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.