Responding to the Progyny Short Report

My Take on the Short Report Published Today.

There was a short report published on Progyny this morning by an anonymous source. Beyond the fact that this didn’t come from an established firm with a strong reputation, there were major holes in the main arguments that I wanted to point out.

The first argument was based on Progyny changing its cost of services and accrued payables calculations from using “historical” to “expected” gross margin in Q4 2021. The author conveniently selected a chunk of the data that made it seem like Progyny did this to juice its profit picture unfairly. They used that same selected data to then argue Progyny’s expected gross margin wasn’t attainable. In reality, Progyny has already reached that level of profitability in the past, with lesser economies of scale than it enjoys today. And when looking at its incremental EBITDA margins of over 20%, there’s clear (and consistent) operating leverage in the model.

So then why did Progyny make this change? Because historical gross margin was no longer a reliable indicator for calculating accrued expenses. This was because the company -- also in Q4 2021 -- issued equity grants that are temporarily weighing on GAAP gross margin (why gross margin has recently fallen). That’s why it started to disclose adjusted gross margin at that time -- because it offered a better sense of the expected gross margin when the grants stopped vesting. At that point, expected and historical will be synonymous.

The second argument was that bad debt expense is a red flag for Progyny. Here are some numbers: Its allowance for doubtful accounts over the first nine months of the year is 4.6% of revenue and growing in line with sales. Progyny’s bad debt expense during that period was 1.7% of revenue and growing slower than sales. That’s during one of the most hectic macro environments we’ve experienced this century -- for a company that sells service bundles costing tens of thousands of dollars. Their client list is a Who’s Who of major corporations and if they stopped paying, their employees would lose all services.

Next, the report calls Progyny  “a subprime lender” that’s as vulnerable to credit cycles as… actual subprime lenders.  This is simply not accurate. Its clients are Fortune 2000 companies (not unemployed borrowers).  It collects most of its revenue from these massive enterprises and, to a lesser extent, their gainfully employed members. There’s a reason why this has never come up in analyst Q&As during earnings calls or conferences. And there’s a reason why no carrier has ever dropped the Progyny integration.

If this were truly an issue, the company wouldn’t have been able to comfortably beat and raise guidance quarter after quarter during the tumultuous 2022 our world has experienced. Claiming Progyny as a subprime lender is a gross misunderstanding of their entire business model.

Finally, the report claims that Progyny’s diminished cash flow in recent quarters is concerning. Actually, it’s a matter of the firm’s improved negotiating leverage with its pharmacy partners. The renegotiated contracts give Progyny more cash flow, but spread out over a longer period of time. That’s why quarterly cash flow generation looks underwhelming based on the chart used.

I was not even sort of tempted to sell any shares after reading this. I’ve reached out to my contacts with the company and will include any updates from them in Saturday’s News of the Week post.