Accolade, Inc. (ACCD) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon and welcome to the Accolade Fiscal First Quarter 2021 Earnings 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 Instructions] Please be advised that today’s conference is being recorded. Hosting today’s call are Rajeev Singh, Chief Executive Officer of Accolade; and Steve Barnes, Chief Financial Officer of Accolade. Rajeev and Steve will offer the prepared remarks then they will take your question. The Accolade press release, webcast link and other related materials are available on the Investor Relations section of Accolade’s website. These statements are made as of August 12, 2020 and reflect management’s views and expectations at this time and are subject to various risks, uncertainties and assumptions. This call contains forward-looking statements – that is statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as anticipates, believes, contemplate, continue, could, estimate, expect, intend, may, plan, potential, predict, project, should, target, will or would or similar expressions. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us particular uncertainties that could our actual results to be materially different than those expressed in our forward-looking statements include our ability to achieve or maintain profitability, our reliance on a limited number of customers for a substantial portion of our revenue, our expectations and management of future growth, our market opportunity, and our ability to estimate the size of our target market, the effects of increased competition as well as innovations by new and existing competitors in our market and our ability to retain our existing customers and to increase our number of customers. This call includes non-GAAP financial measures. These non-GAAP financial measures are in addition to, and not as a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures. For example, other companies may calculate similar titled non-GAAP financial measures differently. Refer to the appendix for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, I’ll turn the call over to Rajeev Singh, CEO of Accolade. Rajeev? Rajeev Singh: Hello, everyone. And thank you for joining Accolade’s first earnings call as a public company. Today, we will be reviewing our results from our first fiscal quarter, as well as speaking to our outlook for the quarter and the year ahead. Before we begin, let me offer my appreciation to the investors and analysts, who met with us on our recent IPO road show and took the time to understand our mission and vision here at Accolade. Many of you are familiar with Accolade, but for those of you who are new to our story, I’d like to start our call today with a brief overview of what we do and how we do it. After that I’ll review highlights from Accolade’s first quarter results, discuss how we’re meeting the needs of our members and customers amid the ongoing pandemic and provide some color on the strength of our sales pipeline. I’ll then turn it over to Steve Barnes, our CFO, to review the quarter’s financial results in more detail. One more note, before we jump in. At Accolade, we open every company meeting with a member story because it’s so important to us that we stay grounded within the real life needs of our members and the opportunities you have day in and day out to make an impact. We’d like to expand that tradition to our earnings calls. And so something you’ll see us consistently do is we’ve been a member story into these calls with the intent of making certain concepts we’re discussing more tangible for you. With that let me begin with an overview of our business, briefly recapping who we are and what we do. One thing all of the people at Accolade will tell you is we are a mission driven business. Our vision is for every person to live their healthiest life. We understand that healthcare in this country is a complicated opaque system, which too often does not meet the needs of the patients it’s supposed to serve even while healthcare costs in this country continue to grow. We addressed that problem for employers and other payers by providing their employees and their families, whom we refer to as our members, a single place to go to address all of their healthcare and benefits questions and needs. Our solution consists of empathetic frontline care teams made up of Accolade Health Assistants and experienced clinicians, nurses, doctors, pharmacists, and behavioral health specialists, who build long-term relationships helped by Accolade’s brilliant technology and by an extensive and proprietary dataset to guide our members to the right care, at the right time, in the right setting. The results for our customers are extraordinary and differentiated, high engagement across the full population, extremely high member satisfaction rates, better healthcare outcomes and lower healthcare costs. Some data points to this end are available in the posted presentation. In normal times, our offerings are a powerful remedy for employers wrestling with rising healthcare costs. Warren Buffett once described as the tapeworm of American economic competitiveness. In the pandemic era when healthcare in this country is even more complicated and the potential swings and costs more volatile, we believe customers are finding our solutions essential. We are unique in the industry because of the combination of our deep healthcare roots, more than a decade of delivering impactful, evidence-based interventions in our next-generation technology stack. That technology stack is able to ingest rich, disparate datasets and synthesize them, breaking down the silos that plagued the broader industry. I would like more transactional or condition-focused solutions. We turn that data into longitudinal, 360 degree view of our member’s healthcare journey. We can then leverage artificial intelligence to make that data actionable, thinking about when and why our members need us, and our position to provide them with personalized intervention. This powerful tech stack is also flexible enough to power an innovation engine that has delivered five new offerings over the last two years. Coming off a strong year with 40% top line growth for fiscal 2020, which ended this past February, we’ve also had a strong start to fiscal 2021. We delivered revenue of $35.9 million in fiscal Q1, reflecting an increase of 25% over the first quarter of last year. Our full year revenue guidance for fiscal 2021 reflects approximately 20% year-over-year growth at the midpoint of the range of $158 million to $161 million. Importantly, this range reflects our best estimate of unemployment related impact to our revenues, given the effects of the pandemic on our customer base, including the airlines, which we’ll cover in more depth shortly. We expect the business will return to a higher annual growth rate, which we believe will be in the 25% range for the foreseeable future. Once we get through the uncertainty attributable to the pandemic. From a bottom line perspective, our adjusted EBITDA loss in fiscal Q1 was $9.4 million representing a $2.3 million or 19% improvement versus the first quarter of last year. For bottom line guidance, we expect the fiscal 2021 adjusted EBITDA loss will be in the range of $32 million to $36 million. Turning now to the COVID-19 pandemic and its impact on our business. First and foremost, the coronavirus has put an incredible strain on the healthcare system in this country. And the corresponding increase in complexity for our members has made our value proposition more compelling than ever. Our customers confirm this as does the strength of our pipeline. To meet the unique needs of the moment in a way that leverages our technology platform, our clinical model and our frontline care teams, we released a new offering in fiscal Q1, Accolade COVID Response Care, which is designed to help employers reopen their workplaces safely by supporting employee testing, certification and contact tracing capabilities, while also supporting those employees with any ongoing clinical support they may require if they test positive with the virus. Since its launch at the end of May, the offering quickly secured a number of customers, including Johnson Controls, the world’s leader in making buildings smarter, via product technology, software and services. It should be noted that Johnson Controls will also deploy Accolade Total Health and Benefits next year. Accolade COVID Response Care has also created the opportunity for new dialogues with brokers, consultants, and prospects, who we otherwise might not have reached, who are keen to engage with us as a thought leader in this rapidly changing environment. More tangibly, let me speak to the near-term impacts of the pandemic in our business. As we’ve discussed in the past, our offerings have proven attractive to airlines who are unfortunately wrestling with the dramatic drop off in travel during the pandemic. Airlines represented 22% of our revenues during the last fiscal year. And as we outlined on the road show, we have factored in their anticipated headcount reductions into our future forecasts. Due to this update prior to going public, we have no news to report in this regard. This acknowledged a number of our customers are experiencing a COVID tailwind. And year-to-date while some customers have incurred employee losses, our net member account is unchanged. We continue to monitor the health and hiring of our customer base and will ensure our forecasts are kept up-to-date accordingly On a macro basis, the pandemic has materially reduced healthcare utilization in the United States. Members have been forced to postpone elective procedures. And beyond that, have understandably demonstrated a reticence to engage with the healthcare system in a time with a contagious virus predict throughout the country. We know that chronic conditions have knocked on a way and that our members need help managing their clinical needs. We quickly pivoted to outbound engagement strategies to meet our members where they are and guide them through the right clinical pathways. Importantly, we expect that as healthcare utilization returns. Though, the timeframe is uncertain, customers will wrestle with other challenges related to access to care for their members. And of course, a likely spike in healthcare trend. In fact, the Health Research Institute from PwC pointed to a potential double-digit increase in healthcare spend in 2021. This change in healthcare utilization, the uncertain outlook for next year’s healthcare spend and the outstanding challenges associated with returning to work safely, have notably pushed the conversation around healthcare advocacy and navigation to the forefront for CEOs, CFOs and Boards, who must confront the new reality that healthcare and wellness is no longer a check-the-box benefit. But instead, something that directly impacts business continuity. We envision a world where just as board audit committees now routinely review InfoSec protections for their companies. Other board committees will now be reviewing the healthcare strategies for their businesses. We view this increased scrutiny as positive. Our customers have long viewed us as a strategic partner and our ability to serve ably in that role is especially valued as our customers shepherd their businesses through these uncertain times. We believe our value proposition today resonates with an even broader audience of employers. And we’re ready to serve as a trusted partner going forward. Before moving on to a more detailed update on demand and new customer acquisition, I’d like to take a minute to reinforce the extent to which the comprehensive support Accolade provides is helping our members manage during these difficult times. To do so, let me recount a recent member story that I think shows you the remarkable power of our service. Recently, a member reached out asking for help to find a therapist in their network and adhering to our engagement model, our Accolade Health Assistant asks probing and empathetic questions to better understand the member’s needs and motivations. Within minutes, she learned the following things about the member. First, she was thinking of therapists, given a host of challenges at home that had her feeling anxiety and stress. Second, her husband had recently lost his job due to the economic downturn. Third, she was feeling taxed by the homeschooling required for her child. And finally, her stress was compounded because her sister-in-law had recently just been admitted to the hospital with COVID-19 and put on a respirator. By taking the seemingly simple step of asking about the reason behind the need for a therapist, the Accolade Health Assistant could use her experience, deep knowledge of the members benefits and the technology provided to her to highlight some opportunities the member had not considered. So while the member had a therapist in mind and our Health Assistant could leverage our provider selection tools to verify the therapist was in network at the right price point, the Health Assistant went a step further to confirm that telehealth benefits were covered. Then given that all of the employers benefits were available to our Health Assistant in our purpose built tool for our front-line care teams, she educated the member about her Employee Assistance Program, which would provide for six free visits. Our member learning this expressed how grateful she was for this information given the financial strain, the family was under. Understanding this strain, our Health Assistant went even further and encourage the member to leverage her health savings account, to cover any additional therapy visits while also sharing some information about local food banks, as well as some strategies for negotiating extensions on certain utility bills. As the conversation progressed, our Accolade Health Assistant built trust with the member. The member share that the family had been spending a lot of money on medication, which led to a conversation about signing up for mail order prescription programs that would reduce the cost of their medication. As they wrapped, the Accolade Health Assistants encouraged the member to download our mobile app and provided her with their direct line phone number so that they can maintain a dialogue and address any further concerns as they arrive. I love this example because it’s so clearly shows how well positioned we are, educate members on available benefits like EAPs, HSAs, and mail order prescription programs when they’re most relevant, thereby encouraging appropriate utilization and driving better outcomes, both health and financial. Remember, this story started with a simple request to find an in-network therapist and ended with our Accolade Health Assistants unlocking so much more value from the interaction. It reminds us that health needs don’t exist in isolation, especially now as our members juggled the many complexities of the present moment, our model, which allows our frontline care teams to gather context, account for various member needs, leverage the capabilities of our tech platform and ultimately provide personal life support, is as critical as it is powerful. With that, I will conclude my remarks with a sales and customer update. In part, due to the trends I mentioned above, demand for our services remained strong and we’ve seen traction in each of our core market segments. Additionally, in fiscal Q1, we saw new transactions for each of our core offerings. A couple of highlights for the quarter. First, our Humana partnership continues to yield positive results. In fiscal Q1, our joint offering, Humana, impact with Accolade, was selected by Hillsborough County school district in Florida. Importantly, this is an example of a fully insured customer embracing our solutions via their carrier. Hillsborough is an employer in the enterprise segment for Accolade. We’re excited to continue to deepen the relationship with Humana. Second, existing customers continue to find value in our trusted supplier program, through which they can purchase and seamlessly integrate third-party solutions through Accolade with the assurance that vendors have been evaluated for clinical quality, operational scalability, information security compliance and financial viability with Sedgwick and Temple University health systems expanding their relationships with us. In our government market segment, the Defense Health Agency launched its pilot with Accolade and Med, and satisfaction levels for DHA beneficiaries have been very positive. As a reminder, Accolade was selected as the only vendor to serve a population of around 80,000 beneficiaries with an offering called Accolade TRICARE Select Navigator. The offering is based off of our Accolade Total Care offering with a few adjustments to accommodate the unique needs of TRICARE beneficiaries. I’ll now turn the call over to Steve to review the financials in more detail. Steve Barnes: Thanks, Raj. And I also want to thank the investors and analysts on our call today, and for the time spent with us leading up to the IPO. To start my remarks, I’ll share a recap of our IPO. On July 7, we closed our initial public offering having issued just over $11.5 million shares at $22 per share, resulting in gross proceeds of $253.6 million to Accolade. We’re quite pleased with the outcome, which reflects pricing above the initial range and full exercise of the underwriters green shoe over-allotment option. Before I walk through our financial results and outlook for the year, I’d like to spend a couple of minutes discussing our business model. We believe it offers compelling and differentiated value for our members, our customers and for Accolade. We earn revenue from providing personalized health guidance solutions to our members. Our solutions are priced based on a recurring per member per month, or PMPM fee typically consisting of both a fixed PMPM-based fee and a performance-based PMPM fee component. As a result, generally, a portion of our potential revenue is variable, subject to our achievement of performance metrics and the realization of savings in healthcare spend by our customers resulting from the utilization of our solution. For a typical Accolade Total Health and Benefits customer, about two-thirds of the PMPM fee is fixed and about one-third is performance-based. We have a strong track record of achieving a substantial portion of the contractual performance metrics and realization and savings of healthcare spend, which comprise the variable component, earning over 95% of the aggregate maximum potential revenue under our contracts over the most recent three fiscal years. The combination of our PMPM revenue model, multi-year customer contracts, which are typically three years in length and high customer retention rates provide strong visibility to our future revenues. Turning to financial results. I’d like to remind you that our fiscal year runs from March through February. Results for our fiscal first quarter, which ended in May were as follows: We generated $35.9 million in revenue representing 25% year-over-year growth. We’re pleased to report that revenue exceeded the top end of the range provided in our S-1 by about $900,000. Growth was driven primarily by strength in new customer ads, particularly in the enterprise segment, which we define as employers with between 5,000 and 35,000 employees, and the mid-market segment, which we defined as employers with fewer than 5,000 employees. As we noted in our S-1, we finished fiscal 2020, this past February with 54 customers. And as of July 1, we had 60 customers. For reference, this compares to 20 customers at the end of fiscal 2019. And for those 60 customers as of July 1, we serve more than 1.7 million members. We recorded adjusted gross margin of 38.3% in the quarter. This compares to 39.6% in the prior year period. The slight decrease in year-over-year adjusted gross margin percentage reflects investments we made in the first fiscal quarter, which hit our cost of revenues line. In preparation for new customer launches in particular, the Defense Health Agency, TRICARE government customer, which we launched in May that Raj noted earlier. Our adjusted operating expenses, which represents product and technology, sales and marketing and G&A expenses, net of stock-based compensation expenses total 65% of revenues in Q1 of fiscal 2021 versus 80% of revenues in the prior year period. This improvement reflects scale efficiencies as well as the slight pullback we made on expense growth in the first quarter after COVID-19 hit, in order to manage our spend, given the uncertain environment. Adjusted EBITDA loss in the first quarter of fiscal 2021 was $9.4 million, which compares favorably to $11.7 million in the prior year first fiscal quarter. This year-over-year improvement was driven by an increase in adjusted gross profit, partially offset by an increase in adjusted operating expenses. We’re pleased to report that our adjusted EBITDA loss performance $11 million to $13 million range provided in our S-1, which favorably was primarily attributable to adjusted gross profit generation. Now turning to the balance sheet. Cash at the end of fiscal Q1 totaled $77.7 million and total debt outstanding was $73.2 million. IPO proceeds net of fees and offering expenses totaled $231.6 million. And in July, subsequent to the IPO, we paid down all of our outstanding debt, leaving us with $236.1 million cash on a pro forma basis post IPO as of the end of fiscal Q1. Finally, we had approximately 49.1 million shares of common stock outstanding as of July 31, 2020. In terms of financial guidance, we believe the best way to evaluate our business is on an annual basis. In that vein, we plan in the future to provide annual guidance for revenues and adjusted EBITDA during our fourth fiscal quarter earnings call for the following year with updates toward our progress compared to that annual guidance, including a look ahead view to the next quarter with each quarterly call. Given this is our first earnings call as a public company, today, we’re providing initial guidance as follows: For the fiscal second quarter end in August 31, 2020, we expect revenue in the range of $34.5 million to $35.5 million, and adjusted EBITDA loss in the range of $12.5 million to $14.5 million. And for the full year, and then February 28, 2021, we expect revenue in the range of $158 million to $161 million and adjusted EBITDA loss in the range of $32 million to $36 million. This guidance range for the full year reflects year-over-year revenue growth of about 20% at the midpoint of the range and includes our expectations of potential employment related impact to our revenues, given our PMPM model and exposure to unemployment with some of our customers due to COVID, particularly the two airlines in our customer base. That said, the demand environment for our offerings is strong. And fiscal year-to-date customer wins and bookings are positive across a variety of industries and product offerings. This gives us confidence in achieving our revenue guidance for the year, and we will continue to keep you apprised as we have more clarity on the potential impact of the pandemic on our business over the coming quarters. One last note on the topic of our guidance relates to the seasonality of our business. As a reminder, a portion of our performance based revenues, particularly the part related to cost savings is typically deferred until the fourth fiscal quarter. This leads to a disproportionate amount of our revenues and adjusted gross margin being deferred and recognized in our fourth fiscal quarter. Over the long-term, given the demand we see for our offerings, the value we create for members and customers, which drives both customer acquisition and retention as well as opportunities to grow the business across multiple vectors. We expect to achieve a top line growth rate in the range of 25% on an annual basis. With that, I’ll now turn it back over to Raj for closing remarks. Rajeev Singh: Thank you, Steve. As I think you’ve heard today, our offerings are built to support people in today’s challenging environment, when accessing healthcare is even more complicated than normal. We’re pleased to report our positive first quarter, and I want to thank every member of the Accolade team for their hard work and ongoing dedication. And with that operator, let’s open the call to questions. Operator: Our first question comes from the line of Bob Jones from Goldman Sachs. Your line is now open. Bob Jones: Great. Thanks for the questions. And good evening, Raj and Steve. Appreciate all the details that you’ve shared, the 60 clients as at the end of July, certainly encouraging already with new ads. But I believe as you highlighted, a lot of your new bookings given the selling season come kind of late summer, early fall. So I was hoping maybe you could just give us a sense of how the selling season has been trending, given the onset of COVID. And then I guess, just within that, anything you’d be willing to share beyond the comments already about how the various cohorts have been trending, as you think about the strategic bucket versus enterprise versus mid market would be helpful. Rajeev Singh: Sure, Bob. Thanks for the question. And thanks for being here. I’ll start, Steve, view do you have anything to add, please do jump in. And as we noted in the call, Bob, we actually saw traction across each of the market segments leading into or walking into this call. So we saw customer acquisition in each of those market segments. Can we talk customer acquisition across each of our core offerings, including Accolade COVID response care? And so the demand environment we think has continued to be very strong. And in part we think that’s driven by the complexity created by COVID-19 and in part by an increasing acknowledgement from customers that navigation and advocacy is an important category. As it relates to the cohorts by market segment, we think that you traditionally see strategic and enterprise customers sign earlier in the year and mid market and bottom end of enterprise customers continuing through the remainder of the year. And we expect that that will continue. Bob Jones: Okay, great. And I guess, maybe just to follow on, with some of the newer offerings, I’d be curious what you could share around the COVID response offering. Just maybe what the economics of that look like relative to some of the other offerings. And then more specifically, as you think about Total Care and Total Benefits, I know a little bit on the newer side of the offering set. And so just curious what the response has been from clients. How much traction you’re seeing at this stage of the selling season around those offerings as compared to maybe the core Total Health and Benefits offering would be helpful? Rajeev Singh: Sure. As it relates to COVID Response Care or Accolade COVID Response Care, let me start there. We’re really bullish on the offering, given the incredible interest we’ve seen in it. And we think that interest is actually – interesting Bob, in that it not only generates interest for that as an offering itself, it also generates interest from customers who are, they may be very focused on returning to work today are also by virtue of exploring our Accolade COVID Response Care offering beginning to explore other categories or excuse me, other elements of our product strategy. And so in that way, the product is very strategic for us. The price point on the offering, depending upon market segment, and whether we’re selling back into the customer base for a new prospect ranges from that low single digits PEPM to the mid to high single digit PEPM. And as it relates to Total Benefits – Accolade Total Benefits and Accolade Total Care, one of the things we’re really excited about is that in the first quarter we saw traction on each of the core offerings. And so we saw Total Benefits and Total Care close new customers and looking at deployment starting here in the not too distant future. Bob Jones: Okay. Great. So just to be clear on that last point, you haven’t seen traction from Total Care or Total Benefits come at the expense of Total Health and Benefits, I guess, would ultimately be the clarification. Rajeev Singh: I think that’s a fair characterization, Bob. Bob Jones: Great. Thanks so much. Appreciate it. Rajeev Singh: Thank you. Operator: Thank you. Our next question comes from the line of Ricky Goldwasser from Morgan Stanley. Your line is now open. Ricky Goldwasser: Yes. Hi, good evening and congrats on the first quarter as a public company. When we hear from employers and other companies, healthcare services companies about this gap between the unemployment numbers and the benefited employers are still providing to employees. And if is this gap closes towards year end, how do you think this is going to impact your outlook? And how much are your clients sharing with you as they look to plan ahead for the rest of the year? Rajeev Singh: Hi, Ricky, thank you for being here and thank you for the congratulations. We’re thrilled to be here. As it relates to – and let me make sure I’m answering your question. I believe your question is related to healthcare utilization and clients outlook around healthcare spend and utilization in 2021 and beyond, or even in the fourth quarter of this year. Did I characterize that properly? Ricky Goldwasser: So it’s a little bit beyond the utilization itself, but the fact that for the time being employers are covering healthcare benefits, even furloughed employees and that’s something that they – and it’s sort of a benefited that they will end over time. So if that does happen how is that factored into the guidance that you gave us today and also how much visibility do you have for any of these changes? Rajeev Singh: Steve, you want to grab that one. Steve Barnes: Yes, sure. Hi, Ricky. A couple of things about that, first of all, you’re right. If you look at our base, for sure, our PMPM model kind of a membership creates potential exposure for furloughed employees and otherwise, year-to-date, our net membership across the entire book has actually maintained. We’ve had some customers who have had employee losses in unemployment but we’ve also had customers who’ve grown through the pandemic, which has offset that. I would say we’re in close touch with our customers, understanding what those look like. To the extent, I think the most important one that we’re looking at from a revenue standpoint is certainly the airlines. The visibility we have to them is certainly in line with the public statements that they’ve made, that there could be furloughs in the fall after the government bailout money expires in the end of September. And importantly, we factored in our expectation of that impact into our numbers this year. So the guidance that you’ve seen takes that into account and our expectations of that rolling into next year fiscal 2022. Ricky Goldwasser: Okay. And then on the federal contract, I mean, obviously you’re now – you have a few months of experience with that vertical. Can you just give us a little bit more details about the program the term, the length of the demo type of services in any early experiences or takes? Rajeev Singh: Sure, early experience is a very positive. Beneficiary satisfaction scores are extraordinarily high. We’ve had great traction in terms of engaging in adding value to beneficiaries’ lives, as we started to roll out. The term for the pilot period will be at least a year and potentially longer as we continue the rollout. And we expect that the criteria for the success of the pilot are things that are very closely related to the traditional performance criteria that we’ve laid out for most of our clients. And that we have done a very good job over the last 10 years in terms of achieving. Ricky Goldwasser: Okay. And then lastly, just in terms of housekeeping we saw that the AR number, the DSOs went up from February to May. Any color there? Rajeev Singh: Nothing in particular of note, Ricky, it’s still a relatively small amount of about $3 million at the end of May. Generally our customers pay us monthly in advance. That what you’re seeing there is just timing of a particular customer payment. Nothing in particular point out that DSO is in the business are extremely low given the fact that our contracts typically have customers pay a month in advance. Ricky Goldwasser: Thank you. Rajeev Singh: Thank you for the questions. Operator: Thank you. Our next question comes from the line of Michael Cherny from Bank of America. Your line is now open. Michael Cherny: Good afternoon and I echo my congratulations on the first public company call. I want to dive in a little bit to the care advocates and your team. You talked about the product rollout relative to the COVID response team. But can you give a little sense as well on the type of updates that you’re providing to your team members to make sure that they can best react to some of the inbound calls, they’re getting also best follow-up on outreach depending on how public health or publicly available data continues to change. Rajeev Singh: I appreciate that question. A great deal Mako. Thank you for the question. I think in fact, one of the things that we’re most excited about as it relates to the technology platform, we deliver is its capacity to be flexible and nimble allowing us to deliver either new clinical programs, which is really where COVID Response Care was born within a week and a half of the pandemic really shutting down the country. We delivered a brand new clinical program to our customers, helping guide them with both education and – both education information, as well as clinical guidance around how to manage what was a very chaotic environment back in March. We quickly learned that our customers have more needs than just clinical guidance around the around COVID and wanted more as it related to return to work. Our capacity to quickly create new content, to get that new content to all of our frontline care teams, including our clinicians to make sure that that content is evidence-based and then in turn to feed workflow and data to our care teams so that we can follow physician-led evidence-based guidelines is one of the things that we think really separates us. Our capacity to nimbly react to the way that the market, is working, or in this case to the way that clinical needs are changing. It’s something we’re really excited about. And so we leverage our technology stack, our content management capabilities, our workflow capabilities, and those physician-led evidence-based care teams as the drivers of being able to react so quickly. Michael Cherny: Thanks. And then just a quick follow-up to Bob’s question regarding the selling season. Can you just give us a sense, how the industry representation is across the prospects you’re seeing in the pipeline you have? How widespread is, is there any concentration in one area, the other, in terms of your new prospects? Rajeev Singh: Sure, absolutely. Michael. The – I’m just scrolling through this, thinking about it myself. And in fact, we’re not seeing any particular industry segment or category in any sort of particularly weighted perspective in terms of our existing pipeline or in terms of what’s been closed already year. And so in fact, outside of the airlines that Steve mentioned earlier, that’s reflective of our – the entirety of our customer base. We find that, we’re adding value across multiple industry segments. Most industry segments are wrestling, if not all are wrestling with rising healthcare costs and increased complexity associated with healthcare. And we think that’s reflected for sure, existing customer base as well as in our new business pipeline. Michael Cherny: Great. Thanks so much. Rajeev Singh: Thank you. Operator: Thank you. Our next question comes from the line of Sean Wieland from Piper Sandler. Your line is now open. Sean Wieland: Hi, thanks and congrats for being back in the saddle again, the public company CEO. So, I wanted to ask how’s your sales team adapted to this new virtual world and the selling – in the selling process to get to get in front of the right decision makers and to push deals through the funnel. It’s first time for all of us. Rajeev Singh: Great to chat again, Sean. And thank you. In fact, it’s been one of the most illuminating points about our team more broadly, Sean, to be very candid with you. We have 1,250 employees, and in the first week of March, we had to get every one of them to work from home, because we knew that was the safest place for them to be and within about seven to 10 days, we did that. And so, a part of this, like, well, you didn’t answer the question. I’m going to celebrate our frontline care teams and clinicians, who got to work from home and kept service levels at par, which is spectacular or better in the midst of all that chaos. our sales teams actually had a different challenge and the challenge was that oftentimes prospects, who evaluate services like ours across the entire spectrum of what we deliver, want to meet the teams that they’re speaking – that they’re going to be working with. they come onsite, they do – they do site visits, they spend time understanding the culture of the company, et cetera. And so we had to quickly pivot to figure out how we could deliver and on a site visit in an online form and we did just that. And because in fact, on top of that, a great deal of what we do is beyond the human relationship, which we could demonstrate via virtual calls, et cetera, where we’re doing with our prospects, but also because something that customers really find valuable about us is the next generation tech stack that allows you to engage, not just via the phone, but via other vehicles. We found that our capacity to demonstrate our value proposition, actually expanded fairly well to a virtual selling environment. I think we’re all looking forward to getting back to a personal selling environment, but our team has responded really well. And I think that’s why we’re bullish on our pipeline and our future. Sean Wieland: Thanks. I appreciate that. On the gross margin front, the – as you noted, the decline in gross margins was maybe, some one-time stuff getting ready for Tri-Care. But any more details you can provide on that are those costs going to be ongoing and how should we think about gross margins throughout the rest of the year? Steve Barnes: Hey, Sean, this is Steve. Thanks for that question as well. A couple of things, absolutely, we have a very big opportunity with DHA and tri-care, which we launched in may. And as a reminder, we’re starting our relationship with the only company serving them and its capacity. It’s about 75,000 to 80,000 members. out of an opportunity, that’s eight to nine million members. So, we believe it’s extremely important to serve them incredibly well as we do with all of our customers, but to make some additional investments to allow for scale and to build deep relationships there over time. Speaking to gross margins, stepping back for a minute over the past few years, we have made substantial steps in improving gross margin from the low-30s three years ago in fiscal 2018, up to the mid-40s over the past year and we expect this year that we’ll moderate in that mid-40s range and as we make some investments, particularly around DHA. and then we expect that gross margin to continue to expand over the coming years and into the 50s over the next several years. Sean Wieland: Super. thanks so much for the comments. Steve Barnes: Thanks, Sean. Operator: Thank you. Our next question comes from the line of Jailendra Singh from credit Suisse. Your line is now open. Jailendra Singh: Thanks. Hello, everyone and congrats from my side as well for your first earnings call as a public company and I want to check on this. I don’t know if I missed this, but did you give out your fiscal 2021 ACV expectations and at fiscal 2021, I know you ended fiscal 2020 at $161.4 million. We’re just trying to figure it out what is built in your full-year outlook with respect to new ARR max and Accretion Alliance? Steve Barnes: Hi, Jailendra, this is Steve. And first of all, thank you for the nice words and for the question. We have not given guidance to the ACV number in particular. But what we were doing is giving you a sense of our expectations on revenues for the year. And so that range of a $1.58 to $1.61, which we’ve got good confidence in even taking into account our expectations of some potential attrition hits this year from COVID, pencils out to numbers that would give us confidence in that growth rate. With respect to ACV and some other metrics we would expect to provide the report out on the actual number at the end of the year and do so on an annual basis, but provide some color and picking up on Rajeev’s points earlier, at this point in the selling season, we’ve had some important wins across segments, across products that give us a good confidence in achieving the revenue number for the year. Jailendra Singh: Okay. And then my follow-up maybe for Raj, there has been some around industry consolidation in digital health with Teladoc and Livongo merging. I know you guys don’t directly compete with either of them, but I’m curious on your thoughts around the industry consolidation in digital health and what role Accolade is likely to play in that way, I guess? Rajeev Singh: I appreciate the questions. Great to talk to you again. Yes, maybe before I answer the question, let me say it’s important to kind of zoom out and reiterate first and foremost, that we’re in the early, early innings of market leadership in a category that has huge opportunity for growth. And so, we look at our business and as we discussed before, we think our business has more than enough headroom to grow organically at 25% or better for some period of time. That said, getting into the meat of your question. I think our platform, we are the single place to turn for all things, healthcare and benefits for our members, means that if we acquire any in complimentary categories, we have an opportunity to achieve positive utilization synergies almost immediately by virtue of the incredible engagement that we draw. We demonstrated that capability with the MD Insider acquisition, we completed back in fiscal 2020 and we expect that as the – I’ll close with this, we’re constantly looking for ways to add value to the members and the customers we serve. We want to reinvent how healthcare is consumed in this country by reorienting it with the member in the middle. And we’ve got a concrete hypothesis about how exactly that should be done. And so we will always be looking for ways to simplify that consumer journey and to make aspects of it simpler and more effective. And to the degree we find assets that help us achieve that. M&A will be a part of our strategy and we’ll proceed if the opportunity presents itself. Jailendra Singh: Okay. Thanks a lot, guys. Rajeev Singh: Thank you. Operator: Thank you. Our next question comes from the line of Ryan Daniels from William Blair. Your line is now open. Ryan Daniels: Yes. Thanks for taking the question guys. And I’ll continue with the course of congrats on the strong start and first release as a public company. I guess my focus is little bit more strategic, you mentioned earlier that what’s going on today in the marketplace has really pushed the need for health and wellness and solutions like yours with a high value proposition to the forefront of the executive suite. So I’m wondering if that’s also kind of pushing more conversation with carriers like California Blue and Humana that partner with you, because they’re kind of notoriously poor at delivering communications and working with their customers to create that type of value. And I think even in the pandemic, that’s kind of standing out even more or so? Rajeev Singh: Thanks, Ryan. Appreciate the question. And thanks for the congratulations. It’s great to talk again. I’ll take first crack of that question. Steve feel free to jump in if you’ve got anything to throw-in. Without question Ryan, we are seeing that this buying cycle is driving a more strategic look than it might have in years past, CEOs, CFOs, CHROs more often are participating in the buying process. And we think with that, it’s generating increased scrutiny, which to us is nothing but positive. Meaning we’re a company that’s long been a prided itself on measurable ROI that we actually put at risk in order to align our interests with that of our customers. And so, we look at that scrutiny as a means of differentiating I guess us against competition that oftentimes isn’t quite as rigorous in the measurement of their value. Adding to your – going to the next part of your question, we do see the carriers as a logical growth segment for our business, gosh. Accolade and Humana have been a really excellent fit in that we both share a passion for adding value and improving members’ lives. And because of that, we were able to quickly come to market with the new offering that seen really strong adoption last year, and heading into this year with a witness at Hillsborough public schools as a representative of that. You pointed out California Blue Shield. We’re really bullish on that relationship. And maybe last point on that, Ryan, we’re going to continue to look at relationships like that. And we believe that pure product strategy we offer, which is unique in our category gives us different ways to partner with carriers and is increasingly being met positively with those carriers. And so, I think, you should expect us to continue to pursue that going forward. Ryan Daniels: Great, very helpful color. And then maybe one quick one, and this is somewhat of a follow-up to a few you’ve been asked in your commentary. So given COVID-19, I’m curious if that is spring more entry your interest, not only in the COVID offering, but also in Boost and Trusted Supplier. I’m thinking Boost to get employers with or employees and family members with chronic conditions that may have not gotten appropriate care back in to the marketplace to ensure that their care outcomes don’t deviate from what you would want to see. And then on the Trusted Supplier, clearly, telehealth and things like digital care management probably are more demand than ever before, given the lack of access to physician offices. So is that actually also driving some into your sales more than it normally would up-sell into the client base? Thank you. Rajeev Singh: Let me – we try to tackle that in a few different vectors, Ryan. First, as it relates to – that has COVID driven incremental interest in our add-on offerings back into the customer base, I’ll start with this. When the pandemic really shutdown the country in early March, we immediately began to deliver boosts to our customers to drive engagement and adoption, so that we could get educational information out to all of our customers. We did that broadest. We did that for free for our customers because we knew it was important. We knew they needed it. And we didn’t feel like that was a moment to be asking our customers for money, but instead a moment to be grabbing an order and doing the right thing for our customers. Subsequent to that as we’ve now identified new needs and new opportunities, you’re absolutely right. We have seen and we mentioned that with Temple University Health System and Sedgwick in our prepared remarks we’re seeing customers adopt the trusted supplier program, adopt activation boost capabilities as a means of reaching out to their members and educating them on what is a radically changing environment every single day. And so, it’s very good question Ryan and absolutely we’re seeing that. Ryan Daniels: Okay. Thanks again guys. I really appreciate it. Rajeev Singh: Thanks, Ryan. Operator: Thanks. Our next question comes from the line of Matthew Gilmore from Baird. Your line is now open. Matthew Gilmore: Hi, thanks for the question. I wanted to ask about the performance fees associated with cost reduction. Steve, I was curious how you’re treating those within the revenue guidance? Are you expecting a higher level of attainment this year, because of lower utilization, or will that be treated differently because of how unique COVID is impacting the system? Steve Barnes: Hey, Matt. Thanks for the question. You’re right. With respect to cost savings and healthcare spend; it has come down significantly this year for across the country. And so we’re certainly factoring that in, into our guidance. Stepping back for a minute, historically we’ve achieved more than 95% of the total PMPM opportunity across our book. And when we look at the guidance that we’re providing to you today this year, we’re factoring in essentially that same range with a haircut that we applied for the potential downdraft and employment in our base. So to be direct on your question, we don’t see a dramatic shift in the earnings on the performance based fees this year. But we’ll, we’ll continue to track that through the end of the year as more data comes out to us. Matthew Gilmore: Okay. Fair enough. And then if I could ask one on, on Johnson controls, it’s obviously a very nice win. Should we be thinking about that contract covering all of their U.S. employees or will that be some sort of subset? Steve Barnes: It’s actually a great question, Matt. Thank you for bringing it up. Johnson controls is a great example of a customer who’s taking advantage of multiple offerings. They’re starting with Accolade COVID response care. In that situation, we’re actually – we’re actually pricing the offering by the number of participants that we serve. That number will be more focused on their U.S. employees and we expect that number could get as high as –should we expect it to be as high as about 30,000 members somewhere around that range or participants. And then it’s important to note that beyond that that they’ve also signed up to be Accolade Total Health and Benefits customer that deployment will happen a little bit later, and when they do all their U.S. employees will be a part of that offering. Matthew Gilmore: Okay, great. Thanks very much. Steve Barnes: Sure. Operator: Thank you. Our next question comes from the line of Stephanie Davis from SVB. Your line is now open. Stephanie Davis: Hey guys, thank you for taking my questions and congrats on the first public order. Rajeev Singh: Thanks, Stephanie. Stephanie Davis: I was hoping to dig a little bit into your federal opportunity and maybe compare and contrast the solution with more of your plain vanilla employer contracts. So could you walk us through maybe how much longer the sales cycle looks like and what level of intensity you expect these deals to tend towards? Well, maybe total care winds like tri care, or is there a chance to upsell to total health benefits? Rajeev Singh: I think – first of all, thanks for the question, Stephanie. Thanks for being here. I think we look at the defense health agency agreement as an opportunity to demonstrate value for a population that is in many ways, very unique to standard employer populations. In fact DHA beneficiaries are oftentimes – we’re seeing relocation more often. You’re seeing a more complex set of challenges associated with both government Karen and personalized care. All of which led us to create an offering loosely based off of Accolade Total Care. That we call track here, select navigator, that capability is now deployed to a population of a little bit north of 80,000 members or beneficiaries, excuse me. We expect that we can continue to grow that population as we prove out the pilot and the pilot now going to, I think the need of your question, the pilot will be measured on a set of agreed upon success criteria that look a lot like the performance guarantees that we often provide to our customers across whether that’s total care or total health and benefits. And so we’ve got a great deal of experience in so doing. How will that manifest as Steve mentioned in his earlier answer to a question, there are 8 million to 9 million members in that DHA population. We believe it’s feasible, in fact, that population might see uptake on different components of our offering depending upon their particular needs, but it’s a little too early to tell Stephanie, exactly how that’ll play out. Stephanie Davis: All right, understood, so hope to see it more over time. And then switching gears a little bit, I was hoping you could tell us about your tech stack, maybe how you differentiate your platform from the other care navigation players that are more on the tech side. Rajeev Singh: Sure. I love that question. And here is the reason why. What makes us unique is our capacity to build human relationships with frontline care teams that build aesthetic relationships, and then extend that value clinically for – with our nurses, doctors, pharmacists, behavioral health specialists, our tech stack enables those relationships. And it does so by first weaving together a whole bunch of disparate data sets that the industry has not done a particularly good job of in the past. We fit on health insurance claims, pharmaceutical claims, behavioral health claims, and we also look at our eligibility data benefits plan data, we put all that together. What it allows us to do is build a 360 degree view of that member’s life, and importantly, also their family’s life, because we’re covering all of the members in a population, that data set powers an artificial intelligence engine that allows us to be very smart about who we target, how we target and how we guide them. All of which is built off of a – the court idea that you need both a human relationship and a next generation technology stack to consistently and scaleably and reliably every single time do the right thing, therefore driving the cost savings an incredibly high engagement and satisfaction levels that are core to what we do. Oftentimes when you think about our competition, you think about competition that either A, is very digitally oriented and doesn’t want to invest in the human relationship. B, is very human oriented, but doesn’t have the technology to allow smart insights to be created by leveraging a really rich data set in next generation technology, or C, companies that have attempted to pivot into the category from individual silos of the space, but without the longitudinal understanding of a consumer’s healthcare journey. Stephanie Davis: All right. That’s super helpful. Well, thank you again. Rajeev Singh: Thank you. Operator: Thank you. At this time, I’m showing no further questions. I would like to turn the call back over to Rajeev, CEO for closing remarks. Rajeev Singh: We appreciate all of you being here for our first earnings call. We appreciate all your questions and we look forward to updating you in just a couple months time. Thank you. Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for participating, you may now disconnect.ACCD Ratings Summary
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