Hello. Thank you for standing by. And welcome to the Accolade Third Quarter 2022 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Todd Friedman. Please go ahead..

Thanks, Operator. Welcome everyone to our fiscal third quarter earnings call. With me on the call today are our Chief Executive Officer, Rajeev Singh; and our Chief Financial Officer, Steve Barnes. Shantanu Nundy, our Chief Medical Officer, will join us for the question-and-answer portion of the call later.

Before turning the call over to Rajeev, please note that we will be discussing certain non-GAAP financial measures that we believe are important when evaluating Accolade’s performance.

Details on the relationship between these non-GAAP measures to the most comparable GAAP measures and the reconciliations thereof can be found in the press release that is posted on our website. There are also slides that accompany this conference call that are available on the webcast. The slides will be available for download following the call.

Also, please note that certain statements made during this call will be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to risks, uncertainties and other factors that could cause the actual results for Accolade to differ materially from those expressed or implied on this call.

For additional information, please refer to our cautionary statement in our press release and our filings with the SEC, all of which are available on our website. With that, I’d like to turn the call over to our CEO, Rajeev Singh..

Hello, everyone, and Happy New Year. I hope you’re all able to enjoy time with family and friends during the holiday season. As we enter the fourth quarter of fiscal 2022, we continue to make outstanding progress towards building a great and enduring healthcare company.

In fiscal Q3 we outperformed our guidance across the board and are again raising our forecast for the year.

Steve, our CFO will cover the specifics later in the call, including more detail on how to look at Accolade now that we’ve diversified our offering portfolio, expanded our go-to-market engine and become a more strategic enabler of our customers, people objectives when it comes to providing health and wellness benefits that drive employee satisfaction, engagement and retention.

But I couldn’t resist a little teaser to first hit some key points. At our core, we’re dedicated to consistently delivering on our commitments quarter-after-quarter. Today, we’re providing you with preliminary guidance for fiscal 2023, reaffirming our commitment to our long-term growth rates and our path to profitability.

Our progress due to the hard work of our colleagues is nothing short of remarkable. I’ll outline that progress for you briefly now before turning the call over to Steve. As we entered the current fiscal year, Accolade was an advocacy company serving about 100 customers, representing 2 million members with a $24 billion addressable market.

Today, we have more than 600 customers, representing more than 10 million members and our market opportunity has grown 10X to more than $200 billion. With our integrated offerings and expanded partner services built on top of the market leading healthcare engagement engine, we own the personalized healthcare category.

From a business perspective, this has resulted in far more diversified foundation. At the time of our IPO, our single largest customer represented 25% of our total revenues and our top four customers made up 60% of our revenues. Today no single customer represents more than 10% of revenues.

Most importantly, thanks to our broad portfolio of advocacy expert medical opinion, primary care and mental health services. We are far more strategic and valuable to the customers and members that we serve. That’s demonstrated in our performance.

So far this year, more than 20 new enterprise customers bought Accolade Advocacy and Accolade Expert MD together. More than 20 existing advocacy customers have purchased Accolade Expert MD and less than three months after we launched Accolade Care and accolade One, our first tranche of customers have already gone live on the solution.

Additionally, our momentum in new customer growth continues, with leading organizations like Halliburton, Choctaw Nation of Oklahoma and Choice Hotels joining our customer base.

These data points reflect both the strength of our strategic relationship with our customers and their belief in the vision of personalized healthcare that we set for to the market. Already the combination of our services is driving higher utilization rates for expert medical opinion when delivered in tandem with advocacy.

We expect the same patterns to hold with our virtual primary care and mental health services, providing further proof points that services layered on top of our engagement platform will drive outsize engagement and performance.

Just as our offering suite, pricing model and customer base are diversified and differentiated, so to is our go-to-market strategy. We have a long track record of reaching new customers via direct sales channel that has been remarkably efficient and effective.

More recently, we’ve added health plan partners like Optum, Aetna, Blue Cross Blue Shield of Michigan, Blue Shield of California and Humana as referral and reseller partners. Additionally, new partnerships with leading companies like PlanSource represent our commitment to meeting customers where and how they choose to buy.

On that foundation, we are well positioned for the future.

As I mentioned earlier, looking at fiscal 2023 from a financial perspective, we’re committed to delivering against our longstanding goal of 25% topline growth into the foreseeable future and we will improve our adjusted EBITDA loss in the year ahead, both on $1 and percentage of revenue basis.

And as Steve will describe in more detail, we’re projecting adjusted EBITDA break even in fiscal 2025 at approximately $600 million of revenue. At Accolade, we believe that you can build a lasting healthcare company, a growth engine and a disciplined business at the same time. That’s how we’re running our company.

Earlier this month, we shared our set of beliefs about how healthcare is supposed to work for people in this country, stealing the words of Simon Sinek, it’s important for companies to have a just cause that brings its employees, customers, partners and shareholders together.

Our just cause is that we believe healthcare is a human right and that everyone, regardless of their socioeconomic status, should have access to the care that they need. We believe in treating the whole person by building long-term trusted relationships, not just the symptom or the transaction.

We believe that mental health and physical health are completely intertwined to support the whole person. And we know that it’s time for our industry to start getting paid for outcomes, not just for providing services. You can find our credo in the We Believe section on our website.

We run our business with a fervent commitment to those beliefs every day. If the past two years have taught us anything, it’s that we can only predict so much about the future, whether it’s COVID or government and policy changes or the labor market.

Our customers expect us to remain true to our mission and our beliefs and that’s how we operated Accolade. Before I turn the call over to Steve one last point, healthcare today represents 20% of our country’s GDP. It is massive and it needs to do better at serving people. No single company will solve the problem.

But collectively we can and we must strive to improve. We’re committed to partnering with others who share our beliefs with those who embodied this deep rooted sense of purpose for the people we serve.

Through empathy, experience, and most critically, engagement and trust, we can light up those partner services on the basis of our open platform and the most advanced technology stack in the industry.

In the last year alone, we added SWORD, Virta, Carrot Fertility, Vivante Health and Employer Direct Healthcare to the industry’s most comprehensive partner ecosystem.

Our progress in each of these areas, new offerings, more innovation, more partners and doubling down on the importance of advocacy at the heart of connecting the healthcare ecosystem is why we continue to grow and thrive and why all of us at Accolade are so excited about the future.

With that, let me turn the call over to Steve Barnes, our Chief Financial Officer, Steve?.

Thanks, Raj. First, I’ll recap the results for the third quarter of fiscal 2022. Keep in mind that we closed the 2nd.MD acquisition in Q1 and the PlushCare acquisition in early Q2, where appropriate, I’ll provide color on year-over-year comparisons and [you can find] (ph) additional pro forma detail in the 10-Q.

We generated $83.5 million in revenue in the third fiscal quarter, representing 117% year-over-year growth on a GAAP basis over the prior year period. This reflects a significant beat against the top end of our guidance range.

You’ll recall that after the second quarter, we indicated that we expected to recognize $2.5 million of performance guarantee revenue in Q3 instead of Q4.

As a result of continued strong execution against our performance metrics, we recognized sort of $7 million of PG revenues in Q3 rather than Q4, inclusive of the $2.5 million in our previous guidance. We also saw favorable member count and PG performance compared to our original forecast.

On a pro forma basis to combine business group 44% year-over-year, broken down as 45% growth for Accolade Advocacy, 28% growth for Accolade Expert MD and 53% growth for direct-to-consumer virtual primary care or PlushCare. PlushCare continues to perform strongly and benefit from the tailwind of COVID, pushing more people toward virtual primary care.

While our expert medical opinion business was relatively flat on a sequential basis, as fewer medical procedures than expected are contributing to a reduction in second opinions. I’ll come back to this dynamic in my guidance for Q4 and fiscal 2023.

Fiscal Q3 adjusted gross margin was 47%, compared to 41.8% in the prior year period, which reflects the positive revenue beat, as well as investments in staffing our frontline care teams to support growth and integration.

While Q3 gross margin was favorably impacted by the revenue timing item, as stated in prior earnings calls, we expect adjusted gross margin to remain relatively flat on a full year fiscal 2022 basis compared to fiscal 2021.

Adjusted EBITDA in the third quarter of fiscal 2022 was a loss of $11.9 million, which compares to $11.4 million loss in the prior year third fiscal quarter.

This is significantly ahead of our guidance, primarily due to the performance guarantee revenue timing item noted above, as well as lower spending than planned in the quarter in some areas such as hiring and personnel costs.

Turning to the balance sheet, cash and cash equivalents total $366 million at the end of the third quarter and accounts receivable and DSOs were in line with prior quarters at about 24 days revenue outstanding. Finally, we add approximately 66.9million shares of common stock outstanding as of November 30, 2021.

This does not include any shares related to the 2nd.MD or PlushCare earn outs. For your models, there are up to approximately 2.2 million additional shares related to the 2nd.MD earn out and up to 1.4 million shares related to the PlushCare earn out to be issued in calendar 2022.

And now turning to guidance, for the fiscal fourth quarter ending February 28, 2022, we expect revenue in the range of $90 million to $93 million, representing a year-over-year growth rate of 138% and 13% on a pro forma basis to adjust for the acquisitions of 2nd.MD and PlushCare.

Adjusted EBITDA last for the fiscal fourth quarters is expected to be in the range of $4 million to $8 million.

To provide some context on the year-over-year growth rates and the guidance, keep in mind that we recognized approximately $8 million of PG revenue through the first three quarters that we initially forecasted to be recognized in the fourth quarter. This $8 million is comprised of the $7 million in Q3 noted earlier and $1 million in Q1.

If you were to add that back to Q4, the year-over-year growth rate in Q4 would be about 25% and Q3 would have been 32% growth instead of 44%. As a reminder, we recognize PG revenues upon achievement of the underlying performance guarantees.

PG’s include a variety of items such as member engagement rates, member satisfaction, clinical metrics and cost savings based metrics. The mix and timing of PG’s varies. But to be clear, achieving and recognizing PG revenue in early quarters was positive.

As we establish a track record of consistently achieving our PG’s and recognizing them more evenly throughout the year, it will have the impact of lessening our historical Q4 revenue bump. Also, those PG revenues typically come in at a much higher positive impact the gross margin and adjusted EBITDA.

The net of all this is that we consistently point into the full year numbers which are not subject to the quarterly movements of PG revenue recognition timing and margin within a given year.

Moving the guidance for the fiscal year ended February 28, 2022, we expect revenue in the range of $306 million to $309 million, representing 81% growth over the prior year at the midpoint and 30% on a pro forma basis to adjust for the acquisitions of 2nd.MD and PlushCare.

Adjusted EBITDA loss for the year in the range of $48 million to $52 million, representing approximately negative 16% of revenues at the midpoint of guidance. We also provide a preliminary view of fiscal 2023 revenue guidance today.

Based on our current estimates and assuming no significant change in the healthcare spend environment, we projected revenue will grow approximately 25% over fiscal year 2022 to about $385 million and expect adjusted EBITDA loss will improve to about 1%1 to 12% of revenues, as we continue on our path to profitability after pausing for a year on that progress, while completing the acquisitions and making material progress on integration.

To help you build your models and understand the components of the revenue growth, our guidance breaks down like this. We expect a core Accolade business to grow approximately 25% in line with our previous statements.

Our virtual primary care business which in fiscal 2023 will be driven by our PlushCare direct-to-consumer business is experiencing strong growth and we expect it will grow about 30% next year.

And while we remain very confident in the expert medical opinion market opportunity and have driven significant customer additions in that space since the acquisition, until we see second opinion volumes returned to historical norms, we forecast that Accolade Expert MD revenue will grow approximately 20% next year.

Underlying our guidance, of course, is the ACV or annual contract value as of fiscal 2022 year end. As you know, ACV is not a final metric until the year is over. But as promised, we want to give you some color from the end of the selling season, particularly as it helps you build your models for fiscal 2023.

As an important reference point, when we went public about 18 months ago, ACV represented the near totality of our book of business and as such was a good proxy for modeling our following year’s revenue. Today ACV remains a very useful metric for modeling a large portion of our revenue.

But given the changes in the business since our IPO, we will continue to evolve the metric to ensure it stays relevant as you build your models. More specifically, ACV historically would not include EMO case rate revenue, nor would it include the cluster consumer revenue, which is comprised of subscription fees, as well as visit fees.

Given that we’re evolving the business toward case rate revenues from PEPM for expert medical opinion as we leverage the strength of our engagement platform, when we report in April on the final ACV metric for the end of fiscal 2022, we expect to include our estimate of EMO case rate revenues, as well as contracted enterprise virtual primary care revenues.

Most importantly, our goal here is to help you understand the different inputs of our business to effectively model our growth. First, recall that ACV at the end of fiscal year 2021 was approximately $248 million adjusted to include 2nd.MD on a pro forma basis.

At that time, we said ACV did not include the portion of 2nd.MD revenue that was billed on a case rate basis. You start with that base and then build. Next with the vast majority of new business signs, we are on track to time between $50 million and $60 million of new business in the current fiscal year.

Year end ACV will include all PMP -- PEPM revenue, plus our estimate of EMO case rate revenue and enterprise primary care visit fees. Then we add or subtract normal customer adjustments, such as changes in headcount or terminations. And as we said before, we model for approximately 95%, gross dollar retention, and we’re on track for that this year.

Additionally, we have one unusual item impacting ACV and revenue next year, which is that we made the decision not to renew a legacy health plan customer relationships that had become particularly low margin and non-strategic as our business evolved.

Well, that lowers fiscal 2023 and revenue and ACV by approximately $9 million, we believe it’s a prudent decision to walk away from business that does not fit within our financial and strategic profile. And that’s a framework with -- that will get us to a final ACV of February 28, 2022.

In order to build to the fiscal 2023 25% revenue growth projection, you would start with that ACV, which includes the advocacy, expert MD and enterprise virtual primary care offerings, add revenue for new business sold and launched within fiscal 2023, plus incremental partner revenue, adjust for timing of launches and add to that the fiscal 2023 PlushCare or consumer virtual primary care revenue forecasts.

The net of all that brings you to the 25% revenue growth rate in our preliminary guidance. Now before turning to your questions, I’d like to highlight an important item, which is our past to breakeven, including a picture of the leverage in our pricing model as we add the new solutions to the portfolio.

We’ve consistently stated that our goal is to make meaningful progress towards profitability each year on the strength of our revenue growth and attractive unit economics. We also guided to a pause on that progress for the current fiscal year as we absorb two significant acquisitions.

And as you can see, in our guidance for next year, we expect to continue making meaningful progress on that path. I’d like to go a little deeper to help you understand not just the timing, but also the underlying unit economics. For those of you looking at the slides on our webcast, you can see our historical march toward breakeven.

In fiscal 2018 Accolade with a $77 million revenue business, with adjusted gross margin of just over 30% and adjusted EBITDA loss of 56% of revenue.

Over the next few years, even while we invested heavily in technology, sales and distribution, and other the cost of being a public company, our gross margins improved materially and the adjusted EBITDA loss declined as a percentage of revenue from negative 56% to 41% to 25% and then negative 16% in fiscal 2021 before flattening out this year.

With our preliminary guidance for next year, you can see that adjusted EBITDA improved from negative 16% this year to an 11% to 12% range in fiscal 2023 then cuts in half the following year with a breakeven target in fiscal year 2025 and that improvement in fiscal 2023 would represent a reduction in the adjusted EBITDA loss on an absolute dollar basis as well.

From a size and scale perspective, 25% annual revenue growth over that same period leads to a $600 million revenue target at breakeven in fiscal year 2025. It’s also helpful to show you how the unit economics work for the legacy Accolade business, as well as the incremental margin contribution from our new solutions.

If you start with the legacy Accolade RXD [ph] business, you can see the unit economics in the chart that I just shared.

PEPM for a full suite was approximately $20 and historical improvement in adjusted EBITDA and gross margin was largely driven by the incremental gross margin from existing customers, as we increase engagement and build deeper relationships with our members.

The new solutions we added this year, particularly expert medical opinion and primary care, are generally priced on a per visit or per case basis.

Those visits and consultations are delivered at a higher incremental gross margin than the advocacy revenue, which we expect to further expand as we leverage our advocacy engagement investment with cross-sell customers providing additional lift to the model.

On top of that, as we gain traction with our Accolade One solution, there is additional opportunity for increased margin contribution from gain share performance. And lastly, we expect our partner revenue to grow nicely this year and into the future, also at a higher margin than our advocacy business.

We are not changing our long term targets model today, but if you think about the expected growth and contribution from these solutions, you can begin to see the layering effect of adding higher gross margin revenue in the years to come.

Advocacy will remain the largest revenue contributor this year and next, and we expect higher margin case rate and visit fees to grow in fiscal 2024 and beyond. And we expect our higher margin gain share revenue may contribute in fiscal 2024 and beyond, as we expand beyond our initial pilot customers.

As such, we believe we are building a business foundation and portfolio to drive growth and margin improvement for years to come. And with that, we’ll open the call to questions..

Thank you. [Operator Instructions] Our first question comes from Ryan Daniels with William Blair. You may proceed with your question..

Yeah, guys. Congrats on the strong quarter. Thanks for taking the question. Steve, maybe one for you, you highlighted just the traction you’re seeing in organizations selecting multiple offerings and that laying the foundation for Accolade One and Accolade Care.

So I’m hoping you could dive a little bit more into the pipeline and outlook there and maybe even tie into that some of the recent executive hires I think you’ve added your first Customer Success Officer and Chief Customer Officer, so I’d love to hear how that ties into the growth story as well? Thanks..

Hey, Ryan. Thanks for the question. This is Raj. I know you tried that on Steve, but I’m going to jump in and intercept if you don’t mind and then Steve feel free to jump in and add any color to it.

Ryan we are excited about the growth profile of the company and the continued demand in each of the market segments that we’re performing in and so you’ll recall three years or four years ago, the company made a choice to expand into the middle market where we’re seeing continued growth, both from a logo expansion perspective and from an ACV perspective, the Enterprise segment, same story.

And so you’re exactly right, we’ve actually invested in a Chief Customer Office and that would be Eve Stacey who -- we think it’s going to do amazing things in helping us scale the services that have delivered really outstanding customer satisfaction levels over the last 10 years to the next level as we go to from a couple 100 customers to 610 more than 1,000 soon.

And then, of course, as well, we added a Chief Marketing Officer, Carolina Lobo, who joined us after a rich history of, I mean, in healthcare industry, helping us build out and grow our expansion plans across every one of those segments. So the really positive news in our mind, Ryan is that the space itself is continuing to show growth.

And that customers are embracing this expanded value proposition in personalized healthcare and that’s yielding ACV growth that Steve just talked about and the growth of the team that you mentioned in your question..

Thank you. Our next question comes from Glen Santangelo with Jefferies. You may proceed with your questions..

Oh! Yeah. Thanks. Steve, I just want to follow up on some of the EBITDA comments, I just want to make sure that I’m doing the math right. If I kind of play your numbers through your guidance swing for the fourth quarter, it looks like you’re sort of modeling EBITDA for the full year to be a loss of somewhere in the high 40s, maybe around $49 million.

And then if I use your guidance and the percentages you provided for fiscal 2023, using the mid points, it looks like you’re expecting about $44 million, $45 million in EBITDA loss, so a little bit better. But as you think about the path to profitability, it certainly looks better on a percentage basis than an absolute basis.

I’m just trying to make sure that I’m looking at all those numbers correctly. Thanks..

Sure. Thanks for the question, Glen. And I think, fair to say you’re spot on, for this year, fiscal 2022, you can think of that the midpoint of that EBITDA range for this year is $50 million on the $306 million to $309 million revenue number we gave. And then for next year, about $44 million, that’s a good number to be.

Where -- it’s early yet as far as the guide for next year, it’s preliminary guidance. But think of it in that mid-40s range. And the improvement on absolute dollars, but also on a percentage of revenue basis as we’re growing the business topline 25% year-over-year, we think is very healthy.

And then importantly, laying out that multi year period all the way out to breakeven in fiscal 2025 as we make that steady step down towards breakeven was very important to us in the longer term guide..

Thank you. Our next question comes from Craig Hettenbach with Morgan Stanley. You may proceed with your question..

Yes. Thanks so much. And I appreciate the transparency about the customer that you’re walking away from and implications on the business in terms of lower margin.

Can you maybe just touch on, at the same time, you’re talking about a rapidly expanding and growing TAM and the opportunity set, and just maybe weaving those two things together, like the ability to kind of be more disciplined, because there’s a lot of growth opportunity in front of you and how you are managing the business in terms of growth versus margins as we go forward?.

Yeah. Great question, Craig. Thank you for the question. Thanks for being here today. The transparencies provided as related to the customer that we decided to move on from is really built around this idea that we had started serving that customer, call it, five years ago, in really serving exchange population on behalf of that customer.

And over time, we began to realize that it was a non-core platform, not an area that we were going to - we’re going to spend an extraordinary amount of time growing. And it was operating on a platform where we didn’t believe that was our core platform.

And so I think the decision to move forward is really one, we’re targeting all of our investment on our core platform. We’re targeting all of that investment around innovation that we think appeals to employers and to the TRICARE business that we’re so excited about.

And that -- in that business we can not only deliver outsized innovation, incredible engagement rates and clinical outcomes, but we’ll also see the kind of margin expansion that Steve outlined over the course of the next several years. So you’re exactly right. The two are very correlated.

This is the about the discipline of our investment, the discipline of our investment -- of our execution and the discipline towards our path to profitability..

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

Good afternoon, guys. Congratulations on the nice results. I want to ask one clarification question and one bigger picture question, I am going to squeeze them both in, in case I got cut off after.

Just I want to make sure relative Steve to the $9 million, you mentioned that you walked away from assuming that I mean that’s basically not in the baseline for next year versus this year.

So you could assume the growth rate would have been closer to the high 20s in the event that that’s the case, I just want to confirm that? And then, Raj, I want to dive a little bit into some of the early feedback you’re receiving from the customers that chose to select some of your new platforms.

Obviously, I know, for anyone that went live on 1-1, were not going to actually know how it’s going.

But as you’re going through that launch period, especially implementing newer solutions, newer go-to-market platforms, what were some of the learnings you took out and what were some of the pieces that your customers really want to make sure, you got to the finish line that you’re able to deliver for them?.

Thanks for the question, Mike, and appreciate your being here. I’ll -- let me take the second question first and let Steve answer your first question right after that.

Immediately upon bringing the new solutions to the marketplace with our customers, we [saw traction] (ph), obviously, with expert medical opinion, we outline that as a statistically out on a call with 20 customers buy both advocacy and EMO together or Accolade Expert MD together, we also saw another 20 or so buy EMO on top of Accolade Advocacy.

Here is what every one of those customer said and I think it’s the same thing that we’re hearing from customers on Accolade Care, they’re not interested in disparate products that deliver different value propositions, but they’re interested in an integrated engagement hub that drives value for everything that connects to it and very clear they expect that the things that are coming from Accolade to drive an outsized engagement level than what they would have seen from other vendors potentially.

And so that expectation is starting to manifest in actual reality in terms of statistic we’re seeing from customers around engagement rates.

So that’s part one, customers don’t just want multiple solutions from the same vendor, they want integrated solutions, built off the same technology platform and with a brief [Indiscernible] statistics and value. Then I think point two of that story is, that has to manifest in integrated care teams as well.

And so when we’re talking about delivering value, we’re talking about the capacity that seamlessly transferred from our frontline care teams to our primary care physicians and to our expert medical opinion capabilities without having to leave the interaction, without having to leave the software interface and we think that’s a really important part of what customers want are asking for.

Steve, do you want to take part two of that or part one of that question?.

Sure. Absolutely. So, Mike, the clarification there on that $9 million, you are correct, that we -- that contract, we let that go at the end of December calendar year 12/31. So that’s $9 million impact, think of it is about a 3% headwind on growth rate in fiscal 2023 compared to fiscal 2022, $9 million on that $307.5 midpoint..

Thank you. Our next question comes from Jailendra Singh with Credit Suisse. You may proceed with your question..

Thank you and congratulations on a good quarter. Just following up on fiscal 2022 -- 2023 outlook. Thanks for all the color there and good clarification there from Michael. On 2nd.MD expectations, now you’re expecting 20% growth versus 30% plus what the business has seen in the past.

Maybe remind us again, how that business is split between like PEPM and case rate? And what your underlying assumptions are with respect to electives, as we are seeing the trends now, are you expecting trends to stay the same level or get worse? And kind of related on the margin improvement you expect in fiscal 2023? Is that all operational leverage or expecting some improvement in these recent acquisitions? If I can just one related part I can ask, if electives do recover in fiscal 2023 do driving some upside to your fiscal 2023 revenue? Would that have any impact on margins in fiscal 2023?.

Hey. Hi, Jailendra. It’s Steve. And yeah, I’ll grab that one and so, you hit a few things there.

Let’s start though with the trends as far as volume change, you heard us talk about 200 added customers on a 400 or so customers have taken together post the acquisition, so we’ve had significant growth in customers many of those are buying expert medical opinion either on standalone for together as a suite with advocacy that’s very important to us.

We’re hearing over and over again from the market that customers highly value it, particularly when it’s tied to the accolade engagement engine. So we’re very bullish on the category overall and the opportunity to weave them together. The volumes, yes, we’re seeing procedures down, for sure.

You see -- you’ll see a roughly flat quarter-to-quarter growth from Q2 to Q3. What you’re seeing in the guide from us is an assumed -- assumption that those utilization rates stay about where they are for now until we have better visibility into the future.

So, certainly, if those procedures pick up and there’s more elective medical opinions, there would be some upside there. And then as far as the fiscal 2023 guide goes, there’s operating leverage on the OpEx, for sure.

But we’re also forecasting that gross margins will begin to expand again year-over-year, this year, fiscal 2022 versus fiscal 2021, we’ve been consistent in guiding to about flat gross margins, we expect to see gross margins pick up next year in fiscal 2023 and again in 2024 and 2025, on that March to breakeven.

So it’s a combination of both gross margin expansion, with all the offerings taken together and operating leverage..

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

Hi. Good afternoon, guys. Congrats on the quarter and thanks for taking the questions. I want to say a couple of around performance guarantee trends. So the first one is whether the pull forward of performance guarantees so far in the fiscal year reduces potential volatility. I think mostly to the upside for your fiscal fourth quarter.

And then just more broadly, is customer interest in performance guarantees as part of contracts increasing given your integrated offerings and how would you expect that to layer into the portfolio over time?.

Thanks for the question, Jeff. It’s Steve. So let me hit that. Well, I’ll start with the first part. On the pull-forward and earlier recognition of PG’s, you’re absolutely right it does reduce some volatility in the fourth quarter for us.

I made a point in my prepared remarks to say this is a good thing, when we give guidance, we are -- it is very important to us that the investment community understands.

We’re giving full year guidance and then as we achieve PG’s, if we achieve them throughout the year, we booked them as their earned and that’s a good thing, because it takes some volatility away from the fourth quarter.

So perhaps that takes away some upside and some downsides in the fourth quarter in doing so, again, that’s, we think, a very positive trend. And then to your point about customers, over and again, it’s very important that customers understand that there’s an ROI associated with the work that we’re doing and the value that we’re providing.

And the fact that we have Shantanu Nundy, our Chief Medical Officer on the line, who’s spending a lot of time with customers and the clinical capabilities that we’ve been adding. Let me kick it over to him for a second, because he’s had some real recent interactions with customers on this front.

Shantanu, do you want to take it from here?.

Yeah. Sure. Absolutely. And I think it’s a great part of your question around, the customer interest in PG’s and clinical PG’s, in particular, and I think, it’s definitely a core part of our hypothesis, going back to the whole idea of personalized healthcare being personal data driven and value based.

What we’re seeing in market is that, customers are really interested in how we’re measuring our outcomes and there’s a lot of interest in those performance guarantees.

And it’s something that that we think is going to be really hard for others to be able to replicate, actually showing that we can deliver on those clinical outcomes is something that we’ve done in the past and I think that the customer interest in those, I think is a really good sign that that the core thesis behind personalized healthcare is right..

Thank you. Our next question comes from David Larsen with BTIG. You may proceed with your question..

Hi.

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

How are you addressing that? Thanks very much..

Yeah, David. Thanks for the question and appreciate you being here.

I’m going to take the second part of that question to Shantanu, our Chief Medical Officer to talk a little bit about how we believe virtual care can coordinate and collaborate with brick-and-mortar care, as well as way to think about that in terms of the way we deliver services to our customers.

On the first topic, the way we are working most prevalently with health plans today is approaching their commercial populations with our service, either in tandem with other components of their clinical services or directly with our service in its entirety being a carve out for some of their member services and clinical services functions.

We do that in both a reseller and a referral model and it’s very complementary to our direct sales model.

The questions you’re asking around, would we be willing to take full financial risks and carved out segment of their population? I think it’s not something that you should model into our business -- into what we’re looking at for next year or even really -- for this year or next year, David.

It’s certainly something that we will evaluate down the road as we continue to prove out our capacities right cost savings and improve clinical outcomes for our customers. We certainly have a rich track record of doing so, but it’s not something I’ve modeled into our plants.

Shantanu you want to hit them with question about brick-and-mortar care?.

Yeah. Absolutely. And it’s a great question. I think, one of the things that we really liked about the PlushCare platform is that it’s really purpose built for primary care, right? So that means that they’re -- we’re able to provide comprehensive primary care. So to your point about lab draws partnering with national laboratories for that.

Same thing goes with partnering with pharmacies around the country around medications, delivering vaccines at the point of care within pharmacies.

And so, I think, really that point that Raj alluded to around collaboration, that’s really the key, as someone who still practices primary care in brick-and-mortar context, there’s a significant portion of my patients who need to see a specialist and need to go elsewhere.

Similarly, if you’re providing primary care virtually, you’re absolutely right, there’s going to be a portion of patients, perhaps 10% or so who are going to need to have something done in a brick-and-mortar context.

I think the question the keys either way is really, how are you enabling that collaboration and I think for us, that’s where our data and technology platform comes from -- comes in.

I think if you think about how we’ve built an ecosystem and all the different partnerships that we talked about earlier in the call, it’s the same sort of concept that we believe is going to be really the key and that’s what patients are looking for ultimately.

They’re looking for us to deliver a service to them and for us to really put those pieces together and experience that works..

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

Hi. Thanks for taking my question and congrats on a great quarter. Appreciate the additional color on the long-term targets here.

As you think of about that progression towards breakeven adjusted EBITDA and sort of the revenue threshold that you need to hit, as you look at the next couple of years, how visible or how much visibility do you think you have onto some of the areas around virtual primary care or expert MD? And sort of the consistency or the linearity of that progression, when you think about the organic move towards that breakeven level? Thanks..

Hey. Thanks for the question, Ryan. Appreciate it. Steve.

One of the things we’re seeing that we’re really bullish about as we sit here in the fourth quarter is the power of the platform, the diversification of it, the fact that what we’re seeing strong contributions across the Board from -- in terms of new customer growth in expert medical opinion to complement advocacy, PlushCare, the direct-to-consumer virtual primary care business growing very nicely on its own, while you’re taking care of some of the EMO volumes that you see a bit to being a bit soft.

As we head into next year, we have a strong base of contracted revenue that gives us confidence in that guide.

For the -- think of it as the advocacy and expert medical opinion, the B2B or enterprise business and the PlushCare business performing very strongly on its own really in all aspects in terms of new subscriber acquisitions, visit rates, customer satisfaction, doctor satisfaction on the platform, all of that gives us confidence that the foundation is strong and we get -- it gives us good visibility towards obviously next year.

And then you think about the fact that most of our contracts tend to be long-term contracts, so three-year business-to-business contracts. So we get good visibility there. We’ve got strong retention, high net promoter scores across our member base.

So all of those things combined with a strong ROI for our customers is really the backbone that we build our business on and our revenue models on. So those all combined to give us the visibility..

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

Yeah. Given the second opinion or 2nd.MD trends, do you still expect the contingency consideration thresholds to be achieved? And then what is the timing again, I know you said, calendar 2022 for the shares to come in.

But can you give us sort of the quarterly timing? I know you since your February year end, not sure if it comes in the fourth quarter?.

Sure. Hi, Richard. I appreciate the question. Yeah. So a couple of things. On the -- so each of the 2nd.MD and the PlushCare acquisitions had a contingent consideration or an earn out associated with them. PlushCare calculation will be based on a calendar year 2021 basis. So we expect that to wrap up by the end of the fiscal year, year fiscal 2022.

And for 2nd.MD, there’s a earn out there as well, which will be based in large part on a January 2022 or this month run rate revenue.

So we expect those to all be wrapped up, if not completely by the end of the fiscal year, certainly by fiscal Q1 of fiscal 2023 and you’ll see a calculation in the Q in large part those we expect to be earned fully, but we’re doing those final calculations over the next month or so and I’ll have more to report on that in the next quarterly call..

Thank you. [Operator Instructions] Our next question comes from Stephanie Davis with SVB Leerink. You may proceed with your question..

Hi, guys. Congrats on the quarter and thanks for taking my question. So I’ve got a two part question on the out year margin guidance, first specific and then I have more generalized.

So on the specific side, should we think about the EBITDA margin as benefiting from a step up in 2023, given the contract wind down that was unprofitable in a more linear path from 2023 to 2025 or is there any new ones in there? And then just more generally, what are the toggles that could get us above or below the preliminary 2023 and 2025 EBITDA figures?.

Stephanie, thank you for your questions. It’s Steve. Would you mind repeating the first part about the specific point about EBITDA. It broke up just a little bit and I’m not sure I heard it clearly..

No. No worries.

I’m just saying for the 2023 figure, does that benefit from a step up in margins, given the unprofitable contracts wind down or should we think of that as a more linear path as we get to 2025?.

Understand now. Yeah. On a marginal basis that $9 million or so, our point there was that, yeah, it was essentially a lower gross margin bit of business. So there’s some uplift there. I think overall it’s fairly minor. The underlying key point for us is that gross margin expansion will be a contributor there.

We expect something in the mid 40%, 45% range for this current year fiscal 2022 and expanding that up, that we expect it to go up into the high 40s towards 50% by that fiscal 2025 breakeven date on a somewhat linear path to give you some more color there.

And then the toggles up and down against that, certainly will have to do with the success level that we have with driving better engagement and more engagement of these case rate revenues and an expert medical opinion business and on visits on the virtual primary care and mental health side, as we bring together all the offerings and the offerings that we’re calling Accolade Care and Accolade One.

And then finally in the out year fiscal 2025 and beyond, we’ve spoken about this opportunity for gain share revenues in Accolade One. We have not made any grand assumptions in our target models around that.

We think it’s important that we learn about how that goes, but there certainly would be upside there, if we were to perform well against those gain share opportunities and we’ll report more on that in the coming quarters. Thanks again for the question..

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

Thank you, Operator, and thank you all for joining us today. We appreciate the opportunity to outline our Q3 results, our Q4 plans, as well as our fiscal 2023. Have a great rest of your night..

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