Accolade, Inc.

Good day, and thank you for standing by. Welcome to the Accolades Second Quarter 23 Earnings Results Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. Please be advised that today's conference call is being recorded. I would now like to turn the conference over to your speaker for today, Todd Freeman, Senior President of Investor Relations. Please go ahead, sir.

Thanks, Operator.

Welcome, everyone, to our fiscal second quarter earnings call. With me on the call today is our Chief Executive Officer, Rajiv Singh, and our Chief Financial Officer, Steve Barnes. Shantanu Nundi, our chief macro officer, will join us for the question and answer portion of this 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 and relationship between these non-GAAP measures to the most comparable GAAP measures and the reconciliations thereof can be found in the press release that's posted on our website. Also, please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause the actual results for accolades to materialize from those expressed or implied on this call. For additional information, please refer to our cautionary statement in our press release and our findings of the SEC, all of which are available on our website. With that, I'd like to turn the call over to our CEO, Rajiv Singh.

Thanks, Todd, and thank you, everyone, for being here. We're now officially more than halfway through our fiscal year, and even more so through the traditional healthcare buying season for employers, which, of course, makes up a material component of our growth outlook for the year ahead. Additionally, as we open this call, we're in the heart of an open enrollment season for our existing customers that typically marks the beginning of a very busy season for Accolade's care team. and the implementation process for many of our new customers who are targeting a January 1st, 2023 go live. With those notes as a backdrop, and in spite of a challenging macroeconomic backdrop, Accolade continues to perform well across every major segment of the business. Of course, that begins with our financial performance. For fiscal Q2, 2023, we came in above the high end of our guidance ranges for both revenue and adjusted EBITDA. and we're well positioned for a strong second half of the year. Steve Barnes, our Chief Financial Officer, will cover our financial performance in more detail later in this call. Turning our attention to the business landscape, a few high-level observations before I get into the specifics on each of our core business segments. First, the strategic expansion of our product portfolio in fiscal year 2022 is paying dividends in fiscal year 2023. In our commercial or employer segments, The majority of our customers purchasing our advocacy services are choosing to purchase our Accolade Care and Accolade Expert MD services at the same time, thus validating the personalized healthcare suite Accolade unveiled last summer. In our health plan and government segments, we're seeing interest across the breadth of our offerings as well. Second, across every major segment that we're in. we are in the early stages of cultivating a massive target addressable market that today is largely underpenetrated. The recent Willis Towers Watson survey estimated that 20% of companies have some form of navigation solution. Other surveys represented penetration rates below 20% for full carve-out solutions like Acclaim. Regardless of which survey you read, all indicate there's a massive unserved marketplace. Importantly, those same studies expect penetration to more than double over the next several years. Third, we are well positioned to win in the market we created because we are differentiated and diversified. Our differentiation springs from the breadth of our offerings and the proof points of performance. No other company in our category can point to integrated offerings in advocacy, expert medical opinion, and primary care and behavioral health. with third-party validated savings across a variety of customers. Our long-term customer retention rates validate that fact. Our diversification is a product of our investment in building multiple distribution channels, including the commercial employer segment, health plans, government, and direct-to-consumer. The strength of our position is burnished by our strong balance sheet and our plan to achieve profitability in the near term. Now, let me provide more specific updates on each of our business segments, starting with the commercial segment. While our business has shifted to a model where we are now selling throughout the year, it's still true that summer and fall months are the most important for businesses who are making buying decisions to prepare for a January 1st launch. We've continued the momentum from last quarter across all solutions and segments. To date, we are on pace to exceed our annual recurring revenue results from last year, and put ourselves in a positive position to drive growth for next year. There still remains a number of key customers and RFPs to close, but our win rate and mix of business gives us confidence in our ability to continue signing new business throughout the year. Contracts we signed today are generally slated to go live in January or later. So while deals signed in calendar 2022 provide a small amount of revenue in the fiscal fourth quarter, The real benefit provided is the foundation for revenue growth in fiscal 2024 and beyond. This is an important element of our business model that provides visibility into next year's revenues. We're experiencing strength across all segments and solutions and across verticals as well. We've signed significant customers across a broad swath of industries, including retail, telco, financial services, higher ed, natural resources, technology, manufacturing, and so on. Customers who purchased multiple solutions included a well-known digital finance company, national gas and convenience store operator, and a multibillion-dollar industrial manufacturer. Notably, many existing Accolade advocacy customers added Accolade Expert MD and Accolade Care, including a Fortune 100 insurance company. And we're seeing more existing Accolade Expert MD customers evaluate and select our traditional advocacy solutions. including a Fortune 100 financial services company. While I'll talk about our health plan distribution relationships in a moment, I also want to note that several health plans are now offering Accolade solutions to their own employees. We see this as tremendous validation of our solution and believe that internal use of Accolade will help drive success in our distribution relationships as these health plan partners experience the value we deliver firsthand. Now, let's turn to the health plan market. As we noted last quarter, the Health Plan Partnership Channel has become an increasingly material part of our business over the last two years, starting with our expert medical opinion relationships with key national and regional plans like UHC Optum, Aetna, and BCBS Michigan, advocacy relationships with Humana and Blue Shield of California, and now into multi-product relationships with carriers like Priority Health in Michigan. We expect more relationships to materialize in the quarters ahead and also expect existing relationships to continue to expand as we continue to demonstrate our value to them and their members. Our partnerships with health plans, much like our relationships with our trusted partner ecosystem, reflect our long-held belief that fixing healthcare for people in this country is a team sport and that we have to partner with like-minded companies to make it work for as many people as possible. From a growth perspective, the health plan channel is adding new marquee logos to our roster. In the last quarter alone, we added a number of Fortune 500 companies through these partnerships, including a retail and apparel fitness leader, one of the leading providers of scientific equipment and instruments, several large banks, and a well-known motorcycle manufacturer. Turning our attention to our relationship with the Defense Health Agency, we continue to await a decision on their T5 RFP, which we expect to come soon. Our success with our pilot populations, along with our carrier partner strategy with those bidding the business, have us well positioned for the opportunities that may present themselves. Keep in mind that the T5 contract is set for a January 1, 2024 phased implementation, so this doesn't materially impact our outlook for the current or next fiscal year. We also continue to work closely with TRICARE on our autism care demonstration. and have been very encouraged by the results we've been able to deliver thus far. Next, I'd like to provide a broader update on our direct consumer primary care business. It's been just over a year since we closed the PlusCare acquisition, and our consumer primary care growth has continued to be strong. At a time when other telehealth vendors have seen growth rates contract, our consumer subscriber base has grown more than 30% since the acquisition. We believe the reason for this performance is very simple. while others have focused on virtual primary care as a replacement for urgent care, PlushCare was built from day one as a true primary care solution. The impact on growth is substantial. We see more repeat visits during the year than traditional telehealth vendors, which provides better predictability and sustainability for the membership base. As an aside, the direct-to-consumer physician platform that supports the growth of PlushCare is the very same platform that supports our enterprise accolade care business. As we roll more customers onto accolade care, we already have the capacity to support the growth in that business. One other note on the growth drivers in our primary care business. We've been able to drive this membership growth without seeing a material increase in customer acquisition costs, reflecting both the efficacy of our demand generation efforts as well as what we see as the notable difference between our virtual primary care platform and traditional telehealth and standalone mental health offerings. We remain firmly convinced that our vision for bringing these companies together was both the right choice and will be a key driver behind Accolade's long-term success. Before I turn the call to Steve, I'd like to offer a couple quick thoughts that are key to our current and future success. First, we've already added more than 100 customers this year and now have more than 700 total customers. You'll remember that we had 54 customers when we filed our IPO S-1. That growth delivers more than just diversification of revenues. It delivers clear validation that personalized healthcare, which combines the capabilities of advocacy, primary care, and behavioral health, and expert medical opinion, is a category that meets a profound need for healthcare buyers. Second, our new customer growth also points to the operational scale enabled by our open technology platform. Our incredible care teams, powered by a data set and a platform built for this purpose, are proving that they can deploy hundreds of customers and support millions of members through new deployments, plan design changes, and open enrollment. Demonstrating this scale as we grow revenues while improving profitability each year bodes well for our future

and our competitive prospects. With that, I'll turn the call over to Steve. Thank you, Raj.

First, I'll recap the results from the second quarter of fiscal 2023 and then provide some details on forward guidance. In the quarter, we generated $87.6 million in revenue, representing 20% year-over-year growth on a GAAP basis over the prior year period. Revenue was higher than originally forecast, due primarily to strength in our direct-to-consumer business, as well as member counts for our commercial customers, and approximately $1.5 million in performance guarantee revenue timing. Fiscal Q2 adjusted growth margin was 44.7% compared to 40.9% in the prior year period, which reflects the positive revenue beats, including the performance guarantee revenue timing that benefited gross margin and adjusted EBITDA in addition to higher margin offering mix. Adjusted EBITDA in the second quarter of fiscal 2023 was a loss of $13.7 million, which compares to a loss of $19.4 million in the prior year second fiscal quarter. This is ahead of our guidance primarily due to the revenue outperformance and lower spend than planned in the quarter in some areas such as hiring and personnel costs, as well as reduced sales and marketing costs. Note also that we took a $3.1 million charge for severance costs in the second fiscal quarter associated with the staff reductions we discussed in our first fiscal quarter earnings call. This amount is excluded from adjusted EBITDA given its non-recurring nature. Turning to the balance sheet, cash and cash equivalents totaled $331 million at the end of the fiscal second quarter, and accounts receivable DSOs were in line with prior quarters at about 25 days revenues outstanding. Finally, we had approximately 71.5 million shares of stock outstanding as of August 31st, 2022. This increase from Q1 reflects the distribution of the vast majority of the shares related to the earn out provision of the second MD and plus care acquisitions. Now, turning to guidance and how to think about our financial model progression towards break-even. We are updating our guidance today for fiscal 2023 as follows. We're now forecasting fiscal 2023 revenue will be in a range of $358 million to $365 million, representing growth of approximately 17% at the midpoint. and we are maintaining our adjusted EBITDA loss guidance between $35 and $40 million. As Raj outlined earlier, we're having a strong selling season and feel confident in our business and our ability to achieve our growth target. We are always mindful of the economic environment we're operating in, particularly the uncertain impact of inflation on overall healthcare spend, overall employment trends, and company buying cycles. As such, we take the viewpoint that outperformance in a quarter in this environment particularly serves to de-risk the lower end of our guidance, much as we did in the first quarter. And as Raj also noted earlier, our strong ARR booking fiscal year to date gives us increased confidence in our outlook for fiscal 24 revenue growth. And with respect to the fiscal third quarter, we are providing guidance today of revenue in the range of $86 to $88 million, and adjusted EBITDA loss in the range of $11 to $13 million. And with that, we are reiterating our objective of positive adjusted EBITDA and cash flow in fiscal 2025, which aligns with calendar year 2024. As I noted last quarter, our convertible bonds are not due for approximately three and a half years. So with $331 million cash on hand, we have more than adequate liquidity to achieve our financial plans without going back to the capital markets. placing us in a strong position to execute against our objectives. In short, we continue to believe passionately in the strength, depth, and breadth of our platform, the diversification of our offerings, our revenue streams, and our customer base. And we have an engine built for growth and sustainability, which will ultimately drive significant positive cash flow.

And with that, we'll open the call to questions. Thank you.

A reminder, if you have a question, please press star 11 on your telephone. Also, we ask that you limit yourself to one question, please. Please stand by while we compile the Q&A roster. First question is coming from Michael Cherney of Bank of America.

Good afternoon.

Congratulations on the nice quarter that you put up. Maybe if we can start on the selling season, certainly encouraging given the broader macroeconomic worries about the performance that you put up so far year-to-date. Can you maybe just dive in a little bit closer in terms of relative to the conversations? I guess a couple of pieces of this question. One, have you seen any changes in either the timing of the specific sales cycle and or the close timing? And then second, relative to what you're leading with, given that the product portfolio and service portfolio has expanded so drastically, is there anything that's really coming to the forefront in terms of for the customers that especially have already signed up early, what are they most focused on that Accolade can provide for them?

Thanks for the question, Mike. Great to hear from you. This is Raj. I'll jump in, and Stephen, Todd, if you've got anything you want to add to our champion. Quickly, first, you're exactly right. The demand environment continues to be strong for the offering. One of the things we really like about our business in 2022 is the diversification of the channels that we're actually delivering through, as well as the diversification of the product offerings. And so what we're seeing is really strong demand across each of those channels and across each of those offerings. Maybe the best part of the story from my perspective, Mike, to answer your question directly, is customers are increasingly looking at two things. One, the complexity of their ecosystem and the desire to find a way to get the maximum leverage they can from a purchase that'll drive value to the rest of their ecosystem. And two, an acknowledgment that healthcare costs continue to go up and the desire to lower costs. And all of that's yielding value for us. And I think specifically the data point I'd call out that we talked to in our prepared remarks is the idea that customers, when buying advocacy, a majority of them today are buying not just advocacy, but also buying our primary care service and our expert medical opinion service. which indicates to us a validation of the personalized healthcare suite that we released last year. And so I think it's about the complexity of their ecosystem. I think it's about lowering costs.

And we feel fortunate that we've got offerings that solve both of those problems.

Next question will be coming from Glenn Santangelo of Jefferies.

Hey, Ross, I just missed in your prepared remarks How many customers you said you have now? And I was wondering if you could just sort of give us a sense for, you know, how many of those customers that you've been signing up this selling season are slated for a January 1 start? Because I think I heard you correctly that you said even customers you're signing up now, you think you can squeeze in for January 1. And the reason I ask is because it sounds like things are going well, but I'm trying to tie that back. Steve, to the full year guidance, because it looks like, you know, based on your 3Q guidance, you got 101 million or a little bit better than that in the fourth quarter, which would only be about 8% up over the fourth quarter last year, if I'm doing that math right. And so I'm just wondering if you could just sort of flesh that out a little bit for me. Thanks.

Yeah, we'll break that down. First, great to talk to you, Glenn. Thanks for the question. We'll break it down into two parts. I'll answer the first part. Steve can tackle the second. As it relates to new customers, we talked in the prepared remarks about the idea that we have now more than 700 customers. We've signed more than 100 this year. Again, going back to the point that we answered in Mike's question, one of the things we love is the diversification of the revenue streams. And in the context of this answer, speaking to that across product lines, we're signing customers for primary care and behavioral health for medical opinion and for advocacy. Clearly, the preponderance of our customers in the past have always gone live on January 1st. That changes a bit now that we've got expert medical opinion customers and advocacy customers who might go live, or excuse me, care customers, who might go live after January 1st, given that they don't necessarily have to see the carve-out from their plans that the advocacy business has traditionally been known for. And so we'll see a percentage of those customers, our advocacy customers, go live, most of them on January 1, but many others will go live potentially later than that or earlier than that, depending upon their needs. Steve, anything you want to add to that?

Just a bit. Hi, Glenn. On the guide for the year, first of all, really pleased with a strong quarter. The strength in the quarter really came across all aspects of the business. We saw strength in advocacy and expert medical opinion as well as the virtual primary care business, particularly on the direct side with Bushcare. We also did have some timing of revenue there, $1.5 million that got pulled forward from the fourth quarter. Glenn, so what you're hearing from us is a strong outlook for the year. Mostly January 1 starts, but not all of them. And in this current economic environment, we have a real strong confidence in that range that we're providing today for the full year.

One moment for the next question.

The next question is coming from Jonathan Young of Credit Suisse. Please go ahead with your question.

Hi, thanks for taking my question. I was just curious on plus care and the strength you're seeing there. I was wondering if you could expand on that and are you guys seeing higher levels of utilization just from the population base and it's just remaining elevated or is it actually accelerating? And then given some of the shake up in the telehealth entities in recent months, do you see yourself taking share from them or is it just core growth of the market and you're just exceeding the market? Thanks.

Thanks for the question, Jonathan. It's very early days in the idea of virtual primary care and behavioral health. 2020 with COVID and the pandemic really saw an explosion in urgent care utilization, as you might expect, excuse me, in telemedicine for urgent care, as you might expect. Plush care, and one of the reasons we like that business so much, is that plush care even in that environment, was extraordinarily focused on building from the ground up a primary care offering that focused on being able to deliver primary care and hold on to your primary care position over the long term as you had in the brick and mortar world. So we believe that, first of all, to answer the first part of your question, these are early days. And so this isn't about taking share from other telemedicine players. Instead, it's about creating a brand-new market space and being the leader in that brand-new market space. The second part of your question, in terms of perhaps extrapolating the question a bit and speaking to our growth rate versus the growth rate of other players in the space, not knowing their businesses exceptionally well, what we can say is this. We are unique and differentiated because we're a primary care player with behavioral health embedded in that primary care, different than the urgent care offering that most of our competitors are talking to. Our capacity to have a primary care physician stay with the patient on the long term leads to better long-term retention rates and therefore leads to better growth rates than other players are seeing. We're also seeing that while at the same time seeing customer acquisition costs come in at better than expected levels, which is something that we're really excited about as well.

Thank you while we prepare for our next question. Next question, it's coming from Jalindra Singh of Trist. Please go ahead.

Yeah, thank you and thanks Raj and Steve for all the color on all the contract wins. I was wondering if you could share some color around the trends you saw around the pricing or even contract structures for next fiscal year. For example, you guys have talked about a shift to more risk-based revenue in the past. Did you see that accelerating for next year? And is that varying by products and solutions? And how is that shift impacting employers' willingness to work with the vendors in the space?

Thanks for the question, Jalinder. Great to talk with you. When we think about the makeup of the deals that we're closing, as we talked about during the prepared remarks, we're excited about the demand environment. We spoke even last quarter to the idea that in a strong demand environment, as the leader in the space, we expect to win more than our fair share of those transactions. That actually occurred in Q2. And one of the other things we're excited about is that those deals are pricing at historic levels, meaning that we're seeing that customers are willing to pay for value. At Accolade, we do price a premium offering, and we're seeing customers willing to pay that premium. Maybe the last part of the question associated with fees at risk, by and large, our customer contracts look very much like they have looked historically. I do believe over time, a couple of things will be true, breaking out your question into more detail, Jay Leather. First, When you look at advocacy, primary care, and expert medical opinion, in expert medical opinion and primary care, because we drive such high utilization, we're quite happy whether a customer wants to pay us on a PEPM basis or on a case rate or utilization basis. That makes us unique from the rest of the industry because we know we can drive utilization in the right way. And I think that's something that we'll continue to keep an eye on moving forward. Steve, anything to add there?

I think you got it. I think that last part about case rate is something in a trend we're seeing and plays well into the model.

Thank you.

Our next question will come from Cindy Marks of Golden Facts. You may go ahead, please.

Hi. Can you hear me? Hello?

Yes, we can hear you great.

Oh, great. Well, yeah, congratulations. Thanks for taking my questions and congratulations on a really good quarter. So I just wanted to follow up on PlushCare, but also some of the segment details. So it looks like is advocacy still running around two-thirds, or is it more like 64%, 65% of your revenues? And then it looks like PlushCare is definitely growing maybe a little faster than you expected, and certainly that's anecdotally what you've seen with some of the app data. I'm curious how much of it is mental, health, and then do you feel like some of these point solutions, I know you've given us some good commentary here, but have you seen sort of a decline in some of these point solutions with mental health sort of falling off? And again, is that maybe why you're accelerating? Thanks.

Hi, Cindy. It's Steve. So let me take the first part of your question, and Raj and I will tag team on the second part. But you're right in terms of the splits of the business. The advocacy portion of the business runs in the range of low 60% of the total revenues, with the balance being made up of expert medical opinion and virtual primary care. And you're right, the flush care side of the business is growing a bit faster. We commented last quarter that the business is growing on a 30% or so annualized growth rate year over year, and that's maintaining through the second quarter as well. positive performance there. With respect to where that's coming from and what we're seeing in terms of primary care or mental health, I'll start by saying, remember that flush care leads with a virtual primary care offering and then has a capability to get that person efficiently to a behavioral health specialist or team as needed. Let me hand it to Raj if he has any comments on some trends there.

I think what we're seeing, Cindy, across the board is that customers are interested in all of the offerings, knowing that they need an advocacy foundation or a personalized healthcare platform foundation by which we can drive not only utilization for primary care, behavioral health, and expert medical opinion, but also the rest of their digital healthcare solutions. And so maybe tying out your question around, are they seeing decreased utilization in those other things or potentially moving away from them? In fact, quite the contrary, we continue to see customers looking at other digital solutions I think what they're really focused on now is the return on investment from those solutions. And we think we have a platform and our customers believe we have a platform to deliver that on every app.

Thank you.

The next question is coming from Craig Heddenbach of Morgan Stanley.

Thank you. Just a question, Raj, more broadly on the macro uncertainty and really what's changing with customer conversations or discussions. And I think you touched on some of it in terms of the broad offering is helping you in this type of backdrop. But anything else kind of from maybe the beginning of the year, how conversations have evolved and any anecdotes you can share in terms of what's underpinning some of your relative strength near term?

I think there's some consistency, Craig. First, it's great to talk to you again. Thank you for the question. I think there is a level of consistency over the course of the last year associated with the conversations. The reality is, even in a macroeconomic environment that has some uncertainty, we're continuing to see job growth. We're continuing to see a relatively full employment environment, at least for the time being. Employers, therefore, are very focused on retaining their employees and attracting new employees. At the same time, there's an acknowledgement that cost cost reduction from a healthcare perspective is perhaps even more important in the year or two years ahead than it was in the years past. Accolade has always been very good at being the only proven vendor in the space with independently validated data that speaks to our cost reduction capability. And then finally, this, and it's a question that came earlier in a couple of the questions earlier today, the acknowledgement that the digital landscape of carve-out solutions is so complex at this point, given the profound amount of innovation happening in the space, that customers need platforms by which they can weave all that together and manage that complexity. Those three themes are consistent with almost every employer slash payer we talk to.

And that's why we think we're well positioned. Thank you for your question.

The next question. It's coming from Stephanie Davis of SVB Securities.

Thank you for taking my question. You've touched on this a bit with some of your new wins commentary, but I was hoping we could just kind of fully clarify this. From the new logos and the repaired remarks, are those ads still predominantly ones and twos, like expert second opinion takeaways or plush care wins? Or should we think of these wins as more on the larger bundled platform plus category? And to that same token, how is that looking, that mix in your pipeline? Thank you.

Thanks for the question, Stephanie. Great to chat. Think about it in terms of quantity, and then think about it in terms of annual recurring revenue contribution. In terms of annual recurring revenue contribution, I think it's fair to say that more than a plurality of those deals are coming from multi-platform deals where they're buying advocacy, expert medical opinion, and care in aggregate. I think in terms of quantity of transactions, the N of number of transactions, you're going to see a greater distribution across some of the smaller deals, potentially expert medical opinion and care being drivers of those smaller transaction sizes.

Thank you. The next question will be coming from Ryan Daniels of William Blair.

Yeah, guys, thanks for taking the question. Congrats on another strong quarter. I wanted to ask about the three themes you just mentioned, so the complexity of the ecosystem, the need to drive lower cost in your proven ROI. How does that in a positive environment, kind of work into your current thoughts on investing in sales and marketing and R&D. So just, you know, kind of the desire to ramp towards EBITDA breakeven through 2025, but also what might be a more appealing market for you to continue to gain share and land and expand. How do you balance those two as an organization? Thanks.

Steve, thanks for the question. really important point you're raising here because we see this very large market opportunity, strong growth, and with an eye towards this plan to get the profitability over the next two years. So you see this balance where we're investing around innovation in terms of R&D and the platform and the two acquisitions that we did over the past year and integrating those together. And we're seeing the real fruits of that, to Raj's point, that many of the deals we're selling today are really validating the purpose and strategic element of those acquisitions, selling multiple offerings into that end customer. In terms of sales and marketing spend, one of the big elements of leverage we're seeing now is, having brought the three companies together, we have strong efficiency out of the direct sales forces that we've brought together. And very importantly, the channels that we have to access customers are providing a lot of leverage. The health plan channel in particular, where we're selling expert medical opinions, both on its own and in some cases together with other offerings, is providing leverage. So we're looking at the unit economics, which are quite attractive, in balance with that goal to get the profitability about two years out from now. One of the reasons we often get the question, hey, you guys beat the top end. Are you bringing up the bottom end, the EBITDA number? We're actually very comfortable with the current EBITDA projections while we grow the top line because of the size of the opportunity and the strength of our balance sheet. So we look at all of that taken together and the size of the opportunity in front of us as balancing all of that out together.

Thank you. The next question is coming from Richard Close of Canaccord Genuity.

Congratulations. Maybe a follow-up to the conversation question earlier. Raj, have yet any customers just shut down conversations with you guys because of the economic outlook? Or would you characterize the level of conversations increasing due to the, you know, the expectation, the healthcare costs that you cited in the surveys?

Thanks for the question, Richard. I think the, a couple of ways to think about the answer to your question. First, no, you know, we always have customers as they go through the process, a certain percentage of them go through the process and choose to buy. We win more than our fair share of those transactions. And there's always customers as well in any given selling season, regardless of environment, who kick the tires and choose to wait until next year. I think those ratios have been fairly constant, although the total number of RFPs slash evaluations has grown on a year-over-year basis and grew materially this year. So we haven't seen any sort of push in that regard. I think to think about it in context of what the environment looks like this year, Increasingly, customers looking at those three themes that I've talked about in the past are looking and saying, perhaps in years past, they might be just buying digital point solutions for a particular carve-out category, are beginning to grasp, perhaps more so this year than in years past, that those things by themselves will not drive the trendline improvement that they might otherwise be seeking. And that what they need is a woven together platform that ties all those solutions together. And I think that certainly may be driving increased focus on personalized healthcare suites like ours.

Great. Thanks.

Next question is coming from Stan Bernstein of Wells Fargo.

Hi. Thanks for taking my questions. First, some comments you made earlier about the strength in the quarter was partially driven by an upside surprise in member growth. I guess excluding any impact from client churn that you're anticipating, how much of the growth expectations for this year are coming purely from member growth?

Thanks for the question. We've had over the past couple of years, we've seen modest year-over-year growth. Think back to the time we came public during the pandemic. We've never had a quote-unquote normal year yet. So employee counts have grown within the book over the past couple of years. We don't assume a whole lot of that given the backdrop, the macroeconomic backdrop in our guidance. We did see some upside surprise for that through the second quarter. So when you step back, I think the heart of your question is probably around the guidance for the full year. We've got good confidence in the range we're providing today and also providing a certain level of caution and pragmatism around employee counts given the macro environment.

The next question is coming from Dev. We're in Shire of Bamberg.

Go ahead, please. Hi. Can you guys hear me?

We can hear you, Dev.

Oh, great. Hey. Thanks for taking my question, and good quarter here, looking toward the end of the year. I wanted to talk a little bit about the performance guaranteed revenue. You know, Accolade One was kind of more of a conversation, I think, last year and has been kind of less so this year. But how are clients thinking about the performance guaranteed portion of revenue, you know, within contracts? Is that an important selling point? And then, You know, what percentage, as a percentage of contract value, you know, is the performance guaranteed portion higher in these new contracts that you're signing or similar to last year? Any color on that would be helpful. Thank you.

Hey, Deb. Thanks for the question. This is Raj. I'm going to take the first part of your question. Steve will take the second part of your question. As it relates to Accolade One, think about Accolade One as an offering that ultimately is where customers take advantage of all of our capabilities Plus, a select few partner capabilities that when we think embedded with the offering can drive even better savings and clinical outcomes. What we're seeing this year, which we're really excited about, is the preponderance of customers who are buying from us are buying our three core offerings, advocacy, expert medical opinion, and virtual primary care and behavioral health, at the first shot when they're contracting with us. We expect a number of them to come back and actually procure those partner solutions downstream over time as our customer selling organization goes back into those organizations after they've gone live. And so we're still really excited about the prospects for Accolade One and the opportunity to see that full suite of offerings take place across the preponderance of our customers. I'll let Steve answer the performance guarantee question.

Sure. And so to your point, clearly the willingness to put part of our fees at risk is a really key selling point. And the ROI that we provide that's validated for the customer each year through claims, evidence of claims savings continues to be a key selling point. In large part, the ratios of PG or fees at risk to base fees is roughly the same as you've heard from us in the past. advocacy contract, it might be something like two-thirds fixed fee and about a third at risk. And again, that's at risk for things like cost savings, but also other elements that are important to customers. For example, engagement rates, adoption of trusted partner ecosystem partners, and net promoter score or some measurement of customer satisfaction. In large part, that ratio has remained the same. And then to Raj's point, we're quite enthused that new sales are having often multiple offerings hold on to the advocacy offering, and those demonstrate an attractive ROI for customers.

Next question will be coming from Ryan McDonald of NEAHM.

Thanks for taking my questions and congrats on a nice quarter. I wanted to understand the health partner channel and the impact we could see moving forward. First, you know, on the 100 customers you've added this year, I'd love to understand sort of what the mix of where that came from either direct sources or the partner channel. And then as we look out into the pipeline for the remainder of the year into next year, What sort of magnitude of impact could we see from that, both on a sort of total number of deals, but then also sort of dollar value number of deals as those relationships mature? Thanks.

Question, Ryan. We haven't really broken out customer numbers between health plan and direct, but let me give you some color on a broader basis. But if you wouldn't mind, I'll first step back and speak to why we're so excited about the opportunity. The health plan channel really began for us with Humana about four years ago, taking advantage of our advocacy solutions and delivering it to their self-insured book. Post the second MD acquisition, we actually entered the health plan channel in a more pronounced way with an expert medical opinion business that was selling through United Healthcare Optum, Aetna, as well as Blue Cross Blue Shield of Michigan and other plans. We've had the opportunity to continue to expand those relationships while more recently signing Blue Shield of California as well as Priority Health. What's great about what's happened over the last several years is not just that the channel has expanded in terms of number of partners, but that they're also now beginning to look at all of our solutions, not just expert medical opinion, not just advocacy, but also, as in the case of Priority Health, where we're actually seeing our virtual primary care and behavioral health solutions being used to power a virtual first plan design for Priority Health. And so we believe over time that we have an opportunity to expand that channel, not just by signing new partners, but also by growing the product portfolio within those existing partners. Today, we're generating, you know, call it a double-digit percentage of new ARR coming out of that health plan channel. And we expect that we could have an opportunity to continue to grow as an overall percentage of total ARR delivered in any given year.

Thank you. Our next question will be coming from Sandy Draper of Guggenheim.

Thanks very much, and congrats. You guys are doing a nice job of proving me wrong so far. So my question is maybe on PlusCare, the direct-to-consumer. I know generally you guys view yourselves as a premium-priced product in selling the value, but if I just sort of look at – you know, an unnamed primary care model that charges $190 a person, or another one that does telehealth, it's 300 bucks a month. One of the things I was really surprised when I was going through PlusCare, for my family of five, I can get all of it for just $99 as a consumer, not through my employer, then pay out. If I did a similar thing at a lot of primary care models, it would cost me a thousand bucks. I mean, do you think, I don't know how much you surveyed, but do you think, given the macro environment of the consumer, one of the reasons the DTC side of plus care is, you deliver a tremendous amount of value, but your entry point, there's not a big sticker shock. If someone says it's 99 bucks for my family, that's, you know, it's not insignificant, but that's a lot less than other areas and you're still getting tremendous value. I don't know if that's something you guys are tracking, focused on, and you think that's something that's just driving the business.

Thanks for the question, Sandy, and appreciate you digging in on the offering and and appreciate all the feedback slash insight. First of all, I do agree with you. We do believe that we've presented a really compelling capability to the market. We've done so at a price point that actually compels people to try the service, and when they try the service, we deliver a 90-plus MPS. That means they stay with the service. They stay with the service. They stay with their primary care physician. They do multiple repeat visits, and we retain that customer on a long-term basis. better than most urgent care slash telemedicine solutions on the market today. We're constantly looking at innovating on both price points and potential new models by which we're servicing families or elements of families. And so I just ask you to stay tuned on that one as we continue to explore how we can grow. We do believe for sure that the opportunity for services like that one to expand into that family's life with other capabilities in the consumer business is a future part of the growth model.

Thank you.

The next question is coming from Jessica Tansen of Piper Sandler.

I'm hoping, can you guys just maybe frame what the impact of the primary care and expert medical opinion buy-ups within core advocacy look like? And then I think you'd recognize that revenue for both commercial primary care and expert MD over the, ratably over the course of the year based on estimated utilization, but can you just confirm again that that's the correct way to think about it? Thanks.

Hey, Jess, thanks for the question. I think, yes, that's the correct way to think about it. You know, what's important maybe for me to point out before we speak to the pricing on either offering is one of the things that makes Accolade really unique is that we encourage our customers to do what they think is best for them to meet our customers where they want to be met. If they're looking for a PEPM price for care and expert medical opinion or Accolade Care and Accolade Expert MD, you should think about that in the low single digits PEPM for those offerings depending upon utilization expectation. But we're also quite happy to have those customers take advantage of the service on a case rate billing or per visit basis because we can drive extraordinary utilization based off of our personalized healthcare platform and the engagement levels we drive for all of our customers. And so there are two different ways to buy, and customers are choosing both right now, and it's too early to say which of those will be the preponderance of the model. On the care side, on the expert MD side, we're seeing more and more customers choose the case rate billing model.

And, Jess, I would just add to your question about timing of earning that revenue. If it's a PEPM, obviously that's monthly, and then to the extent it's case rate or visit-based, we're recording that revenue as that happens. The only other thing I'd add to Raj's comments is to the extent a customer chooses a PEPM model, we're oftentimes having some kind of tiers around utilization rates, too. sort of protect the margin profile of the company while we meet the customer where they want to be in terms of how to budget for the service and see the utilization and ROI show up for that.

Thank you. The last question is coming from Robert Simmons of DA Davidson. Please go ahead.

Hey, thanks for taking the question. So you've talked in the past to seeing customers who left you start to look at coming back. Can you talk to that trend? Are you actually seeing them resign with you, or what's the kind of situation there?

Thanks for the question. And, you know, I think maybe the biggest point there might be if we were to take a giant step back and look at the customer retention levels of the company over the last five years, We retain about 95% of our customers on a year-over-year basis. We've actually had years in the last three or four where we retained 100% of our customers in any given year. And so it's a relatively small end in terms of the number of customers who've left us. We have seen customers actually step away from the service and come back, but from an impact on the P&L perspective, it's not a material number nor a material impact on the top line.

that concludes the q a session one moment thank you all for joining the conference today you all may