Accolade, Inc. (NASDAQ:ACCD) Q1 2024 Earnings Call Transcript

Accolade, Inc. (NASDAQ:ACCD) Q1 2024 Earnings Call Transcript June 29, 2023

Accolade, Inc. beats earnings expectations. Reported EPS is $-0.52, expectations were $-0.62.

Operator: Good day, and thank you for standing by, and welcome to Accolade First Quarter ’24 Earnings Results Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to introduce your host for today’s call, Todd Friedman, Senior Vice President of Investor Relations. You may begin.

Todd Friedman: Thanks, operator. Welcome everyone to our fiscal first quarter earnings call. With me on the call today are our Chief Executive Officer, Rajeev Singh; and our Chief Financial Officer, Steve Barnes. Shantanu Nundy, our Chief Health Officer, will join for the question-and-answer portion of the call later. Before turning the call over to Rajeev, please note that we will be discussing certain non-GAAP financial measures that we believe are important when evaluating Accolade’s performance. Details 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 that 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 1995.

Such forward-looking statements are subject to risks, uncertainties and other factors that could cause the actual results for Accolade to differ materially from those expressed or implied 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 Singh.

Rajeev Singh: Thank you, Todd, and thank you, everyone, for joining us today. We entered fiscal Q2 with optimism regarding our company, our category and our opportunity to build a nationwide customer-obsessed healthcare delivery system of the foundation of advocacy-led primary care. Let’s get into the reasons for our excitement. First, revenue and adjusted EBITDA were both ahead of our guidance for fiscal Q1. Revenue in the quarter was $93.2 million with an adjusted EBITDA loss of $12.6 million, both ahead of our previous guidance and leaving Accolade in solid financial position to start the year. Revenue highlights in the quarter were marked by continued strength in our virtual primary care and mental health offerings, both consumer and enterprise.

Strong growth in our expert medical opinion segment and some early recognition of performance-based revenues. We are increasing guidance for both revenue and adjusted EBITDA this quarter. Both our growth engine and our path to profitability are firing on all cylinders. Steve will give you all the details in his prepared remarks shortly. Second, the selling season is off to a strong start. Fiscal Q1 is really the first quarter our buyers put pen to paper on contracts, and we saw large companies and foodservices and retail choose Accolade. Fiscal Q2 is also a major quarter for signing new business, and the pipeline continues to look strong. Notably, more of the deals in the pipeline include multiple offerings and one or more trusted partner solutions.

We view this as powerful validation of our overall vision as well as the importance of embracing the ecosystem. This is reflective of continued interest in our category and our ability to win more than our fair share of the market with our differentiated personalized healthcare suite. From our foundation of advocacy, we’re making advocacy-led primary care a critical factor for companies evaluating in our category. Third, calling out two other drivers of growth for our business. As I mentioned earlier, both our expert medical opinion business, Accolade Expert MD, and our virtual primary care and mental health business, Accolade Care and PlushCare, are demonstrating strength. Today, we’ll focus on the virtual primary care business. On the enterprise side of the business, we fully deployed all of our new business sales from last fiscal year on January 1, 2023 and those customers are ramping up adoption of primary care and mental health services according to our expectations.

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Given that it’s our first year of deployments, achieving our usage expectations in the first quarter is notable. On the consumer side of the business, we continued to see strong demand for the high-quality longitudinal care delivered by our physicians and therapists and growth rates remained strong and steady. Since I’m sure, we’ll get a question about the impact of GLP-1 drugs, let me make a few comments here. Accolade’s approach is different than many other companies in this space. That said, we did see a benefit from interest in these treatment options, and our primary care business is benefiting from the demand associated with GLP-1 weight loss drugs. I call this out for two reasons, to bring your attention to how Accolade differs from other companies who have a role or a part to play in this healthcare journey.

While it is a fact that GLP-1 drugs are driving interest and virtual primary care. This is in many ways no different than when COVID drove demand for virtual primary care or during flu seasons. What is important is how we apply the same clinical focus and rigor, balanced customer acquisition and physician resources and maintain our obsession with the customer experience that has resulted in NPS scores over 90 for our virtual primary care services. Our care delivery teams led by Dr. Shantanu Nundy and Dr. James Wantuck are ensuring that we apply the proper clinical rigor in prescribing these drugs only to patients who meet the defined criteria and for prescription. We don’t earn money for prescribing medications. So there are no incentives driving behavior to the contrary.

Additionally, because of the nature of our service, we have the ability to help the patient with other needs such as behavioral health and ultimately lifestyle change that might be required when no longer taking the drug. Thus, much like patients who engage with us during the COVID lockdown, we expect to retain many of these customers on our platform long-term. Final point on this topic, the robust nature of our suite of offerings here make us unique in the market. For example, while not everyone qualifies for these medications, partners like Virta may be a strong alternative for our customers and members seeking to address their needs. Moving on, fourth, our government business continues to grow on the strength of our Autism Care Demonstration and other opportunities we are pursuing.

As we have said previously, the T5 award remains in a protest phase with the decision on Health Net’s protest now due in September. The official launch date has been pushed to August 2024, but that still remains subject to the protest timing. We continue to work with our T5 partners and look forward to planning our rollout and updating you on timing once that protest is complete. Fifth, our trusted partner ecosystem, a vital element of the value proposition for our customers continues to grow. Our customers benefit buyers are overwhelmed by the number of solutions available to them in the market. Our trusted partner ecosystem solves that problem by vetting critical partners in core categories. Last quarter, we added Equip, a leader in delivering eating disorder treatments.

We’ll continue to add new partners in a highly curated way and leverage our technology and data platforms to ensure strong adoption and efficacy for those programs. Finally, in terms of quarterly highlights, we made tremendous progress on our One Accolade initiative. This is already having the effect of streamlining decision-making in Accolade and improving our operating structure as we scale to serve hundreds more customers and millions more members. Now, wrapping up before I turn the call over to Steve, let’s briefly take a giant step backward and look at our opportunity. Our mission is rooted in the idea that every person should have the opportunity to live their healthiest life and that this opportunity should not be hindered by an overly complex and costly healthcare system that intimidates people instead of welcoming them.

We are demonstrating through outcomes, engagement, and measurable ROI that an advocacy-led population health strategy, one we call personalized healthcare, is the key to transforming the U.S. healthcare system for our customers. To address that challenge, we’re aspiring to build the first customer-obsessed nationwide delivery system in the United States. That is no small task, but the opportunity for the company that succeeds there is enormous. The heart of that business is an advocacy-led primary care practice that once again puts primary care in the center of delivering high quality care. Over the last 50 years, for a variety of reasons, primary care spend as a percentage of total healthcare spend and utilization has gone down, while specialty care and pharmacy costs have continued to skyrocket.

Accolade’s strategy of virtual primary care and mental health, built off of a foundation of simplicity, service and data, delivered by our advocacy service, is a scalable means of reversing that trend. And our clients and prospects are agreeing and voting with their dollars. The market opportunity for doing this successfully is enormous. Our ability to influence many different parts of the healthcare journey has many significant vectors. Advocacy by itself is a $25 billion market. Expert medical opinion is similarly sized. Primary care is a $200 billion-plus market and our immediately addressable piece is north of $100 billion. Mental health is a large and growing market. The federal government represents a huge opportunity. And the capacity to enable dozens of ecosystem partners is also extraordinary.

Today, fewer than 1,000 companies have adopted true advocacy-led benefits programs. There are over 35,000 companies with more than 500 employees who would consider our target market. Put it all together and we see a runway for years to come with the real beneficiary being the healthcare consumer. We encourage all of you to review our proxy statement filed this week, which goes into more detail on our strategy and our vision. Now, I’m going to turn the call over to Steve to review our financials. Steve?

Steve Barnes: Thanks, Raj. First, I’ll recap the results for the first fiscal quarter and then provide details on the rest of fiscal 2024. We generated $93.2 million in revenue in the first quarter of fiscal ’24, representing 9% growth year-over-year or 19% pro forma growth, excluding the impact of a large customer termination in fiscal ’23. Revenue highlights in the first quarter included strong growth in our primary care and expert medical opinion offerings, each of which grew in the range of 30% on a year-over-year basis. In Q1, we also recognized approximately $1 million in performance guarantee-related revenue earlier than expected, as we had initially forecasted this PG to be earned in fiscal Q4. As we’ve noted previously and highlighted in our Capital Markets Day presentation on May 8, at the start of a fiscal year, we generally forecast that savings-related PGs will be recognized in our fiscal Q4.

When we earned those PGs earlier, we call them out to the extent they are notable. Fiscal Q1 adjusted gross margin was 43.5% compared to 45.6% in the prior year period. The primary factor impacting the year-over-year comparison was high gross margin performance guarantee revenue, recognized in Q1 of last year. Net of that PG timing impact, technology-driven efficiencies, as well as prudent spend management contributed to gross margin performance. Adjusted EBITDA in the first quarter of fiscal 2024 was a loss of $12.6 million. The positive performance versus guidance reflects the revenue overperformance, as well as a keen focus on spend management as we continue on our path to profitability. Note that fiscal Q1 reflects some duplicative costs as we transition and consolidate roles in certain of our office locations.

This dynamic will continue into fiscal second quarter, with savings from the cost actions we announced on February 28 being fully realized in the second half of the fiscal year. Turning to the balance sheet, cash and cash equivalents totaled $303 million at the end of the first fiscal quarter. As a reminder, our convertible notes are not due for about three years. So with $303 million cash on hand, we have more than adequate liquidity to achieve our financial plans without going back to the capital markets, placing us in a strong position to execute against our objectives. Finally, we currently have approximately 75.6 million shares of common stock outstanding. Now, turning to guidance. We’re updating our guidance today for fiscal year 2024.

Given the strong performance in fiscal Q1 and our optimistic outlook on growth, as well as our continued drive towards profitability, we are raising fiscal 2024 revenue guidance to a range of $410 million to $414 million, representing year-over-year growth of approximately 21% at the midpoint, excluding the customer termination noted earlier. We are also raising our full year outlook on our bottom line, updating our adjusted EBITDA loss for fiscal ’24 to a range of $6 million to $12 million. And with respect to the fiscal second quarter, we are now guiding to revenue in the range of $93 million to $95 million and adjusted EBITDA loss in the range of $11 million to $14 million. This adjusted EBITDA guide puts you at roughly negative $25 million for the first half of the year, which, when combined with our annual guidance, shows that we expect to be significantly positive on an adjusted EBITDA basis for the second half of the year as our cost initiatives become fully realized and we turn the corner towards full year profitability on an adjusted EBITDA basis in fiscal ’25.

And with that, we’ll open the call to questions.

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Q&A Session

Operator: [Operator Instructions] And our next question – our first question comes from Ryan Daniels from Blair. Your line is now open.

Ryan Daniels: Yes, good evening. Thanks for taking the question. Maybe a big picture one for you. We’re seeing a lot of recent data that indicates that 2024 could be one of the larger healthcare cost trend increases for employers in about a decade. So, maybe a two-part here. Number one, do your early channel conversations lead you to believe this is being widely recognized in the market? And then number two, if so, is that really helping your advocacy-led PCP initiative as kind of a means to battle that trend at scale? Thanks.

Rajeev Singh: Hi, Ryan, thanks for the question and thanks for being here. I’ll address the question and see if you’ve got anything you want to jump in on Q2. First part of the question, are we looking at a year ahead where a medical trend line is going to be significantly higher or materially higher than it has been in years past? I think that’s very consistent with the feedback we’re hearing, both from our customers, from the consultant community, and from the indexes, or the early view on the indexes for the year. And I think, the corollary to that, Ryan, is very true. Now, when companies are looking at increased cost, when companies are looking at significant changes in the landscape with things like GLP-1 or other material waves that are hitting the healthcare ecosystem in 2023 and 2024, they’re looking for broad-based solutions that solve the problem at scale across the entirety of their population.

And that’s where we think we really differentiate ourselves. Primary care is a part of the story, but primary care builds off of an advocacy platform where you can surround primary care with data, service and simplicity. We think it’s really differentiated, and that’s no doubt playing a role in the growth of our pipeline on a quarter-for-quarter basis.

Operator: And thank you. And one moment for our next question. And our next question comes from Craig Hettenbach from Morgan Stanley. Your line is now open.

Craig Hettenbach: Yes, thank you. Raj, you spoke to some of the strength and expert medical opinion, and it does look like maybe there’s some pent-up demand out there. Can you maybe just give a little bit more color in terms of some of the patterns that you’re seeing and what that means for your outlook here?

Rajeev Singh: Yes, Craig, first of all, thanks for the question. I’m glad you’re here. Two things that drive expert medical opinion revenues and growth. The first is new logo acquisition. Are we growing by acquiring new customers? And we do that both with our direct sales channel and with our outside partner channel. The answer to that question is yes. We’re continuing to see strong growth there. The demand for a service like that one is so rationally aligned with the customer need continues to be strong. The second part of that story is utilization, and we’re continuing to see utilization at levels that we’ve previously seen, and both of those things are driving the growth rate of the expert medical opinion business.

Operator: And thank you. And one moment for our next question. And our next question comes from Jeff Garrow from Stephens, Inc. Your line is now open.

Jeff Garrow: Yes. Good afternoon, guys, and thanks for taking the question. So, it sounds like I’m hearing an increased emphasis on virtual primary care as a differentiator. So, I was hoping you could comment a little bit more on that and also the mention of an increase in interest in more than one product at a time. So, relatedly there, curious to hear on any particular themes of combinations of products that prospects are interested in.