continue to have interest from both greenfield and brownfield clients relative to those that don't have anything whatsoever and/or those that have something but not as comprehensive a solution that Progyny offers. And so that continues, no different than what we've seen in the past 2 years.

Relative to whether or not it's easy for imports to just go with their carrier from a cost perspective, we generally show prospective clients we could save in the neighborhood of 30% compared to traditional carrier and PBM plan for both the pharmacy and medical side of the benefit that we offer. But the important point isn't just that.

It's the whole comprehensive solution. As Michael said before, there's an assumption, especially with investors that cost is always a discussion. The discussion is more about member experience. It's about creating favorable clinical outcomes.

It's about creating healthy pregnancies, getting members pregnant to a live birth faster, et cetera and avoiding all the other issues that happen when you don't do that. And that's a big part of the discussion with prospective clients, continues to be, right? Cost is always something that they ask about.

Cost is always something that they want to understand. But the first and most important part of the discussion is that member experience driven by our offering. And I think that's really important when you think about and ask about what people are talking about..

That's helpful. And then my quick follow-up around your provider partnerships.

Maybe if you can spend some time around retention there and what you're seeing from like just in general rates point of view, maybe spend some time, how do you ensure these provider retention and quality in general?.

The provider retention, we've had 0 issue with those in our network. There isn't anybody that we wanted in our network that's not in our network. I'll start with that. Nobody has left our network that is any challenge anywhere either geographically in the country or overall across the country.

We have a really, really deep collaborative relationships with our providers. We're all in it together effectively relative to the clinical outcomes that we're achieving and helping to lift overall awareness and the overall boat of fertility services in the U.S.

And so it's a very important relationship that we make sure that we take care of equally along with our members and our clients relative to our overall offering and our approach that we do here at Progyny.

What was the second part of the question? That was it? Was there another part? I'm sorry, was there another part to your question?.

I just wanted to understand on the reimbursement, if you're seeing any changes?.

Oh, yes..

Rates negotiated, yes. Go ahead..

Yes. So no issues with reimbursement rates. In fact, unlike the rest of health care that's talking about a 5% to 8% increase in cost in the upcoming year.

We're telling our clients that we're generally going to be flat to slightly down and are able to do that through those relationships and through those partnerships, whereas we continue to grow the overall industry and grow the number of patients that they would otherwise probably never see with lack of coverage. That's really important.

And as a result, together, we're able to achieve the success that we are and still able to maintain and keep costs in check which is as Michael mentioned before, we can talk about what clients are looking for, that's a real differentiator for us, especially in this upcoming year as people are very sensitive to cost and cost increases..

The next question comes from Scott Schoenhaus with KeyBanc..

Congrats on the nice momentum heading into the year. So my first question is actually on the pharmacy benefit side of the business.

Baked into your first quarter and full year guidance, what kind of growth should we be expecting in this segment, given the timing of the large wins and your guidance of expected 90% penetration rate?.

Well, we're not -- we don't break out from a guidance perspective, medical and Rx. A big piece of that is because of timing and timing of when things come in within given quarters or years.

But I would say that as we continue to -- I think Mark's comments, as the base of clients now continues to approach 100% of clients having pharmacy benefit, your growth rates are going to start to get closer to each other. Pharmacy will still be higher than medical this year but your growth -- it won't be as pronounced as it was in the past year.

Your growth rates are going to definitely start to get tighter relative to pharmacy versus medical..

And just adding to that, that will progress as the year goes on. You may remember that we -- and if you go back and look at 2022, there were some step increases throughout the year as some of those newer clients launched and some of the upsells launched as we went through 2022.

So your Q1 comp will be maybe a little bit stronger than it will be as the year goes on..

That's very, very helpful. My follow-up question is on utilization. You're seeing stable and even a slight uptick from last quarter on utilization.

Can you provide any color on how much of these new larger clients are pressuring utilization? Meaning what's the more mature rates on your legacy clients? What do they tend to be at? And then are you seeing any difference in utilization rates with different client cohorts? For example, are your more tech-based clients having higher rates, utilization rates in your newer and more industrial clients? Or do they run pretty on par with each other?.

I'll start with the second part first. Utilization rates do vary. It's not really industry specific but it is industry specific only to the extent that the average age of employees in certain industries are younger versus older, if you will. And so you have a larger portion of your population that's in childbearing years. Think of it that way.

So yes, tech tends to run at a higher utilization rate versus, for example, manufacturing. And other than that, though, that's the biggest driver. Other demographics affect it but that's the biggest driver relative to the difference in utilization rates.

When you talk about sort of mature versus pressure, if you will, yes, the first year of utilization is the floor, if you will, relative to a cohort in terms of new client adds. And then as the years progress, utilization rates for that cohort generally will either be flat to slightly up each year.

And that's been the behavior but it's not creating sort of an outsized depression, if you will. I forgot the words you used but drag, if you want utilization because at this point, we're now up to 5.4 million lives, if you will, expected for 2023 off of what we exited the year with all the -- as Mark said, almost 2 dozen clients that started early.

I think we were at roughly 4 points.

What was it 12/31?.

4.6 million..

4.6 million lives exiting the year, 4.5, 5 something, I forgot what the exact number was but rounds up to 4.6 million. The point is simply at the end of the day, that's going to be less and less of an impact in terms of any sort of drag on utilization as we continue to get bigger and bigger versus the new cohorts being added..

[Operator Instructions] The next question is coming from Stephanie Davis with SVB Securities..

So it's early but you guys did talk about the record pipeline. I was hoping to prod a little bit there. Should we think of the past 2 years, record selling season is like this count consumer demand and companies buying a fertility benefits in a tight labor market.

Or do you think this is a bar that you can keep continuously beating just as market demand does persist and you're finding new sets of folks that you could actually have the benefit appeal to..

Well, thanks for the comment, by the way. The way I think about it is this, right, -- when we look at our active pipeline and when our active pipeline is up versus this time last year, that alone, combined with early wins that we talked about across industries, et cetera.

Our expectation continues to be, as it's been in the past for us to exceed prior sales years in terms of sales performance. And this year, we don't expect to be any different, right? So although the last 2 years were good, that doesn't mean that we think that, that's somehow a record and not achievable in the future. In fact, it's the opposite.

We think the addressable market and the unmet need is still so big that we expect to continue to have these levels of success for the foreseeable future..

Another one that keeps surprising me. Let's talk about your margins. So we've seen a healthy level expansion in recent years. We're starting to really narrow the spread between your EBITDA and your gross margin here and it still does feel a lot of upside.

So my thought is how sustainable is this level of upside? What's driving it? And I guess with margins in mind, how are you thinking about your buy versus build algorithm as you touch on some of the areas you'd like to expand on this call?.

Yes. I mean -- thanks, Stephanie. We've definitely been narrowing the gap between gross margins and EBITDA. And obviously, we constantly point towards that margin on incremental revenue which has been in the high teens and low 20s guidance for this next year at 19.4.

We continue to be able to leverage across each of our lines, whether it's our care management service teams. And as we retain our clients and bring new ones on, we've not needed to grow those teams at the same pace as revenue. And certainly, G&A, we've continued to leverage down pretty well.

And as Pete said, I think a little bit earlier to another question, our focus on sales and marketing and go-to-market and to continue to make investments there so that we can drive the business forward to, as you just asked about a second ago, keep raising the bar for ourselves and keep growing the company, given how much opportunity there is out there.

So that's our position and we think that we can continue to do that for -- certainly for 2023 and likely beyond..

This concludes the Q&A portion of the call. I'd now like to turn it back to James Hart for any closing remarks..

Thank you, John and thank you, everyone, for joining us this afternoon. Obviously, to the extent you have any follow-up questions, please feel free to reach out to me at your convenience. And we look forward to speaking to you in a couple of months for first quarter..

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation..