Accolade, Inc. (ACCD) on Q3 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by and welcome to the Accolade Inc., Fiscal Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference maybe recorded. Todd Friedman: Thanks operator. Welcome everyone to our fiscal third quarter earnings call. With me on the call today are Chief Executive Officer, Rajeev Singh and our Chief Financial Officer, Steve Barnes. Shantanu Nundy, our Chief Medical Officer will join us for the question-and-answer portion of the call. Before I turn the call over to Rajeev, please note that we'll be discussing certain non-GAAP financial measures that we believe are important in evaluating Accolade's performance. Details in the relationship between these non-GAAP measures to the most comparable GAAP measures and reconciliations thereof can be found in the press release that is posted on our Web site. Also please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause the actual results for Accolade to differ materially from those expressed or implied in this call. For additional information please refer to our cautionary statement in our press release and our filings with the SEC, all of which are available on our Web site. With that, I'd like to turn the call over to our CEO, Rajeev Singh. Rajeev Singh: Thank you, Todd. Hello, everyone. All of us at Accolade would like to wish you a Happy New Year. And thank you for joining us to discuss the results of our third quarter for fiscal year 2021. It's a busy time of year for us with the pandemic and vaccines at the front of our members minds. And a set of new customer go lives in early stages given the beginning of the new calendar year. And we're excited to report on our progress, put succinctly we enter 2021 in a stronger competitive position than any time in Accolade's history. And the key metrics bear it out. Revenue of 38.4 million and adjusted EBITDA loss of 11.4 million were both ahead of our guidance. We raised additional capital via our follow on offering in October to further strengthen our balance sheet. The third quarter represents the end of the traditional health care selling season and we saw record adds in terms of new customers and members. We saw continued momentum across all market segments and product offerings, further demonstrating that mainstream customers, the consulting and broker community, carriers and other partners are embracing our leadership position in this important category. In fact, less than two years ago at the end of fiscal 2019, Accolade had 20 customers. About 18 months later. At the time of our follow on offering in October, we had nearly 5x that number, and our momentum has continued into this quarter. Steve Barnes: Thanks, Raj. I'm pleased to report on our results for our third quarter of fiscal 2021, which ended on November 30, and provide an update to our guidance. We generated $38.4 million in revenue in the third fiscal quarter, representing 30% year-over-year growth. This is $1.4 million ahead of the top end of the range of our guidance, which we provided during our last earnings call. Revenue growth was driven primarily by strength in new customer ads, and therefore members, particularly in the enterprise and mid-market segments. Adjusted gross margin of 41.8% was roughly flat compared to 41.1% in the prior year period, reflecting investments we've made in new customer launches, including the defense health agency, which launched in May. Rajeev Singh: Thank you, Steve. Amidst incredibly challenging times, we remain focused on our mission and our vision to help every person lead their healthiest life. That single minded focus has continued to lead to strong results for the company. With that operator, I'd like to open the call up to questions. Operator: Thank you, sir. Our first question comes from the line of Jeff Garro of William Blair & Company. Jeff Garro: I want to ask a couple questions about the fourth quarter guidance. I've guessed maybe more specifically about new customer launches and performance based fees. So first, on performance based fees, you've talked about a majority of those performance based fees occurring in your fourth fiscal quarter historically, with visibility you have now on fiscal 2021 performance, how is the seasonality of performance based fees played out during the year? Steve Barnes: This is Steve. Thanks for the question. You're right, the cost savings based performance guarantees, we almost in every case, defer and recognize those in the fourth quarter, as we track and see the healthcare spend finalized in December, then we do that ultimate tally, in January and February. And so this year would be similar to those prior years where we've deferred and would recognize those in the fourth quarter. Some customers we picked that up along the way, but that is generally the case. That's why when you look at our P&L, you see somewhere in the range of a third to about 35% of a year's worth of revenues occur in the fourth quarter, because we're picking up those cost base revenues there. And I would say that that shape looks similar this year, as it has in prior years. Jeff Garro: I know claims need to be reconciled for some time after we pass the end of the calendar year. But any visibility or degree of confidence in achieving similar level of performance based fees compared to your annual contract value, or ACV, versus what you've done historically? Steve Barnes: Right. So it certainly an incredibly unusual year in terms of the pandemic and spend. What we're seeing now remember the way that our contracts work is we generally we earn that revenue when we beat the index, or we beat the market. And even in this environment in which health care spend decreased quite a bit immediately after the pandemic. And now it's rising back up as people come back into the health care system, our data is showing that we're continuing to save against those in the fees. With all that said, Jeff, we are maintaining some conservatism even within the guide that we're providing today, because it is such an unusual year, in the end of year guidance that we've provided. Jeff Garro: Understood, that's helpful. One more for me back to the fourth quarter guidance and the impact of new customers launching on January 1. I know there's some diversification there. But - and you reference this in the prepared remarks, many customers starting on January 1, and you've talked about strong customer account growth throughout the year. And I look forward to an update in a few months when you close out the fiscal year I'm aware you end there. But in the interim, could you discuss the mix of signing customers that were live as of the end of this November fiscal quarter versus those that that went live as of January 1? Steve Barnes: Sure, I can give you some color on that. One of the reasons, we're so pleased with being able to provide an increase in guidance today, in the midst of a pandemic is the underlying core strength of the business that we're seeing and Raj mentioned in his remarks. We're seeing strong growth in terms of new bookings across market segments, meaning size of customer and offerings. And we've had a strong bookings year. So many of those either went live in terms of open enrollment services in November timeframe, or launched on January 1, and some of that uplift in our guidance relate to a strong new booking season of customers that launched on 1/1. Operator: Thank you. Our next question comes from the line of Robert Jones of Goldman Sachs. Robert Jones: I guess maybe I know, we'll have to wait till next quarter to get the ACV number and guidance. But maybe just wanted to try to get some preliminary thoughts on how you're thinking about revenue growth shaping up for next year. And maybe just to frame it a little, some of the major announcements that you've shared so far with, Johnson Controls, you mentioned Humana, University System of Georgia, just making some rough assumptions around normal course of economics on members, employees, it seems like you can get a lot of the way there if not beyond your kind of long-term 25% revenue growth target. So just wanted to, to kind of level set ahead of the specific numbers next quarter. Is there anything specific around the wins this year that would be different than historical wins? Or is it right to think that, some of the wins you guys have already announced that are in the book, if you will, can really kind of set you up well against your long-term targets for next year. Steve Barnes: This is Steve. I'll start. Couple of things on that, the wins from this year are very much a part of what gives us confidence in raising the guidance and the view that we're providing today for this year. We will provide guidance for fiscal 22 in next quarter. But that all said, we're really bullish on the business and the long-term growth rate that we've spoken about that 25% plus kind of growth rate that we think is achievable. We do temper that a bit, given the COVID environment that we're in, the fact that there are unemployment issues that given our per member per month revenue model does give us pause, it puts us in a place where we want to have some conservatism in the way we think about the numbers. While we're incredibly bullish about the core underlying business. And those bookings this year that we've spoken about, I think are in line very much so with the kinds of bookings we've done before from a pricing standpoint. We're seeing it again, across offerings, oftentimes, with bolt-ons and our trusted supplier program or COVID response care capability, and so forth. Rajeev Singh: This is Raj. I'll just chime in to Steve's point. The bottom line is that throughout the course of the year, we've been very consistent around the fact that every market segment and all of our core products have seen traction. And therefore, we have been able to raise guidance throughout the course of the year. So, we continue to see a strong demand environment. We will obviously update guidance as it relates to next year, coming up next quarter. But, the outlook and the makeup of that types of customers signing on has been positive all year. Robert Jones: Yes. No, that's encouraging. And I guess just maybe one follow up, you guys, you mentioned, the raise from the proceeds -- from the follow on offering strengthened the balance sheet. Balance sheet was in pretty good shape to begin with. Anything you would want to highlight, as far as just priorities and use of proceeds, use of cash as we think about where the balance sheets is today, post that raise. Steve Barnes: Raj, I will take a quick swing at that one and then you add on anything I missed. The bottom-line is, we think we sit in a marketplace, with enormous growth opportunities with a huge target addressable market and in a leadership position where we're acquiring customers across segments and across products at a rapid clip. And so strengthening the balance sheet was entirely about investment investing in the business clearly in terms of continuing to fund that growth. And beyond that so strategically identify opportunities where we can expand our product portfolio or expand the types of value propositions we can deliver to our existing customers and the new customers. We're consistent against both of those objectives. Outside of that, not much more to give you obviously, before we announce new products or new offerings or potential new capabilities, but that's where our focus is. Operator: Our next question comes from the line of Ricky Goldwasser of Morgan Stanley. Ricky Goldwasser: My question is focused on the partnership with Ginger. Can you maybe give us some updates there and the uptake that you're seeing with both existing customers in the new win? Rajeev Singh: Sure. Let me let Shantanu speak to the relationship and sort of how it's working. I will tell, we've acquired our first customer where we think the pipeline is very strong there. And we see significant demand. Shantanu, you want to jump in and talk a little bit about how the relationship has gone? Shantanu Nundy: Yes, absolutely. Thanks, Ricky for the question. I think, first of all, from a demand perspective, as a physician, acutely aware of how much mental health is really a crisis around the country. And I think that's being reflected in the interest that we're seeing. And I think there's also a broader recognition from the market that, with a lot of different point solutions out there that I think there's a lot of interest for solutions that can drive outcomes and ultimately lead to cost savings. And so I think all of those are creating significant tailwinds around the partnership with Ginger, which the whole idea was to create a solution that integrated physical and mental health with an eye toward outcomes, which we thought was pretty differentiating from how the rest of the market in mental health has pursued it. And so, with that the two teams have gotten into a really great cadence starting to learn a lot from that first customer that Raj mentioned. And a lot of great early indications that we're having the impact that we wanted to see at the outset. Ricky Goldwasser: So as we think about the relationship and the uptake of customer, is this sort of customer add-on offering that we could see adding upside middle year, necessarily customers bringing on as they launched a program, that's something that they would add on as the year progresses? Rajeev Singh: Certainly, Ricky, we would expect that offerings like this one, like we saw with COVID response here this year. Actually COVID response here this year, our products are offering that are capable of launching mid-year. While some of our core offerings are capable of launching mid-year, as has been noted previously, many of them launched predominantly on 1/1 coincident with the plan year. So I think the short answer to your question is, yes, it's very feasible. And it will be largely depending upon the culture of deployment or rollouts of customers who are purchasing. Ricky Goldwasser: And then, when we think about it, the delta between the revenue guide trays into EBITDA guide, seems that there's less of a flow through. Can you maybe talk a little bit about the investments that you are doing and how should we think about these investments as we kind of like also update our models for next year understanding that it's too early for guidance yet? Steve Barnes: Sure. Ricky, this is Steve. Thanks for the question. A couple of things. As we raised guidance in terms of revenue and seeing a very strong core underlying business, it's really important to us to maintain that profitability target but not in a rush to outperform per se in the bottom-line, given all the opportunities we see to invest in growth. For example, investing in distribution, around sales and marketing, not just adding quota carrying reps, so to speak, but also building strong relationships, in channels with brokers and consultants and others in those channels. The way we work with Humana, for example, investing behind those opportunities to drive smart growth with attractive unit economics is how we think about it. So when you step back, I would harken back to guidance we've spoken about in the past, which is this idea of a demonstrable step towards breakeven as we drive attractive growth. So that idea of roughly two years out to breakeven, or roughly breakeven profile is still how we think about the business. So big market opportunity, creating value by pursuing it with attractive unit economics to get to a responsible, breakeven type of profile in the next couple of yours. Operator: Thank you. Our next question comes from Michael Cherny of Bank of America. Michael Cherny: I'm pulling a little bit more on that thread, relative to the EBITDA side tying back to a couple of other questions that you addressed earlier. As you think about the future growth and you talked about the mid-20s, give or take long-term growth targets that you've had. Would there be any desire, I guess, how would you contemplate especially some of the new products, the potential to essentially spend to accelerate that growth? Or is it more fact of wanting to stay measured rollout products as is and not get too ahead of your skis, in terms of new customer momentum. Just trying to think about the puts and poles on that long-term trend? And how you think about manage those cost in terms of performance lines? Rajeev Singh: Steve, let me take that from a philosophical point and then kick it to you to add any color. From my perspective, Michael, the way we think about it, we've tried to be very disciplined consistently in terms of the way we talk about our business and the way we run our business that we see a 25% growth rate as far as I can see. And that we're going to run the business in a disciplined fashion turning towards that breakeven point out in fiscal '23. With the acknowledgement as well, that to the degree, we see growth opportunities that are more material than that 25% that in a huge target addressable market with a leadership position that will evaluate those opportunities and potentially and bias towards spending against those opportunities. And so to the degree, we're outperforming, you're going to see us spend into that outperformance to continue that growth trajectory and it continues to distance ourselves from the competition as it relates to both innovation and customer acquisition. And I think the reverse is also true. Well, we don't see us disciplined up from a top-line and growth perspective. And you'll see us disciplined from a bottom-line perspective to a degree that growth doesn't materialize. Steve? Steve Barnes: The only thing I'd add to that is, as you see us, for example, in this quarter, outperforming on the top-line and pursuing those opportunities, as Raj just spoke of. A discipline towards maintaining those bottom-line targets as a step towards breakeven. So we have a very, I think, healthy tension, as we run the business, Mike between pursuing growth at attractive unit economics levels, while we maintain that discipline to roughly breakeven. When you dig into the metrics behind our business, when we have longest term contracts, three-year type of multi-year contract on the PMPM basis that are very predictable, you can make a strong argument to invest more in growth, where we are today, investing in 20 or so percentage of revenue in sales and marketing. But we're doing so with a real eye towards maintaining that step towards running a disciplined business towards breakeven, balanced with the growth opportunity in front of us. Michael Cherny: That's very helpful. And I guess, one follow up that Raj kind of gave, the opening for -- you had obviously a nice some of these momentum in terms of the number of new customers added. Can you give us any sense of the push and pull you had in some of the discussions during the selling season? We hear so much from companies about basically everything is COVID, COVID, COVID. And figuring out how to return to work and all these other dynamics? Well, you actually can help with that on that front and have a readymade solution. So I guess, as you sat through whether that specifically or just pitching the total wares of Accolade, how do those discussions start to shape out? And how were some of the proof points really able to shine through to allow you to drive the customer additions that you have? Rajeev Singh: Thanks for the question, Mike. I think if you think about us, if you rewind, or excuse me zoom out to the highest level what Accolade provides is extraordinary relationships with members who are seeking health care, but confused by the healthcare system. We build trust with those members, that trust yields more interactions, therefore high engagement, because we do a good job of guiding them to the right place, we lower costs. If you zoom out of that, there's been no more profound set of needs, as it relates to health care questions and decision-making as it occurred in the last 12 months with COVID and now rolling into the vaccine. So first testing, then the vaccine, and then of course, the mental health challenges that have been exacerbated in the country. And so everything that prospects have been talking about, in many respects, Mike have been things that they needed to be able to get data to their employees, start with education, move towards guidance, and then yield better results. And so in a shorter way of saying things, our entire business is built on building relationships and leveraging those relationships to drive good guidance towards better clinical outcomes at lower costs. And this year, that has been more profound than ever and we've been able to sit in a lot more boardrooms than may be other vendors who might be more conditioned folks. Operator: Our next question comes from the line of Jailendra Singh of Credit Suisse. Jailendra Singh: I want to follow up on the question earlier about implied Q4 guidance. Is it fair to say that around two thirds of that revenue is fixed. And the $3 million range you have on the guidance? Is that all functional for saving space, revenue and operation and performance revenue, because I'm assuming that the fixed portion is pretty much locked in at this point with most of the contracts gone effective 1/1, just curious if you can give some a little bit more color around where is the variability there. And when you say that, that you're building some cushion, therefore fiscal Q4 is more on the saving side or some other variable we should be aware of? Steve Barnes: You're in the right ballpark in the fourth quarter that you can think about it somewhere in the range of a third being variable based revenue. The reason when you think about what's in there, when we think of fixed revenues, we think of that PMPM revenues, members times a PMPM rate. There's always some uncertainty around how many employees are going to be on the rolls, so to speak, when we're in the midst of a situation like we are right now. So we maintain some conservatism on those so that we don't get ahead of ourselves, given that employers are still managing their businesses through the pandemic. And then, with respect to PGs, similar type of approach where we want to have some conservatism around given the unusual environment that we're in. And so you're seeing that in the guide that we're providing today. All of that to say, a lot of that uplift relates to the new customers we booked and the growth that we're seeing and the confidence that we have in the business. Jailendra Singh: Okay. And then last quarter, you talked about those benefiting from the slower hiring ramp. I was just curious that if you still continue to remain conservative on hiring, even when the demand is, it looks okay for you guys. Just curious, like, how you are thinking about that? Steve Barnes: Sure. So you'll see this year or this quarter, I should say the third quarter OpEx as a percentage of revenues grew a bit on a sequential basis. That's the impact of us letting out the reins a bit as we came out of the initial part of the COVID pandemic back in March, April, May. And the confidence that we saw as we booked more customers prepared for customer launches in the fourth quarter and are seeing that demand environment remains strong. So it's always about maintaining that balance of hitting those bottom-line targets and reinvesting oftentimes back into that growth as we overperform on the top. Jailendra Singh: Okay. And the last question, Raj, I was wondering if you can spend some time on the competitive landscape. We have come across several digital health companies, which have historically focused on some points, solutions or some set of services, and are looking to explore the employee navigation, employee engagement services for employers. I know it is still an under penetrated market. But do you think COVID has resulted in increased competition in this space and more interest from other players where you come across during RFPs? Any thoughts on that? Rajeev Singh: When you think about the competitive landscape in advocacy navigation benefits and health management, I think the space has been fairly competitive for a long time with digital only providers who have attempted to solve the problem fundamentally by providing digital tools to consumers to be able to manage their healthcare decision-making, that's proven to be ineffective for a number of years for a variety of reasons that we've outlined in previous conversations. You've also seen companies really focused on either conditions, or very specific populations, high cost claimants, or those who are dealing with acute conditions. I think you'll continue to see activity in those spaces, those categories might choose to potentially position themselves more in navigation or advocacy largely because this category, navigation advocacy, is growing really quickly. And therefore it might be advantageous to position themselves there. But we haven't seen a material change in companies entering this space, with the variety of tools needed to be able to deliver value to customers. For us that as you know, mean, from my care team, that you build trusted relationships, clinical teams that can guide people through clinical programs are evidence based and that these are better clinical results, all of which drive cost savings that you're willing to sign up to right down to the dollar. So has a competitive landscape changed in that regard? No. Have we seen more companies doing the same thing, but announcing that they're engaging companies or that they are navigation companies, absolutely. Operator: Our next question comes from the line of Sean Wieland of Piper Sandler. Sean Wieland: So my question is on the recent price transparency rule for providers. And I wanted to get your sense of how you see this longer term impacting your value proposition in that care navigation space. Shantanu Nundy: As you know, one of the most common points in someone's care journey that we help them with is, is finding a provider. And we've made a lot of investment and being able to personalize that decision and help match people to the best provider for them. I think, for us, the new transparency rules is actually really exciting. I think what that allows us to do is have even more granular data that we can use, in concert with other data. I mean, we know as a patient price is important, it's a critical input into a decision, but so is the quality of providers, so is the appropriateness of the care of the provider, so is the safety and quality of the facility that they're in. And so we look at it as really additive to what we're able to provide, which is we're able to combine multiple data points together, including price transparency data, and deliver that in a way that consumers can understand and actually help them make that right decision for them and ultimately get to better health outcomes. So we're very bullish on the new regulation. Sean Wieland: That's great. Thank you. And then I just wanted to check in again, on the airlines, they announced that they were bringing back some of their furloughed employees. Did that have any impact on your guidance? Steve Barnes: I would say a little bit, but not a lot. Certainly the majority of what you're seeing in the guide is the underlying business launches on 1/1 and so forth. The airlines, we maintain conservatism around in the fourth quarter, primarily, because it's not clear exactly when and how many of those employees come back, and the just the overhang that the airlines are obviously still, punching through a low travel environment. So we're maintaining some real rational conservatism there. Sean Wieland: Okay. And, Steve, you said that, that you're managing cash collections for the airlines to be flat for the fiscal year? Is there any kind of catch up payment that is planned for next fiscal year? Steve Barnes: We don't comment specifically on customer contracts Aean but I would say that was primarily meant to address the acute situation of the pandemic, and to keep the changes in the contract, tried to keep that inside the fiscal year. So otherwise, those relationships continue to be strong. And those contracts are the way that they're originally structured. Operator: Our next question comes from the line of Matthew Gilmore of Baird. Matthew Gilmore: Maybe going back to the Aon study, I was curious if that was specific to total health and benefits or to some of the other products? And then more broadly, is this a segment of the market, the smaller employers? Are they more sensitive to studies like this? Or is it a similar dynamic to the prior study for large employers in terms of the importance from this? Shantanu Nundy: And we love talking about that study. I think of the first, yes, this is a total health and benefit customers. And that's really a function of the fact that we wanted to do the most rigorous study design possible. And so what that meant is, we wanted to have a baseline year, we wanted to go look at customers at one year and look at them in two years. And so, just in terms of where the business was two years ago, the preponderance of our customers were in total health and benefits. In terms of your second point, I think it actually ties to the earlier question about competitiveness too. I think where we are today with different navigation services out there. I think the markets matured to the point where ultimately what they care about is costs and outcomes. And that's extremely difficult to achieve in healthcare, as you know. And so, for us, I think the Aon study is a significant competitive differentiator, right, because it allows us to say that independently through a very rigorous study design are able to demonstrate, significant and sustained cost savings. We think that's difficult to replicate, frankly. And it's important to all sizes of customers, because ultimately, one of the greatest challenges that small customers are stressful and facing is, the significant cost. And as we're looking at the next year, and seeing predictions of potentially another double-digit year in terms of a cost trend, we think that's going to be of critical importance to all sorts of customers. Matthew Gilmore: And then, I guess I wanted to ask about the TRICARE contract. I know, in the past, you said, that implementation is done really well. I was hoping you could remind us about the process that they'll go through to determine when to potentially expand the number of slides you're supporting, does that take place in calendar 2021 or is that further out? Rajeev Singh: I think the best way to think about that, this is Raj, again. The best way to think about that is we need a measurable period upon which we can demonstrate value associated with the agreed upon measurables for the contract. Those agreed upon measurables for the contracts, just to take one step back look fairly similar to the types of performance guarantees and incentives that we've educated the market out as it relates to our consumer customers, or excuse me, our commercial customers. That deployment really went live in the early part of this year in May, excuse me in the early part of last year calendar 2020. We would expect that we need at least a year, potentially longer to be able to show the effects of all of the capabilities that we deliver to those consumers, and then claims run out against that year or potentially longer. So we don't have an exact timeframe where the government will make that decision, we would expect it would be in late 2021 calendar or early calendar 2022. We continue to give you more color commentary on where we are. We continue to expand to the gross size of the population in terms of members engaged. And we continue to see really strong results as it relates to engagement levels within those populations as well as satisfaction levels. Operator: Our next question comes from the line of Hannah Baade of DA Davidson. Hannah Baade: I first wanted to ask a bit of a follow up on the transparency rule. Obviously, the rule itself will not change the impact of high prices and overall spend levels or your overall consumer demand. But do you have any concerns that more consumer-friendly price menus may impact the number of annual encounters you have with your members? Shantanu Nundy: I think for us the decision around making, choosing a provider is an incredibly complex and personalized decision, right? I mean, I think all of us had been in that position of trying to find a doctor. And price and cost are certainly a critical input. But we do really look at it as just one input, right. And a lot of care decisions as a consumer, you may want to pay for higher costs provider, if there's a commensurate increase in value that you can get in terms of the quality of the complication that you're going to face and that's what we see. And that's what our record is done with serving these numbers is that what's really missing is not necessarily a single self-service tool, but it's the ability to integrate disparate pieces of information and deliver it in a personalized, empathetic way. That ultimately is what our consumers are looking for, and ultimately, what drives the greatest value. And so, we don't anticipate that this alone is going to decrease the engagement that we see. We think it's going to continue to be able to strengthen what we can deliver to our members. Hannah Baade: And just want to follow up, when thinking about that initial PMPM rate, on a customer land, how does that vary when Accolade is replacing other solutions versus a greenfield customer? Steve Barnes: So the way to think about that is generally speaking, if you think about total health and benefits, we're oftentimes replacing member services, provider services and clinical services that the health plan is providing. And so there is some potential for savings there. But the way to think about it really, that we think about it with our customers is in terms of the ROI that's generated, and you are harkening back to that report and the returns and the savings that we're generating for customers is, we think of it in that way, the return on the PMPM fee that their the customer is investing. Operator: Our next question comes from line of Richard Close of Canaccord Genuity. Richard Close: Maybe a follow up on Mike's questions on client discussions. Raj, I wonder if you could talk a little bit give us some insight in terms of maybe how discussions with potential customers changed from the beginning of the year to the end of the year? And how -- maybe compared to past years, what they were mainly focused on? I think you said overall demand is accelerating is, is there any way or any metric you can provide to sort of quantify that? Rajeev Singh: Let me start with the beginning and I will -- with the early part of the question, which is how are the conversations evolving over the course of a calendar year, and perhaps really, even from years previous to a pandemic year, like the one we have this year. By and large, what I would say for sure, is by segments, we saw in the middle part of the year as we were hitting the heart of the pandemic and the first wave of the pandemic, customers were very, very preoccupied, understandably, with COVID, COVID testing access to care and an understanding of how to keep their employees safe. I think our immediate response to that was not only Accolade COVID response gear to help people return to work, but also a set of clinical programs available to all of our customers, to help them manage their employees, employee education and access to care, et cetera. Beyond that, the conversations have continued to then move into a sense of what population health looks like, for 2021, I think, post the first wave of the pandemic, the conversations moved into, we believe that costs are potentially depressed in 2020. In 2021, to the degree they return, how can we manage that, again, an area where we think we can play a really significant role or prospects and customers as it relates to engaging in total population health management via risk stratification and clinical programs. Today, it's a little early to tell with the second wave upon us and the vaccine upon us. Where the conversations will lead us, we do know that they're growing as the conversation continue and as our relevance continues to be really, really hot. Last point, I think, Richard, as it relates to any metrics we could guide you to, I think we're really focused on growth and into the core market segments and across each of the core products. We'll update guidance next quarter, for in terms of where we are from a TV perspective and our expectations for the next year. Beyond that, I think it's more of a qualitative view on the continued strength of the business as evidenced by the top-line growth of the company. Richard Close: And if I can slip one in for Steve, appreciate the comments and the visibility. And with respect to performance fee. And I think we've discussed previously about two thirds of performance fees are based on operational metrics, maybe the net promoter score, engagement and customer satisfaction. I would think that you performed very well on those engagements during COVID. Is there any insight you can provide in terms of how that has trended during the year? SteveBarnes: Sure. And thanks for the question, Richard, good to talk to you. First of all, you're right. Of the variable revenue or performance based revenue, about two-thirds of them are operational types of performance guarantees like engagement rates, consumer satisfaction, as measured by MPS or CSAT, engagement of families and membership. Those have trended very well during the year obviously, it took a different shape and way that that happened from the beginning of the year when COVID first hit to where it is today. All along, we've been helping members and those are for now through those kinds of operational PGs. And then as it relates to the other part, the cost savings PGs. Those are primarily measured in the fourth quarter contractually in determining the dollar amount that we earn, but we're able to track them as we move through the year. And I would say we've got good visibility baked into the guidance that we've provided as it relates to those PGs. Operator: Our next question comes from the line of David Grossman of Stifel. David Grossman: I want to go back to some of your prepared remarks. And maybe I didn't catch this right. But I thought you said that ramping new business could be a temporary drag on gross margin. And I just wanted to make sure I heard that right. And if I did hear that, right, maybe you could perhaps better -- help me better understand that dynamic. Steve Barnes: When you look at one way to think about that is, you're right in October, November, and going into December and January 1 go-live, we're certainly investing in launching new customers, part of that is staffing up. You'll see historically, our fiscal third quarter, which includes that October, November timeframe. Gross margins do compress a bit, that's reflecting the staffing up for those 1/1 launches. And part of what you're hearing from us in the fourth quarter guide. Not only strong top-line, but also investment in those new customer launches to ensure that they go really well, while we also invest in growth parts of the business for new business around innovation and sales and marketing. That's a bit of rapid dynamic that we see in third and fourth quarter. David Grossman: And then, another question just about the business model. I'm curious whether you can give us a sense of, how much automation the market in the model can tolerate as the business matures. And where we are in that journey, particularly in the large companies segment, is there some kind of curve that it follows as you get to know these clients better? Or, I know it varies by customer size. But are there any other factors we should consider as we think about, how many kind of physical interactions you will have versus how many will be automated over time? Steve Barnes: I'll start on that. Raj, would you like to chime in? Yes, there are a couple of ways we think about that, David. And I would step all the way back to our model at its core, which is we believe very strongly that the engagement of members and getting them to the right health outcome. It's important to combine that clinical expertise, the empathetic touch, along with a technology and innovation behind it to help it scale. And we're constantly balancing those and investing in that. As customers mature, for example, we see mobile app interactions and self-service interactions increase as customers get to know us better. So there is that efficiency built into customers as they mature with us. But as we introduce more offerings and continue to add on to that relationship, it's kind of a constantly moving target across customers. But there certainly are those kinds of efficiencies that can happen with customers as we grow with them. Rajeev Singh: One last point, because I know we're running out of time. Just a quick addition to that, as we add interactions with customers and that data about those customers from the various data sources, we're able to better risk stratify those populations, and then therefore, prioritize and guide them to the right programs that are highly prioritized, risk stratified fashion. And that might be in addition to the technology levers that Steve mentioned, the single biggest drivers of long-term step functions from a margin perspective. Operator: Our next question comes from Stephanie Davis of SVB Leerink. Joy Zhang: Hi, this is Joy Zhang on to Stephanie. Just wondering you can talk about if there were any levels of revenues reserves going into the quarter and was any of that reversed? Steve Barnes: Meaning with respect to the third quarter is your question. I think beating the guidance that we provided was multi-faceted. Some of that was related to stronger membership growth. So you can make the point that we had a level of conservatism that fortunately showed up better even than we had in our models. So there are elements there where we outperformed in terms of just membership. reminder that we have a very diversified customer base across industry. So where we do see some industries under pressure like the airlines, those are well made up for -- from customers in retail and technology and financial services. So there were certainly some of the beats there. Other parts of the outperformance came from new offerings like COVID response care that Raj spoke about and Accolade boosts and some trusted supplier upsells in period revenues. And then, finally just continued strong performance on the PGs and the operational performance guarantees as we just talked about on a question or two ago. Joy Zhang: And as a follow up, can you provide any color on what the current mix of airline revenues are? And what's the mix of Comcast is? Steve Barnes: So airlines and Comcast, was that your point? Joy Zhang: Yes. Steve Barnes: Yes. So you'll see references throughout our 10-Q about major customers that those percentages have been roughly consistent quarter-over-quarter, you saw Comcast, pop back up our largest customer in line with expectations. But nonetheless, the big trend is that as the business grows, each single customer becomes less a percentage of our total revenue, which is obviously healthy from a diversification standpoint. So that trend continues and we expect it to continue into the future. Operator: Our next question comes from David Larsen of BTIG. David Larsen: Congrats on a good quarter. With the revenue growth of 30% this quarter. I mean, it seems to me like 25% growth, longer term, that might be a little bit conservative. I mean, I'm just thinking about fiscal 2022. The variables, in my mind, are people going back to the doctors offices and claim sort of catching up from the delayed care that had happened over the past year. And then also the labor markets, can you just talk a little bit about that? Do you need to see, a significant improvement in the labor markets to meet that sort of 25% growth in revenue bogey? And then, with the claim, sort of catch up something that does happen? In your mind, is that a potential tailwind or a headwind or neutral? Steve Barnes: So a couple of things. Obviously, we're pleased with a 30% growth rate in the third quarter, and understand your underlying point. We'll come back with future guidance. Importantly, I don't think we're depending upon very discrete or specific employment factors into that long-term target growth rate of 25%. What we're looking at there is very early stages of an extremely large market in which most recently reported just under 100 customers against the market of 20,000 plus opportunities. That's where that growth comes from that strong demand environment that Raj was speaking to. That's what gives us confidence in that kind of 25% plus growth rate opportunity. And then, with respect to claims catch up, we view it as more neutral because our contracts are generally structured that our costs need to do better than market. So whether spend environments are lower, like they were this year or higher, like we all expect them to be next year. The Accolade service ought to show up just like, on this study we talked about earlier, we'll describe that we do better, materially better than the market because of our model. I think that that's the takeaway for us, it gives us confidence and the strength of the business and the opportunity in front of us. David Larsen: Okay. One more really quick follow-up. Assuming claims costs do come in significantly higher in fiscal '22 relative to fiscal '21. And assuming that you can provide the typical percent cost savings, might that result in higher sort of performance fees in fiscal 4Q '22. Or is that not how the contracts are structured? Steve Barnes: Generally not David, there is a cap on them. We do that. We think it's smart. Our customers appreciate it. They want to know how to budget for the service. So there isn't, this unlimited upside and the contract, our view is continuing to provide that value really strong ROI for customers that will result in high returns for the customer and which job and retention and new customer acquisition. Operator: Thank you. At this time, I'd like to turn the call over to Rajeev Singh for closing remarks, sir. Rajeev Singh: Thank you, operator. We appreciate all of you being here and tuning into our Q3 updates. We look forward to talking to you next quarter and looking ahead to fiscal '22. Thanks very much. 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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