Progyny: Still Bullish On The Business And Stock

Thesis

I maintain my buy rating on Progyny (NASDAQ:PGNY) with attractive upside. The market for managing fertility benefits is growing quickly due to societal and cultural shifts, such as the postponement of having children and the rise in acceptance of alternative methods of having children. PGNY's approach results in better health outcomes and lower costs for employers. I believe the 4Q22 results have proven that PGNY is delivering as what I expected. PGNY's 4Q22 results were better than expected, both in terms of revenue and earnings. The 68% increase in revenue to $214 million was higher than the expected $212 million, and the EBITDA of $33M was higher than the expected $32 million. Forward-looking guidance includes $1 billion to $1.03 billion in revenues and $166 million to $174 million in EBITDA for FY23. Worth noting, in my opinion, is that despite PGNY's early wins, the company's 2023 guidance does not include any incremental customer launches or lives. As such, I believe the guidance might be leaning towards the conservative side of things - leaving room for a surprise. Management also expressed optimism about the pipeline and early sales season indicators, noting that they had conversations with customers similar to those in previous years due to increased customer education on fertility and PGNY's continued demonstration of value. I'd like to also point out that the company expects to see an increase in EBITDA margin of roughly 80bps in 2023, bringing it to 16.75%. If we do the math, this implies an incremental margin of high teens to low-20%, which I infer as management confidence for long-term margin target. As PGNY seeks to expand into new markets by capitalizing on its existing strengths, I look forward to learning more about potential new avenues for expansion. Overall, I was satisfied with the print, and I like both the long and short-term storylines.

Conservative guidance

In my opinion, the management team seems to be exercising prudence when it comes to their hiring plans for the upcoming year of 2023. This circumspection is due to the fact that their yearly projections still presume that there will be no considerable growth in organic customer acquisition for existing clients, nor any additional customers added in the middle of the year.

Despite this, it's worth noting that when it comes to the general labor market, there are indications that many clients are still in the process of enlarging their workforce during the fourth quarter of 2022. In support of this, management has also referenced the most recent jobs report as evidence of the robustness of the labor market. Both of these factors augur well for PGNY. I'm glad to hear that the future looks bright for PGNY in FY23. Management has emphasized that it's still early in the 2023 selling season, and the initial signs are quite encouraging. They've specifically mentioned that there's a very promising pipeline in place, and year-to-date active pipeline increases in comparison to 2022 are a testament to this. It seems that PGNY is poised for success in the coming year. Specifically, I expect PGNY's demand to increase further this year as delayed purchases from last year finally materialize. In my opinion, this, combined with the opportunities from demand generation and inbounds, will give PGNY the boost it needs to surpass FY23 guidance. I think new opportunities will remain robust as long as we keep in mind the underlying secular trends, such as the robust demand from Millennials, the growing importance of family building benefits, and the benefits once an employer has added coverage. A clear indicator of PGNY being well-liked is that management noted a near 100% retention rate of customers.

New revenue streams

Preconception services and male infertility services, both of which PGNY plans to launch by 1Q23, will generate additional revenue and boost the company's long-term viability. In addition to these, PGNY also has investments in maternity and other areas of women's health, and during FY23, management will be piloting some of these initiatives. Together, these new openings should augment current offerings and boost revenue. I think it allows PGNY to better assist members with maternity care by providing follow-up services and a greater emphasis on high-risk pregnancies after a pregnancy has been completed successfully. There won't be a need for a major capital outlay, and the cost is already factored into 2023 projections, so these new revenue streams should come with a healthy incremental margin. So, while the total amount of these new revenues may not be large at first, they will ultimately add to the profit margin.

Conclusion

In conclusion, my buy rating on PGNY remains unchanged, and I see attractive upside for the company. The 4Q22 results were better than expected, and the forward-looking guidance shows management's confidence in the long-term prospects of the company. Despite conservative guidance, I believe PGNY has a strong pipeline and early sales season indicators that bode well for FY23. The company's emphasis on expanding into new markets, such as preconception and male infertility services, should generate additional revenue and boost long-term viability. Overall, I believe PGNY is well-positioned to capitalize on the growing demand for fertility benefits management.