Accolade, Inc.

Thank you for standing by and welcome to the Accolade third quarter 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 at that time, please press star 11 on your touchtone telephone. As a reminder, today's conference call is being recorded. I will now turn the conference over to your host, Mr. Todd Freeman, Senior Vice President of Investor Relations. Please go ahead, sir.

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

Thanks, Scott, and thanks, everyone, for being here. While we still have one quarter left to finish the fiscal year, our Q3 call really marks the end of the calendar selling season and the start of the new plan year for many of our customers. As such, on this call, we're happy to provide our preliminary outlook for the next fiscal year and share the foundational details that give us confidence in our market position and our outlook to drive sustainable growth and profitability. We had a successful 2022, adding new customers, expanding existing relationships, and increasing our footprint with our growing portfolio of offerings. The market is speaking clearly that employees and their families want and deserve a better healthcare experience. Accolades years of proven results, especially our ability to scale with the most demanding and growing customers, are factoring heavily on the minds of buyers, and they responded by helping us achieve our strongest booking performance in company history. Steve will give you more detail, but we expect that when fiscal 2023 is complete, we will have grown ARR bookings by more than 30% over last year. giving us confidence in fiscal 24, but also providing the early foundation for continued growth into fiscal 25. Most notable is the mix of those bookings. Continuing the trends that we've described over the past year, our new, renewed, and expanded commercial customer relationships were spread across customer size, across distribution channel, across solution, and across industry verticals. It's that diversity that validates our strategy and our approach. Accolade solutions are resonating across the board, especially as we see the majority of new deals evaluating and selecting multiple solutions. Our renewals are also increasingly expanding to add additional Accolade solutions and partner solutions as well. More and more, we're hearing customers talk about their employees' healthcare experience as a key strategic imperative for driving employee satisfaction and retention. One of the places where we see this clearly is the volume of advocacy deals this year. In 2022, we saw a renewed focus on the employee healthcare experience and on return on investment. And advocacy was once again front and center for our customers and the consulting community. With our expanded offering set, we're now able to leverage that advocacy discussion to also include other things like primary care, mental health, and expert medical opinions. Again, Steve will cover this in more detail in the guidance section, but our confidence in our fiscal 24 guide is rooted both in the growth in our newer solution as well as the strength of the advocacy market and our position as the leader of that market. That leadership was borne out by our performance in this fiscal year, and we intend to press our advantage in the years ahead. The focus on employee experience and return on investment is true of our health plan relationships as well. Health plans have been an important contributor to our growth this year, both from a logo and a revenue perspective. Certainly one of the key reasons behind that attraction is the expansion of our offerings to include expert medical opinion in virtual primary care and mental health. This growth has positioned Accolade as a core strategic partner as health plans also look to the member experience as a critical measure of success. Today, member satisfaction is an executive priority for most health plans, and Accolade's high NPS is very attractive as a complement to their existing solutions. Before I touch on our consumer and primary care business, I'd also like to give you an update on our government business. By now, most of you have heard that the Defense Health Agency made an initial selection for the vendors who will service T5, the next generation of health plan services, to their 9 million-plus beneficiaries. Humana was awarded the eastern region, and TriWest was awarded the west. While the vendor selection still needs to be finalized pending a likely appeals process, we were thrilled to hear the decision as we've been anticipating an award for some time. There were three bidders for the T5 award. We have teaming agreements with two of the bidders and a strong relationship with a third. With this decision, we are positioned to serve a significant number of TRICARE families once the implementation begins. Until that time, we'll continue to work on our current government contracts, demonstrating the tremendous value Accolade brings to our current military families through the Tricare Select pilot and the autism care demonstration. And we'll work with the selected T5 vendors to define our potential scope and we'll provide an update when that scope is finalized. But we're very excited to be moving past the evaluation phase of this opportunity and into the planning and execution phase. For our category of services, we're extremely well positioned to see the government sector be a driver of growth for our business in the years ahead, as it has been for several years. With respect to our virtual care business, PlusCare has continued to deliver outstanding results quarter over quarter. Our PlusCare team, led by founders Ryan McQuaid and Dr. James Wontuck, have been in front of the market since its inception. We deliver a wow experience for our members and a rich platform for our physicians. The result has been increasing subscriber counts with well-managed customer acquisition costs. Importantly, on January 1st, we turned on a number of enterprise virtual primary care customers. significantly expanding the number of lives we're prepared to serve. The combination of our consumer-focused business, which requires a different level of user experience to drive acquisition and retention, and our commercial business, which requires a different understanding of how to scale to serve millions of lives, creates a powerful platform to drive growth for years to come. About a year and a half after the acquisition of PlusCare, the core hypothesis of this transaction has been validated in both the consumer and enterprise segments, and we're bullish on the future of this business. Before I talk a bit about the upcoming year and our strategy to continue our momentum, I want to take a minute to highlight something that many people take for granted, but it's really the foundation of our customer satisfaction. Every year between October and December, almost all of our customers go through an open enrollment process, especially when a customer is changing their benefits in some way. This is not only the busiest time of year for our frontline care teams, but it can also be the most stressful times for our members and their families. To give you some comparison, at the time of our IPO in 2020, Accolade had roughly 50 customers in total. This year, we managed open enrollment for hundreds of customers. We're now operating at a level of scale with millions of members and high engagement rates that would place us among the largest carriers in the country by membership. Aside from the obvious importance of delivering the service at scale with high member and customer satisfaction, Open enrollment presents something far more critical for Accolade's success. For new customers, this is usually the first touchpoint that a new member has with an Accolade health assistant. It is the moment that we plant the seeds of proving the value of creating a personal relationship with every engagement opportunity. It is that ability to build personal relationships with millions of members to drive better healthcare outcomes that differentiates Accolade from our competitors, and it's the key reason for our high win rate. Turning to the outlook for the next fiscal year and why we believe strongly that we're set up for continued success, I'll start with the financials and we'll end with a word about our strategy and our identity. Simply put, our ARR booking success in the past selling season gives us great visibility and high level of confidence for our fiscal 2024 revenue guide and our profitability outlook. Steve will give you more details here, but we're pleased coming through a difficult macroeconomic environment with this outlook. We have a business that's diverse in many ways. It's diverse in how we sell. We sell across a number of channels, including our direct commercial sales force, through our health plan partners, leveraging our trusted partner ecosystem, and to the federal government and direct to consumers. It's diverse in the mix of solutions we offer. Our service offerings allow us to meet customers where they see fit, either with individual solutions or increasingly as bundles with multiple offerings. Our growing primary care business allows us to impact both health outcomes and overall healthcare costs in more meaningful ways. And it is diverse in terms of its revenue foundation. Our highly visible revenue model allows us to set our investment strategy to pursue the areas of most impactful growth to help drive us towards cashflow positive in the next year and beyond. This diversification is now a core strength of our business, a driver of complimentary value across offerings, segments, and solutions, and stands in stark contrast to our business even just three years ago. As we make the turn to free cash flow positive in fiscal 2025, which begins just 14 months from now, we will be one of the few scaled, diversified healthcare disruptors in the market. For our customers, while they want to know that we're financially strong, they're far more focused on who Accolade is as a business and as their personalized healthcare partner. They know that we've built solutions and services that are engineered to care. Accolade has spent more than 15 years engineering a better healthcare experience, one that predictably engages members to understand their care needs, proactively navigates them to quality care and informed healthcare decisions, and addresses barriers to taking healthcare actions, including social determinants of health, all while delivering an exceptional personalized experience. For employers and payers looking to improve the healthcare and benefits experience for members while reducing the cost of healthcare, Accolade is the one company that delivers improvements in outcomes and plan performance by guiding members to the next best clinical action in their personal healthcare journey. And we do it at scale across entire employer populations. Unlike our competition, Accolade's solution is predictive, proactive, and personalized, allowing us to address barriers to care and offer proven results. When we say that Accolade is engineered to care, it's important to recognize the multiple dimensions of what it means to care Care is about the act of physically or virtually delivering medical care, whether that is through one of our own physicians and nurses, through a trusted partner like Virta or Care at Fertility, or through our members' own trusted medical providers. But care is also about the act of caring for another human being. It's the empathetic listener instead of the anonymous call center agent. That is a personal element of the care journey that we can't fully replace with technology, but that we can make better through engineering. It starts with a fully integrated set of offerings that we can deliver value singularly, but really begins to transform the healthcare experience when it's used in concert. It is about having a robust and modular open platform that allows us to plug in third-party services and solutions with trusted partners. Our intelligent technology and proprietary approach help Accolade care teams build lasting personal relationships with everyone we serve. This unique approach rests on three foundational pillars. The promise of being engineered to care is that we enable predictive engagement, deliver proactive care, and address barriers to healthcare access. You'll be hearing more about these pillars in the months to come. But in short, our predictive engagement model continuously captures critical population and unique member health insights so we can proactively address clinical and cost-related risks across the organization. Supported by this intelligence, our team proactively identifies and engages individuals in need of care. guiding each member to the next best clinical action so they can achieve the best possible outcome. And lastly, Accolade's diverse care team, supported by predictive data, is trained to understand and address the needs of each member so we can engage those likely to face barriers to care and guide them to the right care. You'll hear more about our engineered to care approach in the months to come, and I look forward to sharing more customer success stories around this vision. With that, I'll turn the call over to Steve.

Thanks, Raj. First, I'll recap the results for the third quarter of fiscal 2023 and then provide some details on forward guidance for the fourth quarter and next fiscal year. We generated $90.9 million in revenue in the third fiscal quarter, which was ahead of our guidance, primarily due to the strength in our direct consumer business, as well as member counts for our commercial customers, which have stayed relatively strong despite the macroeconomic environment. Note that the quarter also benefited from about $1.2 million of performance guarantee revenue timing that was not included in our Q3 guidance. Fiscal Q3 adjusted gross margin was 45.9% compared to 47% in the prior year period. Last year, Q3 included some performance guarantee revenue timing that benefited gross margin and adjusted EBITDA. For a more relevant comparison, note that our nine-month to date adjusted gross margin was 45.4%, which compares to 43.1% for the nine-month year-to-date period last year. Adjusted EBITDA in the third quarter of fiscal 2023 was a loss of $10.2 million, which was ahead of our guidance, and compared to a loss of $11.9 million in the prior year third fiscal quarter. We are currently at an adjusted EBITDA loss of $39.3 million year-to-date, and expect to finish the fiscal year in the range we have consistently provided throughout the year. Turning to the balance sheet, cash and cash equivalents totaled $326 million at the end of the fiscal third quarter, and accounts receivable DSOs were in line with prior quarters at about 20 days revenue outstanding. And finally, we had about 72.4 million shares of common stock outstanding as of November 30, 2022. AND NOW TURNING TO GUIDANCE AND ELEMENTS OF OUR FINANCIAL MODEL PROGRESSION TOWARDS BREAK EVEN. WE'RE UPDATING OUR GUIDANCE TODAY FOR FISCAL YEAR 2023 AND ARE NOW FORECASTING REVENUE WILL BE IN THE RANGE OF $361 MILLION TO $365 MILLION, REPRESENTING YEAR-OVER-YEAR GROWTH FOR APPROXIMATELY 17% AT THE MIDPOINT. AND WE FORECAST ADJUSTED EVENT LOSS GUIDANCE BETWEEN $36 AND $40 MILLION. With respect to the fiscal fourth quarter, we're providing guidance today of revenue in the range of 97 to $101 million, and adjusted EBITDA in the range of a $1 million loss to a positive $3 million. On today's call, we're also providing a preliminary look at fiscal 2024 revenue and adjusted EBITDA. We have said throughout the year that we believe we can sustain a 20% revenue growth rate, and we reiterate that outlook today. For fiscal year 2024, that 20% growth would be net of Comcast, which will contribute approximately $23 million of revenue to fiscal year 2023. Based on that math and our current year revenue guidance, we're providing preliminary fiscal year 2024 revenue guidance of approximately $410 million. We expect that adjusted EBITDA loss will improve on both a percentage and absolute dollar basis to a range of 5 to 7% of revenues in fiscal 2024. It's our intention to invest strategically in the growth of the business, returning any top line upside back into the business while maintaining the adjusted EBITDA target as we have done historically. And I'd like to provide a couple more data points to help you model out next year and our path to profitability the following year. First, as Raj mentioned earlier, we've had a very strong selling season. You'll recall that we signed roughly $54 million of ARR bookings last fiscal year. When calendar 2022 closed and more deals still in the pipeline for January 1st, 2024 launches, we are well on pace to deliver ARR growth of more than 30% over last year. That success is the foundation of our revenue growth forecast for fiscal year 2024, and is already forming the basis for additional growth in fiscal 2025. Second, as you build your models towards breakeven or better in fiscal 2025, I'd like to give you some guidance on where to model operating leverage across P&L line items. We'll provide more detail after the fiscal year closes, but at a high level, you can expect us to continue improving adjusted gross margin by 100 to 200 basis points per year with a goal of 50% adjusted gross margin in fiscal 2025. On the operating lines, the greatest leverage is in the product and technology line, followed by G&A, and then sales and marketing. So, if we were to improve each of those line ends by roughly 100 basis points each year, that would get us the five to six percentage points we need in order to achieve breakeven and beyond over the next two years. I'd like to make one important point to help you understand our view towards these goals. These are rough guidelines for building models, but we are not as focused on 50 basis points here or there. We're focused on the objective of reaching break-even and driving profitability thereafter. If we see a reason to invest more in one area, we'll adjust other spend to accommodate it. In other words, the goal is not a G&A target of X percent per se. The goal is adjusted at an even pre-cash flow positive in fiscal year 25 and beyond. I'll also take a moment to anticipate some questions we may get in the Q&A. First, we've been asked a lot about the labor market and how we forecast member counts in the face of an uncertain macro environment. We take a relatively conservative view on member counts when formulating our guidance, but it's more notable that we have a business today that is widely diversified across customers, industries, solutions, and distribution channels. Two years ago, this was a more relevant discussion when we had 50 customers. one of which represented about 20% of revenue and another 20% of revenue was concentrated in two airlines dealing with COVID. But today we have a business that serves more than 700 customers with no single industry vertical representing a concentrated portion of our base. Second, we're often asked about our commitment to achieving positive cash flow and adjusted EBITDA on fiscal 2025. The answer continues to be that we remain committed to fiscal discipline and our timeline for profitability. and have consistently demonstrated our ability to manage the business in order that we maintain our bottom line targets. To that end, we will continually look at our business to find areas where we can operate more efficiently. For example, we're continually finding synergies across the business as we combine all of our capabilities to create an integrated healthcare platform. In addition, we continually assess where we concentrate our talent across our various office locations. as we are well situated already in some lower labor cost markets like Prague and Vancouver, for example, where we can be opportunistic in our growth investments. Given our track record of steadily improving gross margin and adjusted EBITDA, we are confident in our ability to manage the business appropriately to stay focused on this goal of adjusted EBITDA and be cash flow positive, regardless of the economic environment. And as I noted last quarter, our convertible bonds are not due for more than three years. So with $326 million cash on hand, we have more than adequate liquidity to achieve our financial plan without going back to the capital market, 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, revenue streams, and customer base. and that we have an engine built for growth and sustainability, which will ultimately drive significant positive cash flow. With that, we'll open the call to questions.

Hi, can you hear me? We've got your mic.

Go ahead.

Okay, great. Appreciate the caller on both. the selling season into next year. Maybe, Raj, if I can start a bit on some of the selling season commentary. Can we just dive a little deeper? You mentioned the employment dynamic, but also there's a lot going on relative to employers' decisions beyond their employment levels about whether or not they want to take on new benefits or not, how they think through their benefit offerings. Can you maybe give a little bit of push and pull in terms of what resonated most from the, whether it's an accolade total care approach versus And maybe if there was anything that had a little bit of either a pause or a pullback or a not now, call me in six months mentality relative to your ability to layer on new benefits.

Yes, I appreciate the question, Mike, and sorry about the technical difficulties there. We'll see if Mr. Friedman is capable of moderating the call from here, but glad we just got the first call, the first question out. A couple of ways to answer your question, Mike, and I think it's a really important one. The first is to really start, and when you think about the growth rate of the company, think about the diversified revenue stream. Think about our primary care business and the growth rate of that consumer primary care business. And then also think about the growth in our bookings numbers, which is what I want you to refer to. As it relates to bookings and as it relates to employer buying patterns, one of the things that we continue to see is that employers are interested in looking at drivers of employee satisfaction and, of course, those drivers of employee satisfaction that can measurably provide return on investment, lowering cost. And so solutions in our category have continued to be really valuable to them. Now, I think the next really important question is, why are we winning more than our fair share of those transactions and delivering a 30% growth in our bookings on a year-over-year basis? And I spoke to it a little bit in the context of our engineer to care capability, of our engineer to care uh, delivery vehicles. And so I'm going to, with that, I'm going to turn it over to our chief medical officer, Shantanu Nandi, talk a little bit more about why we're winning, and then I'll maybe jump back in and answer your final question about, uh, employer behavior. Shantanu?

Yeah, it's a really great question. I think what we're hearing pretty consistently from the customers that we're in sales conversations with and our, our prospects and our current customers is that, um, you know, they're continuing to look for the same thing, right? They're looking for, um, who can get to the right numbers at the right time, right? And that's where our predictive engagement comes in. They're looking for who can get the quality of care and who can get the better outcomes, that's the proactive care. And increasingly, they're saying, who can help us also improve health equity? And that's where our approach to addressing barriers is coming in. And just one evidence for that, we just had a piece in Harvard Business Review Magazine just a couple weeks ago that was highlighting our approach to health equity. and specifically highlight some of the work that we did with the United Airlines, which we think is pretty pioneering on the front of improving healthcare for marginalized groups. And so I think all those themes are continuing to pull through and driving the numbers that Raj and Steve talked about earlier.

Yeah. So last part of your question, Mike, was if there was any themes around people pushing transactions on a year-over-year basis, what were those themes? The bottom line is we've seen really strong growth in bookings across the categories that we deliver in. We think the reason we're seeing that growth is people aren't pushing those transactions, and the reason they're not pushing those transactions is we do both. We deliver employee satisfaction, and we deliver tangible, measurable ROI that we warrant with our performance guarantees and our incentive savings. So that's why we think we're seeing this kind of traction right now. Appreciate the question, Mike.

Got it. And just one more quick follow-up. I know you have the multi-year targets and you talked about TRICARE being in the various different phases of appeal or whatnot. Can we just confirm that there's nothing in the long-term targets tied to the T5 announcement and how you think about the visibility you'll have into that?

I appreciate the question, Mike. We're extremely excited about how well positioned we are in that TRICARE space in our category and the capacity to grow in the innovations. When you think about our business there, Our current plan, as you know, has about $10 million-ish or revenues associated with our existing relationships with the government. Those are our autism care demonstration as well as our TRICARE Select Navigator Program. If those programs were to grow as they are and as they're currently defined, they could grow to, you know, 4 or 5x their current size. Of course, the timing on that will be variable in the T5 agreement, having just announced its awards has some variability associated with the appeals process, et cetera. All of that said, and this is maybe the direct answer to your question, we have nothing in our 2024 or 2025 model in terms of our top line revenues that imply anything other than the simple continuation of the existing revenue stream with the modest growth associated with that. The way to think about our TRICARE business is the way I would, perhaps we've positioned in the past, the strategic account space for us. Look, there are large transactions out there in the federal government. There are no larger transactions in the federal government or a space like this one where you can't predict the timing. What you can do is put yourself in an extraordinary position to be ahead of your competition, to take advantage when the timing of those transactions does manifest. And so, yes, the answer is we've got nothing baked into our into our plan outside of what the current revenues are in 24 and 25, and we're bullish on the capacity when that transaction actually does reveal itself, that it'll present some upside to our models going forward.

Perfect. Thanks.

Thanks, everyone, for the technical difficulty. I think we have an operator online now. Victor, are you there to take over? I'm here.

Remind yourself to one question each. And once again, that's star 11 for questions. One moment for our next question. Our next question comes from Ryan Daniels from William Blair. Your line is open.

Yeah, guys, congrats on the quarter. Thanks for taking the question. Another bit of a follow-up there in regards to health equity and social determinants of health, we're also starting to see a lot of Medicare Advantage plans and managed Medicaid RFPs from the states requiring that. And it seems like health plans don't have as robust solution sets there, so they're going out to partners. And I'm curious if you see that as an opportunity to continue to expand your distribution channel, doing some partnerships with payers on a go-forward basis, given your expertise there. Thanks.

First of all, thanks for the question, Ryan. It's great to talk to you. I'll start the answer, and then again, I'll turn it over to our chief medical officer, who will maybe end the answer around social determinants of health and those capabilities. One of the things that we really are enjoying about our relationships with health plans is we keep growing those relationships from their foundations and expert medical opinions is the componentization or the capacity to deliver different components of our capability to those health plans in a means that allows them to take our capabilities to their customers in the way that they want to deliver them. And so to us, different capabilities and advocacy, for example, are becoming more and more important to health plans. And those capabilities being delivered via health plans to their members is an important growth opportunity for us moving forward. potentially those capabilities around social determinants of health are also an opportunity in that regard. So, yes, is the answer to your question, but I'll let Shantanu describe kind of some of the things we do from a SGOH perspective that might be so compelling.

Yeah, I think it's a fantastic question. I mean, I think, you know, Accolade's approach to social determinants of health really has been honed in the commercial sense, right? It started with this really simple idea of, of having our health assistants that really represent the community that we serve on the proprietary model that we've built, which is a behavioral science approach to really be able to understand members, understand their specific needs. And over the last several years, really a lot of the investment in data and technology was infused to be able to scale that. So what was really interesting about the work we did with the VA population is that it was sort of proved positive that our approach that we've taken is extensible, right? So we dissolved it, honed it around a commercial population, but what we found taking care of really, really sick and complex veterans was that the model extended extremely well. And so I think that goes really positively in terms of thinking about other populations that we might want to address over time, that ultimately the barriers that these different population states, whether it be Medicaid or Medicare, population states are near a lot of the same challenges that the working poor and working Americans face. And so we think there was really a huge opportunity

Thank you. One moment for our next question. And our next question comes from from Goldman Sachs. Your line is open.

Hi. Thanks for taking my question. Congratulations on the quarter. I was just wondering, because you usually, Steve, give us maybe a breakdown of the divisions. It sounds like expert MDs doing pretty well. And it looks also like PlusCare is continuing to grow higher than we would have expected. But maybe just a breakdown there. And then would you expect that to continue like sort of rough percentages into next year? Thanks.

Sure, Cindy. Thanks for the question. Let me give you some comments in color on that for the third quarter and also on a look ahead basis. You know, for the Q3 over our performance versus our guidance, we saw strength across the different categories. Advocacy had strong performance. The flush care business is continuing to grow in the range of 30% on the top line, and expert medical opinion business has rebounded quite a bit from a couple of quarters back. As we look ahead, there's strong bookings that we've seen this calendar year that Raj spoke about in his comments give us a lot of confidence that the advocacy part of the business is on track to begin to get back to that 20% growth rate. in addition to PlushCare continuing to perform over and above the 20% growth rate on the virtual care business and the expert medical opinion business growing in the neighborhood of 20%. So importantly, Cindy, the diversification of the platform and the different revenue streams that we have in the different business units and sources of revenue we have are really turning to be quite an asset in terms of new business as well as ongoing customers.

Thank you. One moment for our next question. Our next question will come from the line of Craig Hedenbach from Morgan Stanley. Your line is open.

Yes, thank you. Raj, just had a question on just the element of cross-selling in the portfolio today. So after the acquisitions of Plush Care and 2ndMD, now that you have many quarters under your belt, just How are the customer discussions changing in terms of what they're valuing the most and how may that be kind of helping you in the marketplace?

I appreciate the question, Craig. Great to talk to you again. I think the – let me approach this from two different vantage points. Existing customers who would take advantage of our advocacy solution have a platform by which they can drive engagement for other solutions. They've known that forever because we've been coming to them with our trusted partner ecosystem, talking to them about Virta. talking to them about CARAT, talking to them about SORD, and we saw great uptake in those solutions within our customer base because those customers knew that we could drive engagement at higher levels than they could do independently. When we came to market with an expert medical opinion and a virtual primary care and mental health solution, our customers had to first evaluate the capacity of those solutions. Were they functionally superior? Did they deliver the value that they were expecting or better? And how did they compare to our competition? What they found was that we checked all those boxes. We had best-in-class solutions that drove extraordinary value independently. They already knew that we could drive extraordinary engagement. And so what did we see post that early evaluation process, post the acquisition? We saw a great uptake. I think we talked last quarter about the fact that 10% of our lives are now live on more than one solution at Accolade. That number continues to grow. And what we're seeing is most of our new deals, now switching to the second vector, new deals and new transactions, new customers getting to know us full stop, are buying more than one solution as they go through the process. I think maybe going back to a macro trend, Craig, that you and I have talked about in the past, benefit buyers are fatigued by the idea of the thousands of solutions that they're getting approached by every single day. They want a single place to go to find the value that they need. what we think we've done exceptionally well over the course of the last two or three years is weave together the highest value solutions, those things that provide the most clinical value with the right levels of engagement and in turn drive lower cost and better satisfaction. And so we're seeing in both of those vectors that the conversation is now shifting to when should we deploy it and in what order should we deploy it versus are these the right answers for us?

Thank you. One moment for our next question. Our next question comes from the line of Glenn Santangelo from Jefferies. You're on.

Oh, yeah. Thanks for taking my question. Good evening. Steve, I wanted to talk to you about the forward guidance. If I look at the fiscal 24 guidance you sort of laid out, it kind of assumes, you know, rough numbers like an incremental 45 to 50 million in REVs and maybe about 14 million of an improvement in EBITDA at the midpoints. which would kind of imply an incremental 30% adjusted EBITDA margin. Is that the right way to think about it? Because what I'm trying to do is sort of extrapolate that through to 25, right? I mean, depending upon what you think the incremental margins are, I'm trying to get a sense for what you're expecting revenue growth to be in fiscal 25 and sort of comparing that to what you told us a long time ago historically about the long-term EBITDA margins of the business in the 15% to 20% range. Thanks. So if you could just sort of reconcile all those numbers, that'd be helpful. Thanks.

Sure. Thanks, Glenn. Thanks for the question. First of all, we're really pleased on the strong bookings of fiscal 23 here coming off of calendar 22 to be able to provide preliminary guidance at that 410 number. You know, that's north of 20%, including the Comcast, you know, termination this year. And to reiterate over and again the importance to us of by fiscal 25 breaking through to break even. And so, Glenn, we think it's a combination of a few things. First of all, diversification on the top line and growth rate. We've got good visibility to that and confidence in it coming off of the booking season this year. Secondly, with respect to gross margins that certainly have continued to expand over time, we see that on a continued march up from there. And then finally, we're continuing to see leverage on OpEx while at the same time we're investing in the business against that growth opportunity. All of that taken together gives us that profile towards what we're laying out today and taking essentially the EBITDA loss 10, 11% of revenues into that 5% to 7% range and then to break even and positive two years out from now. In the fourth quarter call, when we finish out the year, we'll provide more color on all of that and more detail on the forward guidance. But I think all of that sets up and what we're essentially saying today is we're reaffirming with confidence that model that we've laid out on that steady march towards break even and profitability while we're growing the top line of the business in a very a very healthy way.

Yeah, maybe just add to Glenn's question and we can jump to the next. Let's add to Steve's answer for Glenn's question before we jump to the next one. Yeah, Glenn, I think what we tried to lay out today with a view to fiscal 24 revenues is just that based on the performance of the business so far this year that we feel really good about top line next year. In fact, we took the top line guide a little bit ahead of the consensus numbers that are out there right now. And we feel really good about our path to profitability. We'll give a ton more guidance around how all that works. As you noted, I think, in your preliminary note earlier, we don't typically give a whole bunch of detail in the Q3 call. We give a lot more detail in the Q4 call, and we'll plan on doing that in the Q4 call when we talk about 24 and a preview to 25 as well.

One moment for our next question. Our next question comes from Jonathan Young from Credit Suisse. Your line is open.

Hey, thanks for taking my question, and congrats on the strong results in selling season. I guess to extend on your comments about what employers are looking for, have the hurdles to achieve performance guarantees risen? And during the selling season, has the ask from employers to you increased more than normal given the backdrop on enhancing benefits? And I just ask this to get a better sense of, you know, are you Are they asking more from you and just competitors just aren't able to keep up and you're just massively outperforming them? Thanks.

I appreciate the question, Jonathan. It's great to talk to you again. Maybe let me catch that in a little different way. I don't think they've changed dramatically. I think a couple of things have happened, though. We've lived in a competitive universe since the beginning of time. And by competitive universe, I mean we've lived in a universe where customers had extraordinary demands. in terms of the return on investment associated with our solution. Since the company was founded, we've been putting fees at risk. Since the company was founded, we've been warranting cost saving on a comparative year-over-year basis. That's different than most categories of healthcare benefits delivery. Most categories have looser ROI requirements than the one that exists in our category. I think what perhaps has changed is not the rigor of which customers are asking for measurement and asking for accountability, but instead the fact that we now have most of our competition, there's been a lot of new competition in the space over the last several years, most of our competition does not have to live through one or two years of actually delivering and proving they can deliver against that value. Accolade's proven history of having done so for seven, eight, nine years, and then doing so again in the last year, is proving to be a competitive advantage. Customers are seeing our history and our proven capacity to deliver return on investment against some of our competitors perhaps not being able to do quite as much as a driver of us winning more market share.

Thank you. One moment for our next question. Our next question comes from William Hoover from Canaccord. Your line is open.

Yes, thank you. I'm on for Richard Close. Thanks for taking our questions and congratulations on the quarter. So I was hoping you could provide a little more color on your health plan sales. I know I believe last quarter I would say that the health plan sales were a double-digit percentage of the new ARR coming on, and I wonder if you could provide a little more color on how that's progressing and kind of expectations with new relationships and the expansion of the existing relationships, maybe some Timing for the future quarters or any expectations. Thank you.

I appreciate the question and thank you William for being here. Let me break down the channels by which we deliver our service and then I'll come back to the health plan. as a growth vehicle. I don't think we give a bunch of detail as it relates to as it relates to the percentage of new ARR. But instead, what I can tell you is we've got our direct to employer segment. We've got our direct to via the health plan segment. We've got our government segment and we have our consumer segment. Each of those, when we look at them, have a capacity to grow in the 20% to 30% range, depending upon the market segment that we're in. And what we're seeing across each of those is the capacity to deliver our primary care business, our EMO business, and our advocacy business. We think each of those segments and each of those categories have an opportunity to grow in the 20% to 30% range. What we've seen with our health plan business is it's particularly strong delivering capabilities like expert medical opinion, virtual primary care, which is becoming increasingly important to that channel, and individual components of advocacy. As Shantanu spoke about earlier, this answer to the question around social determinants of health. So what we continue to see with that health plan channel, and hopefully this answers your question, William, is opportunities to go into the channel our existing partners with new capability, some of them that are a component of the advocacy solution we deliver to our customers, and a capacity to grow new health plan partners over time. What we love about that channel and we love about our mid-market offering and what we love about our consumer business is that each of those channels continue to sell even when the so-called selling season for health care in the enterprise segment stops. And so what that's creating is less and less seasonality in our business and more and more predictability based on diversification.

Thank you. One moment for our next question. Our next question comes from Jaylendra Singh from Truist. Your line is open.

Thank you, and good afternoon, everyone. I actually want to ask about some long-term, high-level questions. One of the trends we are seeing in the employer market is that more and more employers are trying to narrow down the benefit vendors they're working with. Various vendors have talked about trying to get into more risk-based arrangements to drive more engagement with these vendors. If these trends accelerate, how do you think about the value of employee education, employee engagement service you guys provide if we do see these trends kind of moving forward and continue in the next few years? So just maybe give us some high-level thoughts on that in three to five years from now.

I think that trend exists. First of all, it's great to talk to you again. Sorry, I got super excited to answer your question and I forgot to be polite. It's good to talk to you again and thanks for being here. That trend that you're speaking to, do employers want to consolidate the number of vendors that they're working with? Yes, and they have for the last several years. And so that trend already exists. Will it accelerate into the future? I don't know the answer to that question, but I think all sounds point to yes. If that's true, Do they want return on investment as a driver of value because they're tired of buying 10 different point solutions, all of them saying they're going to save money and yet their overall healthcare trend line goes up? The answer to that is also yes, of course they do. And so are they going to be more demanding as it relates to return on investment guarantees and performance guarantees? I think the answer to that is also yes. Then the question becomes, well, what do you need? Well, very clearly, you need an engagement engine to be able to get your people to the solutions that you want them to use in order to lower costs. You need a population health strategy that helps you understand which solutions you need, and you need a means of reaching that stratified population with the right actions. We call them true health actions at Accolade with the capacity to guide them to the solutions that they need when they need them at the right time at the right place. That is exactly what Accolade does. And so in that context, if you already had a platform that was already based on, that was already measured on performance guarantees and return on investment, you would leverage that platform to answer the question that you just talked about. And I think when we look at a 30% growth rate on bookings this year, I think what we're seeing is the trend, the very trend that you're talking about manifests in the behavior that's happening in our space. If that behavior continues, it bodes well for our company.

Thank you. One moment for our next question. Our next question comes from the line of Ryan McDonald from Needham. Your line is open.

Hi, Raj and Steve. Thanks for taking my questions, and congrats on the preliminary good news with T5. My two questions really are just focused on that. First off, with Humana and TriWest winning the two regions, does that still place you in a position to win both opportunities if they go through appeal and sort of stick with those two carriers? And then second, as we look into Fiscal 24 and the preliminary guidance you've placed in there today, On the adjusted EBITDA side, are you already contemplating incremental investments that you'll need to make to start to scale up the staff for launching TRICARE in preparation for a 2025 launch? Thanks.

Thanks for the question, Ryan. Let me hit both of those, and then Steve, if you want to jump in if I've missed something. So first, the first part of your question as it relates to do we have an opportunity in both regions if the regions remain awarded as they are? The answer to that question is absolutely yes. I think what we've talked about, and we're only able to publicly disclose, that we've signed teaming agreements with two of the partners. We've got a really strong, excuse me, with two of the parties that bid the agreement We have a really strong relationship with the other. We believe there's opportunities to team across both of those regions, regardless who ends up winning even after the appeals process. So that's part one of the answer. Part two of the answer then is, and I agree with you, we're really optimistic about the future of our capacity to grow the business in that category. Have we already factored in investments? Well, I think that here's the really great news there. We've already built a service infrastructure to serve the government. We've done that in our autism care demonstration. We've done that with our TRICARE Select Navigator program. Oftentimes, building out a new service and a new service offering, the most expensive part of that story is the initial build-up and phase-in of the offering. We've already done that work. And so our capacity to grow from here really is leveraged off of variable costs associated with the growth of population. That's a business we're very familiar with, and we're quite comfortable that we've modeled well.

Yeah, and the only – Brian, this is Steve. The only thing I'd add to that is when you see the preliminary guide there to the top line and the 5% to 7% on the bottom line, what you're hearing from us is any variability in there will be about investments into fiscal 25 and staying committed to the break-even and positive free cash flow in fiscal 25, but giving some room there, spending some opportunities upon growth.

Thank you. One moment for our next question. Our next question will come from Jessica Tassin from Piper Sandler. Your line is open.

Hi, thank you guys for taking the question and congratulations again on the quarter. So I was just hoping for some detail about the size and the duration of the Autism Cares demonstration. Can you remind us what services you're offering and how you were kind of able to transform the accolades navigation offering to specifically suit that population? And then maybe if you could remind us how much is that contract contributing to the P&L and is the renewal tied to the T5 contract at all? Thank you.

Fantastic. Thanks, Jess, for the question. Autism Care is a unique program. It's a clinical pilot program being run in a core set of regions to actually deliver an extraordinary amount of clinical value for families who are wrestling with the challenge of managing children who are on the spectrum. Dr. Nundy's here in case we needed more details on the program itself. But the nature of the agreement is to actually deliver as an increment to a standalone from the T5 arrangement. But that demonstration has actually been renewed. And like all government contracts, Jeff, It's a year-over-year renewal process. The agreements are one year in nature. It's been renewed. And we're seeing extraordinary value, and we believe there's an opportunity to grow from its current region into new regions moving forward. And if it does, in fact, do so, as we've talked about in the previous answer to the previous question, that would represent offsides of the model and the way we're thinking about it. Steve or Shantanu, anything you ask for that?

Yeah, I mean, I think the only thing I'd add is from a clinical perspective, I mean, your question around, you know, what did it take to be able to adapt the model? I mean, I think what we're finding again is that our model is very extensible, right? I mean, I think if you think about what we're doing on the commercial side, we're oftentimes dealing with people with really complex medical needs. We're addressing them in a whole person way. We're doing care coordination for those families. And so whether that's transplant, whether that's oncology, or in this case, whether it's around autism, It's a very similar set of foundational capabilities we need. Most of the incremental assessment was around some of the specific requirements that the government has around data. But we found that the model we have was very accessible to the population. We've been very happy with the outcomes we're getting so far.

Thank you. One moment for next question. Our next question comes from Stephanie Davis from SVB Securities. Your line is open.

Hey, guys. Thanks for taking my question, and congrats on a solid quarter. Raj, I thought it was notable that we always think of you as an employer-facing solution, and then your prepared remarks essentially just focus on the government and payer business. So with that in mind, and those prepared remarks essentially reflecting a changing mix in business, I was hoping you could talk about What sort of mix shift that creates in your investment spend and how you're looking at hiring across engineers versus sales folks versus care teams as you go more towards the outside of the employer base?

First of all, thanks for the question, Stephanie. It's great to talk to you. Stephanie, it's great to talk to you again, and thanks for being here. Stephanie, I think here's the way we think about the business, and we'll always think about the business. We've got a diversified set of channels that we deliver to. and a diversified set of solutions that we deliver to those channels and we've kind of walked through those and i won't uh i won't walk through each of those uh the the commercial sector our direct to employer segment and are reaching that segment either via our direct sales team or via our health plan channel continues to be an extraordinarily important part of our business uh and and uh and at the majority of our business and so if if there was any implication or Anything that you took out of my prepared remarks as it relates to our focus on the government business being larger or potentially outside to our commercial business or even our consumer business, that was not intended. Instead, I think what we believe is we have really healthy growth opportunities in the commercial segment. We've talked in the past about when you think about the commercial segment and the fact that I think the last time we talked about the number of customers we had, We talked about north of 600. There's 30,000, 35,000 opportunities in that commercial segment. We've got plenty of room to grow there and plenty of room to build a billion-dollar company just there. We also think there's a segment in the government space that has an opportunity to be hundreds of millions of dollars on a long-term basis as well. And beyond that, we think the consumer segment or the direct consumer segment has an opportunity that could potentially be a billion-dollar business of its own. That's why we're excited about the business. Each of those is going to grow at different rates and therefore require different levels of patience, different levels of capital investment, et cetera. We've got to do that within the context of being a $500 million company that's free cash flow rate even or better. In fiscal 25, and that's what we intended to do. So I wouldn't say we were over, that we've shifted our focus in some material way, only to say every quarter we aspire to give you color on all the things we're working on. Because I think in fiscal 2021, in 2020, when we went public, we were a one product company with one segment. And sometimes we want to make sure that the market as a whole understands that this is a fundamentally different business, more diversified, more capable, and with far more predictability to go forward revenue streams than P&L.

Thank you. One moment for our next question. Our next question is from Stan Berenstein from Wells Fargo. Your line is open.

Hi, thanks for taking my questions. Maybe I can share a couple here. First, can you quickly just quantify the extent performance-related revenue hit the third quarter? And then within your core navigation and advocacy services, can you share with us what mix of member communications, navigation versus advocacy, and whether you've seen any changes in that mix over the past couple years? Thank you.

Hey, Sam. This is Steve. Nice to talk to you. Thanks for the question. So I think your first question was the mix of PGs versus, you know, kind of base fees in the third quarter. While we don't have that specifically laid out right here for the call, what I will say, Sam, that's an interesting dynamic, and it goes hand in hand with what Raj just described, is the evolution of the business over the last three years or so. You know, in 2020 when we came public, You'll remember that PGs were roughly a third of the revenue and 85, 90% of those savings-based PGs are recognized in the fourth quarter of the business. What we have fast forward today is the advocacy businesses comprises 60 plus percent of the revenues. So we've got a diversified set of revenues. and the PGs of the business are being recognized much more validly during the year. So rather than 90% of them being withheld to the fourth quarter, it's something like half of them are recognized through the year. And I'm talking now about just the savings-based component and call it half of them are recognized in the fourth quarter. And then along those lines, the mix of those on a typical advocacy deal is something like two thirds of the revenues are fixed and a third of them are variable, and within that, call it 10% of the total are savings-based. So all of that adds up to a diversified, predictable set of business. I'm going to hand it to Raj for the other part of your question.

Yeah, sure. Stan, as it relates to member communications and the breakdown between advocacy and navigation, we perhaps need to follow up on this one, because I'm not totally sure I understand the question. We're really good at being able to break out the type of engagement we have with a member, whether it's a benefits question, a claims question, a provider search question, or a clinical need broken down by clinical category. We don't necessarily break out our communication, sort of our messaging by advocacy versus navigation. In fact, we look at both of those things as really inexorably tied to the solution that we deliver.

Thank you. One moment for our last question. And our last question will come from Robert Simmons from DA Davidson. Your line is open.

Hey, thanks for taking the question. So when you were building your preliminary fiscal 24 guidance, what were the key swing factors that you considered? And then kind of where would you say is the most potential upside and where is the most potential downside to your numbers?

Robert, first of all, it's great to hear from you. Will you repeat the question? You cut out a little bit right in the middle.

Yeah, yeah, yeah. So I was wondering, what are the key three factors that you considered as you're building your preliminary guidance for next year, and where you'd see the most potential upside or most potential downside?

Gotcha, Robert. This is Steve. Thanks for the question. Let me get that, and I think this is the last one, so I'll hand it to Raj if any closing comments. First of all, when we walk into fiscal 24, a couple of things, and picking up on a point I made before, we've got a diversified platform of 60-ish percent of the revenue coming from the advocacy business and on balance, the virtual primary care, mental health, and expert medical opinion and trusted partner ecosystem revenue. When we put those all together, we walk into the year with a set of contracted revenue. It goes back to the earliest comments Raj made in the call, which is, A strong booking, a strong bookings year on top of that set of existing customer base gives us a good forward look. And then what we layer on top of that are the consumer revenues primarily from the PlusCare platform. When you think about opportunities on the upside, certainly the opportunity on consumer revenues in-year, bookings for next year being even stronger. And then certainly the macro environment, it's on everybody's mind what are our assumptions. We make fairly modest assumptions around the macro environment as it relates to our customer book. So when you add all that together, we're really pleased to enter today's call giving preliminary guidance of that 20 plus percent growth rate at the impact of a lost customer earlier in the year. And as you can hear from us today, we're really enthusiastic about the strength and breadth of the business and the demand environment for our offerings.

With that, we've come to the end of our prepared remarks as well as the Q&A session. We're thrilled to have the opportunity to share our results with you, and we appreciate all of you being here. Thanks, everyone. Have a great night.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.