Value Investors Club / CASTLIGHT HEALTH INC (CSLT)

Description

The initial public offering of Castlight Health (CSLT) in the spring of 2014 generated some amazing

headlines:

“Castlight Health IPO Illuminates Bubble Discussion” – TheStreet

“The Insanity of Castlight Health’s IPO” – The Motley Fool

“Castlight Health: Most Overpriced IPO of the Century” – Yahoo Finance

By our count, Castlight shared the stage with ~50 other technology IPO’s in 2014. Like Castlight, a

number of those IPO’s were built around empowering businesses and individuals in a world where the

public cloud was just starting to bring about significant disruption. The IPO window was wide open and

valuations were sky high.

Many of the 2014 cohorts have gone on to become some of the more successful software companies in

the market today. Castlight did not. The initial hype around Castlight allowed the company to garner an

enterprise value of ~3.5B despite only generating 11.9M of subscription revenue in FY 2013 but having

grown +240% over the prior year. Today Castlight has an enterprise value of ~90M and annual recurring

revenue of ~139M a multiple of .65x and a gross profit multiple of ~1x.

In software land such a valuation is typically left for the “shrinkers” – those companies with top line

revenue declines and the inability to radically alter their cost structure. At its current valuation,

companies like Castlight typically find their way into the hands of private equity funds who radically

reduce operating expenses and thus drive significant cash returns to their limited partners while the

company’s customers slowly churn. Given the transformation that has occurred at Castlight since 2019,

we believe that such an outcome would be a disappointment, even if it did lead to a significant positive

outcome for shareholders from current share price levels.

As Castlight progresses through 2021, we believe that the market’s understanding of Castlight will

change. This change in sentiment will be driven by flat to token organic revenue growth, a normalized

cost structure and a better understanding of Castlight’s place in the healthcare ecosystem. Should these

things come to pass, the upside in Castlight is significant, as a stable software company should garner a

revenue multiple of 3-4x implying a share price somewhere around $3.75 vs the current price of $0.85.

Should the company’s growth rate get into he mid to high single digits the multiple would be

significantly higher. Recent initial public offerings from competitors show potential for a significantly

higher valuation for Castlight. Accolade (ACCD) which recently completed a follow-on offering after its

initial public offering earlier this year has an enterprise value of ~1.5B with expected revenue this year

of ~160M, and Limeade (LME AU) which also came public this year and has an enterprise value of

~$320M with expected revenue this year of $56M. While the growth rate for these two companies is

higher, the quality of their businesses are lower as Castlight has been serving large enterprises for longer

with a true software platform built to consumer and manage an extraordinary level of data. Over the

next year, an investor should have greater clarity on whether Castlight should trade in the ballpark of

these two somewhat similar businesses or will be left bleeding in the forest for private equity to find.

At the time of Castlight’s initial public offering, the company described their software offering as a the

“Castlight Enterprise Healthcare Cloud” that “transforms a massive quantity of complex data into

transparent and useful information”. In reality, Castlight was a simple transparency solution that used a

network of data providers and ultimately member data to highlight the expected cost and quality of a

medical service before it was consumed.

The primary customers of Castlight at the time of the public offering were large enterprises who then

like now self-insure their employees and their families. Customers in the company’s prospectus

included: Wal-Mart, Cummins, Eaton, Liberty Mutual, Microsoft, Mondelez, Safeway & Honeywell. Wal-

Mart alone represented 16% of total revenue while the top 10 customers accounted for 61% of total

revenue. These customers signed with Castlight in the hopes of combating runaway healthcare costs

and typically saw results around significant savings and laboratory expenses, imaging, and elective

surgeries. Employers used Castlight to manger their disparate benefit plans across geographies while

providing the same common front door to their employees, retirees and their families. Castlight viewed

transparency as the beachhead by which they could establish a platform on which to offer other services

to the thousands of domestic self-insured employers with over 1,000 employees.

Castlight would finish 2014 with 41.6M of subscription revenue, followed by 70.3M in 2015 and 95M in

2016. The sharp deceleration in growth was driven by significant pricing pressure and customer churn

attributable to the rapid commoditization of the company’s primary transparency offering at the hands

of large health insurance and pharmacy benefit management companies that often administer plans on

behalf of self-insured employers. The space would eventually become so commoditized that Anthem,

which at the time was one of the smaller national health insurance companies decided to partner with

Castlight on some of its health care plans vs continuing to invest in its own transparency solution. This

partnership would eventually become an important part of the Castlight story. Castlight’s limited

success expanding its platforms into other related areas forced the company into an ill-fated but

eventually foundational acquisition in early 2017 as it sought to become more relevant to its customers.

In January 2017, Castlight announced the acquisition of Jiff in an all-stock deal that handed over 20% of

the pro forma company to Jiff shareholders. Jiff offered a product that enabled employers to offer a

managed “app-store” like experience for digital health solutions. By this point, Castlight had expanded

its transparency offering into dental, pharmacy and behavioral health and also integrated with tele-

medicine providers to FSA/HSA vendors. This combination of “app-store” experience and integrated

product suite should have been a positive catalyst for the company. There were promising results, like

the Wal-Mart renewal in early 2017 that included the Jiff offering. But in large part, the catalyst never

materialized.

In early June of 2017, Castlight launched Castlight Complete, its vision for a full-service mobile offering

encompassing both solutions. By the end of 2017, Castlight was gathering data on the healthcare

decisions of tens of millions of Americans. Unfortunately for Castlight, Castlight Complete would not

become generally available until late 2018. The horror of deciding to push together two disparate

technology platforms before ultimately realizing the need to rewrite into one new platform caused

significant disruption to both sets of clients. By the summer of 2018, Wal-Mart, an early victory for the

new company, would announce its decision to churn.

The turmoil around rebuilding the company’s platform and migrating customers to the new platform

ultimately led to the board bringing in the current CEO, Maeve O’Meara, in the summer of 2019 in an

attempt to slow what had at this point become year over year declines in revenue and an absolute

dumpster fire. Understanding O’Meara and her impact on the company is important to becoming

comfortable with the Castlight story. O’Meara’s impact was seen as soon as the fourth quarter of 2019

when last of the legacy Jiff customers finally transition onto the new Castlight technology stack and the

company also announced an enterprise licensing agreement with Anthem. In talking with formers, the

Anthem enterprise license would not have happened under the prior management team. Selling

software in today’s world is all about selling the future, including features you might not yet have in

your product, from talking with large enterprise customers it is clear that they buy into what O’Meara is

trying to achieve. One benefits manager at a Fortune 10 customer of Castlight even indicated his desire

to work with O’Meara if asked, it is highly doubtful that the company’s prior management team would

have inspired such a statement.

The new Anthem agreement opened a second growth front for the company as it signaled the start of

Castlight’s effort to market the same offerings to both self-insured enterprises and insurance

companies. While Anthem was already a significant Castlight customer as a result of Castlight getting

added on a one off basis on corporate plans administered by Anthem, the new contract represented a

20% increase in Anthem related ARR and amounted to 170M of total contract value over the 30 months

ending in June of 2022. The agreement allowed Anthem to expand Castlight’s transparency and

personalization offerings beyond some of its more premium offerings.

The Anthem agreement and, perhaps more importantly, Anthem’s willingness to serve as a reference

customer to other health insurance companies represent a positive step forward. Insurance companies

have now tired of managing the undifferentiated infrastructure underpinning member communication

and transparency; a nod of confidence from Anthem is powerful for Castlight. We see an example in a

recent customer win this summer within a ~200k member federal health plan managed by Cigna that

amounted to $2M of ARR for Castlight’s transparency module.

Management is adamant that a number of plans are close to signing with many more in the pipeline and

puts the total opportunity in excess of 100 different plans covering 150M lives. In being willing to sign

enterprise licensing agreements, the new CEO O’Meara, is showing an understanding that instead of

being a platform that exists in spite of the existing players in the domestic healthcare market it can be a

key part of the infrastructure underpinning the current system, especially as the forces of Covid-19

bringing about a shift in roadmaps and opportunities within the healthcare system.

The current iteration of Castlight offers three products that share a common technology platform and

are supported by the open architecture and personalization required in today’s world. With time it is

possible that Castlight emerges as the infrastructure underpinning how plans and large enterprises

interact with and expose health benefits and services to their members. For health plans this will be

through white label enterprise license agreements and for employers this will be through the Castlight’s

care guidance navigator, wellbeing navigator and care guides offerings wrapped together in a mobile

app under the company’s Castlight Complete product. With a modern central hub currently severing +60

Fortune 500 customers with such reference companies as AT&T, Pepsi and Ford, Castlight should finally

be in a position to serve the employees of large self-insured employers in a manner that delivers the

ability find, manage and consumer benefits via a single pane of glass. With the addition of the

company’s new care guides offering, users will now also have the ability to use Castlight as the

coordination layer for when they are seeking live support for everything from financial implications of

health services to dealing with drug costs to seeking guidance on managing their chronic conditions. The

care guides offering is particularly interesting as it resembles what Accolade is going to market with.

Castlight has indicated that 30 customers have explored the offering in connection with Covid-19.

Further, the company has also indicated that this module could be a potentially interesting offering for

its future health plan customers. The best way to think about care guides is as a CRM built to manage

known patients through their health journey.

The digital health ecosystem was already increasingly fragmented before Covid-19 and the wave of

innovation as a result of Covid-19 is only likely to create a further fragmented ecosystem. Corporate

benefits departments are increasingly enabling digital health applications for their employees in an

effort to keep them out of higher cost in-person offerings. In a world with hundreds of mobile digital

health applications, Castlight has been able to create a platform by which members can seamlessly use

these applications through the Castlight portal. Castlight ecosystem partners have deep integrations

that exchange data, tie in with corporate reward systems and can be purchased by enterprises through

Castlight. Digital health applications with this higher level of integration with Castlight include Hello

Heart, Hinge Health, Livongo, Maven, Omada, 2

.MD, Total Brain, Sleepio and Zipongo to name a few.

In addition, Castlight integrates with ~100 other applications via its open architecture as well as

homegrown corporate solutions.

In a future world where employees can use their FSA/HSA dollars, Castlight’s platform likely becomes

even more interesting. Through the company’s Castlight Complete offering, Castlight ties together the

data from these digital health offerings with claims data and medical records to give members and their

employers, who are ultimately paying for care, actionable insights and personal recommendations to

help deliver better care at a lower cost. In January of 2020, Castlight released some data points that

pointed to the vast improvement in the company’s offerings in the eyes of end users namely a 61

percent subscriber retention rate and a monthly return rate of 38 percent, a NPS of 75 and a 4.7 App

store rating. In addition, employers saw 38 percent of registered users have a preventive office visit vs

25 percent of non-users, Castlight users used the ER 25 percent less often than non-users after being

directed by Castlight to more appropriate options. Those Castlight patients steered to higher quality

providers experienced a 15% reduction in in patient stays and a 12% reduction in lab and imaging costs.

Finally, Castlight users were more likely to use employer sponsored digital health offerings by up to 2.4x.

With the acceleration of digital health offerings as a result of Covid-19, Castlight which aggregates digital

health offerings in a manner that connects them with the company’s customers existing employee

offerings while tying data together across all the moving pieces might finally be in a position to become

the infrastructure layer for how care is delivered and consumed. A quick google search highlights the

explosion of digital health startups each seeking to manage one condition or another. These startups are

being driven not just by a change in the way that care is consumed but by changing reimbursement

rates from the federal government as a result of the pandemic and a push to radically improve

interoperability as a result of the final rules issued around the 21

Century Cures Acts that prevents

information blocking and mandates interoperability via APIs. The way in which care is delivered and

consumed is evolving quickly. Tim O’Reilly of O’Reilly Media has a famous line where he states that

“evolution breeds not a single winner, but diversity”, Castlight is set to benefit from this evolution of

healthcare as it enables enterprise benefits departments to offer a growing number of digital offerings

via one platform.

Caslight’s legacy as a data aggregation platform positions the company well in a world where data

sources are becoming more heterogeneous. Castlight’s claim of controlling 3B unique data assets should

likely become an increasing advantage as the amount of data it collects grows further. As a neutral party

in the healthcare ecosystem, Castlight should see its relative importance increase especially given its low

cost on a per member basis. With its now modern platform being used by large enterprises and health

care plans alike, Castlight should have the scale by which to finally build and offer the building blocks for

a digital health future.

While the recent uptick in demand from health care plans for the company’s offerings and the demand

for the company’s guidance product bodes well for Castlight, an investment in the company has

substantial risks. These risks include, Anthem/Cigna and the remaining health plan pipeline deciding to

reverse course and build their own offerings. Newer competitors like Accolade & Limeade encroaching

on Castlight and the risk that enterprises go all in on a closed ecosystem like Teladoc.

In regards to Accolade and Limeade, Castlight appears to have a significantly deeper technology stack.

Limeade is focused on giving employers the ability to measure what is important to employees, deliver

personalized content meant to improve physical, emotional and financial well being and drive morale via

acknowledgement and inclusion. Accolade on the other hand is focused on a high touch call center

based offering that helps employers manage employees with chronic conditions and steer those

employees who are uncertain about how they should proceed with health decisions. While both are

likely to proceed in the direction of Castlight, Castlight should be able to drive a reacceleration in its R&D

road map in a manner that builds on the company’s strengths now that is finally on one technology

platform.

Should traction stall in growing the company, an investment in Castlight likely is dependent on private

equity acquiring the company. Castlight is an attractive target given it has finally completed the rewrite

of its technology stack and the fact that the company has substantial overhead that obscures the cash

flow from its high gross margin software business.

In the 12 months ended 6/30/2020, Castlight generated 88.4M of gross profit, yet managed to spend

38.6M in sales and marketing, 26.6M in general and administrative expenses and 55.6M in research and

development. Private equity returns are made of situations like where Castlight finds itself in today.

Earlier this year Castlight moved to trim 13% of its workforce representing annual savings of 10-15M.

This action likely indicates managements awareness that they need to trim expenses in a manner that

preserves value for shareholders and has guided to a net cash balance at the end of the year of in excess

of 40M. In a scenario where the company is taken private by private equity the stock is a likely double

whereas if the company can return to growth it is likely worth many multiples of its current valuation on

a relative valuation basis. A further handicapping of outcomes likely requires the passage of time.

Disclosures

This is not an offer to buy or sell a security. The ideas expressed in this posting are the views and opinions of the

author of this posting (Author). Author has no obligation to update any of the information contained herein and

has no obligation to update the posting to reflect any changes in the Author’s opinion on any of the companies or

topics contained herein. This posting contains forward looking statements and predictions that are inherently

uncertain, because the matters they describe are subject to known (and unknown) risks, uncertainties and other

unpredictable factors. No representations or warranties are made as to the accuracy of such forward looking

statements and predictions. Do not rely upon the information contained in this posting for making investment

decisions; prepare your own analysis or contact your financial advisor. While the Author has tried to present facts

it believes are accurate, the Author makes no representation as to the accuracy or completeness of any

information contained in this note. Past performance is not necessarily indicative of future results, and there can

be no assurance that targeted or projected returns will be achieved.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

ARR ceases to decline and resumes growth; potentially in late 2021

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			2020	2021
Price:	1.13	EPS	0	0
Shares Out. (in M):	118	P/E	0	0
Market Cap (in $M):	173	P/FCF	0	0
Net Debt (in $M):	0	EBIT	0	0
TEV (in $M):	0	TEV/EBIT	0	0