Accolade Inc (ACCD) 2023 Q3 法說會逐字稿

Thank you for standing by, and welcome to the Accolade Third Quarter Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Mr. Todd Friedman, 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, Rajeev Singh; and our Chief Financial Officer, Steve Barnes. Shantanu Nundy, our Chief Medical Officer, will join the question-and-answer portion of the call later.

Before turning the call over to Rajeev, please note that we'll be discussing certain non-GAAP financial measures that we believe are important in evaluating Accolade's performance. Details and 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 of 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'll turn the call over to our CEO, Rajeev Singh.

Thanks, Scott, and thanks, everyone, for being here. While we still have 1 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 health care experience. Accolade's years have 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's 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 solutions 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' health care 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 health care 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 opinion. 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 solutions 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 traction is the expansion of our offerings to include expert medical opinion and 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 3 bidders for the T5 award. We have [teaming] agreements with 2 of the bidders and a strong relationship with the 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 navigator carrier demonstration. And we will work with the selected T5 vendors to define our potential scope and will provide an update when that cup 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, PlushCare has continued to deliver outstanding results quarter-over-quarter. Our PlushCare team, led by founders, Ryan McQuaid and Dr. James Wantuck 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 1, 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 1.5 years after the acquisition of PlushCare, the core hypothesis of this transaction has been validated in both the consumer and enterprise segment, 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 will place us among the largest carriers in the country by membership.

Aside from the obvious importance of delivering this 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 touch point that a new member (inaudible) adds 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 health care outcomes that differentiates Accolade from our competitors and is 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 bookings success in the past selling season gives us great visibility and high levels 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-consumer.

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 health care costs in a more meaningful way. 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 cash flow positive in the next year and beyond. This diversification is now a core strength of our business, a driver of complementary value across offerings, segments and solutions and stands in stark contrast to our business even just 3 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 health care 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 health care 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 health care experience, one that predictably engages members to understand their care needs, proactively navigate the quality care and informed health care decisions and addresses barriers to taking health care actions, including social determinants of health, all while delivering an exceptional personalized experience.

For employers and payers looking to improve the health care and benefits experience for members while reducing the cost of health care, Accolade is the one company that delivers improvements in outcomes and planned performance by guiding members to the next best clinical action in their personal health care journey, and we do it at scale across the entire employer population.

Unlike our competition, Accolade 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 active physically or virtually delivering medical care, whether that is through one of our own physicians and nurses through a trusted partner like Berta or Care fertility or through our members' own trusted medical providers. But care is also about the act of caring for another human being. It is 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 health care 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 3 foundational pillars. The promise of being Engineered to Care is that we enable predictive engagement, deliver proactive care and address barriers to health care 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 strength in our direct-to-consumer business as well as member counts for our commercial customers, which have stayed relatively strong despite the macroeconomic environment.

Sales in the quarter also benefited from about $1.2 million of performance guaranteed 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 9 month-to-date adjusted gross margin was 45.4%, which compares to 43.1% for the 9-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 compares 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 breakeven. 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 of approximately 17% at the midpoint. And we forecast adjusted EBITDA loss guidance between $36 million and $40 million.

With respect to the fiscal fourth quarter, we are providing guidance today of revenue in the range of $97 million to $101 million and adjusted EBITDA in the range of $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 will be net of (inaudible), which will contribute approximately $23 million of revenue to fiscal year 2023. Based on that math and our current year revenue guidance, we are 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 of more data points to help you model out next year and our path to profitability in 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. While in calendar 2022 close and more deals still in the pipeline for January 1, 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 model 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 line, 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 items by roughly 100 basis points each year, that would get us to the 5 to 6 percentage points we need in order to achieve breakeven and beyond over the next 2 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 breakeven and driving profitability thereafter. If we see a reason to invest more in 1 area, we'll adjust other spend to accommodate it. In other words, the goal is a not a G&A target of x percent per se. The goal is adjusted EBITDA and free 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 count in the face of an uncertain macro environment. We take a relatively conservative view on member count 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 2 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 in fiscal 2025. The answer continues to be that we remain committed to fiscal discipline and our time line to profitability and have consistently demonstrated our ability to manage the business in order that we maintain our bottom line target.

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 health care 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 cost -- lower labor cost markets like Prague and Vancouver, for example, where we can be opportunistic in our growth impact.

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 free cash flow positive regardless of the economic environment. and as I noted last quarter, our convertible bonds are not due for more than 3 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 markets, placing us in a strong position to execute against our objectives.

And 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.

(inaudible) with us for a moment, we're just -- our operator seems to have disconnected. And so we're working through some difficulties. Do hang with us for a moment. We'll work through it, and we'll be -- we'll start taking Q&A shortly.

I'll try it from my side guys, we lost the operator. Mike Cherny, if you can hear us, you can ask your question, go ahead.

Can you hear me?

We got you, Mike.

Yes, we got you. Go ahead.

Okay. Great. I appreciate the color on both the selling season and 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 dynamics, but also there's a lot going on relative to employer's 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 point solutions? 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 6 months mentality, relative to your ability to layer on new benefits.

Yes. 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 as the first question. A couple of ways to answer your question, Mike, 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 streams. 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 booking that 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 Engineered to Care delivery vehicles. And so I'm going to -- with that, I'm going to turn it over to our Chief Medical Officer, Shantanu Nundy, to talk a little bit more about why we're winning. And then I'll maybe jump back in and answer your final question about employer behavior. Shantanu?

Yes. It's a really great question. I think what we're hearing pretty consistently from the customers that who were in sales conversations with and our prospects and our current customers is that they're continuing to look for the same thing for it. So they're looking for who can get to the right members 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 to better outcomes at the proactive care.

And increasingly, they're saying who can help us also improve health equity, and that's where our approach to addressing (inaudible) coming in.

And just one evidence to that, we were -- we just had a [piece] in Harvard Business Review magazine just a couple of weeks ago. They really highlighting our approach to health equity and specifically highlighted some of the work that we did with United Airlines, which we think is pretty pioneering on the front of improving health care for marginalized groups. And so I think all those themes are continuing to pull through and driving the number of that (inaudible) Steve talked about earlier.

Yes. So the last part to your question, Mike, was if there was any themes around people pushing transactions, on a year-over-year basis, what were those themes. But 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. I appreciate the question, Mike.

Got it. And just 1 more quick follow-up. I know you have the multiyear 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 innovation. When you think about our business there, our current plan, as you know, has about $10 million-ish of revenues associated with our existing relationships with the government.

Those are (inaudible) 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 4x or 5x their current size. Of course, the timing on that will be variable. And 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 some 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 accounts space for us. Look, there are large transactions out there in the federal government. There are no larger transactions than 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 those -- when the -- when that transaction actually does reveal itself that it will present some upside to our models going forward.

Thanks for the patience with the technical difficulty. I think we have an operator online now. Victor, are you there to take over?

(Operator Instructions) Our next question will come from the line of Ryan Daniels from William Blair.

Congrats on the quarter. 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 acquiring that. And it seems like health plans don't have as robust solution set 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?

Yes. 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 as we're growing -- as we keep growing those relationships from their foundations and expert medical opinion is the componentization or the capacity to deliver different components of our capability to those health plans, and a means that allows them to take their -- 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. We think 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 described kind of some of the things we do from an FPOH perspective that might be so compelling.

Yes, I think it's a fantastic question. I mean I think active approach to social determinants of Health really has been honed in the commercial space, right? It started with this really simple idea of having our health assistance that really represents 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 wasn't due to be able to scale that. But 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 accessible, right? So we developed it and honed it around the commercial population. But what we found, taking care of really, really sick and complex veterans with the model (inaudible) extremely well.

And so I think that bodes really positively in terms of thinking about other populations that we might want to address over time that ultimately, the barriers that the different population spaces, whether it be Medicaid or Medicare population based are near a lot of the same challenges that they're working for and work in the American space. And so we think there's really a huge opportunity to (inaudible) to be able to address those populations over time.

(Operator Instructions) And our next question will come the line of Cindy Motz from Goldman Sachs.

Congratulations on the quarter. I was just wondering could you usually, Steve, give us maybe a breakdown of the divisions. It sounds like experts doing pretty well and it looks also like PlushCare is continuing to grow higher than we would have expected, but maybe just to break down there? And then would you expect that to continue like sort of rough percentages into next year?

Sure, Cindy. Thanks for the question. Let me give you some comments and color on that for the third quarter and also on a look-ahead basis. For the Q3 outperformance versus our guidance, we saw strength across the different categories. Advocacy had strong performance, the PlushCare 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, the strong bookings that we've seen this calendar year that Raj talked 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 that 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.

(Operator Instructions) Our next question will come from the line of Craig Hettenbach from Morgan Stanley.

Raj, just had a question on just the element of cross-selling in the portfolio today. So after the acquisitions of PlushCare and 2nd.MD, 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 in a different -- from 2 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 Berta, talking to them about Care, talking to them about SWORD, and we saw a 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 do 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 do we see post that early evaluation process, post the acquisition, we saw a great uptick, I think we talked last quarter about the fact that our lives are now live on more than 1 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 1 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 2 or 3 years is weave together the highest value solution 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 what order should we deploy it versus are these the right answers for us?

(Operator Instructions) our Next question will come from the line of Glen Santangelo from Jefferies.

Steve, I wanted to talk to you about the forward guidance. If I look at the fiscal '21 guidance, you sort of laid out, it kind of assumes rough numbers like an incremental $45 million to $50 million in revs and maybe about $14 million of an improvement in EBITDA at the midpoint, 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, to get 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. So if you could just sort of reconcile all those numbers, that would be helpful.

Sure. Thanks, Glen. 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. That's north of 20%, excluding the Comcast termination this year. And to reiterate over and again, the importance to us by fiscal '25 breaking through to breakeven.

And so Glen, 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 that 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 given that profile towards what we're laying out today and taking potentially the EBITDA loss from 10%, 11% of revenues into that 5% to 7% range and then to breakeven and positive 2 years out from now.

In the fourth quarter call, when we finish out the year, we'll provide more color on all of that in 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 breakeven and profitability while we're growing the top line of the business in a very healthy way.

Yes. Maybe just to add to the last question and we can jump to that. So let's add to Steve's answer for Glen's questions before we jump to the next one. Yes, Glen, I think what we tried to lay out today with a view to fiscal '24 revenue, it's 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 on the Q4 call, and we'll plan on doing that in the Q4 call when we talk about '24 and a preview of '25 as well.

(Operator Instructions)

Our next question is come from the line of Jonathan Yong from Credit Suisse.

Congrats on the strong results on selling season. I guess to the extent in 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 increase more than normal given the backdrop on enhancing benefits? And I just asked this to get a better sense of are they asking more from you and just competitors just aren't able to keep up and you're just massively outperforming them?

I appreciate the question, Jonathan. It's great to talk to you again. Maybe let me (inaudible) 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 we were -- since the beginning of time. And by competitive universe, I mean, we've lived in a universe where customers had extraordinary demand 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 savings on a comparative year-over-year basis. That's different than most categories of health care 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 of 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 has not had to live through 1 or 2 years of actually delivering improving. They can deliver against that value.

Accolade's proven history of having done so for 7, 8, 9 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 putting more market share.

(Operator Instructions) Our next question comes from the line of William Hoover from Canaccord.

I'm on for Richard Close. Congratulations in the quarter. So I was hoping you could provide a little more color on your kind of health plan sales. I believe last quarter, I would say that the health plan sales were double-digit percentage of the new ARR coming on. And I wonder if you can 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.

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 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 segments 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 a 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, the answer to the question around social determinants of health. And 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 capabilities, some of them that are a component of the advocacy solution we deliver to our customers and the 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 (inaudible).

(Operator Instructions) Our next question comes from the line of Jailendra Singh from Truist.

I actually want ask about some long-term high-level question. One of the trends we are seeing in 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 to more risk-based arrangements to that to drive more engagement with these vendors. If these trends accelerate, how do you think about the value of employee advocacy and 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 3 to 5 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 questions. 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 times 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 health care 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. And 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 cost. 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 that Accolade but 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 trends -- the very trend that you're talking about manifest in the behavior that's happening in our space. And so if that behavior continues, it bodes well for our company.

(Operator Instructions) Our next question will come from the line of Ryan MacDonald from Needham.

Raj, Steve. Congrats on the preliminary good news on T5. My 2 questions really are just focused on that. First off, with Humana and TRIWEST winning the 2 regions. Does that still place you in a position to win both opportunities if they go through appeal and sort of stick with those to 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 for the question, Ryan. (inaudible) hit both of those and then Steve, if you want to jump in if I 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 2 of the partners we've got a really -- excuse me, with 2 of the parties with the agreement, and 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 appeal process.

So that's part 1 of the answer. Part 2 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. We'll -- have we already factored in investments. Well. I think 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 buildup 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.

Yes. And the only thing -- Ryan, 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 breakeven and positive free cash flow in fiscal '25, but giving some room there pending some opportunities upon growth.

Our next question come from the line of Jessica Tassan from Piper Sandler.

Congratulations again on the quarter. So I was hoping for some detail about the size and the duration of the autism care demonstration. Can you remind us what services you're offering and how you were kind of able to transform the accolade 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?

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 is 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 or a stand-alone from the T5 arrangement. But that demonstration has actually been renewed.

And like all government contracts, Jess, 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 talked about in the previous answer to the previous question, that will represent upside to the model and we're thinking about it.

Steve or Shantanu, anything you guys would add?

Yes. And I think the only thing I'd add from a clinical perspective and your question around what did it take to be able to adapt the model. And I think what we're finding again is that our model is very accessible, right? I mean I think if you think about what we're doing on the commercial side, (inaudible) people with really complex medical needs we're addressing them in a full person way. We're doing a 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 and most of the incremental investment was around some of the specific requirements that the government has around data. But we found that the model we have was very accessible, the population have been very happy with the outcomes we're getting...

(Operator Instructions) Our next question will come from the line of Stephanie Davis from SVB Securities.

Congrats on the 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 focused on government and payer business. So with that in mind in those prepared markets potentially reflecting a changing mix of 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 sale 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 walk through each of those.

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 and that's majority of our business. And so 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 outsized 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 to have 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-to-consumer segment has an opportunity that could potentially be a $1 billion 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 patients, different level 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 breakeven or better in fiscal '25, and that's what we intend 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 1 product company with 1 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 the go-forward revenue streams and P&L.

(Operator Instructions) Our next question is from the line of Stan Berenshteyn from Wells Fargo.

Maybe I can (inaudible) 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 of years?

Stan, this is Steve. Thanks for the question. So I think your first question was the mix of PGs versus 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, Stan, it's an interesting dynamic and it goes hand to hand with what Raj just described is the evolution of the business over the last 3 years or so.

In 2020 when we came public, you'll remember that PGs were roughly 1/3 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 revenue. So we've got a diversified set of revenues and the PGs of the business are being recognized much more ratably during the year. So rather than 90% of them being with us in 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 deals is something like 2/3 of the revenues are fixed and 1/3 of them are variable and within that, call it, 10% of the total of our savings base. 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.

Yes. Sure. Stan, as it relates to member communications and the breakdown between Advocacy and Navigation, we probably need to follow up on this one. I'm not so sure I understand the question. We're really good at being able to break out the type of engagement we have with the member, whether it's a benefits question or 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 an actually tied to the solution that we deliver.

(Operator Instructions) And our last question will come from the line of Robert Simmons from D.A. Davidson.

So when you're building your preliminary fiscal '24 guidance, what were the (inaudible) 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, we -- 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.

Yes, yes. So I was wondering what are the (inaudible) pictures that you considered as you're building your preliminary guidance for next year and where you see the most potential upside or most potential downside?

Got you, Robert. This is Steve. Thanks for the question. Let me get that. I think this is the last one. So I'll hand it to Rajeev for any closing comments. First of all, when we walk into fiscal '24, a couple of things and picking up on (inaudible) before we've got a diversified platform of 60-ish percent of the revenue coming from the Advocacy business and the balance the virtual primary care, mental health and expert medical opinion and trusted partner ecosystem revenues.

When we put those all together, we walked 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 bookings year on top of that set of existing customer base. It Gives us a good forward look. And then what we layer on top of that are the consumer revenues, primarily from the PlushCare 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 given preliminary guidance of that 20-plus percent growth rate ex 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 an opportunity to share our results with you, and we appreciate all of you being here. Thanks, everyone. Have a great day.

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