Q3 2022 Accolade Inc Earnings Call

January 10, 2022

Hello, Thank you for standing by and welcome to the accolade third quarter 2022 earnings results Conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session. Jack a question. During this session you will need to press star one on your telephone please be advised.

Today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Tom Friedman. Please go ahead.

Thanks, operator.

Welcome everyone to our fiscal third quarter earnings call with me on the call today are Chief Executive Officer, Rajiv <unk>, Our Chief Financial Officer, Steve Barnes Chocolate in India, Our Chief Medical Officer will join the question and answer portion of the call before turning the call over to Rajeev. Please note that we'll be discussing certain non-GAAP financial measures that 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.

The slides that accompany this conference call that are available on the webcast. The slides will be available for download Paul Wogan call.

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.

Really from those expressed or implied in 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 website with that I'd like to turn the call over to our CEO Rajeev sake.

Hello, everyone and happy New year, I hope, you're all able to enjoy time with family and friends during the holiday season.

As we enter the fourth quarter of fiscal 2022, we continue to make outstanding progress towards building, a great and enduring health care company in fiscal Q3, we outperformed our guidance across the board and are again, raising our forecast for the year.

Steve Our CFO will cover the specifics later in the call, including more detail on how to look at accolade now that we've diversified our offering portfolio expanded our go to market engine and become a more strategic enabler of our customers people objectives. When it comes to providing health and wellness benefits that drive employee satisfaction engagement and retention, but.

But I couldnt resist a little teaser to first hit some key points at.

At our core we're dedicated to consistently delivering on our commitments quarter after quarter.

Today, we're providing you with preliminary guidance for fiscal 2023, reaffirming our commitment to our long term growth rates and our path to profitability.

Our progress due to the hard work of our colleagues is nothing short of remarkable I'll outline that progress for you briefly now before turning the call over to Steve.

We entered the current fiscal year accolade was an advocacy company, serving about 100 customers, representing 2 million members with a $24 billion addressable market.

Today, we have more than 600 customers representing more than 10 million members.

And our market opportunity has grown tenex to more than 200 billion.

With our integrated offerings and expanded partner services built on top of the market, leading health care and engagement engine, we own the personalized health care category.

From a business perspective. This has resulted in far more diversified foundation at the time of our IPO. Our single largest customer represented 25% of our total revenues and our top four customers made up 60% of our revenues.

A day no single customer represents more than 10% of revenues.

Most importantly, thanks to our broad portfolio of advocacy expert medical opinion primary care and mental health services, we are far more strategic and valuable to the customers and members that we serve.

That's demonstrated in our performance.

So far this year more than 20, new enterprise customers bought accolade advocacy and accolade expert M D. Together.

More than 20 existing advocacy customers had purchased accolade expert M D and.

In less than three months after we launched accolade Karen accolade won our first tranche of customers have already gone live on the solution. Additionally.

Additionally, our momentum in new customer growth continues with leading organizations like Halliburton, Choctaw nation of Oklahoma and choice hotels, joining our customer base.

These data points reflect both the strength of our strategic relationship with our customers and their belief in the vision of personalized health care that we set forth to the market.

Already the combination of our services is driving higher utilization rates for expert medical opinion when delivered in tandem with advocacy.

We expect the same patterns to hold with our virtual primary care and mental health services, providing further proof points that services layered on top of our engagement platform will drive outsized engagement and performance.

Just as our offerings suite pricing model and customer base, our diversified and differentiated so too is our go to market strategy. We have a long track record of reaching new customers via direct sales channel that has been remarkably efficient and effective.

More recently, we've added health plan partners like Optum, Aetna Blue Cross Blue Shield of Michigan, Blue Shield of California, and Humana as referral and reseller partners.

Additionally.

New partnerships with leading companies like planned source represent our commitment to meeting customers, where and how they choose to buy.

On that foundation, we are well positioned for the future.

As I mentioned earlier looking at fiscal 2023 from a financial perspective, we're committed to delivering against our long standing goal of 25% topline growth into the foreseeable future.

And we will improve our adjusted EBITDA loss in the year ahead, both on a dollar and percentage of revenue basis, and as Steve will describe in more detail. We are projecting adjusted EBITDA breakeven in fiscal 2025 at approximately $600 million of revenue.

At accolade, we believe you can build a lasting healthcare company a growth engine and a disciplined business at the same time that how we're running our company.

Earlier this month, we shared our set of beliefs about how health care is supposed to work for people in this country.

Stealing the words of Simon Sinek its important for companies to adjust costs that brings its employees customers partners and shareholders together.

Or just cost is that we believe health care is a human right and that everyone regardless of their socioeconomic status should have access to the care that they need.

We believe in treating the whole person by building long term trusted relationships not just the symptom or the transaction.

We believe that mental health and physical health are completely intertwined to support the whole person.

And we know that it's time for our industry and start getting paid for outcomes not just for providing services.

You can find our credo and that we believe section on our website.

Run our business with FERC commitment to those beliefs every day.

If the past two years have taught us anything it's that we can only predict so much about the future whether it's COVID-19, our government and policy changes or the labor market.

Customers expect us to remain true to our mission and our beliefs and that's how we operated accolade.

Before I turn the call over to Steve One last point.

Care today represents 20% of our country's GDP.

It is massive and it needs to do better at serving people.

No single company will solve the problem, but collectively we can and we must strive to improve.

We're committed to partnering with others, who share our beliefs with those who embody this deep rooted sense of purpose for the people we serve.

Through empathy experience and most critically engagement and trust, we can light up those partner services on the basis of our open platform and the most advanced technology stack in the industry.

In the last year alone, we added sword, Berta carat fertility advancing health and employer direct health care to the industry's most comprehensive partner ecosystem.

Our progress in each of these areas new offerings more innovation more partners and doubling down on the importance of advocacy at the heart of connecting the health care ecosystem is why we continue to grow and drive and why all of US that alkylate are so excited about the future.

With that let me turn the call over to Steve Barnes, Our Chief Financial Officer, Steve.

Thanks, Raj first I'll recap the results for the third quarter of fiscal 2022.

Keep in mind that we close the second of the acquisition in Q1, and the <unk> acquisition in early Q2.

Where appropriate I'll provide color on year over year comparisons you can find additional pro forma detail in the 10-Q.

We generated $83 $5 million in revenue in the third fiscal quarter, representing 117% year over year growth on a GAAP basis over the prior year period.

This reflects a significant beat against the top end of our guidance range Youll.

Youll recall that after the second quarter, we indicated that we expected to recognize two and a half million dollars a performance guarantee revenue in Q3 instead of Q4.

As a result of continued strong execution against our performance metrics, we recognized several million dollars of PG revenues in Q3, rather than Q4 inclusive of the $2 $5 million in our previous guidance.

We also saw favorable member counts and PG performance compared to our original forecast.

On a pro forma basis, the combined business grew 44% year over year broken down as 45% growth for accolade advocacy.

8% growth for alkylate expert M D and 53% growth for direct to consumer a virtual primary care, where plus care.

<unk> continues to perform strongly and benefit from the tailwind of Covid pushing more people towards virtual primary care.

Our expert medical opinion business was relatively flat on a sequential basis as fewer medical procedures than expected are contributing to a reduction in second opinions.

I'll come back to this dynamic in my guidance for Q4 and fiscal 'twenty three.

Fiscal Q3, adjusted gross margin was 47% compared to 41, 8% in the prior year period, which reflects the positive revenue would be as well as investments in staffing our frontline care teams to support growth and integration.

While Q3 gross margin was favorably impacted by the revenue timing item as well.

The prior earnings calls, we expect adjusted gross margin to remain relatively flat on a full year fiscal 'twenty two basis compared to fiscal 2021.

Adjusted EBITDA in the third quarter of fiscal 'twenty, two with a loss of $11 9 million, which compares to $11 $4 million loss in the prior year third fiscal quarter.

This is significantly ahead of our guidance primarily due to the performance guarantee revenue timing item noted above.

As well as lower spending than planned in the quarter and some areas such as hiring and personnel costs.

Turning to the balance sheet cash and cash equivalents totaled $366 million at the end of the quarter.

Accounts receivable Dsos were in line with prior quarters at about 24 days revenue outstanding.

Finally, we had approximately $66 9 million shares of common stock outstanding as of November 32021.

Does not include any shares related to the second M D or plus their earn outs.

For your models there are up to approximately $2 2 million additional shares related to the second M. D earn out and up to one 4 million shares related to the plus their earn out to be issued in calendar 2022.

And now turning to guidance.

For the fiscal fourth quarter, ending February 28, 2022, we expect revenue in the range of $90 million to $93 million, representing a year over year growth rate of 138% and 13% on a pro forma basis to adjust for the acquisitions of second MDM plus here.

Adjusted EBITDA loss for the fiscal fourth quarter is expected to be in the range of $4 million to $8 million.

To provide some context on the year over year growth rates in the guidance keep in mind that we have recognized approximately $8 million of P. G revenue through the first three quarters that we initially forecasted to be recognized in the fourth quarter.

This $8 million is comprised of the $7 million in Q3 noted earlier and $1 million in Q1.

If you would add that back to Q4, the year over year growth rate in Q4 would be about 25% in Q3 would have been 32% growth instead of 44%.

As a reminder, we recognize revenues upon achievement of the underlying performance guarantee.

Pge's include a variety of items, such as member engagement rate member satisfaction clinical metrics and cost savings based metrics.

The mix and timing of Pg's vary, but to be clear achieving and recognizing P. G revenue in early quarters as positive.

As we establish a track record of consistently achieving rpgs and recognizing them more evenly throughout the year. It will have the impact of lessening our historical Q4 revenue bump.

Also those P. G revenues typically come in at a much higher positive impacted gross margin and adjusted EBITDA.

The net of all of this is that we consistently pointing you to the full year numbers, which are not subject to the quarterly movements of PG revenue recognition timing and margin within a given year.

Moving to guidance for the fiscal year ended February 28, 2022, we expect revenue in the range of $306 million to $309 million.

Representing 81% growth over the prior year at the midpoint and 30% on a pro forma basis to adjust for the acquisitions of spectrum MDM plush care.

Adjusted EBITDA loss for the year in the range of $48 million to $52 million, representing approximately negative 16% of revenues at the midpoint of guidance.

We also provide a preliminary view of fiscal 2023 revenue guidance today.

Based on our current estimates and assuming no significant change in the health care spend environment. We project revenue will grow approximately 25% over fiscal year 2022 to about $385 million and.

And expect adjusted EBITDA loss will improve to about 11% to 12% of revenues as we continue on our path to profitability after pausing for a year on that progress, while completing the acquisitions and making material progress on integration.

To help you build your models and understand the components of the revenue growth our guidance breaks down like this.

We expect the core <unk> business to grow approximately 25% in line with our previous statements.

Our virtual primary care business, which in fiscal 'twenty, three will be driven by our plus their direct to consumer business is experiencing strong growth and we expect it will grow about 30% next year.

And while we remain very confident in the expert medical opinion market opportunity and have driven significant customer additions in that space since the acquisition.

So we see second opinion bounds returned to historical norms, we forecast that that's accurate.

Expert MD revenue will grow approximately 20% next year.

Underlying our guidance of course is the ACD or annual contract value as of fiscal 2022 year end.

As you know ACB is not a final metric until the year is over but as promised we wanted to give you. Some color from the end of the selling season, particularly as it helps you build your models for fiscal 'twenty three.

As an important reference point when we went public about 18 months ago ATV represented the near totality of our book of business and as such was a good proxy for modeling our following year's revenue today.

Today ACD remains a very useful metric for modeling a large portion of our revenue.

But given the changes in the business since our IPO, we will continue to evolve our metrics to ensure it stays relevant as you build your models.

More specifically the ACB historically would not include Nemo case rate revenue nor would it include the cluster of consumer revenue, which is comprised of subscription fees as well as visit fees.

Given that we are evolving the business towards case rate revenues from P. EPS for expert medical opinion, as we leverage the strength of our engagement platform when.

When we report in April on the final ATB metric for the end of fiscal 'twenty. Two we expect to include our estimate of BMO case rate revenues as well as contracted enterprise virtual primary care revenues.

Importantly, our goal here is to help you understand the different inputs of our business to effectively model our growth.

First recall that ACB at the end of fiscal year 2021 was approximately $248 million adjusted to include second empty on a pro forma basis.

At that time, we said <unk> did not include the portion of <unk> revenue that was billed on a case rate basis.

You start with that base and then build.

Less with the vast majority of new business signed we are on track to sign between 50 and $50 million of new business from the current fiscal year.

Yearend ACB will include all P. M. P. P M revenue plus our estimate of BMO case rate revenue and enterprise primary care visit fees.

Then we add or subtract normal customer adjustments such as changes in head count of our termination.

And as we said before we model for approximately 95% gross dollar retention and we're on track put out this year.

Additionally, we have one unusual item impacting ACB and revenue next year, which is that we made the decision not to renew with legacy health plan customer relationship that had become particularly low margin and non strategic as our business evolves.

While that lowers fiscal 2023, and our revenue and <unk> by approximately $9 million. We believe it's a prudent decision to walk away from business that does not fit within our financial and strategic profile.

And that's a framework that will that will get us to a final ACB at February 28 2022.

In order to build to the fiscal 2023, 25% revenue growth projection you would start without a C. D, which includes the advocacy expert M D enterprise virtual primary care offering.

AD revenue for new business sold and launched within fiscal 2023.

Plus incremental partner revenue.

Adjust for timing of launches and add to that the fiscal 2023, plus care, where consumer virtual primary care revenue forecast.

The net of all of that brings you to the 25% revenue growth rate in our preliminary guidance.

Now before turning to your questions I'd like to highlight an important item, which is our path to breakeven, including a picture of the leverage in our pricing model as we add new solutions to the portfolio.

We've consistently stated that our goal is to make meaningful progress towards profitability each year on the strength of our revenue growth and attractive unit economics.

We also guided to a pause in that progress for the current fiscal year as we absorbed two significant acquisitions.

And as you can see in our guidance for next year, we expect to continue making meaningful progress on that path.

I'd like to go a little deeper to help you understand not just the timing, but also the underlying unit economics.

For those of you looking at the slides on our webcast you can see our historical March toward breakeven.

In fiscal 2018 accolade was a $77 million revenue business with adjusted gross margin of just over 30% and adjusted EBITDA loss of 56% of revenue.

Over the next few years, even while we invested heavily in technology sales and distribution I know that the cost of being a public company. Our gross margins improved materially in the adjusted EBITDA loss declined as a percentage of revenue from negative 56% to <unk> 41 to <unk> 25, and then negative.

18% in fiscal 'twenty one.

Before flattening out this year.

With our preliminary guidance for next year, you can see that adjusted EBITDA improved from negative 16%. This year to an 11% to 12% range in fiscal 'twenty three than cuts in half the following year with our breakeven target in fiscal year 2025.

And that improvement in fiscal 2023 would represent a reduction in the adjusted EBITDA loss on an absolute dollar basis as well.

From a size and scale perspective, 25% annual revenue growth over that same period leads to a $600 million revenue target at breakeven in fiscal year 2025.

It's also helpful to show you have the unit economics work for the legacy accolade business as well as the incremental margin contribution from our new solutions.

If you start with the legacy <unk> business you can see the unit economics in the charts that I just shared.

P. P M for a full suite was approximately $20 and the historical improvement in adjusted EBITDA and gross margin was largely driven by the incremental gross margin from existing customers as we increase engagement and build deeper relationships with our members.

The new solutions, we added this year, particularly expert medical opinion in primary care are generally priced on a per visit or a per case basis.

Those visits and consultations are delivered at a higher incremental gross margin then the advocacy revenue.

Which we expect to further expand as we leverage our Atlas advocacy engagement investment with cross sell customers provide an additional lift to the model.

On top of that as we gain traction with our accolade one solution. There's additional opportunity for increased margin contribution from gained share performance.

And lastly, we expect our partner revenue to grow nicely this year and into the future also at a higher margin than our advocacy business.

We are not changing our long term target model today, but if you think about the expected growth in contribution from knee solution. You can begin to see the layering effect of adding higher gross margin revenue in the years to come.

Advocacy will remain the largest revenue contributor this year and next and we expect higher margin case rate and visit fees to grow in fiscal 'twenty four and beyond.

And we expect our higher margin gain share revenue may contribute in fiscal 'twenty, four and beyond as we expand beyond their initial pilot customers.

As such we believe we are building a business foundation and portfolio to drive growth and margin improvement for years to come.

And with that we'll open the call to questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Please limit yourself to one question.

Our first question comes from Ryan Daniels with William Blair. You May proceed with your question.

Hey, guys congrats on the strong quarter. Thanks for taking the question.

Steve maybe one for you you highlighted just the traction you are seeing in organizations selecting multiple offerings.

And that laying the foundation for accolade, one an accolade care. So I'm, hoping you could dive a little bit more into the pipeline and outlook, there and maybe even tie into that some of the recent executive hires I think you added your first cut.

Customer success officer, and our Chief customer officer, So love to hear how that ties into the growth story as well. Thanks.

Yes.

Hey, Ross. Thanks for thanks for the question. This is Raj I know you you term that wanted to see but I'm going to jump in and except if you don't mind and then Steve feel free to jump in and add any color to it.

We're excited about the growth profile of the company and the.

The continued demand in.

Each of the market takes us and we're performing in it so you'll recall three or four years ago. The company made a choice to expand into the middle market, where we're seeing continued.

Continued growth both from a logo expansion perspective and from an ACD perspective, the enterprise segment same story and so youre exactly right.

We've actually invested in.

Customer <unk>.

These Stacey who we think is going to do amazing things in helping us scale the services delivered really outstanding.

Customer satisfaction levels over the last 10 years to the next level as we go to from a couple of hundred customers 600 to more than a out soon and then of course as well as chief marketing officer currently level.

Who joined the Centrum.

Rich history.

In the healthcare industry.

Helping us build out and grow our expansion plans across every one of those segments.

It really positive news in our mind Ryan is that the space itself is continuing to show growth and that customers are embracing this expanded value proposition of personalized healthcare.

<unk>.

It's yielding ACB growth that Steve just talked about and the growth of the teams that you mentioned in your question.

Thank you. Our next question comes from Glenn Chin to Jello with.

Jefferies. You May proceed with your question.

Oh, yeah. Thanks, Steve I, just wanted to follow up on some of the EBITDA comment. So I just wanted to make sure that I'm doing the math right. If I, if I kind of play your numbers through your guidance here for the fourth quarter. It looks like you're sort of modeling EBITDA for the full year to be a loss of somewhere in the high Forty's, maybe around $49 million and then if.

I use your guidance and the percentages, we provided for fiscal 'twenty three using the midpoint it looks like we are.

Youre expecting about 44 $45 million, an EBITDA loss, so a little bit better, but you know as you think about the path to profitability. It certainly looks better on a percentage basis than an absolute basis. So I'm just trying to make sure that I'm looking at all of those numbers correctly.

Sure. Thanks for the question Glen and I think it's fair to say Youre spot on for this year fiscal 'twenty. Two you can think of at the midpoint of that EBITDA.

The range for this year is $50 million on that three.

350 to 309 revenue number we gave and then for next year about 44, Thats a good number to be where it is.

It's early yet.

Far as the guide for next year preliminary guidance, but think of it in that mid <unk> range and the improvement in absolute dollars, but also on a percentage of revenue basis as we're growing the business top line.

95% year over year, we think is very healthy and then importantly, laying out that multi year period, all the way out to breakeven in fiscal 'twenty five as we make that steady.

Stepped down towards breakeven was very important to us in the longer term guide.

Thank you. Our next question comes from Craig heading back with Morgan Stanley. You May proceed with your question.

Rapid leagues, expanding and growing Tam and the opportunity set and just maybe weeding those two things together like the ability to kind of be more disciplined because there's a lot of growth opportunity in front of you and how Ya man, how you're managing the business in terms of growth first first margins as we go forward.

Yes, great question great. Thanks for the question. Thanks for your thanks for being here today.

Got it.

The transparency provided as it related to the customer that we decided to.

To move on from it was really built around this idea that we had started.

Being that customer call it five years ago.

Really Serbian exchange population on behalf of that customer and over time, we began to realize it was a non core platform not an area that we were going to were going to spend an extraordinary amount of time growing and it was operating it.

On our platform.

We didn't believe that was our core platform and so I.

I think.

Seated to move forward is really want to.

We're targeting all of our investment our core platform, we're targeting all of that investment around innovation, and we think appeals to employers and to the Tricare business that we're so excited about.

And then in that business, we can not only deliver outsized innovation incredible engagement and clinical outcomes, but we will also see the kind of margin expansion that Steve outlined over the course of the next several years, so youre exactly right.

Very correlated this is about the discipline of our investment discipline of our investors of our execution and discipline towards our asset profitability.

Okay.

Thank you. Our next question comes from Michael Cherny with Bank of America May proceed with your question.

Afternoon, guys. Congratulations on the nice results I wanted to ask one clarification question and one bigger picture question I'm going to squeeze them. Both in case I got cut off after just I want to make sure relative to the $9 million you mentioned that you walked away from assuming that.

Basically not in the baseline for next year versus this year. So you can assume the growth rate would have been closer to the high twenty's in the event that that's the case I just want it.

From that and then Raj I wanted to dive a little bit into some of the early feedback you're receiving from customers that chose to select some of your new platforms. Obviously, you know for anyone that went live on one one we're not can actually know how it's going but as you're going through that launch purion, especially implementing newer solutions new go to market platform.

<unk> what were some of the learnings you took out and what were some of the pieces that your customers really want to make sure you got to the finish line that you were able to deliver for them.

Thanks for the question Mike.

Would you be in here.

I'll take the second question first and let Steve answer your first question right after that.

Immediately upon bringing them new solutions to the marketplace with our customers. We subtract obviously with expert medical opinion, we are.

Mind that in the statistics laid out in our call.

What are your customers buy both advocacy and emo together, where I calculate expert and D. Together. We also saw another 2020 or so by emo on <unk> use of every one of those 10%.

We are hearing from customers on isolated care, they're not interested in distressed products.

Deliver different value proposition.

It is.

<unk> engagement.

<unk> value for everything that connects to it it's very clear that they expect the things that are coming from accolade should drive an outsized engagement level than what they would have seen from other from other vendors potentially and so that expectation is starting to manifest in actual reality in terms of.

<unk>, we're seeing from customers around engagement rates.

That's part one customers don't just want multiple solutions from the same vendor they want integrated solutions built off the same technology platform.

And with redefining with statistics and value.

0.2 of that story is.

That has to manifest in integrated care teams as well and so when we're talking about delivering value. We're talking about the capacity that seamlessly transfer from our frontline care teams to our primary care physicians into our expert medical opinion capabilities.

Without having to leave the interaction without having to leave the software interface and we think that's a really important part of what customers want.

Steve you want to take part two of that kind of part one of that question.

Sure absolutely so Mike the clarification, there on that $9 million Youre correct that that contract. We let that go at the end of December calendar year at 12, 31, So that's $9 million impact think of it as about a 3% headwind on growth rate in fiscal 'twenty three compared to fiscal 'twenty.

Two nine on that three of seven five midpoint.

Thank you. Our next question comes from Jay Lenders Singh with Credit Suisse. You May proceed with your question.

Thank you and congratulations on a good quarter.

Following up on fiscal 'twenty outlook.

Our outlook. Thanks for all the color there and a good clarification there from Michael on the second MB expectations now you're expecting 20% growth was 13% plus what the business has seen in the past maybe remind us again, how that business is split between like BMP them in case rate and what your underlying.

Assumptions are with respect to elect pillars as we have seen the trends now what are you expecting trends to stay the same level or to get worse and kind of related on the margin improvement you expect in fiscal 'twenty. Three is that all operational leverage are you expecting some improvement in these recent acquisitions. If I can just one part I can park.

Do they cover.

In fiscal 'twenty two.

Driving some upside to your fiscal 'twenty revenue would that have any impact on margins in fiscal 'twenty two.

Hey, Hi, Joe Steve.

Yeah, I'll grab that one and so you hit a few things there, let's start though with the trends as far as volume and you've heard US talk about 200 added customers on our 400 or so customers taken together post the acquisition. So we've had significant growth in customers. Many of those are.

Buying expert medical opinion, either on stand alone or together as a suite with advocacy that's very important to us we're hearing over and over again from the market that customers highly value it, particularly when it's tied to the accolade engagement engine. So we're very bullish on the category overall and the opportunity of that.

We've been together.

The volumes, yes, we're seeing procedures down for sure Youll see youll see a roughly flat quarter to quarter growth from from Q2 to Q3.

What youre seeing in the guide from US is an assumed assumption that those utilization rates stay about where they are for now until we have better visibility into the future. So certainly if those procedures pick up and theres more elective medical opinions there would be some upside there and then as far as the fiscal 'twenty three guide goes.

There is operating leverage on the Opex for sure, but we're also forecasting that gross margins will begin to expand again year over year. This year fiscal 'twenty two versus fiscal 'twenty. One we've been consistent in guiding to about flat gross margins, we expect to see gross margins tick up next.

Year in fiscal 'twenty, three and again in 'twenty four 'twenty five on that March to breakeven. So its a combination of both gross margin expansion with all the offerings taken together and operating leverage.

Thank you. Our next question comes from Jeff Garro with Piper Sandler You May proceed with your question.

Hi, Good afternoon, guys congrats on the quarter and thanks for taking the questions I'll ask a couple around performance guarantee trends. So the first one is whether the pull forward of performance guarantees so far in the fiscal year reduces potential volatility I think mostly to the upside for your fiscal fourth.

And then just more broadly is this customer interest in performance guarantee as a part of contracts increasing given your integrated offerings and how would you expect that to layer into the portfolio over time.

Thanks for the question, Jeff It's Steve.

Let me hit that well I'll start with the first part on the pull forward.

On the earlier recognition of PG Youre, absolutely right. It does reduce some volatility in the fourth quarter for us and made it a point in my prepared remarks to say this is a good thing when we give guidance. We are it's very important to us.

The investment community understands we're giving full year guidance and then as we achieve P. G that we achieve them throughout the year, we booked them as they're earned and Thats a good thing because it takes some volatility away.

From the fourth quarter.

So perhaps that takes away some upside and some downside from the fourth quarter in doing so yes.

We think a very positive trend and then to your point about customers over and again, it's very important that customers understand that there is an ROI associated with the work that we're doing and the value that we're providing and.

The fact that we have Sean <unk>, our chief Medical officer on the line Who's spending a lot of time with customers in the clinical capabilities that we've been adding let.

Let me kick it over to him for a second because he said some real recent interactions with customers on this front chunk Denis you want to take it from here.

Yeah sure absolutely and I think it's a great part of your question around the customer interest in <unk> and clinical <unk> in particular, and I think it's definitely a core part of our hypothesis going back to the whole idea of personalized health care being personal data driven and value based on what we're seeing in market is that customers are really interested in how.

We're measuring our outcomes in and Theres a lot of interest in those performance guarantees.

And it's something that we think is going to be really hard for.

For others to be able to replicate actually showing that we can deliver on those clinical outcomes is something that we've done in the past and I think that on the customer interest in those I think it's a really good sign that but the core thesis behind personalized healthcare is right.

Thank you. Our next question comes from David Larsen with <unk>. You May proceed with your question.

Hi, if a health plan were to come to you and say Hey, we want you to bear full risk for this cohort of lives for X dollars per member per month is that something you'd be able to do or is that a track that you might sort of beyond to to do longer term and then.

Just any thoughts around <unk>.

In person care with plush virtual is great, but I mean, a lot of times you need to draw blood you have to have an in person diagnostic piece to virtual care.

How are you addressing that thanks very much.

Thanks for the question I appreciate you being here I'm going to I'm going to keep the second part of that question, Sean <unk>, Our Chief Medical officer to talk a little bit about how we believe virtual care to coordinate and collaborate with brick and mortar Paris one.

The way to think about that in terms of the way, we deliver services to our customers on the first topic.

We are working most.

Prominently with health plans today is approaching their commercial populations with our service either in tandem with other components of their clinical services or directly with our service in its entirety being a carve out for some of their member services and clinical services functions, we do that in both a reseller.

Our referral model.

And it's very complementary to our direct sales model.

Question Youre asking around would we be willing to take full financial risks in a carve out typically their population.

It's not something that you should model into our business into what we're looking at for next year or even really hot.

For this year and next year, David It's certainly something that we'll evaluate down the road as we continue to prove out our capacity to drive cost savings.

Improved clinical outcomes for our customers.

Certainly have a rich track record of doing so but it is not something I've modeled into our plan. Our company you want to you to answer your question about about brick and mortar.

Yeah, absolutely and it's it's a it's a great question I think you know what are the things that we really liked about the plus their platform is that it's really purpose built for primary care right. So that means that there we're able to provide comprehensive primary care. So to your point about lab draws partnering with national laboratories for that same thing goes with partnering with pharma.

He is around the country around medications delivering vaccines at the point of care within pharmacies, and so I think really that point that Raj alluded to around collaboration Thats really the key is someone who still practices primary care in brick and mortar contact.

There is a significant portion of my patients who need to see a specialist and he said it'll elsewhere. Similarly, if youre, providing primary care virtually youre absolutely right that it's gonna be a portion of patients.

That is 10% or so who are going to need to have something done in a brick and mortar context I think the question Keith either way is really how are you, enabling that collaboration and I think for us that's where our data and technology platform comes from comes in I think if you think about how we built an ecosystem and all the different partnerships that we talked about earlier on.

The call.

Same sort of concept that we believe is going to be really the key and that's what patients are looking for ultimately they're looking for.

For us to deliver a service to them and for us to really put those pieces together.

An experience that works.

Thank you. Our next question comes from Ryan Macdonald with Needham and company. You May proceed with your question.

Hi, Thanks for taking my question and congrats on a great quarter I appreciate the additional color on the on the long term targets here as you think about that progression towards a breakeven adjusted EBITDA in sort of the revenue thresholds that you need to hit as you look out. The next couple of years, how visible or how much visibility do you think you have on to some of the areas.

Virtual primary care or expert M D and sort of the consistency of the linearity of that progression. When you think about the organic move towards that breakeven level.

Okay. Thanks for the question I appreciate it Steve.

One of the things, we're seeing that we're really bullish about as we sit here in the fourth quarter is the power of the platform. The diversification of it. The fact that we're seeing strong contributions across the board from in terms of new customer growth and expert medical opinion to complement advocacy.

Plus carrier of the direct to consumer virtual primary primary care business growing.

Very nicely on its own while.

Taking care of some of the emo volumes that you see that being a bit soft as we head into next year. We have a strong base of contracted revenue that gives us confidence in that guide for the think of it as the advocacy and expert medical opinion, the b to b or enterprise business and the plus care business performing very.

Strongly on its own.

Really in all aspects in terms of new subscriber acquisitions visit rates customer satisfaction doctor satisfaction on the platform all of that gives us confidence that the foundation is strong and we get that gives us good visibility towards obviously next year and then you think about the fact that most of our.

Contract tend to be long term contracts, so three year business to business contracts. So we've got good visibility there we've got strong retention high net promoter scores across our member base. So all of those things combined with a strong ROI for our customers is really the backbone that we build our R. R.

On and our revenue models on them. So those all combined to give us the visibility.

Thank you. Our next question comes from Richard close with Canaccord Genuity. You May proceed with your question.

Yes, given the second opinion or second M. D trends do you still expect the contingency consideration thresholds to be achieved.

What is the timing again I know you said calendar 'twenty two for.

The shares to come in but can you give us sort of the quarterly.

Timing I know you since your February year end I'm not sure if it comes in in the fourth quarter.

Sure Hi, Richard I. Appreciate the question, yes, so a couple of things on the so each of the second MDM flushed care acquisitions had a contingent consideration or earn out associated with them plus care calculation will be based on a calendar year 2021 basis. So we.

To wrap up by the end of the fiscal year here in fiscal 'twenty, two and for a second M D.

Earn out there as well, which will be based in large part on a January 2022 or this months.

Right revenue. So we expect those to all be wrapped up if not completely by the end of the fiscal year certainly by.

Fiscal Q1 of fiscal 2023.

And Youll see a calculation in the Q in large part those we expect to be earned.

Fully but but we're doing those final calculations over the next month or so and I'll have more to report on that in the next quarterly call.

Thank you and as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Stephanie Davis with SBB Leerink you may have.

Proceed with your question.

Hey, guys, Congrats Macquarie and thanks for taking my question.

A two part question on the out year margin guidance or specific amount more generalized.

On the specific side should we think about the EBITDA margin came from a step up in 'twenty.

The contract flying down to become profitable and more than your past 'twenty three to 'twenty five.

Sure.

And then just more generally what are the toggles that could get us above or below it preliminary 23 and 25.

Sure.

Stephanie Thank you for the questions Steve would you mind repeating the first part about the specific point about EBITDA that broke up just a little bit and I'm not sure I heard it clearly.

No I'm, just saying there.

20 can they stay there and does that benefit from a step up in margins given the unprofitable contracts wind down.

Because that isn't my running a path to get to 25.

I understand now.

On a marginal basis that $9 million or so are our point there was that yes. It was essentially a lower gross margin a bit of business. So there is some uplift there I think overall, it's fairly minor.

The underlying key point for US is that gross margin expansion will be a contributor there.

We expect something in the mid 40%, 45% range for this current year fiscal.

'twenty, two and expanding that up that we expect that to go up into the high $40 towards 50% by that fiscal 'twenty five breakeven date on a somewhat linear path to give you. Some more color there and then the toggle up and down against that.

Certainly we'll have to do with the success level that we have with driving better engagement and more engagement of these case rate revenues and expert medical opinion business and on visits on the virtual primary care and mental health side.

We bring together all of the offerings and the offerings that we're calling accolade care and accolade one and then finally in the out year fiscal 'twenty five and beyond we've spoken about this opportunity for gain share revenues and accolade. One we have not made any grand assumptions in our target models.

Around that we think it's important that we learn about how that goes but there certainly would be upside there.

If we were to perform well against those gain share opportunities.

Q3 2022 Accolade Inc Earnings Call

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