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spk05: Good day and thank you for standing by. Welcome to the Accolade Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will 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 first speaker today, to Mr. Todd Friedman, Head of Investor Relations. Please go ahead.
spk04: Thanks, Operator. Welcome, everyone, to our fiscal fourth quarter earnings call. With me on the call today are our Chief Executive Officer, Rajiv Singh, and our Chief Financial Officer, Steve Barnes. Shantanu Nendi, our Chief Medical Officer, will join us for the question and answer portion of the call. 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-gap measures to their most comparable gap measures and the reconciliation thereof can be found in the press release that's posted on our website. There are also slides to accompany this conference call that are available on the webcast. The slides will be available for download later 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 on this call. For additional information, please refer to our cautionary statement and our press release that are applying to the SEC, all of which are available on our website. With that, I would like to return the call to our CEO, Rajiv Singh.
spk08: Thanks, Todd, and thank you all for joining us today. Today's call marks an important inflection point for our company. We've delivered eight consecutive quarters of outperformance and a remarkable evolution of our business by being cognizant of the environment we're operating in and executing accordingly. Today, we're stepping back to acknowledge that the macro environment has an impact on our business and no doubt every business in our sector and beyond. This requires operating with even more discipline as it relates to profitability and growth. It is with this changing macro environment in mind that we're adjusting our go-forward forecast today. We make these adjustments having just completed a very strong fiscal year, where we dramatically expanded our footprint and exceeded our financial targets. And we see a go-forward environment supported by the largest sales pipeline in the history of the company. While there are tailwinds we're excited about, there are also headwinds. As you may have inferred from our press release, our relationship with Comcast will effectively end in December 2022. Given that timing, it is not a significant impact to FY23 revenues. However, combining that customer loss with a challenging macroeconomic environment is worthy of evaluation. Accordingly, we're moderating our annual revenue growth rate to 20% over the midterm while reducing our adjusted EBITDA loss on our path to profitability. We're adjusting our spend to align with the revised growth rate and now expect to achieve full-year positive adjusted EBITDA in fiscal 2025. This is not about being overly optimistic or unduly pessimistic. It is simply about being pragmatic and clear-eyed about the road ahead. Our updated forecasts are a reflection of that pragmatism. More on all of those points later. For today's call, we'll follow the following agenda. I'll quickly highlight the Q4 and FY22 results, and then we'll talk about what we're seeing in the customer and competitive landscape and how the pipeline looks for the year. Then I'll give you a broad overview of the steps we're taking to position Accolade for both near-term execution and long-term positioning to deliver against those growth and profitability goals. Steve will then give you more information on the financial results. I'll talk in a minute about Comcast and how we plan to adapt to the dynamics at play in our industry. But first, I'll recap the successes we achieved in fiscal 2022. First, I'd like to acknowledge the incredible efforts and commitments of our employees who delivered four quarters of our performance in the midst of an ongoing pandemic. These teams brought together four organizations in Accolade, SecondMD, PlushCare, and HealthReview, while maintaining exceptionally high satisfaction rates across all those customer base We went public two years ago with 1,000 employees, 50 customers, and $130 million in revenues. We exited fiscal 2022 with 2,300 employees, 600 customers, and $310 million in revenue and $366 million in the bank. Accolade today is more durable, diversified, and set up for long-term success than ever before. Before going any further, let's address the end of our Comcast relationship. First, let me express my appreciation to the team at Comcast for being our founding customer and for the visionary leadership that chose to reinvent the healthcare experience for their employees and their families by partnering with a company that at the time had no customers. That was 12 years ago, and through multiple contract renewals and changes in their business, including me joining as CEO almost seven years ago, Comcast has been a great collaborator. It's important to note that so much has changed over the years. In fiscal 2018, when we had fewer than 20 customers, Comcast represented 45% of our revenues. Today, we've got more than 600 customers, and Comcast represents less than 10% of revenues. And next year, based on the economic structure of their current evaluation process, that percentage would have been materially smaller. Our roster of Fortune 500 clients is the envy of the industry. For good reason. Customers of this nature oftentimes lead the way with innovation in healthcare because of their buying power and population size. Additionally, our customer retention rates have been north of 95% for many years. While this isolated event is disappointing, it is just that, an isolated event. In many ways, the diversification of our revenue stream, offerings, and customer base were all in preparation for an event like this one. While we're always sad to say goodbye to an old friend, we wish Comcast the best of luck. With that, let's turn our attention to the future. Our conviction regarding our strategy, our offerings, and our company remains very strong. First, we're in the midst of an exceptionally strong demand environment. We're participating in more RFPs across every market sector, including the middle market, enterprise and strategic, and government sector than ever before. Our performance early in the selling season has been strong. Building off that point, we're in the midst of renewing the TRICARE Select Navigator Program for the third year of the pilot. Year one of the pilot resulted in us achieving the majority of our performance incentives, and we expect our results in year two to be equally strong. Importantly, we're well-positioned to grow in other areas of the TRICARE program as well, such as our early success with the autism care demonstration. Second, our offerings are differentiated and compelling. Accolade is a personalized healthcare company that combines the strength of an advocacy platform with clinical capabilities like primary care, mental health support, and expert medical opinion. Those capabilities, increasingly tightly integrated, creates a data-driven, personal, and value-based healthcare solutions that healthcare buyers need. Our customers and prospects agree as our new sales and cross-selling momentum remains strong. The utilization of primary care and mental health or expert medical opinion capabilities is exceptional when delivered in an integrated fashion. Importantly, we've replaced our competition in those categories at a number of existing advocacy customers where customers were keen to work with their proven front door to healthcare for services of this nature. Additionally, this broader portfolio is more interesting to health plan reseller partners who want to take Accolade's capabilities to their member base. This month, we announced a partnership with Priority Health in Michigan, who's incorporating advocacy, primary care, and mental health into their offerings. Much as we already have in place for Accolade Expert MD, we see health plans as a key distribution partner for Accolade Care. Third, our ability to address the inequity in health care makes our solution essential for employers. Where health care has fallen dramatically short is in providing care to those who don't have easy access to it. Those impediments could be related to geography or social or economic factors. We're leveraging our deep customer relationships, clinical depth, and expertise and machine learning to narrow those gaps. Finally, our disciplined approach to building our business will differentiate us in uneven economic times. Our cash position provides the foundation to execute on our strategy. And our commitment to delivering on our path to profitability is even further strengthened in our outlook today. I raise this point to address the changing macroeconomic environment and competitive book behavior that we believe is not sustainable for the long term. Our success over the years has attracted our fair share of competition, and our win rate has remained very high. That said, more recently, we've seen some of our competition begin to lower prices to levels where we believe they must either sacrifice fiscal discipline or quality delivery to members. In the end, strong businesses with a commitment to operating with discipline survive and thrive in environments like these, and we're positioning ourselves today to do exactly that. To that end, while the vast majority of our pipeline is made up of companies evaluating advocacy and personalized health care for the first time, we also have a meaningful number of prospects who previously chose a lower cost, lower engagement competitor years ago and have now reopened RFPs after coming to the realization that low cost, low engagement solutions do not produce the outcomes, experience, and ROI desired. Now I want to revisit how our core principles shape our view on go forward guidance. Our company has always been focused on creating a new category of healthcare solutions that put people at the center of the service. And today our personalized healthcare solutions are doing just that for more than 10 million people. We've been focused on growing our business on the top line while progressively improving profitability each year. That commitment has been unwavering since we went public in 2020. That said, as an operating team, we're also committed to confronting the facts in a changing market. We believe it's smart business to moderate our growth expectations for the year. At the same time, we think fiscal discipline is important and are also reducing the adjusted EBITDA loss for FY23 and FY24 from our previous guidance. We expect to achieve positive adjusted EBITDA for the full year in FY25. Our guiding principle in challenging environments is to redouble our focus on execution and discipline. Our addressable market is growing, and our demand environment remains strong. With our focus on discipline and execution, we expect to emerge from this challenging environment even further differentiated from the rest of the market. With that, let me turn the call over to Steve Barnes, our Chief Financial Officer. Thanks, Raj.
spk09: First, I'm going to recap the results for the fourth quarter and full fiscal year 2022 before providing more color on the changes in our fiscal 23 guidance. We generated $93.8 million in revenue in the fourth fiscal quarter ahead of the top end of our guidance, representing 58% year-over-year growth on a gap basis over the prior year period. Fiscal Q4 adjusted gross margin was 54.4% compared to 53.8% 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. Adjusted EBITDA in the fourth quarter of fiscal 22 was $1.8 million, which compares to $2.7 million in the prior year fourth fiscal quarter. This was significantly ahead of our guidance primarily due to the revenue beat as well as lower spending than planned in the quarter in some areas such as hiring and personnel costs. For the full year, this rolls up to revenue of $310 million, an 82% increase over last year on a gap basis, and 30% on a pro forma basis, adjusting for the acquisitions. Adjusted gross margin for the full year was 46.5% compared to 45.6% in the prior year. Adjusted EBITDA for fiscal year 2022 was a loss of $42.4 million for 13.7% of revenue, significantly better than our guidance and compared to a loss of $26.9 million for 15.8% of revenue in the prior year. Turning to the balance sheet, cash and cash equivalents totaled $366 million at the end of the fiscal year, And accounts receivable DSOs were in line with prior quarters at about 20 days revenue outstanding. Finally, we had approximately 67.3 million shares of common stock outstanding as of February 28, 2022. This does not include the approximately 3.4 million aggregate shares related to the second MD and plus care earnouts, which will be issued in the near term, resulting in 70.7 million shares outstanding on a pro forma basis. And now turning to guidance. We're updating our guidance today for fiscal year 2023, as well as our midterm outlook. We are now forecasting fiscal year 2023 revenue will be in the range of $350 million to $365 million with adjusted EBITDA loss between 35 and $40 million. This represents revenue growth of approximately 15% at the midpoint and an adjusted EBITDA loss of negative 10 to 11%. The change from the preliminary guidance we provided in January is primarily related to a few factors. First is the Comcast contract, which will end in December and reduce revenue in the fourth quarter by roughly $5 million. Secondly, you'll recall in January we expected between $50 and $60 million of new business signed in fiscal 2022. The final result came in closer to the middle of that range, and we ended fiscal 2022 with annual contract value of approximately $286 million. We have also included some reservation on the lower end of our guidance related to the TRICARE pilot. As a government program, the pilot requires annual reauthorization. And while we fully expect the pilot to be renewed for the third year, and we are bullish on other opportunities with the federal government, we haven't yet received the official authorization. And the last factor relates to our comments about the macro and competitive environment. As we said, we're having a favorable start to the selling season, and our pipeline is strong. But with what we're seeing in the market, we have moderated our expectations and we'll give you ongoing color about the selling environment as the year progresses. As it relates to our midterm outlook, we're now forecasting 20% growth, excluding the loss of Comcast. So as you look out beyond fiscal 23, if you grow the business 20% ex-Comcast, you will get to around $500 million in fiscal 2025 revenue. Importantly, we remain committed to our goal of consistent progress toward profitability. The loss of a more mature large customer like Comcast will impact gross margin. While we won't try to recoup the entire gross margin loss at once, particularly in fiscal 24 when the impact is greatest, we are adjusting our spend and now project positive adjusted EBITDA in fiscal 2025. One last note about spending in fiscal 2023. Like all of you, we see what is happening in the stock market while at the same time are focused on employee recruiting and retention. To that end, we are incorporating a stock component along with cash for our fiscal 2023 corporate bonus plan. Aside from providing a lever to manage cash, it also provides a clear incentive for the team to execute against our strategy and even further align with shareholders. This will result in a bump to stock-based compensation of approximately $14 million in fiscal 2023. Now, before we take your questions, I want to align my comments today with the remarks we made in our January call regarding the revenue growth breakdown and modeling the path to profitability. The revenue impact I've just described primarily impacts the core advocacy growth rate. The one caveat I'd add is that PlusCare finished fiscal 22 stronger than expected, But given the macroeconomic volatility, we haven't changed our internal estimate for that revenue in fiscal 2023. And therefore, the implied growth rate is a bit lower than we said in January. While this updated framework results in a lower revenue target, we're adjusting our spend to improve our path towards positive adjusted EBITDA in fiscal 2025. Finally, allow me to take one more step back. While we had some difficult news to report today, This event has also given us the opportunity to take stock of Accolade from a broader perspective. Two, three, or four years ago, this kind of event would have had a much deeper impact on our business. We have built Accolade through internal innovation and M&A for growth and durability. Just compared to a year ago, our customer base is far more diversified. We have growth opportunities across multiple vectors. Our revenue mix is spread across different sources and structures. and we are solving more complex, meaningful healthcare challenges. We went public to create the foundation for the business we are operating today. We continue to be confident about the future and the value we bring to our 600-plus customers and 10 million members, even as we make adjustments to our spend to align our near-term business objectives with our path to profitability. With that, we'll open the call to questions.
spk05: Thank you, sir. As a reminder, to ask a question, you would need to press star one on your telephone. To return your question, please press the pound key. We ask that you please limit yourselves to one question, and if time permits, we'll take follow-up questions. Please stand by while we compile the Q&A roster. I show our first question. It comes from the line of Michael Cherney from Bank of America. Please go ahead.
spk17: Good afternoon, and thanks for all the color. I think I want to dive in a bit on the differential in your commentary, Steve, a little bit further, and also make sure I heard correctly. So if you think about that bridging and the 25% growth that you had estimated on the last earnings call, Comcast takes out a little more than a percent of that, or a percent and a half, I guess, based on the timing. it seems like maybe a percent on bookings. When you talk about the conservative nature of the rest of the business, how much of that is truly in-year business wins versus how much is some of the dynamics around performance-based fees that you may expect or expect not to get versus how much is employment levels at your customers? I know it's a lot of moving pieces, but I just want to make sure we can bridge a little bit better, and I just have one quick clarification after.
spk09: Thanks for the question. First, you're right. The Comcast and bid softness in the ARR bookings in fiscal 22 do come off the top for roughly a point each headwind on growth. The remainder of the guide is across the various sectors you mentioned. We're softening the diamonds across the board to recognize the macro environment primarily as it relates to being thoughtful around headcounts in a highly inflationary environment, for sure. Being thoughtful around the timing of being able to book and launch new business in-year. And, in part, just recognizing that buying decisions last year pushed a bit towards the end, which is what resulted in the softer ARR. While our win rate remains strong when there is a decision, we're thoughtful about the fact that some of those decisions were slower. One of the very important points to us, Mike, as we address all of that, But then looking at the revenue softness, we look directly to our spend and profitability. And, you know, you see that we beat fiscal 22 fourth quarter handsomely in terms of bottom line as well as top line. And we're rolling that forward to remain committed to the overall profitability structure from here through to fiscal 25 positive visa tax.
spk17: Got it. And just the one clarification, you talked about the 20% annual revenue growth excluding Comcast. Just want to make sure that's completely out of the baseline in terms of how to think about 24 and 25. I want to make sure I get the math correct on how you think about that, given that the 25 number came down by about $100 million overall.
spk09: That's right, Mike. So what we're effectively doing there is if you think about Comcast in fiscal 22 having been about $28 million of revenue, you take about five out to get to your fiscal 23 number. If you were to back that out and then put a 20% growth rate on top of that compounding for the next two years, that's how you get to the approximately $500 million in fiscal 25. Got it. Thanks.
spk05: Thank you. As a reminder, we ask that you please limit yourselves to one question. And I show our next question comes from the line of Ryan Daniels from William Blair. Please go ahead.
spk06: Yeah, guys, thanks for taking the question. I don't know how much detail you can go into this, but clearly a question we'll get is in regards to the Comcast relationship, especially if it was an anchor tenant for the organization. You know, clearly good relationship. You had 12 years with them, multiple renewals, so they liked the service. They got the ROI. What was it that led to the change on a go-forward basis to kind of end that relationship? Was it what you talked about with competitive pricing? You indicated the pricing would have made it much less than 10% going forward under newer terms. I just want to get a little more color on what you're referring to there and maybe what drove that loss. Thank you.
spk08: Yeah, I appreciate the question, Ryan. This is Raj. A few thoughts. First and foremost, I appreciate you pointing out the fact that the Comcast relationship has been a really productive one over the course of 12 years and multiple contract renewals. We think over time that customers begin to evaluate different buying criteria in terms of what they're most interested in. I can't speak specifically to all the rationale for Comcast buying criteria, but I can say we're really focused on servicing clients who are looking at employees improving healthcare outcomes while achieving that, the return on investment that's associated with achieving those healthcare outcomes. And so, you know, in terms of that specific instance, I would say we may have seen a divergence of those motive and mission there. And for us, it's imperative to point out, we've had a customer retention rate, Ryan, of 95% on an ongoing basis for many years first. And secondly, we view this as an isolated event and not one that we expect to repeat itself on the customer base.
spk05: Thank you. Aisha, our next question comes from the line of Jonathan Young from Credit Suisse. Please go ahead.
spk10: Hey, thanks for taking the question. I guess when you think about the 20% growth rate when adjusting for Comcast on a go-forward basis, How much conservatism are you kind of building into that? Because obviously the Comcash relationship was a bit of a surprise to you, to us, given how long that relationship has gone. So I'm just wondering how much conservatism is built into that top line. And then commensurately with that, when you think about that bridge to positive EBITDA on 25, given the current inflationary environment and kind of what's going on, are there any pushes and pulls? on any of the hiring that you'll need to do to achieve that 20% and achieve that EBITDA positive number that you're talking about. Thanks.
spk08: Jonathan, we're having a bit of a hard time hearing you. We'll try to recap your question. I think, Steve, it'll go to you. We'll recap your question. Please catch us if we're missing it. I think you asked the question, how much conservatism is baked into the 20% growth rate, excluding Comcast, and what impact, if any, would the inflationary pressures have on our hiring ability to achieve that 20% growth rate?
spk10: Yes.
spk09: Okay. Sure. So, Jonathan, first of all, on the level of conservatism in the 20%, We look at the – it starts with our pipeline. As Raj mentioned in his comments, the pipeline is strong, and we're seeing a lot of interest, particularly in terms of RFP volume from customers large and small, many of which have never purchased an advocacy offering. So based upon that, relative to ratios that we see in terms of fields closed, the size of pipelines, I feel like that's a good estimate to have. And we're tempering it a bit, though, given the macroeconomic factors and the possibility that decisions will push. So the 20% we put together on that is based on really a pragmatic view in a clearly difficult environment. In terms of people and inflationary environment, this is top of mind for us. It's obviously a really inflationary environment. It's important that we address that through a broad set of employee benefits, not just salary, but also compensating with stock and attracting great people to the mission and business that we have here. That comprehensive package, and I alluded to it in my comments of making sure we're aligning with employees across all of those vectors, is built into what we see. One last comment there. You know, as we look at managing our spend and as we turn the road, we look very hard at rigorous spending control opportunities that we have across the book. Remember, we're still barely a year into two significant acquisitions where we see more opportunities to lean into integration, et cetera. And then finally, with a large customer transitioning, we'll see opportunities there as far as reallocation of spend.
spk05: Thank you. I show our next question. It comes from the line of Glenn Santangelo from Jefferies. Please go ahead.
spk12: Oh, yeah. Thanks for taking my questions. You know, Raj and Steve, I want to flesh out some of these comments on this revenue shortfall because it seems like you take your revenue guidance down by call it roughly $35 million. And, you know, if we know Comcast is, I don't know, a little more than $5 million of that for a couple months, it seems like the shortfall here is at least $25 to $30 million. Now, you said... that, you know, you had some expectation of new business of about 50 to 60 million, and half of that, you know, maybe didn't show up. And I'm trying to figure out what happened from January 10th when you reported your last quarter when seemingly you had some visibility on all the January 1st starts to kind of now. And then if you could just roll into that, your sort of comments about the competitive landscape and, you know, some competition there. lowering prices. I just want to make sure I understand the competitive dynamics and also the last part, and then I'm done. Are Plush Care and 2ndMD, are they performing up to your expectations, or is any of that $30 million in weakness coming out of either of those two businesses? Thanks, and I'll stop there.
spk09: Thanks, Glenn. And so the bridge to the midpoint, it's about $27.5 million to the midpoint. Let me just take that, break that down in pieces. First of all, Comcast cost $5 million. On the ARR shortfall from prior year, we came in at the bottom end, essentially, of that $50 to $60 million range. The booking of about 55 or so, when you adjust it for PGs, you end up at about 50. So there's another 5 to 10 there, all right? After that, you're talking about really a broad just softening, particularly around the advocacy side. The EMO business continues to perform along the lines of what we described in the last call, although we're certainly cautious about elective procedures as we've spoken about. The virtual primary care business remains in line with what we talked about. The advocacy business is really where we see, because it tends to be a larger purchase for our broadest offering, where we are tempering our expectations around not just new business bookings, but also being super thoughtful around employment and other variables that go into the revenues associated with that book, given the inflationary and potentially recessionary environment we're heading into.
spk05: Thank you. Our next question comes from the line of Jeff Garrow from Piper Sandler. Please go ahead.
spk18: Yeah, good afternoon. Thanks for taking the question. I want to dive a little deeper in the comments on the macro environment and pricing. So I would ask if the predatory pricing or just aggressive pricing, is that on any particular offering or across all? And then how should we think about performance guarantees and your ability to offset lower base pricing from peers with the promise of stronger results?
spk08: Thanks, Jeff, for the question. I think in terms of when you think about pricing, I think we're clearly now having established a brand new category in personalized health care and establishing that the category is actually Very interesting to customers. While we're looking at this year's revenues and moderating those expectations, we are continuing to see a really strong demand environment from customers looking at personalized health care. Because of that, we've attracted a set, as you would in any space that's growing at this kind of clip, we've attracted a set of numbers. Some of whom are approaching the space with materially lower price points, others who are looking at it from a materially lower service quality perspective. We think over time those things fire themselves out. Ultimately, customers are seeking, as we noted in our prepared remarks, customers are seeking improved healthcare outcomes and return on investment. We traditionally see that in our full-service advocacy offering, and what we're beginning to see already is the early stages of customers who, having chosen in the past lower cost, lower engagement, lower outcome orientation solutions, are now coming back into our pipeline and revisiting Accolade's solution as the chosen course or path. So I'd say, Jeff, to answer your question directly, we're really thinking more about the more full-service advocacy offerings as it relates to the pricing pressure. But we expect over time that in the near term that that pricing pressure will alleviate itself as customers choose value over price.
spk09: And Jeff, as it relates to performance guarantees and the thoughts we have in our guidance here, You know, always with performance guarantees for accolades, take that into two pieces. First, you have the operational type performance guarantees that relate to engagement rates and customer satisfaction rates and, you know, other kinds of engagement and operational requirements. rigor that we apply, and we continue to have very good visibility there and apply that same type of view towards fiscal 23. Savings-based revenues, similarly, although, as you know, those can bounce around a little bit, particularly coming out of COVID. Healthcare trend has been erratic over the last couple of years. So, we do apply some additional hedge in there to ensure that our forecast represents a range where we feel confident in achieving.
spk05: Thank you. Aisha, our next question comes from the line of Ricky Goldwasser from Morgan Stanley. Please go ahead.
spk11: Hi. Good afternoon. It's a two-part question. The first one, when you think about your forecast between now through 2025 and that CAGR of 20% top line growth, are you assuming any price pressure in that 20% or are you assuming sort of steady state and to your point that your customers will ultimately kind of understand the value of And the second part of the question, as we think about your large employer book, can you just tell us what percent of the book is up for renewal in the next couple of years?
spk08: Sure, Ricky. Thanks for the questions. In terms of the first point, one of the things that we take the most heart in is Both the incredible demand environment that exists, the number of evaluations that we're participating in today, given the long-term win rate of the business and the continuation of that win rate into this fiscal year. The second part of that story from a pricing assumption perspective is we are receiving vendor of choice selections and new business wins right now at a price point that are very similar to where we've operated in the past. customers are aware, particularly in a space like healthcare, where we're talking about delivering healthcare services with doctors and nurses and frontline care teams, that there is a cost of delivering services like that, and particularly customers who are focused on improving clinical outcomes, clinical quality, and return on investment, have continued to demonstrate the capacity and the wherewithal to choose solutions that may be higher priced than others, but our demonstrated value and a proven demonstrated value over the years. So that's part one in terms of our go-forward assumptions. In terms of customer renewals, we have customers every year who are up for renewal. And as we've pointed out in the past, Ricky, because of the incredible value we've delivered for our customers, Our renewal rates or our customer retention rates have been 95% for at least the last five years and probably longer than that. And so we continue to see the vast, vast majority of our customers renew their agreements with us because of the value we've provided and the relationships that we've built with their employees and their partners.
spk05: Thank you. I'm sure our next question comes from the line of Cindy Muth from Goldman Sachs. Please go ahead.
spk01: Hi, thanks for taking my question. Yeah, just following up on the, you know, the revenue retention, I guess what I'm feeling like is you're expecting maybe that would continue, that, you know, in the B2B market, it feels like some of this maybe competitive pricing, you know, does not fly. Maybe it is more of a temporary thing, like, you know, some players try to win, you know, customers, but then in the end, you know, if you're running, you know, business and everything, you have to think about the sustainability of that, you know, whether they're going to be, you know, continue to be well-funded and be around. So I guess would you sort of say that this is something it sounds like that you think is more temporary? But then I also just did want to ask a second one just about the cadence of EBITDA because it looks like, you know, obviously it's better than we would have expected full year you're expecting. So I guess not the next quarter, but it looks like it's going to be maybe positive through the third and fourth quarter. Anyway, if you could just give us something about the cadence there, and I'll stop and maybe ask one more follow-up.
spk08: Thanks, Mindy. Let me take the first question, and then I'll let Steve take the second question regarding EBITDA and the distribution of EBITDA for the year. I think the answer to your question as it relates to the competitive landscape and customer retention is in line with the way you asked the question. Absolutely, we believe that this is an isolated event. We intend, you know, we've got great visibility into customer retention on a year-over-year basis. And we expect that our retention rates remain on a midterm, long-term basis in that very high, 90-plus percent range on an ongoing basis. But over time, there will be, in any market, particularly one growing this fast, the majority of our evaluations are evaluations for greenfield, brand-new customers who have never looked at advocacy or personalized health care before. That said, there is on occasion some customer trading. I referenced in my prepared remarks today that we added customers from our competition where our customers are consolidating all of expert medical opinion, virtual primary care, and advocacy. into our relationship. And we've seen that in a number of different spots. That said, by and large, we're really focused on continuing to grow the organic space that's here, and we'd expect that that will continue for the foreseeable future. Steve, do you want to hit the EBITDA point?
spk09: Sure. So, Cindy, the cadence of EBITDA for fiscal 23, yeah, fiscal, or excuse me, the first fiscal quarter will be the low watermark, if you will, and the guidance will be provided. And then fiscal second and third quarter trend down, but still a negative. And then a fourth quarter positive EBITDA to send that out to the 37.5 at the midpoint.
spk01: Okay. Yeah. That makes sense. And then I guess, I mean, if I could just add one more. So as we project forward, I guess we see a similar sort of like seasonality or way of, I mean, if you have any color there, it would be helpful.
spk09: Sure. Yeah, that shape on a quarterly basis is a good one to use, similarly in fiscal 24. And we provided in the presentation there, you would see that we expect that loss to be cut about in half in fiscal 24 with a positive result in fiscal 25. But given the business seasonality, that shape persists as well.
spk05: Thank you. I'm sure our next question comes from the line of Ryan McDonald from Needham. Please go ahead.
spk07: Thanks for taking my questions. Steve, I think you mentioned in the prepared remarks about gross margin impact from Comcast coming out of the model as it being a more mature customer and being a bit accretive to gross margins. Can you sort of walk us through what sort of expectations for gross margins are or the magnitude of that impact in fiscal 23? And then as we think about the bridge to the adjusted EBITDA, you know, maybe where some of those cost efficiencies can come into the model as we think about the OPEX lines. Thanks.
spk09: Sure. Ryan, so on more mature customers, when we ramp up a new customer, there's a fair amount of investment to be made both on the OPEX side and on the frontline care team side in the cost service line. So that is a little bit north of the corporate average gross margin that will come out in fiscal 24. So fiscal 24 gross margin, you can think of as roughly flat to a bit up off of fiscal 23. We expect to keep a little bit of a hit there. But importantly, when we look across the business and look for opportunities around cost savings, Again, we just came off a year of beginning to integrate three businesses in which we see more opportunities to lean into those. And in transitioning contracts off, particularly in the OPEX line, there are opportunities to reallocate that spend in other areas. So those are some of the target areas that we have for OPEX. reducing some spend and some growth areas as we lower our top wide growth rates.
spk11: Thank you.
spk05: Thank you. Thank you. I share our next question. It comes from the line of Sandy Draper from Guggenheim. Please go ahead.
spk03: Thanks very much. Just first a quick housekeeping question. And I apologize if I missed it. Did you guys give the actual revenue breakouts between advocacy and expert MD in the virtual primary care slash plus care.
spk09: Sandy, this is Steve. We haven't specifically, though on the last call we spoke to, you know, an expert medical opinion growth rate in the neighborhood of 20%, and the virtual primary care plus care business close to the 30%. And what we're saying to you today is that that advocacy line is coming down based upon the factors that we gave today, and those are how you aggregate that down. And you'll see in the 10-K filing, tomorrow, the spread. But you can think of the business as about 65% or so advocacy today with the balance across expert medical opinion and virtual primary care.
spk03: Okay, great. I'll wait for that on the 10K. I appreciate that. And then my broader question, and it's sort of been asked at a slightly different angle, just trying to think in this macro environment, if I put myself in the shoes of an HR person, person, you know, there's a lot of challenges. They're being pressured with retaining people, hiring people, paying maybe higher bonuses, signing bonuses, retention bonuses, et cetera. I can understand why they would maybe not want to commit to a new purchase or be hesitant to step up. And so I'm wondering, you know, have you seen signs of that or is that what you're factoring in? And maybe as a follow-on to that, is this a situation where someone's less likely to do accolade one and do the all in and say, yeah, that makes sense, but that's a much bigger ticket item. We're just going to do advocacy. We're not going to do all three. I'm just trying to think, not that the ROI isn't there and longer term this won't happen, but maybe those are the pressures that are at play. I'm just trying to get the additional commentary there. Thanks.
spk08: Yeah, thanks for the question. I think it's a really great one, Sandy, and I think here's the way we think about it. First, while we do see a really strong demand environment and customers are really focused, to your point, they're focused on retaining their employees in a market that, at least today, is a very full employment market. And they're also focused on addressing issues like health care equity, et cetera. In the last year, in fiscal 2022, we saw some defocusing of buyers' attention based on They're focused on return to office and those things COVID and pandemic related. And I think we're cautiously optimistic about the future this year, looking at the demand environment and the number of evaluations that we're participating in. We're clearly looking to see the number of opportunities that progress and actually make buying decisions. When customers make buying decisions, we have a very strong win rate. or when prospects make buying decisions, we have a really strong win rate to the degree those buying decisions actually occur versus customers choosing to kick the can down the road after an evaluation cycle, which leads to the second part of your question, which is, is there a likelihood that customers might be evaluating components of our solutions versus the entirety of our solutions in Accolade 1? And I think it's a very astute point. I think customers... will continue to want to buy in components. And it's really a significant driver of the way we've architected our strategy to be able to meet a customer where they'd like to be met, whether that's an expert medical opinion, virtual primary care and mental health, or advocacy, or in those cases where it's all of the above. So, yes, I think there may be a propensity for that type of buying to occur this year. And we'll have a lot more data as we come back to you in Q2 and the Q3 earnings calls. Great. Really helpful commentary.
spk05: Thanks so much. Thank you. Our next question comes from the line of Stephanie Davis from SVB Securities. Please go ahead.
spk14: Hey, guys. Thank you for taking my question. I was hoping to talk a little bit more about the forward evolution of your pricing model. We're seeing some pushback in the employer market around PMPM solutions, and I know you've talked about going more risk-on with some of your products. So how should we think about maybe the mix of how you're selling and how you are looking at your forward pricing.
spk08: Thanks for the question, Stephanie. I think consistently over the course of the last several years, we call it over the last five years, we've delivered to customers pricing solutions that gave them an opportunity to put a percentage of our fees at risk. Typically, that number has been in the neighborhood of about 30% of our fees at risk. That's been consistent year over year and continues to be fairly consistent in terms of the outlook of the transactions that are occurring in fiscal 2023 and our view on those customer contracts that we're most interested in pursuing in fiscal 2023. We believe that a percentage of our fees at risk associated with clinical outcomes, return on investment, and employee satisfaction is are appropriate for most of our customers. There will be those customers who take advantage, and you've heard this before from us, Stephanie, there will be those customers who take advantage of all of our solutions, looking at advocacy, expert medical opinion, primary care and mental health, and a suite of our partner solutions where we've got the capacity to be more proactively managing all of their population health and the choices that they're making across the ecosystem. And in those situations where we have a more pronounced control capacity, we're willing and able to take more of our fees at risk. We don't think that's the preponderance of our customer base, but we expect that over the course of fiscal 23, you're going to see a customer breakdown that looks fairly similar, or a new customer breakdown that looks fairly similar to the breakdown you saw in 22 or 21.
spk05: Thank you. I see our next question comes from the line of Richard Close from Canaccord Genuity. Please go ahead.
spk16: Yeah, obviously it's been a competitive business for some time. So I'm just curious your thoughts on the pricing environment and, you know, maybe a timeline of when it deteriorated or, you know, is the pricing environment more competitive as a follow-on to Stephanie's question in terms of other people coming in and going more at risk? Any thoughts there would be helpful.
spk08: I think we look at the competitive dynamic in the following ways. You can tier prospects who are looking at solutions in our category as those who are really focused on clinical outcomes, improving employee satisfaction, and delivering return on investment because they're improving outcomes. We think that's the preponderance of the marketplace. That marketplace is continuing to make buying decisions that are consistent with the way the market has always purchased, and we feel really great about our capacity to win the vast majority of those opportunities that actually transact. There's another component of the buying cycle that's always existed that's been more price conscious, that's been more focused on finding low-cost solutions that are either entirely digitally oriented or that offer less in terms of services or perhaps where the companies are more capable or willing to take lower profit margins. In those situations, we think that those are deals that we have always in the past shown discipline around and haven't necessarily pursued and will continue to behave that way.
spk05: Thank you. Aisha, our next question comes from the line of Stan Berstein from Wells Fargo. Please go ahead.
spk02: Hi. Thanks for taking my questions. Maybe on the 20% intermediate growth guidance, how should we think about the different components of advocacy versus post-care versus expert opinion and And within advocacy, maybe as an add-on, is the expectation for PMPM to be flat and membership to be the growth engine there? Or is the expectation for PMPM to be somewhat under pressure given the competitive dynamics you cited earlier?
spk09: Hey, Sam, this is Steve. So on a long-term basis, think about that 20% of being pretty similar across the different business segments. You know, expert medical opinion and plus fare are smaller in terms of lower base right now. care we've called out is growing a bit faster than that. But think of it as not just membership within customers, but the majority of our business today is direct to employers, and therefore a lot of that growth is being projected upon new customer logos as well as growth within those employer bases. In terms of PPMs and where those are coming in, we've talked a little bit about in the last call or two about case rate revenues on expert medical opinion. You know, there's a bit of a dynamic there where some of that book has transitioned to case rate off of a PMPM. But, you know, taking it all the way back to Raj's point, We think customers who are looking at these services, particularly advocacy and expert medical opinion as we bring them all together, they want to understand ROI in a market that's extremely crowded with whether it be small point solutions or other customers that aren't able to warrant that ROI the way that we do consistently by putting a portion of our fees at risk and having had the ROI externally validated. We think that's ultimately the differentiator of why customers do buy and why they renew at such high rates. And so we weave all that together and look at the growth of the breadth of the pipeline to tell us that we think that 20% growth rate makes sense across the different offerings and capabilities.
spk08: And maybe the last part of that question, Stan, We believe over time that those customers, and now those customers represent the preponderance of the marketplace, are willing to pay for value, and that that value will represent consistent VEPM fees to what we've represented in the past.
spk05: Thank you. Aisha, our next question comes from the line of Dev Raraswai from Berenberg Capital Markets. Please go ahead.
spk13: Hi, this is Brenda. I'm for Dev. Thank you for taking my question. My question is what particular types of clients are you seeing the most demand from for Accolade One? Is there more converting existing customer to VVC or have you seen new client demand and what are like the typical sales cycles on this? Thank you.
spk08: Thanks for the question. We continue to see great interest and traction from our existing customer base as it relates to looking at Accolade One and that's really where the preponderance of our focus has been. We look at new prospects, and this goes to one of the earlier questions asked, as perhaps looking at either the platform of advocacy or some of the individual solutions, Accolade Care or Accolade Expert MD, as reasonable landing points for new prospects who are potentially just beginning to explore the opportunities in terms of healthcare reinvention. because that market is growing so fast in each of those categories or demonstrating such demand, we want to simplify those sales cycles and meet the customer where they'd like to be met. So going all the way back to the beginning, Accolade 1 is really we're seeing continued interest in the customer base where we're really focused.
spk05: Thank you. I show our next question comes from the line of David Larson from BTIG. Please go ahead.
spk15: Hello. Thank you for taking my question. This is Aaron on for Dave. A few questions from my end. So first, I guess, what do you see as the largest long-term opportunity from your TRICARE pilot in terms of revenue? And then my next question is, how much cross-selling are you seeing from accolade advocacy care and expert MD, and how much cross-sell revenue are you factoring into your 2023 guidance? Thank you.
spk08: There's guidance. I'll let Steve answer that question at the end. Let me first address the cross-sell, up-sell opportunities. And remind me of your first question besides cross-sell, up-sell opportunities, Frank. the TRICARE opportunity. So I'll start with TRICARE. We'll go to cross-sell ourselves, and Steve, I'll let you answer the question. As it relates to TRICARE, I appreciate the question. There's a couple of components to that story. There's first the renewal of the TRICARE Select Navigator Program. Additionally, just I think a quarter or two ago, we announced that we had actually expanded into a new pilot called the Autism Care Demonstration, Capacity to Deliver Services to Military Families who are wrestling with children on the spectrum. That service is in pilot today to a small population in the mountain region, and we expect that that has a significant opportunity to expand across the country to a material population. Incrementally, the government is today in the process choosing a health plan for the T5 contract, that selection will be happening this year. That selection should go into place on 1-1-23 or perhaps 1-1-24. We have teaming agreements with a number of the vendors who are bidding that T5 agreement, and those teaming agreements give us an opportunity to deliver innovation as a subcontractor with those plans. So those are some of the vectors that we think are a part of a really exciting opportunity for growth.
spk09: And, Aaron, to pick up on your question about cross-selling, here's how we think about that. You might remember on our last call, we talked about about 40 customers, both 20 who had bought multiple offerings out of the gate from Accolade, and then about 20 that we had upsold in one direction or the other, but primarily selling expert medical opinion into the advocacy base. So if you think about that as representing in the neighborhood of 6% or 7% of the base right out of the gate, and this being our first full year in the selling season, we would expect a breakthrough in the 10% or so range of our total book and grow that over time. So what we're seeing now when we go to market, we go to market with all of the offerings. So oftentimes we are either starting with advocacy and then displacing or adding on other of those offerings. or selling a bundle right out of the gate.
spk05: Thank you. I'm sure we have time for one last question. Our last question comes from the line of Cindy Motz from Goldman Sachs. Please go ahead.
spk01: Oh, hi. I just had one last one. So thanks for referring me to the presentation, too, because I actually hadn't seen it. So where you break out all the expense items and the long-term EBITDA margins of 15% to 20%. So long-term, I mean, can I assume that's like in the 20, you know, by 2029, 2030, or, I mean, is that what you're thinking, like, is achievable? And I appreciate the breakout for the expense items and lines as well. But any color there would be great.
spk09: Sure. And Cindy, first of all, you know, the growth rate of 20%, that's an adjustment to what we've seen in the past. But the overall P&L construct and the opportunity into that 15% to 20%, yeah, I would think of that as the longer-term profile. So, you know, kind of five years plus is the right way to think about that and open next. Three years is the outlook that we've provided today on getting to break-even and then study progression beyond that out, you know, several years out.
spk08: I appreciate you calling that out, Cindy. I think it is imperative to note that with our updated guidance today, we've really tried to place a premium on the idea that we're evaluating our adjusted EBITDA loss and and driving improved efficiency in the business to get to adjusted even top positive in fiscal 2025.
spk05: Thank you. That concludes the Q&A session. At this time, I'd like to turn the call back over to management for closing remarks.
spk08: We appreciate all of you being here today, and we look forward to catching up with you down the road.
spk05: Thank you. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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