Q1 2022 Accolade Inc Earnings Call
Good day, and thank you for standing by and welcome to the accolade first quarter 2020.2 earnings results Conference call.
All participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I would now like to turn the call.
And so what's your speakers today Todd Friedman. Please go ahead.
Thanks, Operator, welcome everyone to our fiscal first quarter earnings call with me on the call today are our Chief Executive Officer, Rajiv <unk>, and our Chief Financial Officer, Steve bonds Saturday, and indeed, our Chief Medical Officer will join the question and answer portion of the call later before call. It turn the call over to Rajeev. Please note that we will be discussing certain non-GAAP financial measures.
And we believe are important when evaluating accolades performance details on the relationship between these non-GAAP measures to the most comparable GAAP measures and the reconciliations thereof can be found in the press release is posted on our website 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 95.
Such forward looking statements are subject to risks uncertainties and other factors that could cause the actual results to differ.
Differ materially from those expressed or implied on this call for additional information. Please refer to our cautionary statement and our press release and our filings with the SEC all of which are available on our website with that I'd like to turn the call over to our CEO and Rajiv Zhang.
Thanks, Todd and thank you all for joining us and it's an exciting time to be here at accolade. We're 1 month past the close of the plus care acquisition and are well underway with the work of integrating accolade plus care and second M D into a single business and.
And behind that with excellent financial results to start the new fiscal year and the return of our first wave of employees to our offices, which we're very excited about as.
And as well as a sense of normalcy, returning to the communities and which we live and there was a strong feeling of optimism that accolade.
My reasons for optimism are grounded in the simple belief and we can deliver differentiated value for our customers.
When I joined accolade nearly 6 years ago. It was clear to me that the foundation of advocacy and navigation would be the cornerstone of a richer set of services that could 1 day bring value based care to the employer health care market.
Advocacy provides the foundational platform a broad engagement longitudinal relationships and a rich dataset that make every incremental service that you add to it better than.
And that evidenced originally came and the former partner relationships via our trusted supplier program and will eventually validate a bold acquisition strategy geared towards assembling the industry's richest set of tools for engagement cost reduction and improving clinical outcomes.
Most importantly, our customers have been energized by these new capabilities and their potential for value.
And we're deep into these customer conversations and hard at work outlining for each and how our enhanced solutions will do even more for their specific populations.
Additionally, our integration and innovation teams are working feverishly to launch a fully integrated offering 1 seamlessly combining advocacy primary care and expert medical opinion.
Our mission is to create a health care expense experience that finally puts the consumer's needs first and we cannot wait to show you how our vision for the future translates to an integrated offering.
For today I'll spend time talking about our early progress initial successes and high level plans to change the industry.
First a quick review of the quarter revenue.
Revenue and adjusted EBITDA were both ahead of our guidance revenue of $59.5 million was 66% greater than last year and adjusted EBITDA loss of $12.8 million reflect some of the investments. We told you we plan to make and integration and the launch of a new enterprise primary care business.
Steve will provide more color, including some high level comparisons to account for the impact of our second empty acquisition.
From a business standpoint, I wanted to touch on a few key highlights from the quarter, including the integration of second empty and plus cure a positive start to the early selling season and the growing importance of behavioral health.
I'll start with second M D.
And just 3 months since we closed the acquisition we have signed our first cross sell customers with organizations like the city of Fort worth and a fortune 50 insurance company, adding expert medical opinion to their existing app and seek surfaces.
These early cross sell wins more rapid than even we expected along with second Mds continued new business success validate our hypothesis for the transaction very clearly.
Additionally, as we announced when the transactions close expert medical opinion is now a core component of our total care offering.
The value proposition and more importantly, the measurable impact unemployed and well being and health outcomes have immediately been apparent to our customers.
Not only have we seen cross selling success, but our first joint customer went live on July 1.
We're optimistic about the pipeline of expert medical opinion deals for the remainder of the euro as well.
Most importantly member NPS scores breakthrough medical opinion and remain at historically high levels above 90.
It's July so we're in the prime summer months for the traditional health care selling season for those of you who are new to our company large employers and to make big decisions related to their health care and benefits clients in the summer and anticipation all open enrollment and a January 1 launch as we've told you before with our addition of new.
<unk> and expansion of our target customers to include businesses of all sizes, we are selling throughout the year. However, it's still an important time and the industry and we've had a very positive set of success with both renewals and new business.
We signed deals and the first quarter and each of our customer segments middle market enterprise and strategic and <unk>.
Dish and to some of the notable deals I mentioned per second M. D. We also signed Mckesson, a fortune 50 pharmaceutical company for total health and benefits our premier offering.
We also saw key expansions and the populations, we're serving with Humana as well as notable customer wins via our new Health plan partners, who have established relationships with second M D. Prior to the acquisition.
1 in particular was a fortune 100 financial services firm, who has served by 2 national Health plans.
And note the multi carrier dimension because while it is 1 customer selecting second M D. Our ability to meet the needs of their full employee base. The lives on the strength of our relationships with multiple carriers.
1 other note that I would call your attention to 1 year ago. When we went public we outlined the multiple flavors of advocacy offers we bring to market with the belief that customers, who choose our lighter touch offerings might begin to upgrade more fulsome solutions down the road.
And fiscal Q1, we saw our first upgrades from total benefits and total care to total health and benefits 1.
1 of them dose was the Pepsi Cola National brand beverages group, which is the second largest franchise bottler and distributor Pepsico covering the mid Atlantic.
Finally, we're continuing to see and increase in interest and mental and behavioral health is.
This past quarter, we signed more customers to our mental health integrated care solution with Ginger.
Incrementally we're incredibly excited about the embedded mental health capabilities in our new plus share primary care solutions.
As Covid has exposed the incredible mental health crisis, and the country. We believe our ability to provide a multifaceted behavioral health solution to customers integrated with the most critical touch point and primary care is going to be very meaningful to our customers and their employees and their families.
And that's a good segue to transitions to plus care.
First of all it has been less than 30 day since the acquisition has closed we've already had the current plus care solution as well as our expanded primary care strategy and front of a number of significant customers.
Our field teams have all been trained on plus share and.
And all our new solutions and we are actively executing on a cross sell upsell strategy, but it's looking very positive.
When we announced the plus care acquisition, we talked about a parallel strategy of continuing to focus on the existing direct to consumer business, while building out and expanded accolade primary care strategy that leverages, the core strength of our navigation and advocacy and expert medical opinion offerings.
The core plus care business has continued to perform very well in fact, while traditional urgent telemedicine providers talked about a post COVID-19 returned to lower growth levels plus care has continued to grow subscription and visits will share more about that when we report our first combined quarter on October.
On the broader enterprise primary care models that work continues and we plan to roll out that strategy and the near future.
1 thing we haven't talked about previously is our plan to offer a fully featured solution for primary care on a standalone basis to customers and the quarters at all.
For many customers, especially those in the middle market the existing plus care platform is a powerful primary care offerings that our customers can begin using immediately it's a testament to the combined execution of both the plus and accolade teams were able to move this quickly.
Next I'd like to share a member story from a plus share position that I think is a good allegory for our broader primary care strategy.
This story centers on a member who lives in a rural area far from our medical office a problem for many of our customers employees and by the way.
Suffering from stable hypertension, she had reached up to plus care for help refilling and 1 of her 3 blood pressure medications.
And remember was complaining of the tea, but she didn't want to go to the hospital because of Covid.
A typical transaction focused telemedicine provider, but it's simply refilled the medications.
Plus care primary care position and built a relationship and convinced the patient to have a home blood testing kits sent tour.
The testing kit revealed something serious and the requirement for more tests.
Her glucose liver and kidney levels were very elevated and her a once he was twice the normal level.
The member thought for hypertension medication was out of balance but in reality. She has undiagnosed advanced type 2 diabetes with chronic kidney disease.
Lipid EMEA and fatty liver.
At this point you can see the incredible difference and the plus care approach compared to traditional urgent telemedicine.
<unk> care position discussed a number of potential therapies, including medications and lifestyle changes and <unk>.
Scared nursing staff guided the patient on <unk> comment or use and self monitoring for type 2 diabetes plus.
Plus care offset and engage with the patient the pharmacy and the position to ensure that the correct supplies ordered and delivered to the patient.
The patient and refused influence so constant monitoring follow up and testing was necessary.
After 1 month the patient is adopted new behaviors recommended to hurt by a plus care team, including installing a treadmill and her home and changing or die from.
Blood sugar levels dropped by 3.
3 months later and you won't see levels had dropped by half and our kidney and liver levels were back to normal levels from.
And for blood pressure and also dropped so the position was able to discontinue to over 3 medications at the next follow up her levels had dropped even further to the point that she was no longer even considered pre diabetic and her blood pressure within a normal range.
This was a terrific example of a patient and wedding clinical success, Despite having limited insurance coverage and a rural area with no close access to specialty care.
And arguably she was successful because of the virtual care approach since access to a brick and mortar facility was a barrier.
And those barriers exist across the country.
It could be related to location or socioeconomic factors or rates.
We have the opportunity to break those barriers and change the way care is delivered.
When the plus care primary care Doctor that delivered this care told the story she talked about the difference that would have been made at the member and been engaged with accolade before she knew she at this issue.
Remember with our hypertension and multiple medications would already be on accolades radar through our ongoing monitor claims and likely actively engaged with the health system and nurse when the member reached a plus care physician Doctor would instantly have all of the patient's medical history list of medications critical insurance information and all the other better.
The members employer might be provided and.
And integrated medical expert opinion specialists might've been engaged sooner and when it comes to the necessary supplies and follow ups for this treatment and beyond to a comprehensive ongoing relationships and physician and plus care care team would now have the extended capabilities that come with the accolade frontline care team.
As we look to what's next and this real life example, clearly outlines our opportunity are.
Our fully integrated data driven approach to improving the well being and overall health of our members is the goal and we now have a rich set of assets to achieve it.
With that I'd like to turn the call over to Steve to cover financials.
Thanks Raj.
First I'll recap the results for the first quarter of fiscal 2022.
Keep in mind that we close the second M. D acquisition on March 3rd just a few days into our first fiscal quarter.
Where appropriate I'll provide color on the year over year comparison beyond the tables and the press release.
The plus care acquisition closed in June after the first quarter ended so there's no question care contribution or impact and then you have these results.
We generated $59.5 million of revenue and the first fiscal quarter, representing 66% year over year growth on a GAAP basis over the prior year period.
And our 10-Q, we provide pro forma results for the combined business that showed 35% growth year over year.
And we provide pro forma results per SEC requirements for the rest of this fiscal year. Please keep in mind that we're selling our solutions, both together and separately. So wildly reported pro forma revenue growth and profitability numbers are intended to reflect the acquisitions as a standalone. It may not always be a perfect representation of how we sell to customers.
<unk> and run the business overall.
As a quick example, we sell expert medical opinion as part of accolade total care as an upsell and as a standalone solution.
Some of that would be reported as second M day revenue per pro forma FERC purposes, and some will be recognized as accolade revenue.
The revenue outperformance relative to guidance was largely attributable to solid execution on multiple fronts.
Customer member accounts and performance related revenue has exceeded the expectations built into our fiscal Q1 guidance.
Including the timing of achievement of our customer performance guarantee that pulled forward approximately $1 million of revenue into the first quarter, which also positively benefited adjusted EBITDA.
Fiscal Q1, adjusted gross margin of 42% compared favorably to 38, 3% and the prior year period.
And as stated on the Q4 call. We expect adjusted gross margin to remain relatively flat this year.
Adjusted operating expenses decreased slightly to 62% of revenues in Q1 of fiscal 2022 versus 65% of revenues and the prior year period.
And adjusted EBITDA and the first quarter of fiscal 2022 was a loss of $12.8 million, which compares to $9.4 million and the prior year first fiscal quarter.
Turning to the balance sheet cash cash equivalents in marketable securities at the end of the first fiscal quarter totaled $425.5 million.
Note that during the quarter, we paid $236 million related to the second M. B acquisition and received $245 million and proceeds after estimated expenses from our convertible notes offering.
And after the quarter ended we paid approximately $53 million related to the crush care acquisition and so.
And so on a pro forma basis cash cash equivalents and marketable securities were approximately $373 million heading into the second fiscal quarter.
Accounts receivable increased from the end of fiscal 'twenty 'twenty, 1 to $15.3 million at the end of fiscal Q1, representing.
About 24 days revenue outstanding for the quarter consistent with our last update on the expectation that dsos normalize and the 20% to 30 range.
And the increase and <unk> over the prior quarter relates primarily to the acquisition of second M D.
Finally, we had approximately $58.8 million shares of common stock outstanding as of May 31, 2021 and.
And note that this does not include any shares related to the second M. D earn out for the acquisition of crushed care.
So for your models you should include approximately $7.1 million shares issued for the plush care acquisition and June. Additionally.
Additionally, there are up to approximately $2.2 million shares related to the second M. D earn out and up to $1.4 million shares related to the <unk> earn out to be issued in calendar 2022.
And now turning to guidance.
For the fiscal second quarter, ending August 31, 2021, we expect revenue and the range of $69 million to $71 million, which includes crush care revenue from June 9.
And adjusted EBITDA loss, and the range of 22% to $25 million and.
For the fiscal year, ending February 28, 2022, we expect revenue and the range of $300 million to $305 million, representing 78% growth over the prior year at the midpoint of the range.
Breaking this down further we said that we forecast the poor accolade business at approximately 25% growth and we expect second M D and plush character grow faster than accolade.
If you assume a full year plus care contribution and combined plus care and second M. D. As calendar 2020 revenue with accolade $170 million in fiscal 2021 revenue. It would give you about 30% growth at the midpoint of the range.
Adjusted EBITDA loss for fiscal 'twenty, 2 is expected to be and the range of $49 million to $54 million representing.
And adjusted EBITDA loss of approximately negative 17% of revenues at the midpoint.
This is consistent with the color, we provided last quarter and at the plush Curt close to expect approximately negative 20% adjusted EBITDA margin from crushed care and incremental investment as we build our enterprise primary care business.
And now I'll turn it back over to Raj for his concluding remarks.
Thank you Steve before we take any questions. A couple of quick announcements. Please keep an eye on your inbox for a couple of upcoming events.
We heard good feedback following our deep dive session on expert medical opinion. So we're planning. The next session. Later this month, which will focus on data.
We're also getting ready to host our annual customer event again and September attendance will be limited to customers, but we do plan to webcast the keynote and host an analyst Q&A session.
Please reach out to Todd for more info, if you don't get an email with those states with 8 details.
Operator with that I'd like to open the call for questions.
Thank you as a reminder to ask a question you will need to press star 1 on your telephone.
Try your question press the pound key please standby will be compiled the 10 day off there.
Our first question comes from David Grossman with Stifel. Your line is open.
Thank you good afternoon.
Rajiv you gave some observations about the selling cycle and.
And what you're seeing year to date and now that you've completed these 2 deals I know you mentioned integrated offering and going to market with that offering, but it's probably a little bit too early to comment on that but you know now.
And now that you've closed. These 2 deals you are meeting with customers at a point in time, when they're making decisions.
What are their observations and questions about whats it becomes and where their interest may lie going forward. When you look at the integrated whole.
Yes first of all it's great to talk to you David and thank you for being here.
I think it's it's a it's a really important question you asked because our customers just like we are looking to the future and.
And in that and look at the future there acknowledging that today. They are oftentimes confronted with a complex healthcare system and too many solutions to weave together on their own oftentimes our buyers today are carving out solutions.
And from their local health systems and from their plans and looking to weave together their own ecosystem of solutions and unfortunately too many times, that's very difficult for them to do and Theyre seeing really low utilization rates.
They hired us to solve that problem when they bought our advocacy services over the course of the years.
What we've been able to do for that.
Network solutions that we've woven together that we have called our trusted supplier program is drive engagement not only for our own solutions for the partners that we brought to bear and our customers see that metaphor. They see that metaphor as it relates to primary care. They see that metaphor as it relates to expert medical opinion and they can see how that metaphor is multiplied when that solution is.
Under the accolade umbrella and going to be deeply embedded from a technology perspective, a process perspective, and a clinical perspective, and so David so far our meetings with our customers have been extraordinarily positive day.
Understand the hypothesis behind the acquisitions they understand what on what the long term value proposition should be and and I think what theyre looking for is more from us on on the vision of how that integration work on and that's what we're giving them.
And then if you kind of take that back to a comment you made also on your prepared remarks about offering Standalone solutions for both second empty and for plus care is that targeted at specific market segments or specific.
<unk>, who are trying to solve for the customer or is there more to it from that.
Davidson.
Since we really got going here at accolade. The mission has always been to meet the customer where they'd like to be met.
Current customers are at different stages of their journey and so.
3 or 4 years ago or 3 years ago, we announced.
There are various flavors of our advocacy offerings meeting the customer at different price points with different engagement levels.
We think the same story is true for expert medical opinion, where.
Every single HR buyer has that moment, where 1 of their employees gives them a ring and says some families and what are their family members has been diagnosed with cancer, what do I do.
Second our second M D. Our expert medical opinion solution gives them the answer to that to that question.
That same story is true on virtual primary care.
Customers are looking for particularly those who are wrestling with access and availability issues are looking for answers to questions like that and as opposed to trying to shoehorn them into a particular solution we want to solve their problem.
And that's been the nature of the way, we think about approaching the market price.
Great. Thank you.
Thank you.
Thank you. Our next question comes from Michael Cherny with Bank of America. Your line is open.
And afternoon, congratulations on the nice quarter.
I want to follow up a little bit on the selling season comments Raj and I think he made a comment saying that some of the cross sell came earlier than you expected. If you could characterize a little bit more about that cross sell is there any common traits that youre seeing between the customers.
And what's driving some of those that cross sell capture and earlier pace than you would've expected just try and think through it and also think back to the export.
Expert second opinion feel you did where it seemed like you had the clients there and I was very excited about and potential cross sell and curious do you think about what we should be expecting and what's built into guidance as we move through the rest of the selling season and through fiscal 'twenty 2.
Sure Let me, let me take the qualitative part of that answer and I'll leave the guidance part of that I'll leave the hard part of the question, Steve and I'll just answer that the fun part how's that.
So first of all and thanks for being here, Mike and thanks for the kind words.
Okay.
Interestingly, if you look at the mix of cross sell customers that we saw and the first quarter. Since we acquired second M. D. We saw customers who were already on the process of evaluating.
And second M D.
And who were accolade customers, who made a buying decision meaning they were in the process of evaluating second and be before the acquisition.
Customers, who began and close the evaluation after the acquisition began.
And we saw customers who.
We're.
Looking at.
Oh already on existing solutions and deciding to make a changeover.
Since post the acquisition so all 3 varieties types.
Types of deals closed and so I think the good news is customers fundamentally understand the second opinion utilization is critical and if you can get utilization rates above 2% above 3% and you can yield outsized value and extraordinary employee satisfaction and net to the degree they are not seeing that and some of the other.
Vendors that they're working with.
They have a lot of confidence that they can do so with accolade and second half day spot.
And Mike This is Steve I'll speak to a bit about the guidance and what's factored in as Raj mentioned, we're really really excited about the early momentum with the cross selling that's occurring already and and we have of course factored some of that into guidance, but remember where we are and the selling season. This really will become.
And more significant factor and fit into fiscal 'twenty, 3 particularly with respect to revenue because as you know most of our deals set up to be implemented during open enrollment and then launched on January 1st. So you could think of the revenue impact from cross selling is fairly minor and.
And that the $300 million to $305 million topline revenue guidance, we're giving for the year really has a lot more to do with core organic growth from accolade and then.
On its own second M D strong growth continuing there and then plus care as well both of which you'll recall, we signaled that those companies, we expect to grow and the 35% to 40%.
Right on their own so to speak as we're bringing together that integration and come into market with accolade and maintaining that growth rate on a core organic basis at 25% or so which pencils out to that guidance range.
Perfect and then just 1 hopefully very quick follow up on the pull forward that you had on the at risk revenue and $1 million that you mentioned can you just tell us what that's supposed to be part of the normal course of business that you would have recognized and <unk> just curious how pulled forward and it was.
That's exactly right. The way you described it there Mike we expected it to occur later in the fiscal year and we achieved that and are in the first fiscal quarter and so and recorded there. So.
We think it's important that you understand that youre analyzing those results. So very strong first quarter for for all good reasons around member accounts and PG performance on its own and then you had that that call. It $1 million pulled forward from Q4 into Q1.
Excellent. Thanks, so much.
Thanks, Mike.
Thank you. Our next question comes from Ricky Goldwasser with Morgan Stanley. Your line is open.
Hi, good afternoon and have you.
Couple of questions here.
First of all I'm trying to understand the appetite on the quarter.
Sounds like Steve at 1 million and from the pull forward of the performance payments.
As we think about the remaining upside what is from core and woods from.
Upside to your estimates on FIC, and indeed performance and indeed.
On the quarter.
Great Hi, Ricky.
A couple of things there are a few peel apart and and <unk>.
You'll see the 10-Q, which also either just got filed or will be filed imminently, we do pull apart the pro forma numbers for second M D and accolade in the in the Q. So you'll get a chance to take a look there you'll see the different components of it and you'll see on and a year over year organic basis that second M D.
<unk> grew in the low forties.
And 40% about 42% year over year, so a very strong growth big growth year, and you could assume that that was we had guided towards a 35% to 40% range. There. So strong growth from second M D and importantly, with accolade, we're starting to see.
The negative effects of Covid, we're off a bit and a very positive way, meaning employee channel came up strong for accolade across our customer base, which is positive and and.
Finally, with respect to P. Gs as you know, we we assume different elements of that around the savings P. Gs and the operational P. G is and where we performed very well across all the different categories customer satisfaction and engagement rates and cost savings to the extent our cost savings are booked early in the year.
And as you know about 80% of the cost savings.
Revenues do get booked in the fourth quarter.
But some of those do get booked during the year and so it was a strong.
Q1 across each of those different categories.
Great.
And can you help us quantify the size of the investment and procure making them to integrate their businesses and have to rethink about 8 dosing Christian and should we think about green happening in fiscal year, 'twenty, 2 or should we model.
Elevated metal.
And spilling over into 2020 free.
Sure I can help you with that.
Quite a bit there if you're if you think about let's work backwards from the guidance that we just presented and I'll bounce it off of.
And what what you had seen previously so with the $300 million to $305 million Top line guide and the EBITDA adjusted EBITDA loss guide of $49 million to $54 million. If you look at that step up from what we provided last quarter prior to the acquisition. What you would see there is a few few different elements.
And 1 we're investing significantly in the integration across the frontline care teams and the technologies that are supporting that so that we can create and.
And incredible experience for the consumers who's who.
Or are the members who are.
Customers of the business and for our frontline care teams to bring together each of these complex element, so where does that show up and our P&L shows up in the form of cost of revenues or gross margins, which has a lot to do with why we why we signaled expect roughly flat gross margins. This year some of that investment is happening on the front line care teams.
You'll also see it and product and technology. So we will continue to invest.
At least significant significantly there so that number ought to be and the low twenty's as a percentage of revenue.
Another area, we're investing and Ricky is across distribution and so if you look at the sales and marketing line. This year that number we expect to go up from what was and the high teens and fiscal 'twenty 1 into the low twenty's as a percentage of revenue this year and that has everything to do with building out and expanding our go to.
<unk> teams the business development teams and the underlying.
Marketing teams, who are building that broader story that Raj spoke about and his prepared remarks and was just answering on the further question, which is piecing. This all together in a way that would be a completely integrated connectivity between navigation and advocacy and the primary care and second M D expert medical.
Opinion elements, so it really shows up across the P&L and those different ways.
And the adjusted EBITDA loss, and so the 16 or 17% of revenue range. This year and we will continue that investment while we chunk down towards breakeven over the next couple of years. So that's very intentional that we continue to capitalize on the growth opportunity in front of us while we also maintain that discipline.
And towards breakeven.
And the next couple of years.
That's very helpful. Thank.
Thank you Steve and.
And Frank if my 1 last 1 when you think about last year and when I think about where you're competing with and who are you replacing.
And it seemed a bit platform is quite extensive and should we think about competing interest with primary care and behavioral health, but also urgent care.
Ricky I'll grab that 1 and it's great to chat with you.
We fundamentally position our offering to our customers with the belief that the highest value. We can provide from a primary care and behavioral health perspective, and that that solution of course is in a position where when delivered and when implemented on behalf of the customer can also serve the needs.
Helping and urgent care situations oftentimes 1 of the things we see is that urgent care is.
<unk> lead and event that leads to a primary care relationship and so for our customers I think.
The baseline positioning and the umbrella under which we're and we're delivering the offering is certainly primary care, but we expect that it will lead to urgent care and emergent care situations, where we'll drive visits that way as well.
Thank you very much.
Thank you.
Thank you. Our next question comes from Ryan Daniels with William Blair. Your line is open.
Hey, guys. Congrats on the strong start to the year just wanted to have a follow up question on the sales pipeline I know again. This is a heavy part of the year for you and I am curious.
And if youre seeing more momentum towards the core products given the return to work and maybe a need to re engage the workforce after being absent for a year or perhaps trying to keep a workforce engaged is still working remotely.
And kind of drive cultural aspects for the organization does that helping you with conversions are and conversations with clients.
I think in Iran, and thanks for the question in fact, you really hit on some of the macro tailwind is that we think are a part of what's happening and corporate America today.
First employee engagement is fundamentally.
A challenge for companies, who are wrestling not only with return to work, but a variety of other issues that have their employees and their families distracted.
Second with return to work there are there are a number of clinical and health care needs that are front and center to employees and their families and figuring out where to find them and to help in a.
System that over the last 15 months has gone through a lot.
<unk>.
And is another tailwind and driver and so.
On a on a macro basis, we think there are tail winds that are driving what we continue to see as a growing pipeline and growing and a continued opportunity to grow the business.
Yeah.
Yeah.
Thank you. Our next question comes from Jim and dressing with credit Suisse. Your line is open.
Yeah, Thanks, and congratulations on a strong quarter.
And to go back to selling season discussion and thanks for highlighting and and congrats on those contract wins it seems selling through and that has been going really well for you guys.
My question's on around are you guys seeing any changes and debate and Florida evaluating the alternatives on a greatest offerings and given all the consolidation and changes over the past 12 months, even insurers on aggressively expanding and pushing for their own or partner just on health solutions and also like related to that curious on your thoughts at all and if you're seeing.
Employers looking forward and best of breed vendor approach auto youre coming across and Florida, having vendor fatigue and looking for more comprehensive solutions, just give us some room to play with on that.
Yes, Thank you day leather for the question and.
And I'll try to wrap every element of that question up and 1 answer and if I Miss something please just follow up and we'll make sure and cover it all.
As it relates to let's start with.
How are buyers approaching.
The selection process and 2021 and how has that evolved from 2020 I think the single largest area that we that we'd point to is that increasingly we're seeing buyers come to the table with the with our value orientation and a clear understanding of what that value orientation is.
Buyers understand that when you're seeing hundreds of solutions and the marketplace and differentiating the pretenders from the real value drivers.
And are going to be measured by value clinical outcomes lowered costs and employee satisfaction.
And that increasingly there is a demand that contracting vehicles and and.
And measurement and.
And and and.
And success measures are all geared around those value drivers. So that's 0.1 I'd say, that's certainly more profound and 'twenty 1 than it was in 'twenty and we obviously believe that plays directly in our favor.
And.
Incidentally on that point, the idea of being able to prove that value with documented savings and documented reports is obviously very important as well.
2 of the question I think is on.
Our companies are increasingly looking to find their answers from a single place where they can drive.
Compelling health care experience with deep integration.
Particularly around a core driver surround.
And it launched 2 new relationships and navigation primary care being 2 really good examples and so we think where should that trend was manifest and it was a wall Street Journal article a couple of quarters ago that talked about this but that trend is manifesting across the industry, particularly I'd say.
It's absolutely true and strategic and enterprise accounts day lender.
Middle market accounts do not have the staff to really work through and understand.
Yes.
All of the solutions that are on the market.
And I think those are 2 of those as well.
I would say are 2 things that are evolving as 'twenty 1.
As we hit the midpoint of the 'twenty 1 year.
Yeah, that's kind of you actually covered my follow up question because I noticed in your earnings release that some commentary around your value based model for the first time. So I just wanted to clarify that I mean can you give some examples would be more specific like how these contracts might look like and maybe to level set do you have any value base of risk.
Trading contracts with employers.
Well as you know we are.
And we take risks with our customers and by about a third of our fees are a risk on an ongoing basis today and so.
And in that regard are we taking risk with any employer every 1 of our employment.
Employer agreements today has that element of taking risk and it I.
I think to the more to the point of your question around value based arrangements.
And here's what we would point you to.
And we think the future is about extending that capability and.
And tying it out too not just cost reduction a clinical value.
And that that is fundamentally going to be the future of the employer space.
And so we'll give a little bit more detail about how we're thinking about contracting and when we deliver the integrated offering which will be a little bit later this year.
Okay and then 1 quick question for Steve do you have cash flow outlook for fiscal 'twenty 2.
We do I think gilenya for for US you can consider that adjusted EBITDA number to be a pretty good proxy for free cash flow, maybe a bit higher than that this year to the tune of a few million dollars for related to timing, but its and its in that same ballpark.
Alright, great. Thank you.
Thanks, Joe and Jay.
Thank you. Our next question comes from Jeff Garro with Piper Sandler Your line is open.
Yeah, good afternoon, and thanks for taking the questions and congrats on the quarter.
Spoken about the very possibly about your health plan partnership I'm curious about what's driving success with those channel partnerships and a second part to the question as well overtime I would expect from some efficiencies from leverage from using those sales channel, but are there still upfront investments to build those relationships that are part of this.
Sales and marketing investments that you mentioned earlier.
Hey, Jeff and great shock to you.
Yes, there are some investments and building out new channel relationships with our with our carrier partners. We continue to be bullish on the opportunity to grow that channel and.
And we continue to see organic expansion within those channels that have already been solidified clearly once the relationship has solidified we have an opportunity to grow within their customer base and yes, we absolutely believe that can be and efficient customer jet customer acquisition strategy and I and.
Optimally youre seeing that in terms of even while Steve mentioned the increase in sales and marketing spend this year.
We're still seeing really extraordinary customer acquisitions and LTV.
Ratios and the business. So we're still very efficient from a sales and marketing perspective, and Thats part of the reason why.
The reason for our success with those channels.
And is fundamentally and offering strategy that meet the customer where they want to be met and so we started with multiple forms of advocacy that advocacy delivering core differentiation for carriers, who might otherwise be unable to deliver that blend of technology clinical and clinical capabilities and advocacy.
And adding expert medical opinion and virtual primary care. We've added 2 new solutions that are really core to what customers are looking for and therefore added new tools that our carrier partners can take to their customer base to differentiate yourself so that the.
And the breadth and depth of our services I think it's 1 of the things that really attracts Congress and what we do.
Hi.
That helps great to hear the differentiation as well as continued focus on unit economics.
Second question from me just thinking about the outlook and the contribution from second M D and maybe you could revisit the.
Variable component of that business and how much seasonality you expect of the business, we think about it.
Rolling forward the contribution and the first fiscal quarter throughout the rest of the year.
Sure and Jeff This is Steve great to talk to you again.
So second M D through through their revenue model has a couple of different ways that.
As part of accolade that we go to market with that expert medical opinion offering sometimes it's a P. M. P M offering sometimes it's a case rate price.
But it often times has a performance guarantee associated with it and as you'll recall the returns on a on an expert medical opinion.
Service through through the second M. D offering is very substantial something like $5000 on average and that can exceed 25 or $30000 when our surgeries and Bob So it's quite.
And attractive return for the paying customer.
The way that those P. G's show up though is that unlike accolade, where we're deferring a lot of that savings based revenue to the fourth quarter second M. D recognized we were able to recognize those typically as the year goes on because it's a different construct so what youre going to see with accolade overtime, Jeff is that fourth.
Quarter, which today has a much more significant portion of and a year's worth of revenue.
It will start to flatten out a bit as we bring on board second and D. For a full year plus care. We just closed that transaction as you know as you see that and this year's fourth quarter and then next year when you're looking at that on a year over year basis, Youll see the seasonality of the revenue recognition.
Start to flatten out a bit so it won't be as dramatic and as it has been.
And with accolade.
Great Thanks for that.
Thank you Jeff.
Thank you. Our next question comes from Richard close with Canaccord Genuity. Your line is open.
Yeah, great. Thank you congratulations on the acquisition as well as the first quarter, maybe just to hit.
You hit on a couple of the questions that have already been answered.
Or address but could add a little to it with respect to talking with customers and the pipeline and and you know.
The conversations around value and and maybe some of the other companies that are you're looking at navigation.
And as our customers or potential customers confused at all is there a lot of noise out there that you guys have to sort of educate the customer on just curious thoughts on that first of all.
So thanks for the question and I appreciate you being here I think the.
The best way to just I think your question is really.
Let me try to rephrase your question make sure I'm, capturing and and then I'm going to come back yet.
And my view on it the market is ripe with where new entrants innovation and sometime and noise can be confusing is that is that noise confusing prospects buyers and the mark.
How are they responding to that confusion and capture that.
Correct correct.
Okay, perfect and so I think you're absolutely right that the macro.
For the meta issue that Youre discussing which is the.
The plethora of solutions and the market is creating some confusion for buyers and it's not just buyers and consultants and brokers and even carriers, who are struggling under the weight of having to keep up with the innovations and the market. We believe fundamentally that that is part and parcel of why we're finding success and the market it's not the only REIT.
And but it is a part of the reason customers view us as a platform for weaving together their healthcare ecosystem. The example, I gave you today.
Cash and with that we mentioned on the call. Obviously, a large pharmaceutical company Mckesson purchased both accolade total health and benefits and expert medical opinion, youre seeing more and more companies to look at the breadth of offerings from a single location where.
And the offerings can be integrated we know theyre going to be utilized and we know 1 person is responsible for all of that value that confusion, we think confusion and noise and the market accrete to the value of platforms.
We are and in our view.
On the right platform for our customers, we've all that value together.
Okay. That's helpful and then.
Steve If I can ask the question are you appreciate the flattening of the fourth quarter with second M D and.
And no plush and being included.
And if more customers are moving towards value.
Wouldn't you have that value coming in like you said predominantly and in the fourth quarter and.
And as value becomes a greater mix.
Hey, Richard and.
I think I completely understand the question, it's early days, yet or getting to the point, where Raj and I think and answering <unk> question is it's early days for us to move to a different type.
Type of contracting than we have today around value based contracting and call. It. The next generation of that as we bring all of these capabilities together. So as we come back to you towards the late latter part of this year with more visibility around how that looks we'll give you some color about the expectations are on the financial model, but I will.
And expect that have a material impact certainly in fiscal 'twenty 2.
Me and the current fiscal year.
Okay. That's helpful. I just wanted to clarify that thank you congratulations.
Thanks, and I'm sure.
Thank you. Our next question comes from Stephanie Davis with SBB Leerink. Your line is open.
Hey, guys congrats on the quarter and thanks for taking my question as always.
I wanted to dig in a little bit about this trajectory towards and have a great care offering.
How should we think about the value of a physical footprint and is this something that you either think you can see proceed and that's an M&A opportunity or is it something that would be partnerships. So you can sell to that last mile of care.
I'll tell you what let me take that.
Excuse me Stephanie it's great to talk with you.
And let's go to chart.
Sorry.
And I had a peanut right before our rents and before you ask your question and I'm sure.
We got to get that last voluntary and now he didn't interest maneuver.
And Raj and are considering seriously I got so you're talking about that question and I'm wondering if that's kind of cleanup.
Uh huh.
So 71st Great to talk to you and thanks for the question.
And the last mile of care is extraordinarily important let me take the first part of that question and then I'm going to I'm going to ask doctors on day to engage and talk a little bit about.
And the power of collaboration and <unk>.
Of our model.
For us we do fundamentally believe that.
On a 3 trillion and 4 trillion dollars ecosystem.
Capacity to collaborate across the industry. It's imperative, we will be working directly with bricks.
Bricks and brick and mortar health care systems on the ground that are servicing our existing customers we think.
And importantly, Stephanie and just and then after this and I'll turn it over to shop and importantly, 1 of the things that's so powerful about our model.
Is that we can deliver the concept of value based care, while running on the chassis of a fee for service health care system.
That doesn't require a customer to make radical change around the platform that they are currently running.
And that's really important we're not taking a wide choice, we're not forcing them to make radical changes to their existing infrastructure, which they fundamentally would struggle to implement instead, we can bring this really powerful concept to them and leverage everything that theyre already using Jonathan and you want to jump in there and maybe speak to how we're thinking about that.
Yeah, absolutely and Stephanie I think it's such an important question.
You know I think from from the clinical perspective, right I think we think about the most and the highest leverage point is the decision the clinical decisions that people, making their lives right and that decision is really upstream on the service itself and so when.
And when you think about that that number story that.
We started with.
On the number with you know with diabetes and the the liver function issues.
Really where the system falls down the nose, where that person is on what we call the interstitial space right and it's like the space between visits where people have to go home and and they'll make those decisions every day about their health and wellbeing and so for US that's where we thrive that's what we've done and traded over the past.
Decade, plus and so we think that sets up a really.
Nice way to collaborate with the ecosystem, where it's where it's really saying hey, we're going to help people get the better decisions and we're gonna be accountable for that and we're going to guide them through the 5000 hours that they're not in a physical brick and mortar environment, but we absolutely see the need for that brick and mortar service.
Just wanted to make sure and that people are ultimately getting the right care that they need and get to the outcomes.
I guess a follow up on that 1 do you read the and he kind of venue of care up to and client or is it something where you might want to steer them towards and be more hybrid or risk on models and those kind of up here.
And given their claims.
<unk> improved our ally and cost savings.
Again, we will tag team. This 1 I think it's definitely 1 of the things that we pride ourselves on is our capacity to get people to the right care by leveraging the tools that are and our tool bag as it relates to.
And our intelligent provider matching capability that weeds, together cost quality and appropriateness of care measures are extra medical opinion capabilities, which allow us to ensure that we're on the right trip and decision support I think.
I think the.
In addition around.
Areas that are focused on quality and cost and focused on measures like the measures that we're focused on with our customers are clearly going to be interesting to to partner with us on behalf of our customers.
Chinese you anything there.
Yeah, No I think I would add I think part of I think what you're getting at with your follow up question on something I believe is really you know that as you know brick and mortar sites move to value based care as many employers have onsite clinics, where they have particular brick and mortar and local assets that they develop partnerships with how does that fold into our model I think that's.
Maybe part of your question and I think you read and my mindset I think that day.
Okay perfect perfect, Yeah, and I think I think the short answer is it is absolutely I mean already today, we have a number of customers that have onsite clinics I think.
I think absolutely as the market continues to move towards more value based providers I think theres real opportunities.
To provide differential value getting members to those environments.
Even those that are that are getting care at those local accountable care organizations are still there's still missing a lot of the data on that they need to really serve those numbers and those numbers are still going to have other care needs that may or may not be best served by those those are those local providers and so.
We absolutely think that building on the capabilities that Raj talked about that we're going to be able to construct those ecosystems.
Ultimately get to the outcomes that that employers are looking to get to.
Okay Awesome. Thank you Doug.
Thank you.
Thank you and our next question comes from David Larsen with B T. I G. Your line is open.
Hey, congratulations on a good quarter can you maybe talk a little bit about your long term expectations for gross margin I fully understand that there are investments going into integration. This year for Apache and second and B, because if you think about like fiscal 'twenty 3 and beyond.
Where would you expect gross margins to trend what will get you there and over what time period. Thanks.
David It's Steve Great to talk to you.
You're right absolutely.
Absolutely taking gross margins up over time as part of our plan and expectation, while we invest in and that part of the business. This year and into next year roughly flattish. This year. So think of that as mid forty's with a with a long term target into the fifties call. It the mid fifties over the longer.
Term I think what youre going to see though is this year and really into next year. It's similar types of gross margins in that mid Forty's range to bring all of these capabilities together to create create that fully integrated experience that drives the kinds of health outcomes and cost savings that we think are critical that our.
Driving the growth and new customers and the very high retention rates, we have with existing customers now overtime, how would we take that from the mid <unk> up into the fifties it'll be through a few different things.
Very importantly, continuing to build out the technology platforms that create integrations that help our frontline and care teams be more efficient. So it's leveraging the AR and AI and machine learning engine to do something we call next best action to help our frontline care teams know what would be the next.
Best thing to recommend or where someone to direct where to direct a member elsewhere and the ecosystem that all as and automate that more makes our teams more efficient.
By the way Raj alluded in his prepared remarks, we'll have a segment and analysts segment on data coming up over the coming weeks that will go deeper into that.
And then secondly, as we cross sell and upsell, there's leverage and operating leverage on the business overall, including on the gross margin line. As we are successful with transactions like Raj mentioned with Mckesson, and selling and total health and benefits and expert medical opinion that combined offering and there's certainly leverage that we.
Have on the frontline care teams that equates to improving gross margin at the margin. If you will so there's there's opportunities there.
Those are 2 big vectors, where we think of driving gross margin improvement over time.
Great. Thanks, that's very helpful and then.
We've heard from a couple of health plans like first of all they are very very very large health plans and are very much aware of accolade and we've heard a comment here and there like accolade is doing such a good job there and they're taking away some potentially like fully insured business from us.
Yes.
And the employer groups can purchase the self insured product at a lower price point and on Muzak late and they can get all the benefits.
Have you seen any large health plans sort of react accolade and try to <unk>.
Bring in some of the services themselves have you seen any.
And I don't know if backlash and the right way to describe it but.
And I'm, assuming the answer is no came on how good your sales are but have you seen large players respond to your efforts here and can anyway and its been unexpected lately. Thanks.
I appreciate the question I think for us and we.
We talked about it a little bit earlier.
Hi.
We're finding increasingly that carriers understand and I'm going to I'm going to actually flip your question and take it on a positive way they're looking at.
Yes.
And acknowledging that we can add value to them with our differentiation and so on.
We acknowledge as well, though to be clear that they're going to be moments, where we're there's a level of competition, where we're going to exist and the market and compete where they've got their own advocacy solutions, but yet.
And we win those opportunities, we have an opportunity to collaborate with them and serve the customer well and so I think the short answer to your question is no longer asking hopefully give you a call.
Okay, great congrats on a good quarter, thanks very much.
Thanks, David.
Thank you. Our next question comes from Ryan Macdonald with Needham Your line is open hi.
Hi, Thanks for taking my questions and congrats on a great quarter Raj you mentioned and that behavioral health is continuing to have a strong impact on the selling season and this is something we've heard similarly with other organizations, we've spoken with but there is still this added a layer of complexity there within the different behavioral health models on.
And I'm trying to navigate that and you look at the evolution of accolade and with your partnership with Ginger and the mental and behavioral health component. That's included with Posh here can you talk about how you're positioning those 2 as you start to integrate plush care more directly into your your selling model.
Thanks for the question, Brian glad you're here I'm Gonna Domino and.
And that question over to our Chief Medical officer or something.
Yeah, it's it's such an important question because you're right so top of mind and and we're seeing that come up over and over again from our customers. The concern about emotional health and mental health I think the short answer is we don't think that there's a 1 size.
True to your point.
Behavioral health covers and very broad broad gamut from depression and anxiety.
And I'll help the substance abuse to more atypical.
Yatra conditions and so we.
We think that over time, there's going to be it's going to require.
Multiple types of services are integrated together to ultimately meet their needs.
Part of the challenge as you know is scale I mean, there's just there was a shortage nationally of therapists shortage nationally and psychiatrist and and so really thinking about and approach that can meet our employers very very broad needs on.
And while also maintaining high quality and outcomes.
Really what we're focused on.
Excellent and as a follow up for Steve Steve You know, it's obviously very early days and the integration of bolt on acquisitions, but just curious to get your thoughts and maybe some areas of upside surprise in terms of synergies that they use.
And they might have discovered a day.
Maybe you didn't expect a sort of pre acquisition as we think about the business is being integrated thanks.
Sure Hey, Ryan I think are the most positive upside we're seeing is on the go to market opportunity that really Raj spoke about earlier, we're seeing very strong reception from our customers and prospective customers around the integration of the offerings and the opportunity we have to not only.
<unk> optimized but to drive more and better utilization of the services, particularly.
Mckesson example, buying expert medical opinion, along with total health and benefits is a great example, and we're seeing that across the business and I think just and on the ground. The way we're working together with the teams with accolade and second M. D has been really incredible likeminded people with a common mission to improve.
Health care.
Massively improve both carrier has been really the backbone of the early <unk>.
We've had there and we're also seeing a similar.
And with plush care and the early days here. So it's mostly about top line and the Tam expansion opportunities and.
It's been extremely positive so far.
Great. Thanks again.
Yes.
That's right.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to management for closing remarks.
Thank you operator, thank you all for being here, we really appreciate all your questions and we look forward to updating you next quarter.
This concludes goodbye. This concludes today's conference call. Thank you for participating you may now disconnect.
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