Accolade, Inc. (NASDAQ:ACCD) Q3 2024 Earnings Call Transcript

Accolade, Inc. (NASDAQ:ACCD) Q3 2024 Earnings Call Transcript January 8, 2024

Accolade, Inc. beats earnings expectations. Reported EPS is $-0.28, expectations were $-0.46. ACCD isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Todd Friedman: Thanks, operator. Welcome everyone to our fiscal third 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. 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 Accolade’s performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and the reconciliation thereof can be found in the press release that is posted on our website. Also, please note that certain statements made during the call will be forward-looking statements as defined by the Private Securities and Litigation Reform Act of 1995.

Such forward-looking statements are subject to risks and 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. With that, I will turn the call over to our CEO, Rajeev Singh.

Rajeev Singh: Thank you, Todd. I’ll begin by summarizing the four key themes to my prepared remarks today. One, we had an excellent quarter on both the top and bottom line and we’re raising guidance for the year as a whole. Two, we’re reaffirming our outlook for our next fiscal year. It will be our first profitable year as a company while continuing to grow our revenue at 20% per year. Three, our strategy has yielded sustainable market differentiation, which in turn has led to yet another year of strong bookings growth and incredible opportunities for growth inside of our customer base. And four, based on the strength of that sustainable differentiation, we’re raising our profitability guidance on our five-year outlook. By all accounts, Q3 was another successful quarter for Accolade.

We’re well positioned to execute on our long-term objective to build a great and enduring company important to the future of American healthcare. Let me start with the third quarter highlights and then I’ll provide more color on our outlook. Revenue and adjusted EBITDA were both ahead of our guidance for fiscal Q3. Revenue in the quarter was $99.4 million, with an adjusted EBITDA loss of $4.6 million, both ahead of our previous guidance. With these results, we’re also raising our guidance for the full year. You’ll hear more details about that guidance for this year in Steve’s remarks. Turning to next year, fiscal 2025, we’re reaffirming our commitment to 20% revenue growth and 2% to 4% adjusted EBITDA for the year. Our confidence in this guidance is based on the strength of our bookings to date.

We’ve had a strong selling season. We’ve already exceeded last year’s ARR bookings of $72 million and we’re well on pace for growth of more than 20% over last year. Positively, as we’ve mentioned before, the selling season now rolls throughout the year, particularly as it relates to our newer offerings like Accolade Care and ExpertMD, and the continued impact of our growing health plan channel. This booking strength and diversification reflects our differentiation versus our competition and the continued evolution of advocacy into a must-have category for employers looking to control costs. Next, let’s talk about why Accolade is the differentiated platform for our customers and well positioned for the future. First, our physician-led advocacy teams are more than just navigators with the ability to deliver care, integrate with brick and mortar care teams and local networks, and solve the access to care problem that we call the position gap.

We deliver more than navigation. We deliver better healthcare for our customers that provably lowers costs. Second, resolving the complexity of American healthcare at scale takes more than just our incredible, relentless healthcare advocates. It requires a next generation technology stack driven by artificial intelligence, digital engagement capabilities, and next generation recommendation engines for both our members and our care teams. Accolade delivers on that promise. Third, this multi-trillion dollar regional complex industry has long desired an open platform, shared data sets, closed loop reporting, and ultimately real collaboration. Accolade’s growing trusted partner ecosystem delivers the integration of partners in critical categories, and delivers real technology integration, choice for our customers, and improved engagement for our members.

Finally, employers have never had true transparency into how the system is performing for their people, either economically or from an engagement perspective. Accolade delivers live, real-time reporting for every customer via our True Health dashboard that highlights who we’ve engaged and where they are in their journey, along with operational metrics that give our customers confidence in the road ahead. For our customers, these differentiators give them the confidence to choose Accolade over the rest of the industry. And for our shareholders, those differentiators represent an engine of sustainable growth in new bookings, in incremental services that grow revenue per customer, and in technology innovation that drives expanding unit economics into the future.

Let me expand on that last point regarding unit economics with some simple but powerful examples about how Accolade leverages artificial intelligence. For our care advocates, we use AI to monitor engagement quality, to summarize encounters and follow-up items, and to route tasks and members to advocates who have experience with their specific need, among other things. Every step of the way, we’re improving efficiency while also improving quality for our members by reducing the opportunities for human error. We also use AI in our engagement with healthcare providers, doing risk analysis for every member and building decision and workflow engines to drive better outcomes, among other use cases that support our clinical engagement. Not every member journey is identical, so we use AI to guide the next best action for our physicians and also help them to keep abreast of and adhere to evidence-based guidelines.

Lastly, we use AI for analytics for operational excellence. Some of our investment areas are workforce management, reading customer satisfaction sentiment, and predicting engagement levels. All of these drive efficiency and improve the member experience. These are just some of the simple examples where our leadership in AI and technology investment will yield value for our operations in efficiency, quality, and value, and for our shareholders through improving unit economics. At scale, these investments in technology give us better visibility to long-term profitability. It’s with that in mind that we are upwardly revising our five-year plan that calls for revenue of more than $1 billion and now adjusted EBITDA between 15% and 20% of revenues in fiscal 2029, which is a 5 percentage point raise from our Capital Markets Day in May.

With that positive news, I’ll turn the call over to Steve to give you more color on our financial and operational performance. Steve?

Steve Barnes: Thanks, Raj. First, I’ll recap the results for the fiscal third quarter and then provide details on our outlook and forward guidance. We generated $99.4 million in revenue in the third quarter of fiscal 2024. The outperformance relative to our guidance was largely due to early recognition of approximately $2 million of savings-based performance revenue. I’ll note that we previously called out early recognition of performance-based revenue totaling $2 million in fiscal Q2 and $1 million in fiscal Q1. From a year-to-date perspective, through the end of fiscal Q3, we’ve earned and recognized approximately $5 million in aggregate performance-based revenue that at the outset of the fiscal year was projected to be earned in fiscal Q4.

Fiscal Q3 adjusted gross margin was 46.3% compared to 45.9% in the prior year period, and adjusted EBITDA in the third quarter was a loss of $4.6 million. The positive performance versus guidance reflects the revenue over-performance, as well as the impact of the cost reductions via the workforce realignment that we announced earlier this year, along with a continued focus on spend management as we turn toward profitability in fiscal 2025. Turning to the balance sheet, cash and cash equivalents totaled $230 million at the end of the fiscal third quarter. During the third quarter, we capitalized on an opportunity to improve our balance sheet through the repurchase of $76.5 million of our outstanding convertible notes at a discount for an aggregate purchase price of $65.8 million.

The remaining $211 million of outstanding notes are not due for more than two years, and we are confident in our outlook to generating positive operating cash flows with more than adequate capital on hand to achieve our plans without reliance on raising additional capital. Now turning to guidance, on the strength of our Q3 results, we are raising our full fiscal year 2024 revenue guidance to a range of $411 million to $415 million, representing pro-forma year-over-year growth of 21% to 22%. We are also improving our full-year outlook for adjusted EBITDA loss for fiscal 2024 to a range of $6 million to $10 million as we turn the corner on our way to a full year profitability in fiscal 2025. With respect to the fiscal fourth quarter, keep in mind my earlier comments that we recognized about $2 million of PG revenue in fiscal Q3 that shifted from fiscal Q4.

With that, we are providing fiscal Q4 guidance today of revenue in the range of $121.5 million to $125.5 million, and positive adjusted EBITDA in the range of $16 million to $20 million. I’d like to call out a couple notable points about fiscal Q4. First, it will be our first $100 million revenue quarter. Consider that when we went public 3.5 years ago, we had recently completed our first $100 million revenue fiscal year, so this is a tangible milestone for our company. Second, fiscal Q4 will be our first significantly positive adjusted EBITDA quarter, demonstrating the underlying earnings power in our model and marking a strong launching point for next year when we expect to deliver full year profitability. One of the key questions we often get is about understanding the revenue ramp from fiscal Q3 to fiscal Q4.

There are two factors that primarily impact Q4 revenue relative to the other three quarters. The recognition of healthcare cost savings based performance revenue and net new revenue from customers with January 1st go live dates related to new bookings which Raj noted earlier. These are both rooted in highly visible contracted revenue. Let me take a moment to provide a short explanation of the dynamics of our healthcare cost savings performance guarantees. Those savings guarantees are measured according to a customer health plan service year, which typically aligns to the calendar year. Given a one to two month timing lag to receive claims data, we currently have the visibility to most of the claims data required to measure our cost savings performance in calendar 2023.

The claims data we already have in hand provides a high degree of visibility to the savings-based revenue we expect to achieve in fiscal 2024, majority of which gets recognized in our fiscal Q4 P&L. This dynamic, which has been consistent year-over-year, along with a track record of consistent historical execution against our performance guarantees, has contributed to a high level of confidence in the achievability of our forward guidance. Those two highly visible factors, savings-based PG revenue, plus January and February revenues associated with new customer bookings, lead to the revenue ramp in fiscal Q4, which has been the case for Accolade’s history. Now turning to the forecast for fiscal 2025, we are reiterating our guidance for 20% revenue growth and a positive adjusted EBITDA of 2% to 4% of revenue, which is roughly $10 million to $20 million.

For fiscal 2025, we are not providing quarterly guidance today, but our historical quarterly revenue trend, whereby at the outset of a fiscal year, we forecast the majority of claims-based savings PG revenue in fiscal Q4 will continue to be a good starting point for your models. This aligns with our Capital Markets Day presentation, which is available on our Investor Relations website. And I’ll make one last point before taking questions. As Raj mentioned, we are upwardly revising our five-year plan to call for adjusted EBITDA margins of 15% to 20% of revenues in fiscal 2029. Our prior guide called for a 200 basis point to 300 basis point improvement each year after turning profitable next year. As we are now seeing the impact of our earlier cost reductions, the efficiencies we are driving through the business from AI and other technology-driven innovations, and the incremental margin impact of customers implementing multiple offerings and associated utilization-based revenues, we see profitable growth from here and believe we can deliver an annual improvement of 300 basis points to 400 basis points over the horizons of fiscal 2029.

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

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Q&A Session

Operator: Thank you. At this time, we’ll conduct a question-and-answer session. [Operator Instructions] And our first question will come from Ryan Daniels from Blair. Your line is open.

Ryan Daniels: Yeah, guys, congratulations on the strong performance. Thanks for taking the questions. I want to hit on one that you mentioned regarding the ability to drive intra-year sales. It sounds like bookings are already great, so very good visibility there. But I think something novel that might be underappreciated, and I want to hear a little bit more about it, is your ability to push more intra-year sales. So Accolade Care, ExpertMD, and then also how you’re leveraging health plan partnerships to do that. Thanks.

Rajeev Singh: Thanks for the question, Ryan. This is Raj. In fact, it is a really important point, and so I’m glad you call it out. When you think about, in that context of the — I think the phrase used was intra-year sales, think about it in a couple of components. The first is we have a base of advocacy customers who are excellent targets because of the nature of a really strong customer relationship and because of really strong member MTS for incremental Accolade services that can be layered on well past the beginning of a plan year when most deployments in a straight advocacy only business would occur. That entails things like virtual primary care, expert medical opinion, and of course, all of our trusted partner ecosystems.

Beyond that, you also see the opportunity in — to grow usage of existing services where customers had signed on to those services but we had yet to really fundamentally drive to the engagement levels associated with them. Again, same set of services, Accolade Care, expert medical opinion, and trusted partner ecosystem. Above and beyond that, getting to the health plan component part of the story, the opportunity in things like our Blue Shield California individual and family plan business, the opportunity to drive utilization up on a month-over-month basis is what you might refer to it in that context of in-year sales. All of it gives us the opportunity to continue to grow the business beyond the booking number that we traditionally talk about.

But I appreciate you pointing out, Ryan, that that bookings number was also very strong this year.

Operator: Thank you. One moment for our next question. Our next question comes from Craig Hettenbach from Morgan Stanley. Your line is open.

Craig Hettenbach: Great, thank you. Raj, just to follow up there, as you think through the approximate 20% growth you’re targeting for fiscal ‘25, can you just touch on by kind of segment, the core advocacy, Accolade Care, and expert medical opinion, any nuances to think through in terms of how the different businesses are performing and kind of build up to 20%?

Rajeev Singh: I think, and I’ll let — Steve, I’ll let you jump in and add some color commentary here. Ryan, excuse me, Craig, as you think about that in context first, we expect each of our core businesses to grow in that 20% range. That’s part one of the story. Part two of the story is we expect that the business itself has opportunities to see incremental usage across any of our, what we call our variable usage offerings like expert medical opinion virtual primary care which give us potential offsides of that 20% number. Steve, what would you add to that?

Steve Barnes: Sure, I’d just reiterate a couple of points here around the different offerings. Craig, to Raj’s point we’re really induced by the continuing demonstration of a broad set of capabilities, different offerings that are contributing to that overall 20% growth rate. And like we’ve talked about the last several quarters, we’re continuing to see the advocacy business show up in a strong way in the approaching 20% growth rate. Expert medical opinion offering continuing to grow in that 20% range. And then the virtual primary care offering growing north of that 20% target for the reasons Raj mentioned, which gives us great confidence in the way we go forward, which is when we think about embedding a physician into an advocacy customer, it creates a differentiated opportunity for us to drive incremental revenues.

And interestingly, back to Ryan’s point about strong bookings groups, from the customers we’ve booked year to date, the vast majority of them, when they’re an advocacy customer, were also bundling with that expert medical opinion and/or virtual primary care and oftentimes a trusted partner or more into that opportunity. So we’d show up with a starting point of booking with opportunities to drive incremental value for those members, more value for that customer in terms of financial returns, and Accolade obviously benefits from all that. We’re seeing that all come together and show up in contributing towards that optimism we have on that growth rate, and it’s really spread across those different offerings.

Operator: Thank you. And one moment for our next question. Our next question will come from Ryan MacDonald from Needham. Your line is open.

Ryan MacDonald: Hi, thanks for taking my question and congrats on a nice quarter. Steve, maybe just expanding upon the last commentary as you look at the sort of segments of growth, with expert medical opinion, given all the success that you’ve had this year in cross-selling that, as we look out into next year, what maybe assumptions are you making in that 20% growth on, in terms of case rate volume growth? And now that we’re starting to see some of those case rates start to rise, utilization in a lot of the health systems start to rise as we head into next year, what may be are assumptions you’re building into that and potential opportunities for upside? Thanks.