Accolade, Inc.

Good day and thank you for standing by. Welcome to the Accolade first quarter 2022 earnings results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Todd Friedman, please go ahead.

Thanks, Operator. Welcome, everyone, to our fiscal first quarter earnings call. With me on the call today are our Chief Executive Officer, Rajiv Singh, and our Chief Financial Officer, Steve Barnes. Shantanu Nundi, our Chief Medical Officer, will join for the question and answer portion of the call later. Before I turn the call over to Rajiv, please note that we will be discussing certain non-GAAP financial measures that we believe are important when evaluating Accolades performance. Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and the reconciliations thereof can be found in the press release that's posted on our website. Also, please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause the actual results to practically differ materially from those expressed or implied on this call. For additional information, please refer to our cautionary statement in our press release and our filings with the SEC, all of which are available on our website. With that, I'd like to turn the call over to our CEO, Rajiv Singh. Thanks, Todd, and thank you all for joining us.

It's an exciting time to be here at Accolade. We're one month past the close of the PlushCare acquisition and are well underway with the work of integrating Accolade, PlushCare, and 2ndMD into a single business. Combine that with the excellent financial results to start the new fiscal year and the return of our first wave of employees to our offices, which we're very excited about, as well as a sense of normalcy returning to the communities in which we live, and there is a strong feeling of optimism at Accolade today. My reasons for optimism are grounded in the simple belief that we can deliver differentiated value for our customers. When I joined Accolade nearly six years ago, it was clear to me that the foundation of advocacy and navigation was would be the cornerstone of a richer set of services that could one day bring value-based care to the employer healthcare market. Advocacy provides the foundational platform of broad engagement, longitudinal relationships, and a rich data set that makes every incremental service that you add to it better. That evidence originally came in the form of partner relationships via our trusted supplier programs. and would eventually validate a bold acquisition strategy geared towards assembling the industry's richest set of tools for engagement, cost reduction, and improving clinical outcomes. Most importantly, our customers have been energized by these new capabilities and their potential for value. We're deep into these customer conversations and hard at work outlining for each how our enhanced solutions will do even more for their specific populations. Additionally, our integration and innovation are working feverishly to launch a fully integrated offering, one seamlessly combining advocacy, primary care, and expert medical opinion. Our mission is to create a healthcare experience that finally puts the consumer's needs first. And we cannot wait to show you how our vision for the future translates to an integrated offering. For today, I'll spend time talking about our early progress, initial successes, and high-level plans to change the industry. First, a quick review of the quarter. Revenue and adjusted EBITDA were both ahead of our guidance. Revenue of 59.5 million was 66% greater than last year, and adjusted EBITDA loss of 12.8 million reflects some of the investments we told you we plan to make in integration and the launch of a new enterprise primary care business. Steve will provide more color, including some high-level comparisons to account for the impact of our second MD acquisition. From a business standpoint, I want to touch on a few key highlights from the quarter. including the integration of SecondMD and PlushCare, a positive start to the early selling season, and the growing importance of behavioral health. I'll start with SecondMD. In just three months since we closed the acquisition, we have signed our first cross-sell customers with organizations like the City of Fort Worth and a Fortune 50 insurance company, adding expert medical opinion to their existing advocacy services. These early cross-sell wins, more rapid than even we expected, along with 2ndMD's continued new business success, validate our hypothesis for the transaction very clearly. Additionally, as we announced when the transaction closed, expert medical opinion is now a core component of our total care offering. The value proposition and, more importantly, the measurable impact on employee well-being and health outcomes have immediately been apparent to our customers. Not only have we seen cross-selling success, but our first joint customer went live on July 1st. We're optimistic about the pipeline of expert medical opinion deals for the remainder of the year as well. Most importantly, member MPS scores for expert medical opinion remain at historically high levels above 90. It's July, so we're in the prime summer months for the traditional healthcare selling season. For those of you who are new to our company, large employers tend to make big decisions related to their healthcare and benefits plans in the summer in anticipation of fall open enrollment and a January 1 launch. As we've told you before, with our addition of new capabilities and expansion of our target customers to include businesses of all sizes, we are selling throughout the year. However, it's still an important time in the industry, and we've had a very positive set of success with both renewals and new business. We signed deals in the first quarter in each of our customer segments, middle market, enterprise, and strategic. In addition to some of the notable deals I mentioned for 2ndMD, We also signed McKesson, a Fortune 50 pharmaceutical company for total health and benefits, our premier offering. We also saw key expansions in the populations we're serving with Humana, as well as notable customer wins via our new health plan partners who had established relationships with 2ndMD prior to the acquisition. One in particular was a Fortune 100 financial services firm who is served by two national health plans. I note the multi-carrier dimension Because while it is one customer selecting second MD, our ability to meet the needs of their full employee base relies on the strength of our relationships with multiple carriers. One other note that I would call your attention to. One year ago, when we went public, we outlined the multiple flavors of advocacy offers we bring to market with the belief that customers who choose our lighter touch offerings might begin to upgrade to more wholesome solutions down the road. In fiscal Q1, we saw our first upgrades from total benefits and total care to total health and benefits. One of those was the Pepsi-Cola National Brand Beverages Group, which is the second largest franchise bottler and distributor for PepsiCo covering the mid-Atlantic. Finally, we're continuing to see an increase in interest in mental and behavioral health. This past quarter, we signed more customers to our mental health integrated care solution with Ginger. Incrementally, we're incredibly excited about the embedded mental health capabilities in our new PlushCare primary care solutions. As COVID has exposed the incredible mental health crisis in the country, we believe our ability to provide a multifaceted behavioral health solution to customers, integrated with the most critical touchpoint, primary care, is going to be very meaningful to our customers and their employees and their families. And that's a good segue to transition to PlushCare. First, while it has been less than 30 days since the acquisition is closed, we've already had the current plush care solution as well as our expanded primary care strategy in front of a number of significant customers. Our field teams have all been trained on plush care and all our new solutions, and we're actively executing on a cross-sell upsell strategy that is looking very positive. When we announced the plush care acquisition, we talked about a parallel strategy of continuing to focus on the existing direct consumer business while building out an expanded accolade primary care strategy that leverages the core strengths of our navigation, advocacy, and expert medical opinion offerings. The core PlusCare business has continued to perform very well. In fact, while traditional urgent telemedicine providers talked about a post-COVID return to lower growth levels, PlusCare has continued to grow subscriptions and business. We'll share more about that when we report our first combined quarter in October. On the broader enterprise primary care model, That work continues, and we plan to roll out that strategy in the near future. One thing we haven't talked about previously is our plan to offer a fully featured solution for primary care on a standalone basis to customers in the quarters ahead. For many customers, especially those in the middle market, the existing PlushCare platform is a powerful primary care offering that our customers can begin using immediately. It's a testament to the combined execution of both the PlushCare and Accolade teams that we're able to move this quickly. Next, I'd like to share a member story from a plush care physician that I think is a good allegory for our broader primary care strategy. This story centers on a member who lives in a rural area far from a medical office, a problem for many of our customers' employees, by the way. Suffering from stable hypertension, she had reached out to plush care for help refilling one of her three blood pressure medications. The member was complaining of fatigue, but she didn't want to go to the hospital because of COVID. A typical transaction-focused telemedicine provider might have simply refilled the medications. The PlusCare primary care physician built a relationship and convinced the patient to have a home blood testing kit sent to her. The testing kit revealed something serious and the requirement for more tests. Her glucose, liver, and kidney levels were very elevated, and her A1C was twice the normal level. The member thought her hypertension medication was out of balance, But in reality, she has undiagnosed advanced type 2 diabetes with chronic kidney disease, dyslipidemia, and fatty liver. At this point, you can see the incredible difference in the plush care approach compared to traditional urgent telemedicine. The plush care physician discussed a number of potential therapies, including medications and lifestyle changes. The plush care nursing staff guided the patient on glucometer use and self-monitoring for type 2 diabetes. The plush care op staff engaged with the patient, the pharmacy, and the physician to ensure that the correct supplies were ordered and delivered to the patient. The patient refused insulin, so constant monitoring, follow-up, and testing was necessary. After one month, the patient had adopted new behaviors recommended to her by her plush care team, including installing a treadmill in her home and changing her diet. Her blood sugar levels dropped by half. Three months later, her A1C levels had dropped by half and her kidney and liver levels were back to normal levels. Her blood pressure had also dropped, so the physician was able to discontinue two of her three medications. At the next follow-up, her levels had dropped even further to the point that she was no longer even considered pre-diabetic and her blood pressure was in a normal range. This was a terrific example of a patient who had a clinical success despite having limited insurance coverage in a rural area with no close access to specialty care. And arguably, she was successful because of the virtual care approach since access to a brick and mortar facility was a barrier. Those barriers exist across the country. They could be related to location or socioeconomic factors or race. We have the opportunity to break those barriers and change the way care is delivered. When the PlusCare primary care doctor that delivered this care told this story, She talked about the difference that would have been made if the member had been engaged with Accolade before she knew she had this issue. This member, with her hypertension and multiple medications, would already be on Accolade's radar through our ongoing monitor of claims and likely actively engaged with a health assistant and nurse. When the member reached the plush care physician, the doctor would instantly have all of the patient's medical history, list of medications, critical insurance information, and all the other benefits that the member's employer might be providing. an integrated medical expert opinion specialist might've been engaged sooner. And when it comes to the necessary supplies and follow-ups for this treatment and beyond to a comprehensive ongoing relationship, the physician and plus care care team would now have the extended capabilities that come with the Accolade frontline care team. As we look to what's next, this real life example clearly outlines our opportunity to fully integrated data-driven approach to improving the well-being and overall health of our members is the goal, and we now have a rich set of assets to achieve it. With that, I'd like to turn the call over to Steve to cover financials. Thanks, Raj.

First, I'll recap the results for the first quarter of fiscal 2022. Keep in mind that we closed the second MD acquisition on March 3rd, just a few days into our first fiscal quarter. Where appropriate, I'll provide color on the year-over-year comparisons beyond the tables and the press release. The plush care acquisition closed in June after the first quarter ended, so there is no plush care contribution or impact in any of these results. We generated $59.5 million of revenue in the first fiscal quarter, representing 66% year-over-year growth on a gap basis over the prior year period. In our 10Q, we provide pro forma results for the combined business, that show 35% growth year over year. As we provide pro forma results per SEC requirements for the rest of this fiscal year, please keep in mind that we're selling our solutions both together and separately. So while the reported pro forma revenue growth and profitability numbers are intended to reflect the acquisitions as standalone, it may not always be a perfect representation of how we sell to customers and run the business overall. As a quick example, we sell expert medical opinion as part of Accolade Total Care, as an upsell, and as a standalone solution. Some of that would be recorded as second MD revenue for pro forma purposes, and some will be recognized as Accolade revenue. The revenue outperformance relative to guidance was largely attributable to solid execution on multiple fronts. Both customer member counts and performance-related revenues exceeded the expectations built into our fiscal Q1 guidance. including the timing of achievement of a customer performance guarantee that pulled forward approximately $1 million of revenue into the first quarter, which also positively benefited adjusted EBITDA. Fiscal Q1 adjusted gross margin of 40.2% compared favorably to 38.3% in the prior year period. As stated on the Q4 call, we expect adjusted gross margin to remain relatively flat this year. Adjusted operating expenses decreased slightly to 62% of revenues in Q1 of fiscal 2022 versus 65% of revenues in the prior year period. And adjusted EBITDA in the first quarter of fiscal 2022 was a loss of $12.8 million, which compares to $9.4 million in the prior year first fiscal quarter. Turning to the balance sheet, Cash, cash equivalents and marketable securities at the end of the first fiscal quarter totaled $425.5 million. Note that during the quarter, we paid $236 million related to the second MD acquisition and received $245 million in proceeds after estimated expenses from our convertible notes offering. And after the quarter ended, we paid approximately $53 million related to the flush care acquisition. So on a pro forma basis, cash, cash equivalents, and marketable securities were approximately $373 million heading into the second fiscal quarter. Accounts receivable increased from the end of fiscal 2021 to $15.3 million at the end of fiscal Q1, representing about 24 days revenue outstanding for the quarter, consistent with our last update on the expectation that DSOs normalize in the 20 to 30 range. And the increase in AR over the prior quarter relates primarily to the acquisition of second MD. Finally, we had approximately 58.8 million shares of common stock outstanding as of May 31st, 2021. And note that this does not include any shares related to the second MD earn out or the acquisition of PlushCare. So for your models, you should include approximately 7.1 million shares issued for the PlushCare acquisition in June. Additionally, there are up to approximately 2.2 million shares related to the second MD earn out and up to 1.4 million shares related to the plush care earn out to be issued in calendar 2022. And now turning to guidance. For the fiscal second quarter ending August 31st, 2021, we expect revenue in the range of $69 to $71 million, which includes plush care revenue from June 9th. and adjusted EBITDA loss in the range of $22 to $25 million. And for the fiscal year ending February 28, 2022, we expect revenue in the range of $300 to $305 million, representing 78% growth over the prior year at the midpoint of the range. Breaking this down further, we've said that we forecast the poor accolade business at approximately 25% growth, and we expect SecondMD and PlushCare to grow faster than Accolade. If you assume a full year of PlushCare contribution and combine PlushCare and SecondMD's calendar 2020 revenue with Accolade's $170 million in fiscal 2021 revenue, it would give you about 30% growth at the midpoint of the range. Adjusted EBITDA loss for fiscal 22 is expected to be in the range of $49 to $54 million representing an adjusted EBITDA loss of approximately negative 17% of revenues at the midpoint. This is consistent with the color we provided last quarter and at the plush care close to expect approximately negative 20% adjusted EBITDA margins from plush care and incremental investment as we build our enterprise primary care business. And now I'll turn it back over to Raj for his concluding remarks.

Thank you, Steve. Before we take any questions, a couple of quick announcements. Please keep an eye on your inbox for a couple of upcoming events. We heard good feedback following our deep dive session on expert medical opinion, so we're planning the next session later this month, which will focus on data. We're also getting ready to host our annual customer event again in September. Attendance will be limited to customers, but we do plan to webcast the keynote and host an analyst Q&A session. Please reach out to Todd for more info if you don't get an email with those save-the-date details. Operator, with that, I'd like to open the call for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from David Grossman with Stifel. Your line is open.

Thank you. Good afternoon. You know, Raj, you gave some observations about the selling cycle and you know, what you're seeing, you know, year to date. And now that you've completed these two deals, I know you mentioned integrated offering and going to market with that offering, but it's probably a little bit too early to comment on that. But, you know, now that you've closed these two deals, you are meeting with customers at a point in time when they're making decisions, you know, what are their observations and questions about, you know, what this becomes and where their interests may lie going forward when you look at the integrated whole.

First of all, it's great to talk to you, David, and thank you for being here. I think it's a really important question you ask because our customers, just like we are, are looking to the future. And in that look at the future, they're acknowledging that today they're oftentimes confronted with a complex healthcare system and too many solutions to weave together on their own. Oftentimes our buyers today are carving out solutions from their local health systems and from their plans and looking to weave together their own ecosystem of solutions. And unfortunately, too many times, that's very difficult for them to do and they're seeing really low utilization rates. They hired us to solve that problem when they bought our advocacy services over the course of the years. What we've been able to do for the network of solutions that we've woven together, that we have called our trusted supplier program, is drive engagement not only for our own solutions, but for the partners that we brought to bear. And our customers see that metaphor. They see that metaphor as it relates to primary care. They see that metaphor as it relates to expert medical opinion. And they can see how that metaphor is multiplied when that solution is under the Accolade umbrella and going to be deeply embedded from a technology perspective, a process perspective, and a clinical perspective. And so, David, so far, our meetings with our customers have been extraordinarily positive. They understand the hypothesis behind the acquisitions. They understand what the long-term value proposition should be. And I think what they're looking for is more from us on the vision of how that integration is working, and that's what we're giving them.

And then if you kind of take that back to a comment you made also in your prepared remarks about you know, offering standalone solutions for both, you know, second MD and for plus care. Is that targeted at specific market segments or specific, you know, problems you're trying to solve for the customer, or is there more to it than that?

You know, David, since we, since we really got going here at Accolade, the mission has always been to meet the customer where they'd like to be met. Different customers are at different stages of their journey. And so we, Three or four years ago, or three years ago, we announced the various flavors of our advocacy offerings, meeting the customer at different price points with different engagement levels. We think the same story is true for expert medical opinion, where every single HR buyer has that moment where one of their employees gives them a ring and says, one of their family members has been diagnosed with cancer. What do I do? Our second MD, our expert medical opinion solution, gives them the answer to that question. We think that same story is true around virtual primary care. Customers are looking for, particularly those who are wrestling with access and availability issues, are looking for answers to questions like that. And as opposed to trying to shoehorn them into a particular solution, we want to solve their problem. And that's been the nature of the way we think about approaching the market forever.

Great. Thank you. Thank you.

Thank you. Our next question comes from Michael Cherney with Bank of America. Your line is open.

Afternoon. Congratulations on the nice quarter. I want to follow up a little bit on those selling season comments. Raj, I think you made a comment saying that some of the cross-sell came earlier than you expected. If you could characterize a little bit more about that cross-sell, is there any common traits that you're seeing between the customers and what's driving some of that cross-sell capture or an earlier pace than you would have expected. Just try and think through it and also think back to the, uh, expert second opinion deal you did where it seemed like you had a client there that was very excited about a potential cross sell and curious to think about what we should be expecting and what's built into guidance as we move through the rest of the selling season and through fiscal 22.

Sure. Let me, uh, let me take the qualitative part of that answer and I'll leave the, uh, the guidance part of that. I'll leave the hard part of the question, Steve. I'll just answer the, the, uh, the fun part. How's that? And the, uh, First of all, thanks for being here, Mike, and thanks for the kind words. Interestingly, if you look at the mix of cross-sell customers that we saw in the first quarter since we acquired SecondMD, we saw customers who were already in the process of evaluating SecondMD who were accolade customers who made a buying decision, meaning they were in the process of evaluating SecondMD before the acquisition. We saw customers who... began and closed the evaluation after the acquisition began. And we saw customers who were looking at already on existing solutions and deciding to make a changeover since post the acquisition. So all three varieties of types of deals closed. And so I think the good news is customers fundamentally understand that second opinion utilization is critical, that if you can get utilization rates above 2%, above 3%, that you can yield outsized value and extraordinary employee satisfaction. And that to the degree they're not seeing that in some of the other vendors that they're working with, that they have a lot of confidence that they can do so with Accolade and SecondMD.com.

And Mike, this is Steve. I'll speak to a bit about the guidance and what's factored in As Raj mentioned, we're really, really excited about the early momentum with cross-selling that's occurring already. And we have, of course, factored some of that into guidance, but remember where we are in the selling season, this really will become a more significant factor into fiscal 23, particularly with respect to revenue, because as you know, most of our deals set up to be implemented during open enrollment and then launched on January 1st. So, You could think of the revenue impact from cross-selling as fairly minor, and that the $300 to $305 million top-line revenue guidance we're giving for the year really has a lot more to do with core organic growth from Accolade, and then on its own, SecondMD, strong growth continuing there, and then PlushCare as well, both of which you'll recall are we signal that those companies we expect to grow in the 35% to 40% rate on their own, so to speak, as we're bringing together that integration and coming to market with Accolade maintaining that growth rate on a core organic basis at 25% or so, which pencils out to that guidance range.

Perfect. And just one hopefully very quick follow-up. On the pull forward that you had on the at-risk revenue, the $1 million that you mentioned, Can you tell us, was that supposed to be part of the normal course of business that you would have recognized in 4Q? Just curious how pulled forward it was.

That's exactly right, the way you described it there, Mike. We expected it to occur later in the fiscal year, and we achieved that in the first fiscal quarter and so recorded it there. So we think it's important that you understand that as you're analyzing those results. So very strong first quarter for all good reasons around member counts, and PG performance on its own, and then you had that call-up million dollars pulled forward from Q4 into Q1. Excellent. Thanks so much.

Thanks, Mike.

Thank you. Our next question comes from Ricky Goldwasser with Morgan Stanley. Your line is open.

Yeah, hi. Good afternoon. I have a couple of questions here. So first of all, just trying to understand the upside on the quarter, It sounds like, Steve, that $1 million is from the pull forward of the performance payments. As we think about the remaining upside, what is from core and what's from upside to your estimates on second MD performance in the quarter?

Great. Hi, Ricky. Yeah, a couple of things there. If you peel apart and you'll see the 10Q, which also either just got filed or will be filed imminently, We do pull apart the pro forma numbers for SecondMD and Accolade in the queue, so you'll get a chance to take a look there. You'll see the different components of it, and you'll see on a year-over-year organic basis that SecondMD grew in the low 40s, about 42% year-over-year, so a very strong growth year, and you could assume that we had guided towards a 35% to 40% range there, so strong growth from SecondMD. And importantly, with Accolade, we're starting to see the negative effects of COVID wear off a bit in a very positive way, meaning employee trounce came up strong for Accolade across our customer base, which is positive. And finally, with respect to PGs, as you know, we assume different elements of that around the savings PGs and the operational PGs, and we performed very well across all the different categories, customer satisfaction, engagement rates, and cost savings to the extent cost savings are booked early in the year. As you know, about 80% of the cost savings revenues do get booked in the fourth quarter, but some of those do get booked during the year. And so it was a strong Q1 across each of those different categories.

Great. And then, can you help us quantify the size of the investments that you're making to integrate the businesses? And as we think about those investments, should we think about them happening in fiscal year 22, or should we model elevated levels of investments spilling over to 2023?

Sure, I can help you with that quite a bit there. If you think about, let's work backwards from the guidance that we just presented, and I'll bounce it off of what you had seen previously. So with the $305 million top-line guide and the adjusted EBITDA loss guide of $49 to $54 million, if you look at that step-up from what we provided last quarter prior to the acquisition, What you would see there is a few different elements. One, we're investing significantly in the integration across the frontline care teams and the technologies that are supporting that so that we can create an incredible experience for the consumers who are the members who are customers of the business. and for our frontline care teams to bring together each of these complex elements. So where does that show up in our P&L? It shows up in the form of cost of revenues or gross margins, which has a lot to do with why we signaled expect roughly flat gross margins this year. Some of that investment is happening on the frontline care teams. You'll also see it in product and technology. So we'll continue to invest fairly significantly there. So that number ought to be in the low 20s as a percentage of revenues. Another area we're investing in, Ricky, is across distribution. So if you look at the sales and marketing line this year, that number we expect to go up from what was in the high teens in fiscal 21 into the low 20s as a percentage of revenue this year. And that has everything to do with building out and expanding our go-to-market teams, the business development teams, and the underlying marketing teams who are building that broader story that Raj spoke about in his prepared remarks and was just answering on a further question, which is piecing this all together in a way that would be a completely integrated connectivity between navigation, advocacy, and the primary care and second MD expert medical opinion elements. So it really shows up across the P&L in those different ways. Bringing the adjusted EBITDA loss into the 16% or 17% of revenue range this year, And we'll continue that investment while we chunk down towards break-even over the next couple of years. So that's very intentional that we continue to capitalize on the growth opportunity in front of us while we also maintain that discipline towards break-even over the next couple of years.

That's very helpful. Thank you, Steve. And if I just might, one last one. When I think about plush care and when I think about who are you competing with or who are you replacing, It seems that the platform is quite extensive. So should we think about platforms competing not just with primary care and behavioral health, but also urgent care?

You know, Ricky, I'll grab that one. It's great to chat with you. We fundamentally position our offering to our customers with the belief that the highest value we can provide is from a primary care and behavioral health perspective. And that that solution, of course, is in a position where when delivered and when implemented on behalf of the customer can also serve the needs of helping in urgent care situations. Oftentimes, one of the things we see is that urgent care is the lead-in event that leads to a primary care relationship. And so for our customers, I think the baseline positioning and the umbrella under which we're delivering the offering is certainly primary care, but we expect that that it will lead to urgent care and emergent care situations where we'll drop visits that way as well.

Thank you very much.

Thank you.

Thank you. Our next question comes from Ryan Daniels with William Blair. Your line is open.

Yeah, guys, congrats on the strong start to the year. Just wanted to have a follow-up question on the sales pipeline. I know, again, this is a heavy part of the year for you, and I'm curious – If you're seeing more momentum towards the core products, given the return to work and maybe a need to reengage a workforce after being absent for a year, or perhaps trying to keep a workforce engaged that's still working remotely to kind of drive cultural aspects for the organization. Is that helping you with conversions or in conversations with clients? Thanks.

Thanks for being here, Ryan, and thanks for the question. In fact, you really hit on some of the macro tailwinds that we think are a part of what's happening in corporate America today. First, employee engagement is fundamentally a challenge for companies who are wrestling not only with return to work, but a variety of other issues that have their employees and their families distracted. Second, With return to work, there are a number of clinical and health care needs that are front and center to employees and their families. And figuring out where to find them in a system that over the last 15 months has gone through a lot of shock is another tailwind and driver. And so on a macro basis, we think there are tailwinds that are driving what we continue to see as a growing pipeline and a continued opportunity for the business.

Thank you. Our next question comes from Jalendra Singh with Credit Suisse. Your line is open.

Thanks, and congratulations on a strong quarter. I want to go back to selling season discussion, and thanks for highlighting, and congrats on those contract wins. It seems selling season has been going really well for you guys. My questions are around, are you guys seeing any changes in the way employers are evaluating the alternatives on various offerings, given all the consolidation and changes over the past 12 months? Even insurers are aggressively expanding and pushing for their own or partner digital health solutions. I'd also like to relate it to that. Curious on your thoughts around if you're seeing employers looking for the best of breed vendor approach or you're coming across employers having vendor fatigue and looking for more comprehensive solutions. Just give us a little flavor around that.

Yeah, thank you, Dylan, for the question. And I'll try to wrap every element of that question up in one answer. And if I miss something, please follow up and we'll make sure and cover it all. As it relates to, let's start with how are buyers approaching the selection process in 2021 and how has that evolved from 2020? I think the single largest area that we point to is that increasingly we're seeing buyers come to the table and with a value orientation and a clear understanding of what that value orientation is. Buyers understand that when you're seeing hundreds of solutions in the marketplace, that differentiating the pretenders from the real value drivers are going to be measured by value, clinical outcomes, lowered costs, and employee satisfaction. And that increasingly there's a demand that contracting vehicles and measurement and success measures are all geared around those value drivers. So that's point one, I'd say. And that's certainly more profound in 21 than it was in 20. And we obviously believe that plays directly in our favor. And incidentally, on that point, the idea of being able to prove that value with documented savings and documented reports is obviously very important as well. Part two of the question, I think, is our companies are increasingly looking to find their answers from a single place where they can drive a compelling health care experience with deep integration, particularly around core drivers, around longitudinal relationships, navigation, primary care, being two really good examples. And so we think that trend has manifested. There was a Wall Street Journal article a couple of quarters ago that talked about this. But that trend is manifesting across the industry, particularly, I'd say, while it's absolutely true in strategic and enterprise accounts, Jay Lender, middle market accounts do not have the staff to really work through and understand the depth of all of the solutions that are on the market. And I think those are two, I would say, are two things that are evolving as we hit the midpoint of the 21 year.

Yeah, that's kind of, you actually covered my, the follow-up question because I noticed in your earnings release that some commentary around your value-based model for the first time. So I just want to clarify that. I mean, can you give some examples, be more specific, like how these contracts might look like and maybe to level set, do you technically have any value-based or risk-sharing contracts with employers?

Well, as you know, we, we, uh, We take risks with our customers. About a third of our fees are at risk on an ongoing basis today. And so in that regard, are we taking risks with any employers? Every one of our employer agreements today has that element of taking risks in it. I think more to the point of your question around value-based arrangements, here's what we would point you to. We think the future is about extending that capability and tying it out to not just cost reduction, but clinical value. And that that is fundamentally going to be the future of the employer space. And so we'll give a little bit more detail about how we're thinking about contracting when we deliver the integrated offering, which will be a little bit later this year.

Okay. And then one quick question for Steve. Do you have a cash flow outlook for fiscal 22?

We do. I think, Jalindra, for us, you can consider that adjusted EBITDA number to be a pretty good proxy for free cash flow, maybe a bit higher than that this year to the tune of a few million dollars related to timing, but it's in that same ballpark. All right, great. Thank you. Thanks, Jalindra.

Thank you. Our next question comes from Jeff Garrow with Piper Sandler. Your line is open.

Yeah, good afternoon. Thanks for taking the questions and congrats on the quarter. You've spoken about very positively about your health plan partnerships. I'm curious about what's driving success with those channel partnerships. And a second part to the question is, over time, I would expect some efficiency, some leverage from using those sales channels. But are there still upfront investments to build those relationships that are part of the sales and marketing investments that you mentioned earlier?

Hey Jeff, great to talk to you. Yes, there are some investments in building out new channel relationships with our carrier partners. We continue to be bullish on the opportunity to grow that channel and we continue to see organic expansion within those channels that have already been solidified. Clearly, once the relationship is solidified, we have an opportunity to grow within their customer base. And yes, we absolutely believe that can be an efficient, customer acquisition strategy. And optimally, you're seeing that in terms of even while Steve mentioned the increase in sales and marketing spend this year, we're still seeing really extraordinary customer acquisition to LTV ratios in the business. So we're still very efficient from a sales and marketing perspective, and that's part of the reason why. I think the reason for our success with those channels is fundamentally an offering strategy that meets the customer where they want to be met and so we started with multiple forms of advocacy that advocacy delivering core differentiation for carriers who might otherwise be unable to deliver that blend of technology, clinical capabilities, and advocacy. In adding expert medical opinion and virtual primary care, we've added two new solutions that are really core to what customers are looking for, and therefore added new tools that our carrier partners can take to their customer bases to differentiate themselves. So the breadth and depth of our services, I think, is one of the things that really attracts partners to what we do.

I found that helps. Great to hear the differentiation as well as continued focus on unit economics. Second question from me, just thinking about the outlook and the contribution from second MD, maybe you could revisit the variable component of that business and how much seasonality you expect out of the business as we think about rolling forward the contribution in the first fiscal quarter throughout the rest of the year.

Sure. And Jeff, this is Steve. Great to talk to you again. So SecondMD, through their revenue model, has a couple of different ways that, as part of Accolade, that we go to market with that expert medical opinion offering. Sometimes it's a PMPM offering. Sometimes it's a case rate price. But it oftentimes has a performance guarantee associated with it. And as you'll recall, the returns on an expert medical opinion offer service through the second MD offering is very substantial. It's something like $5,000 on average, and it can exceed $25,000 or $30,000 when a surgery is involved. So it's quite an attractive return for the paying customer. The way that those PGs show up, though, is unlike Accolade, where we're deferring a lot of that savings-based revenue to the fourth quarter Second MD, we were able to recognize those typically as the year goes on because it's a different construct. So what you're going to see with Accolade over time, Jeff, is that fourth quarter, which today has a much more significant portion of a year's worth of revenue, it will start to flatten out a bit as we bring on board second MD for a full year, plus care. We just closed that transaction, as you know. As you see that in this year's fourth quarter and then next year when you're looking at that on a year-over-year basis, you'll see the seasonality of the revenue recognition start to flatten out a bit, so it won't be as dramatic as it has been with Accolade.

Great. Thanks for that. Thank you, Jeff.

Thank you. Our next question comes from Richard Close with Kinnikore Genuity. Your line is open.

Yeah, great. Thank you. Congratulations on the acquisition as well as the first quarter. Maybe just to hit on a couple of the questions that have already been answered or addressed, but could add a little to it. With respect to talking with customers in the pipeline and the conversations around value and You know, maybe some of the other companies that are, you know, looking at navigation. Are customers or potential customers confused at all? Is there a lot of noise out there that you guys have to sort of educate the customer on? Just curious thoughts on that, first of all.

Brad, so thanks for the question, and I appreciate you being here. I think the best way to just – I think your question is really – let me try to rephrase your question, make sure I'm capturing it, and then I'm going to come back to you with my view on it. The market is ripe with new entrants, innovation, and sometimes that noise can be confusing. Is that noise confusing prospects, buyers in the market, and how are they responding to that confusion? Did I capture that well? Correct, correct. Okay, perfect. And so I think you're absolutely right. The macro or the meta issue that you're discussing, which is the plethora of solutions in the market is creating some confusion for buyers. And it's not just buyers, it's consultants and brokers and even carriers who are struggling under the weight of having to keep up with the innovations in the market. We believe fundamentally that that is part and parcel of why we're finding success in the market. It's not the only reason, but it is a part of the reason. Customers view us as a platform for weaving together their healthcare ecosystem. The example I'd give you today, McKesson that we mentioned on the call, obviously a large pharmaceutical company, McKesson purchased both Accolade Total Health and Benefits and Expert Medical Opinion. You're seeing more and more companies look at the breadth of offerings from a single location where The offerings can be integrated. We know they're going to be utilized and we know one person is responsible for all of that value. That confusion, we think, confusion and noise in the market accrues to the value of platforms. We are, in our view, the right platform for our customers to weave all that value together.

Okay, that's helpful. And then maybe, Steve, if I could ask a question. I appreciate the flattening of the fourth quarter with 2ndMD and now Plush being included. But if more customers are moving towards value, wouldn't you have that value coming in, like you said, predominantly in the fourth quarter? as value becomes a greater mix?

Hey, Richard, and I think I completely understand the question. It's early days yet for getting to the point where, Raj, I think in answering Jalendra's question is, it's early days for us to move to a different type of contracting than we have today around value-based contracting and call it the next generation of that as we bring all of these capabilities together. So as we come back to you towards the latter part of this year with more visibility around how that looks, we'll give you some color about the expectations around the financial model, but I wouldn't expect that to have a material impact, certainly in fiscal 22, being the current fiscal year.

Okay. That's helpful. I just wanted to clarify that. Thank you. Congratulations. Thanks, Richard.

Thank you. Our next question comes from Stephanie Davis with SBB Link. Your line is open.

Hey, guys. Congrats on the quarter, and thanks for taking my question, as always. I wanted to dig in a little bit about this trajectory towards an integrated care offering. How should we think about the value of a physical footprint? And this is something that you either think you can supersede as an M&A opportunity, or is it something that will need partnerships so you can sell for that last mile of care?

I'll tell you what, let me take the, excuse me. Stephanie, it's great to talk with you.

Let's go to chat.

Sorry, I had a peanut right before you asked your question.

We've got to get that last molecule to you now.

Seriously, I got so excited about that question. Okay. So, Stephanie, first, great to talk to you. Thanks for the question. The last mile of care is extraordinarily important. Let me take the first part of that question, and then I'm going to ask Dr. Nandi to engage and talk a little bit about the power of collaboration in terms of our model. For us, we do fundamentally believe that in a $3 trillion, $4 trillion ecosystem, we The capacity to collaborate across the industry is imperative. We will be working directly with brick-and-mortar healthcare systems on the ground that are servicing our existing customers. We think, importantly, Stephanie, and after this I'll turn it over to Shantanu, importantly, one of the things that's so powerful about our model is that we can deliver the concepts of value-based care while running on the chassis of a fee-for-service healthcare system That doesn't require our customer to make radical change around the platform that they're currently running. And that's really important. We're not taking away choice. We're not forcing them to make radical changes to their existing infrastructure, which they fundamentally would struggle to implement. Instead, we can bring this really powerful concept to them and leverage everything that they're already using. Jonathan, do you want to jump in there and maybe speak to how we're thinking about that?

Yeah, absolutely. And Stephanie, I think it's such an important question. You know, I think, you know, from the clinical perspective, right, I think we think about the highest leverage point is the decisions, the clinical decisions that people make in their lives, right? And that decision is really upstream of the service itself. And so when you think about that member story that we started with of the member with, you know, with diabetes and the liver function issues, really where the system falls down the most for that person is what we call the interstitial space, right? It's like the space between visits where people have to go home and now make those decisions every day about their health and well-being. And so for us, that's where, you know, we thrive. That's what, you know, we've demonstrated over the past, you know, decade plus. And so we think that sets up a really – nice way to collaborate with the ecosystem where it's really saying, hey, we're going to help people get to better decisions. We're going to be accountable for them. We're going to guide them through, you know, the 5,000 hours that they're not in a physical brick-and-mortar environment. But we absolutely see the need for that brick-and-mortar service. We just want to make sure that people are ultimately getting the right care that they need to get to the outcomes.

I guess a follow-up on that one, do you leave the any kind of venue of care up to the client, or is this something where you might want to steer them towards some of these more hybrid or risk-on models that are starting to appear, just given their claims of improved ROI and cost savings?

Again, we'll tag team this one. I think, Stephanie, one of the things that we pride ourselves on is our capacity to get people to the right care by leveraging the tools that are in our tool bag as it relates to our intelligent provider matching capability that weaves together cost, quality, and appropriateness of care measures, our expert medical opinion capabilities, which allow us to ensure that we're on the right treatment decision support. I think the addition around areas that are focused on quality and cost and focused on measures like the measures that we're focused on with our customers is are clearly going to be interesting to partner with us on behalf of our customers. Shantanu, did you have anything there?

Yeah, no, I think I would add, I think part of, I think what you're getting at with your follow-up questions, I believe, is really, you know, that as, you know, brick-and-mortar sites move to value-based care, as many employers have, you know, on-site clinics or they have particular clients brick-and-mortar local assets that they develop partnerships with, you know, how does that fold into our model? I think that's maybe part of your question, and I think... You're reading my mind.

That's exactly it.

Okay, perfect, perfect. Yeah, and I think the short answer is absolutely. I mean, already, you know, today we have a number of customers that have, you know, onsite clinics. I think absolutely as the market continues to move towards more value-based providers, I think there's real opportunities to be able to provide differential value, getting members to those environments. Even those that are getting care at those local accountable care organizations, they're still missing a lot of the data that they need to really serve those members, and those members are still going to have other care needs that may or may not be best served by those local providers. And so we absolutely think that building on the capabilities that Raj talked about, that we're going to be able to construct – those ecosystems to ultimately get to the outcomes that employers are looking to get to.

I think they're helpful.

Thank you both.

Thank you.

Thank you. Our next question comes from David Larson with BTIG. Your line is open.

Hey, congratulations on a good quarter. Can you maybe talk a little bit about your long-term expectations for gross margin? I fully understand that there are investments going into integration this year for Plush and SecondMD. But as we think about like fiscal 23 and beyond, where would you expect gross margins to trend? What will get you there and over what time period? Thanks.

Hey, this is Steve. Great to talk to you. You're right. Absolutely taking gross margins up over time is part of our plan and expectation while we invest in that part of the business this year and into next year. Roughly flat-ish this year. So think of that as mid-40s with a long-term target into the 50s. Call it the mid-50s over the longer term. I think what you're going to see, though, is this year and really into next year, similar types of gross margins in that mid-40s range to bring all of these capabilities together to create that fully integrated experience that drives the kinds of health outcomes and cost savings that we think are critical, that are driving the growth in new customers and the very high retention rates we have with existing customers. Now, over time, how will we take that from the mid-40s up into the 50s? It'll be through a few different things. Very importantly, continuing to build out the technology platforms that create integrations that help our frontline care teams be more efficient. So it's leveraging the AI machine learning engine to do something we call next best action to help our frontline care teams know what would be the next best thing to recommend or where to direct a member elsewhere in the ecosystem. That all, as we automate that more, makes our teams more efficient. By the way, Raj alluded in his prepared remarks, we'll have a segment, an analyst segment on data coming up over the coming weeks that will go deeper into that. And then secondly, as we cross-sell and up-sell, there's leverage and operating leverage on the business overall, including on the gross margin line. As we are successful with transactions, like Raj mentioned, with McKesson and selling total health and benefits and expert medical opinion, that combined offering, there's certainly leverage that we have on the frontline care teams that equates to improving gross margin at the margin, if you will. So, there's opportunities there. Those are two big vectors where we think of driving gross margin improvement over time.

Great. Thanks. That's very helpful. And then, We've heard from a couple of health plans. First of all, they're very, very large health plans that are very much aware of Accolade. And we've heard a comment here and there like Accolade is doing such a good job. They're taking away some potentially fully insured business from us because if the employer groups can purchase the self-insured product at a lower price point and then use Accolade, they can get all the benefits. have you seen any large health plans sort of react to accolade and try to bring in some of the services themselves? Have you seen any, I don't know if backlash is the right way to describe it, but I mean, I'm assuming the answer is no, given how good your sales are, but have you seen large plans respond to your efforts here in any way that's been unexpected lately? Thanks.

I appreciate the question. I think, you know, for us, and we, we talked about it a little bit earlier, uh, we're finding increasingly that carriers understand. And I'm going to actually flip your question and take it in a positive way. They're looking at the and acknowledging that we can add value to them with our differentiation. And so we acknowledge as well, though, to be clear, that there are going to be moments where there's a level of competition, where we're going to exist in a market and compete where they've got their own advocacy solutions. But yet, when we win those opportunities, we have an opportunity to collaborate with them and serve the customer well. And so I think the short answer to your question is no. The longer answer will hopefully give you a little call.

Okay, great. Congrats on a good quarter. Thanks very much. Thanks, Dave.

Thank you. Our next question comes from Ryan McDonald with Needham. Your line is open.

Hi, thanks for taking my questions, and congrats on a great quarter. Raj, you mentioned that behavioral health is continuing to have a strong impact on the selling season, and this is something we've heard similarly with the organizations we've spoken with. But there's still this added layer of complexity there within the different behavioral health models of trying to navigate that. As you look at the evolution of Accolade and with your partnership with Ginger and the behavioral health component that's included with PlushCare, Can you talk about how you're positioning those two as you start to integrate plush care more directly into your selling model? Thanks.

Thanks for the question, Brian. Glad you're here. I'm going to hand that question over to our chief medical officer.

Yeah, it's such an important question because you're right. It's so top of mind, and we're seeing that come up over and over again from our customers, the concern about emotional health and mental health. I think the short answer is, you know, we don't think that there's – you know, a one size approach, right? To your point, you know, behavioral health covers a very broad gamut from, you know, depression, anxiety, to emotional health, to substance abuse, to more atypical psychiatric conditions. And so, you know, we think that over time, there's going to be, it's going to require multiple types of services integrated together to ultimately meet the needs. Part of the challenge, as you know, is scale. I mean, there's just, you know, there was a shortage nationally of therapists, shortage nationally of psychiatrists, and so really thinking about an approach that can meet our employers' very, very broad needs while also maintaining high quality and outcomes is really what we're focused on.

Excellent. As a follow-up for Steve, Steve, you know, it's obviously very early days in the integration of both acquisitions, but just curious to get your thoughts on maybe some areas of upside surprise in terms of synergies that that you might have discovered that maybe you didn't expect sort of pre-acquisition as we think about the businesses being integrated. Thanks.

Sure. Hey, Ryan. I think the most positive upside we're seeing is on the go-to-market opportunity that really Raj spoke about earlier. We're seeing very strong reception from our customers and prospective customers around the integration of the offerings and the opportunity we have to not only optimize but to drive more and better utilization of the services, particularly, you know, the McKesson example with buying expert medical opinion along with total health and benefits is a great example, and we're seeing that across the business. And I think just on the ground, the way we're working together with the teams with Accolade and SecondMD has been really incredible, like-minded people with a common mission to improve healthcare services massively improved healthcare has been really the backbone of the early success we've had there. And we're also seeing a similar with plush care in the early days here. So it's mostly about top line and the TAM expansion opportunity. And it's been extremely positive so far.

Great. Thanks again.

That's right.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to management for closing remarks.

Thank you, operator. Thank you all for being here. We really appreciate all your questions, and we look forward to updating you next quarter. Bye now.

This concludes today's conference call. Thank you for participating. You may not disconnect.