Accolade, Inc.

Hello, thank you for standing by, and welcome to the Accolade Third Quarter 2022 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. 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 third quarter earnings call. With me on the call today are our Chief Executive Officer, Rajiv Singh, and our Chief Financial Officer, Steve Barnes. Shantanu Nandy, our Chief Medical Officer, will join for the question and answer portion of the call. Before turning the call over to Rajiv, please note that we'll 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 reconciliation thereof can be found in the press release that's posted on our website. There are also slides that accompany this conference call that are available on the webcast. The slides will be available for download following the call. 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 accolades 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 findings 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.

Hello, everyone, and Happy New Year. I hope you're all able to enjoy time with family and friends during the holiday season. As we enter the fourth quarter of fiscal 2022, we continue to make outstanding progress towards building a great and enduring healthcare company. In fiscal Q3, we outperformed our guidance across the board and are again raising our forecast for the year. Steve, our CFO, will cover the specifics later in the call, including more detail on how to look at accolades now that we've diversified our offering portfolio, expanded our go-to-market engine, and become a more strategic enabler of our customers' people objectives when it comes to providing health and wellness benefits that drive employee satisfaction, engagement, and retention. But I couldn't resist a little teaser to first hit some key points. At our core, we're dedicated to consistently delivering on our commitments quarter after quarter. Today, we're providing you with preliminary guidance for fiscal 2023, reaffirming our commitment to our long-term growth rates and our path to profitability. Our progress due to the hard work of our colleagues is nothing short of remarkable. I'll outline that progress for you briefly now before turning the call over to Steve. As we entered the current fiscal year, Accolade was an advocacy company serving about 100 customers, representing 2 million members with a $24 billion addressable market. We have more than 600 customers representing more than 10 million members. And our market opportunity has grown 10X to more than 200 billion. With our integrated offerings and expanded partner services built on top of the market's leading healthcare engagement engine, we own the personalized healthcare category. From a business perspective, this has resulted in far more diversified foundation. At the time of our IPO, our single largest customer represented 25% of our total revenues, and our top four customers made up 60% of our revenues. Today, no single customer represents more than 10% of revenues. Most importantly, thanks to our broad portfolio of advocacy, expert medical opinion, primary care, and mental health services, we are far more strategic and valuable to the customers and members that we serve. That's demonstrated in our performance. So far this year, more than 20 new enterprise customers bought Accolade Advocacy and Accolade Expert MD together. More than 20 existing advocacy customers have purchased Accolade Expert MD. And less than three months after we launched Accolade Care and Accolade One, our first tranche of customers have already gone live on the solution. Additionally, our momentum in new customer growth continues, with leading organizations like Halliburton, Choctaw Nation of Oklahoma, and Choice Hotels joining our customer base. These data points reflect both the strength of our strategic relationship with our customers and their belief in the vision of personalized healthcare that we set forth to the market. Already, the combination of our services is driving higher utilization rates for expert medical opinion when delivered in tandem with advocacy. We expect the same patterns to hold with our virtual primary care and mental health services, providing further proof points that services layered on top of our engagement platform will drive outsized engagement and performance. Just as our offering suite, pricing model, and customer base are diversified and differentiated, so too is our go-to-market strategy. We have a long track record of reaching new customers via a direct sales channel that has been remarkably efficient and effective. More recently, we've added health plan partners like Optum, Aetna, Blue Cross Blue Shield of Michigan, Blue Shield of California, and Humana as referral and reseller partners. Additionally, new partnerships with leading companies like PlanSource represent our commitment to meeting customers where and how they choose to buy. On that foundation, we are well positioned for the future. As I mentioned earlier, looking at fiscal 2023 from a financial perspective, We're committed to delivering against our long-standing goal of 25% top-line growth into the foreseeable future, and we will improve our adjusted EBITDA loss in the year ahead, both on a dollar and percentage of revenue basis. And as Steve will describe in more detail, we're projecting adjusted EBITDA break-even in fiscal 2025 at approximately $600 million of revenue. At Accolade, we believe that you can build a lasting healthcare company a growth engine, and a disciplined business at the same time. That is how we're running our company. Earlier this month, we shared our set of beliefs about how healthcare is supposed to work for people in this country. Stealing the words of Simon Sinek, it's important for companies to have a just cause that brings its employees, customers, partners, and shareholders together. Our just cause is that we believe healthcare is a human right. and that everyone, regardless of their socioeconomic status, should have access to the care that they need. We believe in treating the whole person by building long-term trusted relationships, not just the symptom or the transaction. We believe that mental health and physical health are completely intertwined to support the whole person. And we know that it's time for our industry to start getting paid for outcomes, not just for providing services. You can find our credo in the We Believe section on our website. We run our business with a perfect commitment to those beliefs every day. If the past two years have taught us anything, it's that we can only predict so much about the future, whether it's COVID or government and policy changes or the labor market. Our customers expect us to remain true to our mission and our beliefs, and that's how we operate at Accolade. Before I turn the call over to Steve, one last point. Healthcare today represents 20% of our country's GDP. It is massive. and it needs to do better at serving people. No single company will solve the problem, but collectively we can and we must strive to improve. We're committed to partnering with others who share our beliefs, with those who embody this deep-rooted sense of purpose for the people we serve. Through empathy, experience, and most critically, engagement and trust, we can light up those partner services on the basis of our open platform and the most advanced technology stack in the industry. In the last year alone, we added SORD, Virta, Carrot Fertility, Vivante Health, and Employer Direct Healthcare to the industry's most comprehensive partner ecosystem. Our progress in each of these areas, new offerings, more innovation, more partners, and doubling down on the importance of advocacy at the heart of connecting the healthcare ecosystem is why we continue to grow and thrive and why all of us at Accolade are so excited about the future. With that, let me turn the call over to Steve Barnes, our Chief Financial Officer. Steve? Thanks, Raj.

First, I'll recap the results for the third quarter of fiscal 2022. Keep in mind that we closed the second SD acquisition in Q1 and the plush care acquisition in early Q2. Where appropriate, I'll provide color on year-over-year comparisons and you'll find additional pro forma detail in the 10Q. We generated $83.5 million in revenue in the third fiscal quarter, representing 117% year-over-year growth on a gap basis over the prior year period. This reflects a significant beat against the top end of our guidance range. You'll recall that after the second quarter, we indicated that we expected to recognize $2.5 million of performance guarantee revenue in Q3 instead of Q4. As a result of continued strong execution against our performance metrics, We recognized sort of $7 million of PG revenues in Q3 rather than Q4, inclusive of the $2.5 million in our previous guidance. We also saw favorable member counts and PG performance compared to our original forecast. On a pro forma basis, the combined business grew 44% year over year, broken down as 45% growth for Accolade Advocacy, 28% growth for Accolade Expert MD, and 53% growth for direct-to-consumer virtual primary care, or plush care. Plush care continues to perform strongly and benefit from the tailwind of COVID pushing more people toward virtual primary care. While our expert medical opinion business was relatively flat on a sequential basis, as fewer medical procedures than expected are contributing to a reduction in second opinions. I'll come back to this dynamic in my guidance for Q4 and fiscal 23. Fiscal Q3 adjusted gross margin was 47% compared to 41.8% in the prior year period, which reflects the positive revenue beat as well as investments in staffing our frontline care teams to support growth and integration. While Q3 gross margin was favorably impacted by the revenue timing item, As stated in prior earnings calls, we expect adjusted gross margin to remain relatively flat on a full year fiscal 22 basis compared to fiscal 2021. Adjusted EBITDA in the third quarter of fiscal 22 was a loss of $11.9 million, which compares to $11.4 million loss in the prior year third fiscal quarter. This is significantly ahead of our guidance, primarily due to the performance guarantee revenue timing item noted above. as well as lower spending than planned in the quarter in some areas, such as hiring and personnel costs. Turning to the balance sheet, cash and cash equivalents totaled $366 million at the end of the quarter, and accounts receivable DSOs were in line with prior quarters at about 24 days revenue outstanding. Finally, we had approximately 66.9 million shares of common stock outstanding as of November 30th, 2021. This does not include any shares related to the second MD or plus care earnouts. For your models, there are up to approximately 2.2 million additional shares related to the second MD earnout and up to 1.4 million shares related to the plus care earnout to be issued in calendar 2022. And now turning to guidance. For the fiscal fourth quarter ending February 28, 2022, we expect revenue in the range of $90 to $93 million, representing a year-over-year growth rate of 138% and 13% on a pro forma basis to adjust for the acquisitions of second MD and plush care. Adjusted EBITDA loss for the fiscal fourth quarters is expected to be in the range of $4 to $8 million. To provide some context on the year-over-year growth rates and the guidance, keep in mind that we've recognized approximately $8 million of PG revenue through the first three quarters that we initially forecasted to be recognized in the fourth quarter. This $8 million is comprised of the $7 million in Q3 noted earlier and $1 million in Q1. If you were to add that back to Q4, the year-over-year growth rate in Q4 would be about 25%, and Q3 would have been 32% growth instead of 44%. As a reminder, we recognize PG revenues upon achievement of the underlying performance guarantee. PGs include a variety of items such as member engagement rates, member satisfaction, clinical metrics, and cost savings-based metrics. The mix and timing of PGs varies, but to be clear, achieving and recognizing PG revenue in early quarters is positive. As we establish a track record of consistently achieving our PGs and recognizing them more evenly throughout the year, it will have the impact of lessening our historical Q4 revenue bump. Also, those PG revenues typically come in at a much higher positive impacted gross margin and adjusted EBITDA. The net of all this is that we consistently point you to the full year numbers, which are not subject to the quarterly movements of PG revenue recognition timing and margin within a given year. Moving to guidance for the fiscal year end of February 28, 2022, we expect revenue in the range of $306 to $309 million, representing 81% growth over the prior year at the midpoint and 30% on a pro forma basis to adjust for the acquisitions of second MD and plush care. Adjusted EBITDA loss for the year in the range of $48 to $52 million, representing approximately negative 16% of revenues at the midpoint of guidance. We also provide a preliminary view of fiscal 2023 revenue guidance today. Based on our current estimates and assuming no significant change in the healthcare spend environment, we project revenue will grow approximately 25% over fiscal year 2022 to about $385 million and expect adjusted EBITDA loss will improve to about 11% to 12% of revenues as we continue on our path to profitability after pausing for a year on that progress while completing the acquisitions and making material progress on integration. To help you build your models and understand the components of the revenue growth, our guidance breaks down like this. We expect a core accolade business to grow approximately 25% in line with our previous statement. Our virtual primary care business, which in fiscal 23 will be driven by our plush care direct-to-consumer business, is experiencing strong growth, and we expect it will grow about 30% next year. And while we remain very confident in the expert medical opinion market opportunity, and have driven significant customer additions in that space since the acquisition, until we see second opinion volumes return to historical norms, we forecast that Accolade Expert MD revenue will grow approximately 20% next year. Underlying our guidance, of course, is the ACV, or annual contract value, as of fiscal 2022 year end. As you know, ACV is not a final metric until the year is over, but as promised, we wanted to give you some color from the end of the selling season, particularly as it helps you build your models for fiscal 23. As an important reference point, when we went public about 18 months ago, ACV represented the near totality of our book of business, and as such, was a good proxy for modeling our following year's revenue. Today, ACV remains a very useful metric for modeling a large portion of our revenue, But given the changes in the business since our IPO, we will continue to evolve the metric to ensure it stays relevant as you build your models. More specifically, ACV historically would not include EMO case rate revenue, nor would it include the plus-care consumer revenue, which is comprised of subscription fees as well as visit fees. Given that we are evolving the business toward case rate revenues from PEPM for expert medical opinion as we leverage the strengths of our engagement platform, When we report in April on the final ACV metric for the end of fiscal 22, we expect to include an estimate of EMO case rate revenues as well as contracted enterprise virtual primary care revenues. Most importantly, our goal here is to help you understand the different inputs of our business to effectively model our growth. First, recall that ACV at the end of fiscal year 2021 was approximately $248 million adjusted to include 2nd MD on a pro forma basis. At that time, we said ACV did not include the portion of 2nd MD revenue that was billed on a case rate basis. You start with that base and then build. Next, with the vast majority of new business signed, we are on track to sign between $50 and $60 million of new business in the current fiscal year. Year-end ACV will include all PEPM revenue plus our estimate of EMO case rate revenue and enterprise primary care visit fees. Then we add or subtract normal customer adjustments such as changes in headcounts or terminations. And as we said before, we model for approximately 95% gross dollar retention, and we're on track for that this year. Additionally, we have one unusual item impacting ACV and revenue next year. which is that we made the decision not to renew a legacy health plan customer relationship that had become particularly low margin and non-strategic as our business evolved. While that lowers fiscal 2023 revenue in ACV by approximately $9 million, we believe it's a prudent decision to walk away from business that does not fit within our financial and strategic profile. And that's the framework that will get us to a final ACV at February 28, 2022. In order to build to the fiscal 2023 25% revenue growth projection, you would start with that ACV, which includes the advocacy, expert MD, and enterprise virtual primary care offerings, add revenue for new business sold and launched within fiscal 2023, plus incremental partner revenue, adjust for timing of launches, and add to that the fiscal 2023 plush care or consumer virtual primary care revenue forecast. The net of all that brings you to the 25% revenue growth rate in our preliminary guidance. Now, before turning to your questions, I'd like to highlight an important item, which is our path to break even, including a picture of the leverage in our pricing model as we add the new solutions to the portfolio. We've consistently stated that our goal is to make meaningful progress towards profitability each year on the strength of our revenue growth and attractive unit economics. guided to a pause in that progress for the current fiscal year as we absorb two significant acquisitions. And as you can see in our guidance for next year, we expect to continue making meaningful progress on that path. I'd like to go a little deeper to help you understand not just the timing, but also the underlying unit economics. For those of you looking at the slides on our webcast, you can see our historical march toward breakeven. In fiscal 2018, Ackley was a $77 million revenue business, with adjusted gross margin of just over 30% and adjusted EBITDA loss of 56% of revenue. Over the next few years, even while we invested heavily in technology, sales and distribution, and added the cost of being a public company, our gross margins improved materially, and the adjusted EBITDA loss declined as a percentage of revenue from negative 56% to 41 to 25, and then negative 16% in fiscal 21, before flattening out this year. With our preliminary guidance for next year, you can see that adjusted EBITDA improves from negative 16% this year to an 11 to 12% range in fiscal 23, then cuts in half the following year with a break-even target in fiscal year 2025. And that improvement in fiscal 2023 would represent a reduction in adjusted EBITDA loss on an absolute dollar basis as well. From a size and scale perspective, 25% annual revenue growth over that same period leads to a $600 million revenue target at breakeven in fiscal year 2025. It's also helpful to show you how the unit economics work for the legacy accolade business, as well as the incremental margin contribution from our new solutions. If you start with the legacy accolade advocacy business, you can see the unit economics in the chart that I just shared. PEPM for a full suite was approximately $20, and the historical improvement in adjusted EBITDA and gross margin was largely driven by the incremental gross margin from existing customers as we increase engagement and build deeper relationships with our members. The new solutions we added this year, particularly expert medical opinion and primary care, are generally priced on a per-visit or per-case basis. Those visits and consultations are delivered at a higher incremental gross margin than the advocacy revenue, which we expect to further expand as we leverage our advocacy engagement investment with cross-sell customers, providing additional lift to the model. On top of that, as we gain traction with our Accolade One solution, there is additional opportunity for increased margin contribution from gain share performance. And lastly, we expect our partner revenue to grow nicely this year and into the future, also at a higher margin than our advocacy business. We are not changing our long-term targets model today, but if you think about the expected growth and contribution from these solutions, you can begin to see the layering effect of adding higher gross margin revenue in the years to come. Advocacy will remain the largest revenue contributor this year and next, And we expect higher margin case rate and visit fees to grow in fiscal 24 and beyond. And we expect our higher margin gain share revenue may contribute in fiscal 24 and beyond as we expand beyond our initial pilot customers. As such, we believe we are building a business foundation and portfolio to drive growth and margin improvement for years to come. And with that, we'll open the call to questions.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please limit yourself to one question. Our first question comes from Ryan Daniels with William Blair. You may proceed with your question.

Yeah, guys, congrats on the strong quarter. Thanks for taking the question. Steve, maybe one for you. You highlighted just the traction you're seeing in organizations selecting multiple offerings for and that laying the foundation for Accolade One and Accolade Care. So I'm hoping you could dive a little bit more into the pipeline and outlook there and maybe even tie into that some of the recent executive hires. I think you added your first customer success officer and chief customer officer. So I'd love to hear how that ties into the growth story as well. Thanks.

Thanks for the question.

This is Raj. I know you found that one to see, but I'm going to jump in and intercept it if you don't mind and then Steve, feel free to jump in and add any color to it. Brian, we're excited about the growth profile of the company and the continued demand in each of the market segments that we're performing in. And so you'll recall three or four years ago, the company made a choice to expand into the middle market where we're seeing continued growth, both from a logo expansion perspective and from an ACV perspective. The enterprise segment, same story. And so you're exactly right. We've actually invested in a chief customer officer, who we think is going to do amazing things in helping us scale the services that have delivered really outstanding customer satisfaction levels over the last 10 years to the next level as we go from a couple hundred customers to 600 to more than 1,000 soon. And then, of course, as well, we added a chief marketing officer, Carolee Lobo, who is who joins us after a rich history of time in the healthcare industry, helping us build out and grow our expansion plans across every one of those segments. And so the really positive news in our mind, Ryan, is that the space itself is continuing to show growth and that customers are embracing this expanded value proposition of personalized healthcare. And that's yielding the ACV growth that Steve just talked about and the growth of the team that you mentioned in your question.

Thank you. Our next question comes from Glenn Santagello with Jeff Rees. You may proceed with your question.

Oh, yeah, thanks. Steve, I just wanted to follow up on some of the comments. I just wanted to make sure that I'm doing the math right. If I kind of play your numbers through, your guidance through for the fourth quarter, it looks like you're sort of modeling – EBITDA for the full year to be a loss of somewhere in the high 40s, maybe around $49 million. And then if I use your guidance and the percentages you provided for fiscal 23, using the midpoints, it looks like you're expecting about $44, $45 million in EBITDA loss, so a little bit better. But as you think about the path to profitability, it certainly looks better on a percentage basis than an absolute basis. I'm just trying to make sure that I'm looking at all those numbers correctly. Thanks.

Sure, thanks for the question, Glenn. And I think, fair to say, you're spot on. For this year, fiscal 22, you can think of that, the midpoint of that EBITDA range for this year is $50 million on the 306 to 309 revenue number we gave. And then for next year, about 44, that's a good number to be. It's early yet as far as the guide for next year's preliminary guidance. But think of it in that mid-40s range. And the improvement on absolute dollars, but also on a percentage of revenue basis as we're growing the business top line 25% year over year, we think is very healthy. And then importantly, laying out that multi-year period all the way out to break even in fiscal 25 as we make that steady step down towards break even was very important to us in the longer term guidance.

Thank you. Our next question comes from Craig Hedendock with Morgan Stanley. He may proceed with your question.

Yes, thanks so much. And I appreciate the transparency about the customer that you're walking away from and implications on the business in terms of lower margin. Can you maybe just touch on, at the same time you're talking about a rapidly expanding and growing TAM and the opportunity set, and just maybe weaving those two things together, like the ability to kind of be more disciplined because you're there's a lot of growth opportunity in front of you, and how you're managing the business in terms of growth versus margins as we go forward.

Yeah, it's a great question, Greg. Thank you for the question. Thank you for being here today. The transparency provided as it relates to the customer that we decided to move on from is really built around this idea that we had started serving that customer probably five years ago in really serving an exchange population on behalf of that customer. And over time, we began to realize that it was a non-core platform, not an area that we were going to spend an extraordinary amount of time growing. And it was operating on a platform where we didn't believe that was our core platform. And so I think the decision to move forward was really one of, we're targeting all of our investment on our core platform. We're targeting all of that investment around innovation that we think appeals to employers and to the TRICARE business that we're so excited about, and that in that business we can not only deliver outsized innovation and credible engagement rates and clinical outcomes, but we'll also see the kind of margin expansion that Steve outlined over the course of the next several years. So you're exactly right. The two are very correlated. This is about the discipline of our investment, the discipline of our execution, and the discipline towards our path to profitability.

Thank you. Our next question comes from Michael Cherney with Bank of America. You may proceed with your question.

Afternoon, guys. Congratulations on the nice results. I want to ask one clarification question and then one bigger picture question. I'm going to squeeze them both in in case I get cut off after. Just I want to make sure relative speed to the $9 million you mentioned that you walked away from, assuming that is basically not in the baseline for next year versus this year. So You can assume the growth rate would have been closer to the high 20s in the event that that's the case. I just want to confirm that. And then, Raj, I want to dive a little bit into some of the early feedback you're receiving from the customers that chose to select some of your new platforms. Obviously, I know for anyone that went live on 1.1, we're not going to actually know how it's going. But as you're going through that launch period, especially implementing newer solutions, newer go-to-market platforms, what were some of the learnings you took out and what were some of the pieces that your customers learned really want to make sure as you got to the finish line that you're able to deliver for them.

Thanks for the question, Mike, and I appreciate you being here. Let me take the second question first and let Steve answer your first question right after that. Immediately upon bringing the new solutions to the marketplace with our customers, we saw traction. Obviously, with expert medical opinion, we outlined that in the statistics laid out in the call. We saw 20 customers buy both advocacy and EMO together. or Accolade Expert MD together, we also saw another 20 or so buy EMO on top of Accolade Advocacy. Here's what every one of those customers said, and I think it's the same thing that we're hearing from customers on Accolade Care. They're not interested in disparate products that deliver different value propositions. They're interested in an integrated engagement hub that drives value for everything that connects to it, And very clearly, they expect that the things that are coming from Accolade should drive an outside engagement level than what they would have seen from other vendors potentially. And so that expectation is starting to manifest in actual reality in terms of statistics we're seeing from customers around engagement rates. And so that's part one. Customers don't just want multiple solutions for the same vendor. They want integrated solutions built off the same technology platform and with agreement on engagement statistics and value. Then I think point two of that story is that has to manifest in integrated care teams as well. And so when we're talking about delivering value, we're talking about the capacity that's seamlessly transferred from our frontline care teams to our primary care physicians and to our expert medical opinion capabilities. without having to leave the interaction, without having to leave the software interface. And we think that's a really important part of what customers want and are asking for. Steve, do you want to take part two of that or part one of that question?

Sure, absolutely. So, Mike, the clarification there on that $9 million, you're correct. That contract, we let that go at the end of December, calendar year 1231. So that's $9 million impact. Think of it as about a 3% headwind on growth rate in fiscal 23 compared to fiscal 22, 9 on that 307.5 midpoint.

Thank you. Our next question comes from Jaylander Singh with Credit Suisse. He may proceed with your question.

Thank you, and congratulations on a good quarter. Just following up on fiscal 22, I noticed the outlook. Thanks for all the color there. And a good clarification there from Michael. On the second MD expectations, now you're expecting 20% growth versus 30% plus what the business has seen in the past. Maybe remind us again how that business is split between like PM, PM and case rate. And what your underlying assumptions are with respect to electives as we are seeing the trends now? Are you expecting trends to stay the same level or get worse? and kind of related on the margin improvement you expect in fiscal 23, is that all operational leverage or are you expecting some improvement in these recent acquisitions? If I can just one related part, I can ask, if electives do recover in fiscal 23, do you are driving some upside to your fiscal 23 revenue? Would that have any impact on margins in fiscal 23?

Hi, John, Steve, and Yeah, I'll grab that one. And so you hit a few things there. Let's start, though, with the trends as far as volume. You heard us talk about 200 added customers on 400 or so customers taken together post the acquisition. So we've had significant growth in customers. Many of those are buying expert medical opinion either on standalone or together as a suite with advocacy. That's very important to us. We're hearing over and over again from the market that customers highly value it, particularly when it's tied to the accolade engagement engine. So we're very bullish on the category overall and the opportunity to weave them together. The volumes, yes, we're seeing procedures down for sure you'll see a roughly flat quarter-to-quarter growth from Q2 to Q3. What you're seeing in the guide from us is an assumption that those utilization rates stay about where they are for now until we have better visibility into the future. So certainly if those procedures pick up and there's more elective medical opinions, there would be some upside there. And then as far as the fiscal 23 guide goes, There is operating leverage on the OPEX for sure, but we're also forecasting that gross margins will begin to expand again year over year. This year, fiscal 22 versus fiscal 21, we've been consistent in guiding to about flat gross margins. We expect to see gross margins pick up next year in fiscal 23, and again in 24 and 25 on that March to break even. So it's a combination of both gross margin expansion with all the offerings taken together and operating leverage.

Thank you. Our next question comes from Jeff Garo with Piper Sandler. You may proceed with your question.

Hi. Good afternoon, guys. Congrats on the quarter, and thanks for taking the questions. I want to ask a couple around performance guarantee trends. So the first one is whether the pull forward of performance guarantees so far is in the fiscal year reduces potential volatility? I think, you know, mostly to the upside for your fiscal fourth quarter. And then just more broadly, is customer interest in performance guarantees as part of contracts increasing given your integrated offerings? And how would you expect that to layer into the portfolio over time?

Thanks for the question, Jeff. It's Steve. So let me hit that. Well, I'll start with the first part. On the pull forward and the earlier recognition of PGs, you're absolutely right. It does reduce some volatility in the fourth quarter for us. I made a point in my prepared remarks to say this is a good thing. You know, when we give guidance, it's very important to us that the investment community understands we're giving full-year guidance, and then as we achieve PGs, if we achieve them throughout the year, we book them as they're earned, and that's a good thing because it takes some volatility away from the fourth quarter. So, perhaps that takes away some upside and some downside from the fourth quarter in doing so. Again, that's, we think, a very positive trend. And then to your point about customers, over and again, it's very important that customers understand that there's an ROI associated with the work that we're doing and the value that we're providing. And You know, the fact that we have Shantanu Nundi, our chief medical officer on the line, who's spending a lot of time with customers and the clinical capabilities that we've been adding. Let me kick it over to him for a second, because he's had some real recent interactions with customers on this front. Shantanu, you want to take it from here?

Yeah, sure. Absolutely. And I think it's a great part of your question around, you know, the customer interest in PGs and clinical capabilities. PGs in particular, and I think it's definitely a core part of our hypothesis. Going back to the whole idea of personalized healthcare being personal, data-driven, and value-based, what we're seeing in market is that customers are really interested in how we're measuring our outcomes, and there's a lot of interest in those performance guarantees. And it's something that we think is going to be really hard for others to be able to replicate. Actually showing that we can deliver on those clinical outcomes is something that we've done in the past, and I think that the customer interest in those, I think it's a really good sign that the core thesis behind personalized healthcare is right.

Thank you. Our next question comes from David Larson with VTIG. You may proceed with your question.

Hi. If a health plan were to come to you and say, hey, we want you to bear full risk for this cohort of lives for X dollars per member per month, is that something you'd be able to do or is that a track that you might sort of be on to do longer term? And then just any thoughts around in-person care with Plush Virtual is great. But, I mean, a lot of times you need to draw blood. You have to have an in-person diagnostic piece to virtual care. How are you addressing that? Thanks very much.

Thanks for the question. I appreciate you being here. I'm going to take the second part of that question to Sean Thuneau, our chief medical officer, to talk a little bit about how we I believe virtual care can coordinate and collaborate with brick-and-mortar care as well as a way to think about that in terms of the way we deliver services to our customers. On the first topic, the way we're working most prevalently with health plans today is approaching their commercial populations with our service, either in tandem with other components of their clinical services or directly with our service in its entirety being a carve-out for some of their member services and clinical services functions. We do that in both a reseller and a referral model, and it's very complementary to our direct sales model. The questions you're asking around would we be willing to take full financial risk in a carved-out segment of their population, I think it's not something that you should model into our business, into what we're looking at for next year or even really for this year or next year, David. It's certainly something that we'll evaluate down the road as we continue to prove out our capacity to drive cost savings and improve clinical outcomes for our customers. We certainly have a rich track record of doing so, but it's not something I've modeled into our plan. Sean, do you want to hit the question about brick-and-mortar care?

Yeah, absolutely. And it's a great question. You know, I think, you know, one of the things that we really liked about the PlushClear platform is that it's really purpose-built for primary care, right? So that means that we're able to provide comprehensive primary care. So to your point about lab draws, you know, partnering with national laboratories for that. Same thing goes with partnering with pharmacies around the country around medications, delivering vaccines at the point of care within pharmacies. And so I think really that point that Raj alluded to around collaboration, that's really the key. You know, as someone who still practices primary care in brick and mortar context, you know, there's a significant portion of my patients who need to see a specialist and needs to go elsewhere. Similarly, if you're providing primary care virtually, you're absolutely right. There's going to be a portion of patients, perhaps 10% or so, who are going to need to have something done in a brick and mortar context. I think the question, the key either way is really, how are you enabling that collaboration? And I think for us, that's where our data and technology platform comes from, comes in. I think if you think about how we've built an ecosystem and all the different partnerships that we talked about earlier in the call, it's the same sort of concept that we believe is going to be really the key. And that's what patients are looking for. Ultimately, they're looking for for us to deliver a service to them and for us to really put those pieces together in an experience that works.

Thank you. Our next question comes from Ryan McDonald with Needham & Company. You may proceed with your question.

Hi. Thanks for taking my question, and congrats on a great quarter. I appreciate the additional color on the long-term targets here. As you think about that progression towards break-even adjusted EBITDA and sort of the revenue threshold that you need to hit, you know, as you look at the next couple of years, how visible or how much visibility do you think you have onto some of the areas around virtual primary care or expert MD and sort of the consistency or the linearity of that progression when you think about the organic move towards that break-even level? Thanks.

Great. Thanks for the question, Ryan. Appreciate it. Steve? One of the things we're seeing that we're really bullish about as we sit here in the fourth quarter is the power of the platform, the diversification of it, the fact that we're seeing strong contributions across the board in terms of new customer growth in expert medical opinion to complement advocacy, plush care, the direct-to-consumer virtual primary care business growing, very nicely on its own while taking care of some of the EMO volumes that you see being a bit soft. As we head into next year, we have a strong base of contracted revenue that gives us confidence in that guide. Think of it as the advocacy and expert medical opinion, the B2B or enterprise business, and the plush care business performing very strongly on its own really in all aspects in terms of new subscriber acquisitions, visit rates, customer satisfaction, doctor satisfaction on the platform. All of that gives us confidence that the foundation is strong and it gives us good visibility towards obviously next year. And then you think about the fact that most of our contracts tend to be long-term contracts, so three-year business-to-business contracts. So we get good visibility there. We've got strong retention there. high net promoter scores across our member base. So all of those things combined with a strong ROI for our customers is really the backbone that we build our business on and our revenue models on. So those all combine to give us the visibility.

Thank you. Our next question comes from Richard Close with Canaccord Genuity. You may proceed with your question.

Yeah, given the second opinion or second MD trends, do you still expect the contingency consideration thresholds to be achieved? And then what is the timing again? I know you said calendar 22 for the shares to come in, but can you give us sort of the quarterly timing? I know since you're a February year end, I'm not sure if it comes in in the fourth quarter.

Sure. Hi, Richard. I appreciate the question. Yeah, so a couple of things. So each of the second MD and the plush care acquisitions had a contingent consideration or an earn out associated with them. The plush care calculation will be based on a calendar year 2021 basis, so we expect that to wrap up by the end of the fiscal year here, fiscal 22. And for second MD, there's a earn out there as well, which will be based in large part on a January 2022 or this month run rate revenue. So we expect those to all be wrapped up, if not completely by the end of the fiscal year, certainly by fiscal Q1 of fiscal 2023. And you'll see a calculation in the queue. In large part, those we expect to be earned But we're doing those final calculations over the next month or so, and we'll have more to report on that in the next quarterly call.

Thank you. And as a reminder, to ask a question, you'll need to press star 1 on your telephone. Our next question goes from Stephanie Davis with SBB Learning. You may proceed with your question.

Hey, guys. Congrats, McGuire, and thanks for taking my question. So I've got a two-part question on the out-year margin guidance. First, specific, and then more generalized. So on the specific side, should we think about the EBITDA margin as benefiting from a step up in 23, given the contract fine down that was unprofitable, and a more linear path from 23 to 25, or is there any nuance in there? And then just more generally, what are the toggles that could get us above or below the preliminary 23 and 25 EBITDA figures?

Stephanie, thank you for the question. This is Steve. Would you mind repeating the first part about the specific point about EBITDA? It broke up just a little bit, and I'm not sure I heard it clearly.

No, no worries. I'm just saying for the 23 figure, does that benefit from a step up in margins given the unprofitable contract wind down? Or should we think of that as a more linear path as we get to 25?

I understand now. Yeah, on a marginal basis, that $9 million or so, our point there was that, yeah, it was essentially a lower gross margin bit of business. So there's some uplift there. I think overall, it's fairly minor. The underlying key point for us is that gross margin expansion will be a contributor there. We expect something in the mid 40%, 45% range for this current year, fiscal 22. and expanding that up that we expect it to go up into the high 40s towards 50% by that fiscal 25 break-even date on a somewhat linear path to give you some more color there. And then the toggles up and down against that certainly will have to do with the success level that we have with driving better engagement and more engagement of these case rate revenues on the expert medical opinion business. and on visits on the virtual primary care and mental health side as we bring together all of the offerings and the offerings that we're calling Accolade Care and Accolade One. And then finally, in the out year, fiscal 25 and beyond, you know, we've spoken about this opportunity for gain share revenues and Accolade One. We have not made any grand assumptions in our target models around that. We think it's important that we learn about how that goes, but there certainly would be upside there if we were to perform well against those gainshare opportunities. And we'll report more on that in the coming quarters. Thanks again for the question.

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

Thank you, operator, and thank you all for joining us today. We appreciate the opportunity to outline our Q3 results, our Q4 plans, as well as our plans for fiscal 23. Have a great rest of your night.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.