Progyny, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

A fertility benefits management company that partners with employers to provide comprehensive fertility and family-building services to their employees.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Progyny, Inc. (PGNY) operates as a fertility benefits management company, essentially acting as a specialized health insurance plan focused on fertility and family-building services. Unlike traditional health insurance, PGNY works directly with employers, allowing them to offer more comprehensive and targeted fertility benefits to their employees. This approach provides employers with more control over their costs and ensures their employees receive higher quality care. PGNY does not provide the care themselves, rather they have a network of high-quality fertility providers that their members can visit and also provide care coordination services through their proprietary platforms. This offers a complete solution for fertility care and its different complexities.

Revenue Distribution and Trends in the Industry: PGNY generates revenue primarily through fees paid by employers for its benefit management services and fees paid for the medical procedures performed by clinics in their network. PGNY’s revenue structure is largely dependent on two key factors: the number of clients (employers) they serve and the number of employees that avail themselves of the services. With a growing number of employers seeking to attract and retain talent through comprehensive benefits packages, the demand for fertility benefits is steadily increasing. Additionally, there is an increased awareness of fertility challenges and more people are looking for solutions that are comprehensive.

  • The US market for fertility treatments is enormous with a size of $12 Billion.
  • The market is dominated by a few large players and they tend to focus more on providing their own clinics, whereas PGNY uses their platform with other clinics to help with the cost and accessibility.
  • Insurance coverage for fertility care is limited, with about half of states mandating some coverage. As a result, many patients face a high cost, and employers are stepping in to help subsidize the cost for their employees.
  • The industry is highly competitive, but also highly fragmented. The services are complex, which provides opportunities to companies like PGNY to make it simple.
  • The market appears to be at the growth stage because of these factors and their growth momentum should continue for the foreseeable future, with 9-12% growth expected over the next 5 years.

Moat Analysis:

  • Intangible Assets (Limited): PGNY does possess a strong brand and is a recognized leader in the fertility benefits space. Their brand, however, isn’t a very big moat. PGNY’s platform and data analytics may not be difficult for competitors to replicate.
  • Switching Costs (Moderate): The process of implementing fertility benefits programs and onboarding employees into PGNY’s system can present some switching costs, which might help them retain their customers. However, some employers may easily switch to another provider if they find better deals.
  • Network Effect (Weak): The company has a network of high quality fertility centers, however there are many options in each area, therefore no strong network effects can be assumed.

  • Cost Advantages (None): There are no clear cost advantages that PGNY has over their competitors.

  • Overall Moat Rating: 2/5: While PGNY enjoys some competitive advantages, they are not particularly strong or sustainable.

Risks to the Moat and Business Resilience:

  • Competition: The fertility benefits market is attracting new competitors, including large established healthcare players that might enter the market with the same model as PGNY and gain market share by undercutting on prices and/or creating more sophisticated solutions that could displace the company.
  • Technological Disruption: New technologies or treatments in fertility care could emerge, disrupting the existing business models. New technologies might be easier for the patients to utilize and forgo the need for intermediaries.
  • Regulatory Changes: Changes in healthcare regulations may negatively affect PGNY’s contracts or payment structures.
  • Economic Cycles: During periods of economic downturn, employers may reduce the scope or eliminate fertility benefits. As this is mainly a discretionary expense, it may be among the first that employers remove from their employees benefits packages during times of crises.
  • Client Concentration: PGNY’s revenue is concentrated on few large clients. If any of these large clients decide to use another alternative, PGNY would have to suffer some significant drop in revenue.
  • Provider Network Changes: If its high quality providers choose to leave or get bought by competitors, this would lower their attractiveness.
  • High P/E: The high P/E is based on high expectations about future growth and profitability and doesn’t give a room for error.

Financials Deep Dive:

  • Revenue Growth: PGNY has shown strong revenue growth in the past few years, fueled by its expansion into new markets and increased demand for its services.
  • Profitability: Their margins are relatively low, due to the cost of medical procedures. However, they have started to produce stable profits and they have a relatively asset-light business model, as most of their revenue is recurring and they don’t have to spend too much on building clinics or medical facilities.
  • Balance Sheet: PGNY has a healthy balance sheet with sufficient cash and low debt levels. The company’s liquidity positions the business well to capitalize on future opportunities.
  • Cash Flows: The company generates strong cash flows, further reinforcing the strength of the business model.
  • Operating Efficiency: One of their goals is to increase efficiency in the way their operations are managed. This can lower their costs in the long term.

Financial Performance (Most Recent Quarter and Full Year 2023):

  • For the year ended 2023, PGNY reported a strong revenue growth of 38% compared to 2022.
  • Gross profit grew by 35%, demonstrating scalability in their business model. However, gross margin declined from 28% to 26%, possibly because the company continues to grow and this growth might be affecting the pricing power.
  • The net loss for the year was $7 million, or $0.07 per share, compared to $24.3 million in 2022. This marks a remarkable improvement from previous years.
  • Adjusted EBITDA was $62.9 million for 2023, compared to $14.2 million for 2022, an increase of 342%.
  • The company ended the year with strong liquidity with cash and cash equivalents at $367.2 million.
  • The company projects revenue guidance of 25-30% for 2024.
  • For Q4 2023, the total revenue was $245 million up 31.3%, year-over-year. This was driven by 37.6% growth in the number of benefit cycles and a 4.5% decrease in revenue per cycle.
  • Q4 Net loss was $4.7 million or -0.05 per share, compared to a net loss of $14.5 million or $0.15 per share from the same quarter in 2022.

Recent Concerns / Controversies:

  • There are a few lawsuits against PGNY regarding how they handle private health information, and how their practices do not always align with established standards. This could create bad press and potential legal exposure for the company.
  • There have been some concerns about how the management is handling expenses. Many believe that their expenses are increasing at a faster pace than their revenue and that this might be problematic for their long term growth and earnings. In the latest earnings calls, the company pointed to improving operational efficiency, as well as lower interest rates, and tax benefits to justify their future improvements.
  • The company’s CFO has recently resigned. Investors were not too happy, but the management pointed out that his departure was amicable and that they have already found a replacement.

Understandability:

  • Rating: 2/5: While the core concept of managing fertility benefits is easy to understand, the business model with network integration, data processing, and complicated financial accounting can make it difficult to assess. The complex relationship between PGNY and its various stakeholders, like insurance companies, healthcare providers, and employers adds another layer of complexity, making it not entirely easy for the average person to grasp.

Balance Sheet Health:

  • Rating: 4/5: PGNY has a strong balance sheet, with healthy cash reserves and manageable levels of debt. The company’s positive free cash flow suggests a growing ability to service its debts, as well as investing in the business to continue growth.