Accolade, Inc. (NASDAQ:ACCD) Q2 2024 Earnings Call Transcript

Accolade, Inc. (NASDAQ:ACCD) Q2 2024 Earnings Call Transcript October 4, 2023

Accolade, Inc. beats earnings expectations. Reported EPS is $-0.43, expectations were $-0.56.

Operator: Good day, and thank you for standing by, and welcome to Accolade Second Quarter 2024 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instruction] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Todd Friedman, Senior Vice President of Investor Relations. Please go ahead.

Todd Friedman: Thanks, operator. Welcome, everyone, to our fiscal second quarter earnings call. With me in our Houston office today are our Chief Executive Officer, Rajeev Singh; and our Chief Financial Officer, Steve Barnes. Dr. 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.

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

Rajeev Singh: Thank you, Todd. And thank you, everyone, for joining us today. Having now completed the first half of our fiscal year, there are four clear takeaways we’d like our shareholders to take from this call. First, we came in ahead of guidance and consensus in Q2 on both revenue and adjusted EBITDA. Second, with each passing quarter, we’re closer to crossing the threshold to becoming a profitable, scalable business that will improve people’s lives by changing the way healthcare is experienced. Third, the demand environment for our solutions remains strong. And fourth, we’re presenting the market with a unique and differentiated perspective grounded in our routes in advocacy and powered by care delivery that our competition does not offer.

That differentiation is bearing us fruit today and will continue into the future. I’ll give you more color on those bullets in a moment. But first, let’s head to second quarter highlights. First, revenue and adjusted EBITDA were both ahead of our guidance for Q2. Revenue in the quarter was $96.9 million with an adjusted EBITDA loss of $8.8 million, both ahead of our previous guidance. Revenue highlights in the quarter were marked by continued strength in our virtual primary care and mental health offerings and some early recognition of performance-based revenues. Steve will give you all the details in his prepared remarks shortly. Over the past couple of months, there have been a number of consistent questions and themes in our investor meetings.

I’ll take the time today to hit on those topics and provide some current color. The first question we usually hear is about the selling season. The demand environment remains strong and the selling season continues at a solid pace. I’ll remind investors here that with the growth of our middle market visits and customer selling motion, selling season is a year-long process at Accolade now. We’ve seen strength across verticals and customer size. As we’ve said before, 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.

The customer addition continue in both our traditional direct channel, as well as our rapidly growing health plan business. On the direct side, advocacy and bundled deals have included brand name manufacturers, retail, automotive, CPG, medical, real estate, public sector, financial services, and many others. And our health plan channel has delivered both quantity and quality, including some notable competitive takeaways. Through a combination of our direct sales force, expansions of existing relationships, and new logos through our health plan partners, Accolade Expert MD has added fantastic customers including Nissan North America, Tyson Foods, Phillips, TIAA, Spirit Airlines, Mutual of Omaha and Clorox this quarter. We also signed another major health plan partner to resell our advocacy and care solutions.

In the quarters ahead, we’ll give you more visibility into this partnership and how we see the target addressable market within our health plan relationships continuing to grow. We view these partnerships has incredible opportunities to drive sustainable growth for years to come. Next, let’s talk about the competitive landscape and do it on a couple of vectors. First, in a traditional employer sales driven by ex-installment RFP in the strategic and enterprise account space, our competitors remain the usual suspects we’ve talked about in the past. Our win rate remains strong as evidenced by our growth in bookings over the last several years. Second, in pursuit of health plan relationships, our breadth of product offerings, our technology stack, and our open platform, oftentimes have us competing with low-engagement tech-only platforms instead of advocacy competitors, and our win rate there is very high.

Why are our win rates strong? Because we are deeply differentiated from the rest of the market. Our customers know that one of the primary underlying causes of the dysfunction in the healthcare system is the complete fragmentation of the patient experience from understanding their benefits to how they’re passed through from the care journey, from specialist to specialist, with no coordination or empathy. A fundamental principle of Accolade’s strategy is to embed the physician in the entire care journey and to do so with advocacy at the core. Accolade connects physicians longitudinally with members through our advocacy and healthcare services. Accolade’s treating physicians are uniquely positioned to connect brick and mortar physicians with members’ benefit and pharmacy coverage through claims and benefits specialists.

We can refer to and provide collaborative care with specialists, therapists, and point solutions for specific medical conditions that are covered under these members’ employer health plan. This is a unique role that only Accolade plays with our customers, by providing the benefit advocacy and navigation services their members need to fully leverage their healthcare options, as well as operating a large and growing care delivery organization. We can fully engage the population, identify and reach high-risk members, and guide them down care pathways for major costs and misery drivers like cancer, MSK, diabetes, and more in a measurable, scalable, and deeply differentiated way. This is the next generation of advocacy and Accolade is leading the way.

Recently, we’ve also fielded a number of questions about GLP-1 drugs and their impacts on our business. On this topic, the healthcare industry, employers, and consumers continue to learn from their experience with treatment regimens, usage patterns, and drug availability. Drug availability has clearly driven some fluctuation in usage on a month-over-month basis and we expect that volatility both upward and downward, to continue in the quarters ahead. That said, demand continues to be strong. And we’ve also seen the growing attractiveness of non-pharmaceutical alternatives like Verta, a company in our trusted partner ecosystem that we profiled in our Capital Markets Day, and specializes in diabetes reversal. We’re also beginning to see new approaches to managing the cost and prescription of these drugs.

The University of Texas system decided to stop covering weight loss drugs after seeing its costs for the drug increase from $1.5 million monthly to more than $5 million monthly over 18 months. And BCBS of Michigan has changed its policy so that patients will be required to be on a lifestyle modification program for at least six months before granting approval for weight loss drug therapy. What all of these data points reflect is the clear importance of engaging physicians in the weight loss treatment and a strong advocacy program to help ensure proper usage and program adherence. Finally, regarding the DHA T-5 agreement, we continue to await the final resolution of Health Net’s protest, which we expect to hear over the coming months and we’ll have more to report after that process resolves.

With that, I’m going to turn the call over to Steve to review the financials. Steve?

Steve Barnes: Thanks, Raj. First, I’ll recap the results for the fiscal second quarter and then provide details on the rest of fiscal 2024. As Raj noted earlier, we generated $96.9 million in revenue in the second quarter of fiscal 2024, representing 11% growth year-over-year, or 19% pro forma growth, excluding the impact of a large customer termination in fiscal ‘23. Revenue highlights in the second quarter included strong contributions across our offerings, reflecting the strength of a diversified personalized healthcare platform with multiple revenue streams. Notably, GLP-1 demand remained strong in the quarter, however, not at the surge level we saw in Q1, which contributed to a slight sequential decline in utilization-based revenues from fiscal Q1 to Q2.

And in fiscal Q2, we also recognized approximately $2 million in performance guarantee-related revenue earlier-than-expected. We had initially forecasted these particular PGs to be earned in the amount of about $1 million in each of fiscal Q3 and Q4. As we’ve discussed previously and highlighted in our Capital Markets Day presentation on May 8, at the start of the fiscal year, we generally forecast that savings-related PGs will be recognized in our fiscal Q4. And when we earned those PGs earlier, we called them out to the extent they are notable. As a reminder, we had a similar pull-forward dynamic of about $1.5 million in last year’s fiscal Q2. So, adjusting for both of those, as well as the customer termination, yield pro forma revenue growth of that same 19% noted earlier.

Fiscal Q2 adjusted gross margin was 44.2% compared to 44.7% in the prior year period. The year-over-year change was driven by investments in our frontline care teams, including investments to launch our enterprise virtual primary care capability. There were also some duplicative staffing costs in Q2 associated with the workforce realignment actions we took at the end of fiscal 2023, as we transitioned some roles to new geographic locations. And as we discussed on Capital Markets Day, as well as our prior earnings call, we expect to see the benefits of the workforce realignment materialize in our P&L beginning in the second half of fiscal 2024. Adjusted EBITDA in the second quarter of fiscal 2024 was a loss of $8.8 million. The positive performance versus our guidance reflects the revenue overperformance as well as a keen focus on spend management as we continue on our path to profitability.

And turning to the balance sheet, cash and cash equivalents totaled $292 million at the end of the second fiscal quarter. And as a reminder, our convertible notes are not due for about 2.5 years. Finally, we currently have approximately 76.2 million shares of common stock outstanding. Now, turning to guidance. We remain optimistic about our outlook on growth, as well as our continued drive towards profitability. And with that, we are maintaining our full fiscal year 2024 revenue guidance in a range of $410 million to $414 million, representing pro forma year-over-year growth of approximately 21% at the mid-point. We are also maintaining our full year outlook on the bottom-line for an adjusted EBITDA loss for fiscal ’24 in a range of $6 million to $12 million.

With respect to the fiscal third quarter, keep in mind my earlier comment that we recognized about $2 million of PG revenue in fiscal Q2, that shifted about $1 million revenue each from fiscal Q3 and Q4. And with that, we’re providing fiscal Q3 guidance today of revenue in the range of $95 million to $97 million, and adjusted EBITDA loss in the range of $5 million to $8 million. Tying this adjusted EBITDA guidance to our full year target, we are forecasting positive adjusted EBITDA in the fourth fiscal quarter between $17 million and $20 million, when we earn the bulk of our PG revenues in that fourth quarter, and realize the impact of new customer launches on January 1st, as we outlined in depth on Capital Markets Day. This projection for fiscal Q4, combined with our fiscal year-to-date performance on our bottom-line, give us visibility and confidence in our projections for 2% to 4% adjusted EBITDA positive in fiscal year 2025 and growing profitably thereafter.

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

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Q&A Session

Operator: [Operator Instruction] One moment for our first question. And our first question will come from the line of Jeff Garrow from Stephens. Your line is open. Jeff Garrow, your line is open. One moment for our next question. Our next question will come from the line of Craig Hettenbach from Morgan Stanley. Your line is open.

Craig Hettenbach: Yes. Thank you. Raj, you mentioned a few competitive wins. Can you just touch on kind of what’s differentiating relative to competitors in the marketplace? And then also any additional color on the multiple offerings? What else you see getting pulled through when customers choose to have more than one offering from you?

Rajeev Singh: Thanks, Craig. I think the core of our differentiation that we’re seeing manifest in many of our platform-style deals where people are buying our advocacy service plus other services is the differentiation associated with having physicians embedded in the care teams, number one. Number two, the capacity to engage with brick and mortar care teams from those physician interactions to drive longitudinal care and improve the fragmentation or actually alleviate the issues, especially with fragmentation in the healthcare system. Our value proposition is built off of our incredible capabilities from an advocacy perspective that we’ve built over the years, now adding the incremental services and the incremental capabilities associated with physicians, behavioral health specialists, and specialists associated with our expert medical opinion service.

As it relates to the capabilities or the product offering, we’re seeing strength in advocacy in terms of new bookings. We’re seeing strength in advocacy’s expert medical opinion and customers taking advantage of our Accolade Care service. And so, incrementally we mentioned in the script or in the prepared remarks earlier, that an increasing number of customers are taking advantage of that trusted partner ecosystem as well.

Operator: Thank you. One moment for our next question. And our next question will come from the line of Jessica Tassan from Piper Sandler. Your line is open.

Jessica Tassan: Hi, guys. Thank you for the question and congrats on the strong quarter. I was hoping if you could maybe clarify, are you still expecting to see core navigation x-comcast returned to about 20% growth in FY ’24? And maybe just, how much visibility do you have into that kind of 4Q ramp at this point? And any update on the annual growth rates for each of the businesses would be really helpful, if they are changed relative to prior expectations? Thanks so much.

Steve Barnes: Hi, Jess, this is Steve. So, first of all, with respect to fiscal 2024, yes, we are still expecting that the growth rate overall to be in that range of 20%, 21% at the mid-point for the year, and lining up around the offerings where advocacy would be in the neighborhood of 20% growth rate and EMO or the Expert Medical Opinion offering in the range of 20% as well and the virtual primary care business growing a bit faster than that. We’ve got good visibility to that number. As Raj mentioned in his prepared remarks, the selling season has been — the demand environment is strong, selling season we’ve had several good wins. Selling season continues right through here, but we’ve got good visibility to that for the end of this fiscal year and then visibility towards our 20% long-term growth rate that we’ve spoken about for next year in particular.

Operator: One moment for our next question. And our next question will come from the line of Jailendra Singh from Truist Securities. Your line is open.

Jailendra Singh: Thank you, and congratulations on a strong quarter. I just want to go back to the selling season commentary. We have heard this year that there has been some delay in employer decision-making in terms of deciding on benefits for next year. Just curious if you have seen anything on that line among your client base or just the market in general? And related to that, clearly addressing the GLP-1 medications demand is on top of mind for most employers, so, are you seeing that outsized piece of wallet or mindshare impacting the discussion on other areas in any way? Clearly, new client wins for you guys don’t seem to reflect any impact, but just curious, your thoughts on both the items.

Rajeev Singh: Yes. Jailen, I think, one, we’re continuing to see a strong demand environment. We’re continuing to see customers who buy for the three core reasons that they’ve always purchased solutions, our solutions. First, the desire to control trend lines. Second, the desire to improve the employee experience. And third, the desire to improve outcomes as it relates to healthcare outcomes for their employees. The commentary on GLP-1 is actually tied pretty nicely into that in many ways, Jailendra, meaning, what are employers definitely experiencing is this idea that a new medication has come onto the market that’s driving healthcare costs up. They’ve got to adjust both from a policy perspective and understand how they are going to apply the appropriate clinical rigor to get the outcomes that they want and to drive the value for their employees that’s necessary while controlling costs.

And so, we think in some ways, absolutely it’s driving an incremental spend which employers are going to have to fund from somewhere. But incrementally, it actually drives real demand for services like ours. I’ll use this opportunity as a moment to defer to our Chief Health Officer, Shantanu Nundy, to talk a little bit about our clinical view on how to drive value for corporations as it relates to GLP-1 and the cost of GLP-1. Shantanu?