Castlight Health Beats on Revenue, Updates 2014 Guidance

Updated from 8:37 a.m. ET with Goldman Sachs, Canaccord comments and afternoon share prices.

NEW YORK (TheStreet) - Castlight Health (CSLT) beat first quarter revenue estimates in the company's first earnings report as a public company. The San Francisco-based company also provided second quarter and full-year guidance that may firm up expectations for the six-year old Castlight.

>> Read More: Castlight Health Illuminates IPO Bubble Discussion

Castlight reported first quarter revenue of $8.4 million, based on subscription revenue of $7.5 million and professional services revenue of $900,000. The company also reported a $24.3 million first quarter operating loss, and a 90-cent net loss per share on a GAAP basis, and a 72 cent loss on a non-GAAP basis.

For the second quarter, Castlight expects revenue to be in the range of $9.3 million to $9.3 million, while its non-GAAP operating loss will be in the $20 million to $20.5 million range. For 2014, revenue is now forecast to be between $40 million and $41 million. Non-GAAP operating losses are expected to be between $1.01 a share and $1.03 a share based on 75 million diluted shares.

"The guidance reflects terrific momentum in the business," chief financial officer John C. Doyle said in a telephone interview with TheStreet.

On the company's earnings call, Doyle said Castlight had raised $85 million more than the company initially expected in its March initial public offering, meaning that the company is "extremely confident" it has the cash needed to get to a cash flow break-even.

Castlight's Emergence

The company's results are indicative of how quickly Castlight has emerged at the spotlight of the healthcare sector and how fast it is expected to grow after the company raised about $200 million in a March initial public offering that valued the firm well in excess of $2 billion.

Castlight Health provides enterprise healthcare cloud software that could allow employers to lower their overall healthcare costs, which have spiraled upwards in recent decades and hit corporate bottom-lines.

Shares in the company rose over 150% to $40 a share at one point in the Castlight's first day of trading, however, they have been hit by a selloff in richly valued software and technology stocks in recent weeks.

Castlight shares closed Wednesday trading at $11.80, about 70% lower than its closing price on March 14.

Analysts generally expressed a positive reaction to Castlight's first quarter results in a conference call, and keyed in on the company's stronger-than-expected revenue. Castlight was expected to earn $6.5 million in revenue, according to estimates compiled by Bloomberg.

On Wednesday, Castlight said it added Comcast (CMCSA), Freescale Semiconductors (FSL) and the State of Kansas as customers. Meanwhile, the company highlighted its 300%-plus revenue growth rate in the quarter, and similar forecasts of revenue growth for the full year.

"We are laser focused on building an iconic company that is going to change the healthcare industry," CEO Giovanni Colella said in an interview with TheStreet.

Goldman Sachs analysts characterized the quarter as a "strong beat out of the gate," however, they said valuation risks are keeping the firm at a 'neutral' rating. Castlight implemented 29 clients in the first quarter, far more than expected, driving the company's revenue growth.

"We leave Q1 encouraged on momentum in the business and [Castlight's] competitive positioning. That said, given shaky sentiment for high-growth SaaS names, we think a more solid valuation floor is needed," analysts at Goldman Sachs concluded. The firm lowered their price target for Castlight to $15 a share from $22 a share.

Canaccord Genuity called Castlight's quarter "exceptional" and said the earnings beat was evidence the company belongs in long-term growth funds. Given management's guidance on the company's cash balances, Canaccord analysts said they expect Castlight to achieve cash flow breakeven by 2017.

Shares in Castlight initially surged over 11% in Thursday afternoon trading, however, shares reversed to losses in late afternoon trading.

Greenlight's Einhorn Looms Large

On Monday, David Einhorn of Greelight Capital Management caused stocks in the healthcare IT sector to tumble sharply after saying the fund was short shares of athenahealth (ATHN) because estimates of the company's future earnings and valuation had become far too high

In his first quarter investor letter, Einhorn said he had shorted a basket of so-called "bubble stocks" he thought were overvalued. At the Ira Sohn Investment Conference on Tuesday, Einhorn disclosed that athenahealth was a stock in Greenlight's bubble basket. Einhorn did not say what other companies Greenlight was short, however, he did say his analysis of athenahealth was indicative of the portfolio.

Those comments have impacted Castlight Health shares. The company's stock closed Tuesday trading at about $14 a share, but they have since fallen below $12 a share and near post-IPO lows.

When asked to comment on Einhorn's presentation, Castlight CEO Colella said he had no opinion and hadn't read about the hedge funders analysis. "I have to confess, I haven't even read what he said," Colella said.

Athenahealth CEO Jonathan S. Bush responded to Einhorn's analysis in a Wednesday morning CNBC interview, reiterating his belief the company can grow strongly and that it does a differentiated software services.

"Sufficient Reason" to Question Bubble

Castlight Health provides enterprise healthcare cloud software that could allow employers to lower their overall healthcare costs, which have spiraled upwards in recent decades and hit corporate bottom-lines. The company priced its $200 million IPO at $16 a share, valuing Castlight at about $1.4 billion. Shares more than doubled in Castlight's first day of trading.

Ted Tobiason, a managing director in the equity capital markets division at Deutsche Bank, said in a March client note that Castlight Health should give investors "sufficient reason" to seriously question an IPO bubble. Tobiason, however, also said Castlight's IPO was indicative of a willingness to invest earlier in a company's life-cycle if it possesses a solution to a large addressable market.

"To some the fact that a company with only $13 million in 2013 revenues and negative gross margins can get a $1.4 billion valuation at IPO only to trade to a $3.9 billion IPO its first day is an indicator that we're in another IPO bubble," Tobiason wrote. "There are sufficient reasons to look at this seriously," he said.

Tobiason said Caslight Health's roadshow emphasized the size of the company's addressable market and the solution the company may offer to employee plans. Employer healthcare spending is at $620 billion, with 30% being waste and a majority of chief financial officers citing that spending as their primary cost concern.

Castlight estimated in its roadshow that the company's addressable market would be $5 billion, possibly a low estimate according to Tobiason, given its cost solutions for employee health plans. An expenditure of 1% of a company's overall healthcare costs on Castlight could lead to savings of 15% of total costs, something that investors keyed on, according to Tobiason's note.

"The pricing and performance of the stock certainly indicates that public investors are willing to pay a substantial premium to get exposure to companies with enormous growth potential and the big dream... As for Castlight, they now have a $3.2 billion market valuation and with that will come a great deal of pressure to perform to the expectations that come with that," Tobiason concluded.

So far, results are likely to have underwhelmed who invested in Castlight's IPO. Now the company has set a tangible guidance from which it can deliver through year-end.

"We at Castlight believe that we are helping enterprises lower their cost of care. In helping enterprises do that, we will deliver a lot of value," Collela said on Wednesday.

>> Read More: Castlight Health Illuminates IPO Bubble Discussion

>> Read More: David Einhorn Puts the Spotlight on Saas, athenahealth at Ira Sohn 2014

-- Written by Antoine Gara in New York

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