Accolade, Inc. (NASDAQ:ACCD) Q3 2023 Earnings Call Transcript

Accolade, Inc. (NASDAQ:ACCD) Q3 2023 Earnings Call Transcript January 9, 2023

Accolade, Inc. beats earnings expectations. Reported EPS is $-0.56, expectations were $-0.62.

Operator: Thank you for standing by and welcome to the Accolade Third Quarter Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, today’s conference call is being recorded. I will now turn the conference over to your host, Mr. Todd Friedman, Senior Vice President of Investor Relations. Please go ahead, sir.

Todd Friedman: Thanks, operator. Welcome everyone to our fiscal third quarter earnings call. With me on the call today are Chief Executive Officer, Rajeev Singh; and our Chief Financial Officer, Steve Barnes. Shantanu Nundy, our Chief Medical Officer will join for the question-and-answer portion of the call later. Before turning the call over to Rajeev, please note that we will be discussing certain non-GAAP financial measures that we believe are important when evaluating Accolade’s performance. Details and relationship between these non-GAAP measures to the most comparable GAAP measures and the reconciliations thereof can be found in the press release that’s posted on our Web site. Also, please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to risks, uncertainties and other factors that could cause the actual results for Accolade to differ materially from those expressed or implied on this call. For additional information, please refer to our cautionary statement in our press release and our filings with the SEC, all of which are available on our Web site. With that, I’d like to turn the call over to our CEO, Rajeev Singh.

Rajeev Singh: Thanks, Todd, and thanks, everyone, for being here. While we still have one quarter left to finish the fiscal year, our Q3 call really marks the end of the calendar selling season and the start of the new planning year for many of our customers. As such, on this call, we’re happy to provide our preliminary outlook for the next fiscal year and share the foundational details that give us confidence in our market position, and our outlook to drive sustainable growth and profitability. We had a successful 2022, adding new customers, expanding existing relationships and increasing our footprint with our growing portfolio of offerings. The market is speaking clearly that employees and their families want and deserve a better health care experience.

Accolade’s years of proven results, especially our ability to scale with the most demanding and growing customers are factoring heavily on the minds of buyers, and they responded by helping us achieve our strongest booking performance in company history. Steve will give you more detail, but we expect that with fiscal 2023 is complete, we will have grown ARR bookings by more than 30% over last year, giving us confidence in fiscal ’24, but also providing the early foundation for continued growth into fiscal ’25. Most notable is the mix of those bookings. Continuing the trends that we’ve described over the past year, our new renewed and expanded commercial customer relationships were spread across customer size, across distribution channel, across solution and across industry verticals.

It’s that diversity that validates our strategy and our approach. Accolade solutions are resonating across the board, especially as we see the majority of new deals evaluating and selecting multiple solutions. Our renewals are also increasingly expanding to add additional Accolade solutions and partner solutions as well. More and more, we’re hearing customers talk about their employees health care experience as a key strategic imperative for driving employee satisfaction and retention. One of the places where we see this clearly is the volume of advocacy deals this year. In 2022, we saw a renewed focus on the employee health care experience and on return on investment. And advocacy was once again front and center for our customers and the consultant community.

With our expanded offerings that we’re now able to leverage that advocacy discussion to also include other things like primary care, mental health and expert medical opinion. Again, Steve will cover this in more detail in the guidance section, but our confidence in our fiscal ’24 guide is rooted both in the growth in our newer solutions, as well as the strength of the advocacy market and our position as the leader of that market. That leadership was borne out by a performance in this fiscal year, and we intend to press our advantage in the years ahead. The focus on employee experience and return on investment is true of our health plan relationships as well. Health plans have been an important contributor to our growth this year, both from a logo and a revenue perspective.

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Certainly one of the key reasons behind that attraction is the expansion of our offerings to include expert medical opinion and virtual primary care and mental health. This growth has positioned Accolade and the core strategic partner as health plans also look to the member experience as a critical measure of success. Today, member satisfaction is an executive priority for most health plans and Accolade’s high NPS is very attractive as a complement to their existing solutions. Before I touch on our consumer and primary care business, I’d also like to give you an update on our government business. By now most of you have heard that the Defense Health Agency made an initial selection for the vendors who will service T-5 , the next generation of health plan services to their 9 million plus beneficiary.

Humana was awarded the Eastern Region and TriWest was awarded the West. While the vendor selection still needs to be finalized pending a likely appeals process. We were thrilled to hear the decision as we’ve been anticipating an award for some time. There were three bidders for the T-5 award, we have teaming agreements with two of the betters and a strong relationship with a third. With this decision, we’re positioned to serve a significant number of TRICARE families once the implementation begins. Until that time, we’ll continue to work on our current government contracts demonstrating the tremendous value Accolade brings to our current military families through the TRICARE Select Pilot and the Autism Care Demonstration. And we will work with the selected T-5 vendors to define our potential scope and we’ll provide an update when that scope is finalized.

But we’re very excited to be moving past the evaluation phase of this opportunity and into the planning and execution phase. For our category of services, we’re extremely well-positioned to see the government sector be a driver of growth for our business in the years ahead, as it has been for several years. With respect to our virtual care business, PlushCare has continued to deliver outstanding results quarter-over-quarter. Our PlushCare team led by founders Ryan McQuaid and Dr. James Wantuck have been in front of the market since its inception. We deliver a wow experience for our members and a rich platform for our physicians. The result has been increasing subscriber counts with well managed customer acquisition costs. Importantly, on January 1, we turned on a number of enterprise virtual primary care customers, significantly expanding the number of lives we are prepared to serve.

A combination of our consumer focused business, which requires a different level of user experience to drive acquisition and retention and our commercial business, which requires a different understanding of how to scale to serve millions of lives create a powerful platform to drive growth for years to come. About a year and a half after the acquisition of PlushCare the core hypothesis of this transaction has been validated in both the consumer and enterprise segment, and we’re bullish on the future of this business. Before I talk a bit about the upcoming year and our strategy to continue our momentum, I want to take a minute to highlight something that many people take for granted, but it’s really the foundation of our customer satisfaction.

Every year between October and December, almost all of our customers go through an open enrollment process, especially when a customer is changing their benefits in some way. This is not only the busiest time of year for our frontline care teams, but it can also be the most stressful times for our members and their families. To give you some comparison, at the time of our IPO in 2020, Accolade had roughly 50 customers in total. This year, we managed open enrollment for hundreds of customers. We’re now operating at a level of scale with millions of members and high engagement rates that will place us among the largest carriers in the country by membership. Aside from the obvious importance of delivering the service at scale with high member and customer satisfaction, open enrollment presents something far more critical for Accolade’s success.

Our new customers is usually the first touch point that a new member has an has with an Accolade Health Assistant. It is the moment that we plant the seeds of proving the value of creating a personal relationship with every engagement opportunity. It is that ability to build personal relationships with millions of members to drive better health care outcomes that differentiates Accolade from our competitors and it’s the key reason for our high win rate. Turning to the outlook for the next fiscal year, and why we believe strongly that we’re set up for continued success. I’ll start with the financials and we’ll end with a word about our strategy and our identity. Simply put, our ARR booking success in the past selling season gives us great visibility and high-level of confidence for our fiscal 2024 revenue guide and our profitability outlook.

Steve will give me more details here, but we’re pleased coming through a difficult macroeconomic environment with this outlook. We have a business that’s diverse in many ways. It’s diverse in how we sell. We sell across a number of channels, including our direct commercial sales force through our health plan partners, leveraging our trusted partner ecosystem and to the federal government and direct to consumers. It’s diverse in the mix of solutions we offer. Our service offerings allow us to meet customers where they see fit, either with individual solutions or increasingly as bundled with multiple offerings. Our growing primary care business allows us to impact both health outcomes and overall health care costs in more meaningful ways. And it is diverse in terms of its revenue foundation.

Our highly visible revenue model allows us to set our investment strategy to pursue the areas of most impactful growth to help drive us towards cash flow positive in the next year and beyond. This diversification is now a core strength of our business, a driver of complementary value across offerings, segments and solutions, and stands in stark contrast to our business even just 3 years ago. As we make the turn to free cash flow positive in fiscal 2025, which begins just 14 months from now, we will be one of the few scaled diversified health care disruptors in the market. For our customers while they want to know that we’re financially strong, they’re far more focused on who Accolade is as a business and as their personalized health care partner.

They know that we’ve built solutions and services that are engineered to care. Accolade has spent more than 15 years engineering a better health care experience, one that predictably engages members to understand their care needs, proactively navigates under quality care and informed health care decisions, and addresses barriers to taking health care actions, including social determinants of health, all while delivering exceptional personalized experience. For employers and payers looking to improve the health care and benefits experience for members while reducing the cost of health care, Accolade is the one company that delivers improvements in outcomes and planned performance by guiding members to the next best clinical action in their personal health care journey.

And we do it at scale across entire employer population. Unlike our competition, Accolade Solution is predicted, proactive and personalized, allowing us to address barriers to care and offer proven results. When we say that Accolade is engineered to care, it’s important to recognize the multiple dimensions of what it means to care, cares about the act of physically or virtually delivering medical care, whether that is through one of our own physicians and nurses through a trusted partner like Berta or Carrot Fertility, or through our members’ own trusted medical providers. The care is also about the act of caring for another human being. It’s the empathetic listener instead of the anonymous call center agent. That is a personal element of the care journey that we can’t fully replace with technology, but that we can make better through engineering.

It starts with a fully integrated set of offerings that we can deliver value singularly, but really begins to transform the health care experience when it’s used in concert. It’s about having a robust and modular open platform that allows us to plug in third-party services and solutions with trusted partners. Our intelligent technology and proprietary approach help Accolade care teams build lasting personal relationships with everyone we serve. This unique approach rest on three foundational pillars. The promise of being engineered to care is that we enable predictive engagement, deliver proactive care, and address barriers to health care access. You’ll be hearing more about these pillars in the months to come. But in short, our predictive engagement model continuously captures critical population and unique member health insights, so we can proactively address clinical and cost related risks across organization.

Supported by this intelligence, our team proactively identifies and engages individuals in need of care, guiding each member to the next best clinical actions so they can achieve the best possible outcome. And lastly, Accolade’s diverse care team supported by predictive data is trained to understand and address the needs of each member, so we can engage those likely to face barriers to care and guide them to the right care. You’ll hear more about our engineered to care approach and the months to come, and I look forward to sharing more customer success stories around this vision. With that, I’ll turn the call over, Steve.

Steve Barnes: Thanks, Raj. First, I’ll recap the results for the third quarter of fiscal 2023 and then provide some details on forward guidance for the fourth quarter and next fiscal year. We generated $90.9 million in revenue in the third fiscal quarter, which was ahead of our guidance, primarily due to strength in our direct-to-consumer business, as well as member counts for our commercial customers, which has stayed relatively strong despite the macroeconomic environment. Does it the quarter also benefited from about $1.2 million of performance guarantee revenue timing that was not included in our Q3 guidance. Fiscal Q3 adjusted gross margin was 45.9% compared to 47% in the prior year period. Last year, Q3 included some performance guarantee revenue timing that benefited gross margin and adjusted EBITDA.

For a more relevant comparison, note that our 9-month to date adjusted gross margin was 45.4%, which compares to 43.1% for the 9-month year-to-date period last year. Adjusted EBITDA in the third quarter of fiscal 2023 was a loss of $10.2 million, which was ahead of our guidance and compared to a loss of $11.9 million in the prior year third fiscal quarter. We are currently at an adjusted EBITDA loss of $39.3 million year-to-date, and expect to finish the fiscal year in the range we have consistently provided throughout the year. Turning to the balance sheet, cash and cash equivalents totaled $326 million at the end of the fiscal third quarter, and accounts receivable DSOs were in line with prior quarters at about 20 days revenue outstanding.

And finally, we had about 72.4 million shares of common stock outstanding as of November 30, 2022. And now turning to guidance and elements of our financial model progression towards breakeven. We’re updating our guidance today for fiscal year 2023 and are now forecasting revenue will be in the range of $361 million to $365 million representing year-over-year growth for approximately 17% at the midpoint. And we forecast adjusted EBITDA loss guidance between $36 million and $40 million. With respect to the fiscal fourth quarter, we’re providing guidance today on revenue in the range of $97 million to $101 million and adjusted EBITDA in the range of $1 million loss to positive $3 million. On today’s call, we’re also providing a preliminary look at fiscal 2024 revenue and adjusted EBITDA.

We’ve said throughout the year that we believe we can sustain a 20% revenue growth rate and we reiterate that outlook today. For fiscal year 2024, that 20% growth will be net of contract, which will contribute approximately $23 million of revenue to fiscal year 2023. Based on that math and our current year revenue guidance, we’re providing preliminary fiscal year 2024 revenue guidance of approximately $410 million. We expect that adjusted EBITDA loss will improve on both a percentage and absolute dollar basis to a range of 5% to 7% of revenues in fiscal 2024. It’s our intention to invest strategically in the growth of the business, returning any top line upside back into the business while maintaining the adjusted EBITDA target as we have done historically.

And I’d like to provide a couple more data points to help you model out next year and our path to profitability the following year. First, as Raj mentioned earlier, we’ve had a very strong selling season. You’ll recall that we signed roughly $54 million of ARR bookings last fiscal year. So in calendar 2022 close and more deals still in the pipeline for January 1, 2024 launches, we are well on pace to deliver ARR growth of more than 30% over last year. That success is the foundation of our revenue growth forecast for fiscal year 2024 and it’s already forming the basis for additional growth in fiscal 2025. Second, as you build your model, of course, towards breakeven or better in fiscal 2025, I’d like to give you some guidance on where to model operating leverage across P&L line items.

We will provide more detail after the fiscal year closes. But at a high level, you can expect us to continue improving adjusted gross margin by 100 to 200 basis points per year with a goal of 50% adjusted gross margin in fiscal 2025. On the operating lines, the greatest leverage is in the product and technology line, followed by G&A and then sales and marketing. So if we were to improve each of those line items by roughly 100 basis points each year, that would get us the 5 to 6 percentage points you need in order to achieve breakeven and beyond over the next 2 years. I’d like to make one important point to help you understand our view towards these goals. These are rough guidelines for building models, but we are not as focused on 50 basis points here or there.

We’re focused on the objective of reaching breakeven and driving profitability thereafter. If we see a reason to invest more in one area, we’ll adjust other spend to accommodate it. In other words, the goal is not a G&A target of X percent per se. The goal is adjusted EBITDA and free cash flow positive in fiscal year ’25 and beyond. I will also take a moment to anticipate some questions we may get in the Q&A. First, we’ve been asked a lot about the labor market and how we forecast member accounts in the face of an uncertain macro environment. We take a relatively conservative view on member count when formulating our guidance. But it’s more notable that we have a business today that is widely diversified across customers, industries, solutions and distribution channels.

2 years ago this was a more relevant discussion when we had 50 customers, one of which represented about 20% of revenue and another 20% of revenue was concentrated in two airlines dealing with COVID. But today we have a business that serves more than 700 customers with no single industry vertical representing a concentrated portion of our base. Second, we’re often asked about our commitment to achieving positive cash flow and adjusted EBITDA in fiscal 2025. The answer continues to be that we remain committed to fiscal discipline and our timeline to profitability, and have consistently demonstrated our ability to manage the business in order that we maintain our bottom line targets. To that end, we will continually look at our business to find areas where we can operate more efficiently.

For example, we’re continually finding synergies across the business as we combine all of our capabilities to create an integrated health care platform. In addition, we continually assess where we concentrated our talent across our various office locations. Because we’re well situated already in some lower costs — lower labor costs markets like Prague and Vancouver, for example, where we can be opportunistic in our growth investments. Given our track record of steadily improving gross margin and adjusted EBITDA, we are confident in our ability to manage the business appropriately to stay focused on this goal of adjusted EBITDA and free cash flow positive, regardless of the economic environment. And as I noted last quarter, our convertible bonds are not due for more than 3 years.

So with $326 million cash on hand, we have more than adequate liquidity to achieve our financial plan without going back to the capital market, placing us in a strong position to execute against our objectives. In short, we continue to believe passionately in the strength, depth and breadth of our platform, the diversification of our offerings, revenue streams and customer base, and that we have an engine built for growth and sustainability which will ultimately drive significant positive cash flow. With that we’ll open the call to questions.

A – Rajeev Singh: Operator, we are ready to take questions. Thank you. Hi, Valerie. Are you there to take questions? Operator, are you there? For a moment, we’re just — our operator seems to have disconnected. And so we’re working through some difficulties if you hang with us for a moment, we’ll work through it and we’ll be — we’ll start taking Q&A shortly. . Michael Cherny, if you can hear us you can ask your question. Go ahead.

Q&A Session

Michael Cherny: Hi, can you hear me?

Steve Barnes: We got you, Mike.

Rajeev Singh: Yes, we got you. Go ahead.

Michael Cherny: Okay, great. Yes, appreciate the color on both the selling season and into next year. Maybe, Raj, if I can start a bit on some of the selling season commentary. Can we just dive a little deeper, you mentioned the employment dynamic, but also there’s a lot going on relative to employers decisions beyond their employment levels about whether or not they want to take on new benefits or not, how they think through their benefit offerings. Can you maybe give a little bit of push and pull in terms of what resonated most from the — whether it’s a Accolade total care approach versus point solutions. And maybe if there was anything that had a little bit of a, either a pause or a pullback or not now call me in 6 months mentality relative to your ability to layer on new benefits.

Rajeev Singh: Yes, appreciate the question, Mike and sorry about the technical difficulties there. We’ll see if Mr. Friedman is capable of moderating itself from here, but glad we got the first caller — the first question. A couple of ways to answer your question, Mike. I think it’s a really important one. The first is to really start and when you think about the growth rate of the company, think about the diversified revenue stream. Think about our primary care business and the consumer, the growth rate of that consumer primary care business and then also think about the growth in our bookings numbers, which is what I want you to refer to. As it relates to bookings that as relates to employer buying patterns, one of the things that we continue to see is that employers are interested in looking at drivers of employee satisfaction, and of course, those drivers of employee satisfaction that can measurably provide return on investment lower in cost.

And so solutions in our category have continued to be really valuable to them. Now, I think the next really important question is, why are we winning more than our fair share of those transactions and delivering a 30% growth in our bookings on a year-over-year basis. And I spoke to it a little bit in the context of our engineered to care capability — as our engineered to care delivery vehicles. And so I’m going to — with that, I’m going to turn it over to our Chief Medical Officer, Shantanu Nundy talk a little bit more about why we’re winning. And then I’ll maybe jump back in and answer your final question about employer being. Shantanu?

Shantanu Nundy: Yes, it’s a really great question. I think what we’re hearing pretty consistently from the customer is that who were in sales conversations with and our prospects and our current customers is that, they’re continuing to look for the same thing for as they’re looking for, who can get to the right numbers at the right time, right. And that’s where our predictive engagement comes in. We are looking for — looking at the quality of care and who can get the better outcomes. That’s the proactive care. And increasingly, they’re saying, who can help us also improve health equity, and that’s where our approach to addressing barriers is coming in. And just one evidence for that we were — we just had a piece in Harvard Business Review magazine just a couple of weeks ago, that really highlighting our approach to health equity, and specifically highlight some of the work that we did with United Airlines, which we think is pretty pioneering on the front of improving health care for marginalized groups.

So I think all of those themes are continuing to pull-through and driving the numbers that Raj and Steve earlier.

Rajeev Singh: Yes. So last part of your question, Mike was, if there was any themes around people pushing transactions on a year-over-year basis, what were those themes? Look, the bottom line is, we’ve really strong growth in bookings across the categories that we deliver and we think the reason we’re seeing that growth is people aren’t pushing those transactions. And the reason they’re not pushing those transactions, is we do both we deliver employee satisfaction, and we deliver tangible measurable ROI that we warrant with our performance guarantees and our incentive savings. So that’s why we think we’re seeing this kind of traction right now. Appreciate the question, Mike.

Michael Cherny: Got it. And just one more quick follow-up. I know you have the long multiyear targets and you talked about TRICARE being in the various different phases of appeal or whatnot, can we just confirm that there’s nothing in the long-term targets tied to the T-5 announcement? And how you think about the visibility you’ll have into that?