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

Accolade, Inc. (ACCD)

Q3 2024 Earnings Call Transcript

Company Participants

Todd Friedman - SVP, IR

Rajeev Singh - CEO

Steve Barnes - CFO

Conference Call Participants

Ryan Daniels - Blair

Craig Hettenbach - Morgan Stanley

Ryan MacDonald - Needham

Jailendra Singh - Truist

Stan Berenshteyn - Wells Fargo

Jessica Tassan - Piper Sandler

Richard Close - Canaccord Genuity

Allen Lutz - Bank of America

Stephanie Davis - Barclays

Jenny Shen - BTIG

Jack Wallace - Guggenheim Partners

Presentation

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....

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