Accolade Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
October 8, 2024

There are 14 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Akalade's 2nd Quarter 2025 Earnings Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would like now to turn the conference over to Todd Friedman, Senior Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thanks, Michelle, and welcome everyone to our fiscal Q2 earnings call. With me on the call today are our Chief Executive Officer, Rajiv Singh and our Chief Financial Officer, Steve Barnes. Before I turn the call over to Rajiv, please note that we will be discussing certain non GAAP financial measures that we believe are important when evaluating 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. Also, please note that certain statements made during the call will be forward looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Speaker 1

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 in 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. One more note before I hand the call over to the team. After talking to a number of you about the time and logistics, we've decided to move the Analyst Day to the spring in a more accessible location. More details will come closer to the event.

Speaker 1

And with that, I'd like to turn the call over to Rajiv.

Speaker 2

Thank you, Todd, and thank you everyone for joining us today on our fiscal 2025 Q2 earnings call. We're speaking to you today from our office in Prague. We appreciate you joining us before the market opens and we'll be brief in our remarks, so we can get to Q and A in short order. Before I get into the quarter review, I'd like to give you first our perspective on the opportunity we see ahead of Accolade. I'll use a recent customer presentation to illustrate our view.

Speaker 2

Last month, DeVry University, an Accolade customer participated in a Q and A with one of our analysts to talk about their experience with Accolade. Since going live with us 4 years ago, they've expanded the health and benefit services they offer their employees to include a number of partner offerings, seen incredible results in terms of employee satisfaction and engagement and created excitement across the entire executive team at DeVry for their approach. The whole while keeping medical trend to roughly 2% in a world where healthcare costs are growing 6% to 10% every year. DeVry chose Accolade many years ago because they recognized that a robust technology stack leveraging AI was the best way to augment human care teams and scale with the growth they anticipated for their business. That in and of itself is the future of healthcare, physician led advocacy that closes the physician gap and helps people live their healthiest lives, while driving lower healthcare costs.

Speaker 2

That is the company we're building. Disruption in health care in the United States at scale is no small feat. It requires an understanding that building a great business in a market with massive powerful incumbents is not an up into the right exercise. It requires perseverance and a firm commitment to a differentiated vision. The future of healthcare is clearly aligning with Accolade's view of the world, a collaborative ecosystem sharing longitudinal data to improve the total healthcare experience, lower total costs and help people live their healthiest lives.

Speaker 2

Every day, we see that vision deliver tangible results with our customers like DeVry. It's that success with customers and the continued interest of new customers and partners that steal our commitment to building our business. With that, let's talk about the quarter. We had a solid second quarter with revenue above our guided range and adjusted EBITDA well ahead of our forecast. We also generated a little bit more than $3,000,000 of cash this quarter.

Speaker 2

Steve will provide more color on the financials, but we're affirming our guidance for the year on the strength of these results and the activity within our business. Now turning to the selling season and an update on our commentary from last quarter.

Speaker 3

As we've said consistently, the selling season is

Speaker 2

a year around process, but there is still a concentration of activity in the summer and fall as employers aim to roll out new plans and services for January 1. The pipeline remains strong and we've seen a number of exciting new wins. The most exciting might have been this past month, we won a significant new deal for Second MD that was a notable competitive takeaway in the expert medical opinion space. A number of larger deals are still in flight, which is consistent with what we've seen in past years, including some deals not tied to a January 1, 2025 go live. In those situations, the customers are not as pressed to make a decision for a November December open enrollment window.

Speaker 2

There continues to be good activity across all segments, strategic, enterprise, health plans and government. Our diversification across those segments is in fact a strength and differentiator of our business. The pipeline, our win rates and the pace of discussions gives us confidence in our short and long term financial targets. Turning briefly to our comments from last quarter. As you can see from our reaffirmation of guidance, the actions we took to keep Accolade on a solid path to profitability are having the intended effect.

Speaker 2

We've made some changes in our office location strategy as noted, as well as adjusted our marketing spend to focus on the most efficient opportunities in terms of return on investment or spend. Some of those changes are already visible in the quarter's results, while others will continue to have an impact as the year goes on, particularly where it applies to integrating our tech staff or managing headcount by function or location. Importantly, we're taking steps to constantly improve the member experience and achieve the performance guarantees we set with our customers. We expect you'll continue to see the results as we march towards positive adjusted EBITDA and cash flow this year. If you model the guidance we provided last quarter for revenue growth and adjusted EBITDA expansion, you'll see a business doubling adjusted EBITDA in each of the next 2 years.

Speaker 2

So as I turn the call over to Steve, I've never been more bullish about the strength of the market we compete in, the scale and the leverage of our model and the team we have aligned to execute against our vision. We are going to stay focused on building a great and enduring business. Steve, over to you, sir.

Speaker 3

Thanks, Raj. In the spirit of your opening remarks, I'm going to keep my comments brief as well. Revenue for the quarter was $106,400,000 and above the top of our range, while adjusted EBITDA was well ahead of guidance. There were some early recognized PG revenue in the quarter, which had a positive impact on both revenue and adjusted EBITDA. Adjusted EBITDA also benefited from solid expense control, including diligent management of marketing spend that we discussed last quarter, as well as some timing of operating expenses being pushed out to the second half of the fiscal year.

Speaker 3

Aided by timing of collections of receivables and other items, we generated positive free cash flow in the quarter of approximately $3,100,000 Cash, cash equivalents and marketable securities totaled more than $234,000,000 at the end of the 2nd fiscal quarter. This puts us in a net cash position of more than $23,000,000 relative to our convertible notes and we expect to generate positive cash flow on a full year basis. To put that in context between our operating results, rigorous cash and expense management and the positive impact of our note repurchase last year, we have improved our net cash position by nearly $20,000,000 compared to this time last year. This leaves us in a strong position as we plan refinancing or retirement of our convertible notes that are not due until April 2026. Especially as we begin generating positive cash flow this year and beyond, we don't need to carry as much cash on the balance sheet to execute our strategy as we currently have.

Speaker 3

Call it a need for about $100,000,000 in total cash on hand plus access to cash via credit facilities or otherwise. Based on our market diligence, there appear to be favorable options available that will allow us to retire the debt and maintain a strong balance sheet at favorable terms to execute on our plans. Now turning to guidance. For the 3rd fiscal quarter, we are providing the following guidance. Revenue in the range of $104,000,000 to $107,000,000 and adjusted EBITDA loss between $3,000,000 $5,000,000 Note that early PG recognition in Q2 primarily came out of Q3 impacting both revenue and adjusted EBITDA for Q3 while not impacting our full year forecast.

Speaker 3

With respect to full year guidance, we are reiterating our fiscal year 2025 revenue guidance of $460,000,000 to $475,000,000 and adjusted EBITDA of positive $15,000,000 to $20,000,000 I would like to make a comment about the full year guide and revenue range. As we said before, we believe it's critical for a business our size to prove the scale and sustainability of our long term model. And to that end, we are very focused on driving to profitability as our primary objective. We are operating in a dynamic market and will continue to balance revenue growth against our profit objectives. We have consistently proven our ability to manage our cost structure and investments to meet and exceed our bottom line targets.

Speaker 3

To that point, the revenue range is a bit wider than we historically have shown at this time of the year. I remind you of our past comments about the growing contribution of usage based revenues in primary care, EMO and our trusted partner ecosystem, which are more variable based on how we choose to spend marketing dollars to drive those revenues. They can also be variable based on how health plan partners choose to go live with new customers and members. The key message is that we remain confident in our proven track record of managing the business to deliver against our bottom line goal within our revenue guidance range. With that, we'll open the call to questions.

Operator

Thank And our first question will come from Michael Cherny with Leerink Partners. Your line is open.

Speaker 4

Great. Thank you. This is Dan Clark on for Mike. Just had a question on the selling season. Can you just talk about where kind of navigation is flooding in relative to other big priorities of corporates this year, whether it's GLP-1s or anything else?

Speaker 4

Thank you.

Speaker 2

Hey, Dan. Thanks for the question. I'll grab that one, Steve and Todd. In terms of interest in the market, oftentimes things like GLP-1s will actually spawn more interest in advocacy and primary care because of the necessity for navigation in those complex care situations to be driven by primary care physicians powered by advocacy teams and driving value. And so, we continue to see trends like GLP-1s be drivers of demand for services like ours.

Speaker 2

And oftentimes I think what's unique about our opportunity in those situations, Dan, is that customers can start with primary care. They can start with advocacy or they can choose to bundle a package and go all in on everything that we offer. That makes us unique in many respects from our competition and is positive as it relates to our win rate in the markets.

Operator

And our next question comes from Craig Hettenbach with Morgan Stanley. Your line is open.

Speaker 5

Yes, thank you. Just a follow-up question on that selling season and Raj, you talked about kind of start time sometimes in January, sometimes subsequent to that. So just curious how your visibility is shaping up right here and anything else from a feedback from customers that you're hearing that's resonating?

Speaker 2

Thanks for the question, Craig. And I think that a part of what's unique about our business and the diversification that we've created over the course of the last 4 years is that our new ARR, our new business growth in our B2B segment is really driven across a multitude of channels. You're seeing that in the enterprise and strategic segment, on the employer space. You see that in the health plan business and you see it in the government business. And with each of them, deployment time frames are somewhat different.

Speaker 2

What we're seeing is resoundingly strong demand across each of the core platforms. And by that, I mean expert medical opinion, primary care, particularly in the health plan space for both of those offerings as well as advocacy and all of the associated platform connected revenues in the employer space. What we're seeing across the health plan space is oftentimes the deployment timeframes will not be January 1. They'll be later in the fiscal year or later in the calendar year depending upon their rollouts to those populations and which populations they're serving. But the positive news is really strong demand across each of those channels.

Speaker 5

Helpful. Thank you.

Operator

And our next question comes from Jayendra Singh with Truist. Your line is open.

Speaker 6

Thank you. Good morning and thanks for taking my questions. So basically I want to just take the topic of selling season. Clearly beyond GLP-one impact just in general, I mean there have been some recent developments in the employee benefits market where you've seen some vendor consolidation, maybe some pricing going on. But just curious if you're willing to share any key observation in terms of how employers have approached their benefits employee benefit this year versus last year?

Speaker 6

And have you seen any dramatic change in your competitive landscape in terms of your competitors, either direct competitors or health plans in terms of pricing offering? Any more color beyond just GLP would be helpful.

Speaker 2

Yes, of course. Of course, Jay Linder, and thank you for the question. In each of the different market segments that we play in, so let's just speak to it in the government, the strength of our relationships and the existing relationships in market give us some insulation from pricing pressures based on the long term nature of the relationships in our current service relationships in those markets. In the Health Plan segment, as you think about and the reason I answered this way, Jalinder, is because if you look at the breadth of our ARR, it comes across all three of those segments. In the Health Plan segment, we're exceptionally effective selling into partners.

Speaker 2

You probably saw the recent Celeste announcement, but also our work with Blue Shield of California, etcetera, exceptionally good at selling into those plans and then expanding the relationship post that based on the success we've had with their existing customers. Again, a relatively insulated price environment where the distribution power of those health plan partners allows us to have great access to their customer base. Finally, in the employer segment, the employers are wrestling with trend line and significant increases in healthcare costs. That's pushing employers to push on ROI guarantees in a way that perhaps is even more rigorous than it has been in the past. But fortunately, we believe leans into our strength.

Speaker 2

All ROI guarantees are not created equal. Some customers some competitors of ours or others in different categories we'll calculate those things in different ways. We've got a lot of clinical rigor and actuarial rigor associated with the way we calculate our ROI and we're quite comfortable leaning more into those ROI guarantees this year and even in last year. We do that though with a really keen eye, Jalinder, on our path to profitability and ensuring that we're signing good long term business where we can meet the needs of the customer on a long term basis. But I would say longer a shorter answer to your question because I think your question was very focused on the employer space.

Speaker 2

There's more focus on rigor associated with ROI, more focus on at risk revenues and pushing that in that direction. And we're quite comfortable going in that direction as long as the customer is willing to come along with us on the journey associated with actuarial rigor and understanding how to calculate ROI.

Operator

And our next question comes from Jeff Garro with Stephens. Your line is open.

Speaker 7

Yes. Good morning or good afternoon in Prague. Thanks for taking the question. Maybe one house keeping item before my more substantive question. I was hoping, Steve, you could give us the detail on the utilization based revenue in the quarter.

Speaker 3

Good morning, Jeff. And so usage based revenue in the quarter was similar to how it's been tracking, call it, we're running around 35% or so of the total and it comes from a few places. It comes from both on the employer or the B2B side. We generate those from EMO and VPC and partners and as well on the direct to consumer side of the business. So we're seeing that come in, in the neighborhood of in the 30s as a percentage of revenue.

Speaker 3

I think it was around 32% of total revenue for the quarter. And it continues to trend about as we've seen in prior quarters, a few dynamics. One would be, we're driving those revenues off of the Abbot City platform selling in bundles. Secondly, we are seeing EMO customer shifting from PMPM or PEPM contract over to usage based contracts. So that does both contribute to a growing percentage of revenues there.

Speaker 3

And then finally, on the D2C side, we're certainly managing those cost of customer acquisition costs as we described in the last quarter. How about you take your next question as well Jeff on the more substantive side?

Speaker 7

Yes. Thanks for providing that detail and the additional color. We've had a few questions on selling season, but maybe to ask on the kind of other side of that coin about retention. Just curious if you can give us some comments on how much of the book is up for renewal this year versus last year? And you've alluded to this a little bit in some of your comments, but would love to hear more on whether we should expect kind of another round of sorting out partners that aren't completely aligned on Accolade's value proposition and around appropriate unit economics that allow you to hit your long term profitability goals?

Speaker 7

Thanks.

Speaker 2

Got you. Jeff,

Speaker 6

I'll grab that one,

Speaker 2

Steve, and maybe you can chime in on any incremental. Bottom line is, Jeff, as we've talked about before, in the enterprise book of business, we've got a D2C business and a B2B business. In the B2B business, our contracts are typically about 3 years. And so in that context about a 3rd of your contracts are up for renewal in any given year. And as we illustrated with the Debride point, we offer exceptional value to our customers and therefore the retention rates we'd expect to be in that 90% or above range.

Speaker 2

We call that that's the number we talk about as gross dollar retention. And we'd expect that to be in that same area this year. You're correct. Over the last 2 years, we did some work around identifying customer contracts that we thought weren't consistent with our path to profitability. But we feel like we're in the next stage of our growth now.

Speaker 2

We've identified we're now in the process of growing and growing with sustainable strong new business. And so I think that stage of our business is behind us.

Operator

And our next question comes from Richard Close with Canaccord. Your line is open.

Speaker 8

Yes, thanks for the questions. With respect to, I guess, your book of business in terms of new business being government health plan and the employer side, it sounds like maybe health plan is a little bit more robust. And it sounds like it could maybe be launching at various times during the year. So how are you thinking about growth in the core advocacy as we look into the next fiscal year? It sounds like it may be a little bit softer than historical trends.

Speaker 2

Hey, thanks for the question, Richard. And I'll take we'll probably tag team this one as I can see Steve is chomping at the bit to answer at least a component of it. So let me start with this. The positive news associated with the health plan growth is that health plan growth can happen across all of the product segments. Many of our health plan partners are offering advocacy, offering primary care and expert medical opinion or offering some combination of those bundles.

Speaker 2

So there's breadth there. So just because it's health plan doesn't mean it's not going to have a positive impact on advocacy growth. That's part 1. Part 2, you're correct. They're going to deploy in cycle with their customer contracts to the degree they're going live to fully insured populations.

Speaker 2

They're going to go live based on the operational needs and the needs of their customers in those books. And while we'll have some impact on working with them as a partner on when they're going to deploy, we acknowledge that ultimately that choice is going to be left up to those plans. The great news underneath that, while we have less control of the deployment timeframes is the opportunities are oftentimes very substantive with very large populations that can have an opportunity to impact things. We haven't really given we obviously haven't given any guidance for next year's revenues per se. But I think with that color in mind, we'd expect that you're going to continue to see growth in the enterprise primary care and the expert medical opinion businesses alongside of the advocacy business.

Speaker 2

And the long term growth rates of those three businesses, which we've called out in the past remain intact. Steve, anything you'd add?

Speaker 3

Yes. I think you hit it with that last point, Rajil. We've given to a point we've hit the last couple of quarters that continued to prevail is the selling of bundled deals. So, obviously, on its own is becoming rare and rare. Customers are leaning into when you think about those ROI needs that customers have given that elevated cost environment, they recognize that advocacy is the chassis, but purchasing other elements along with it really is the bundled kind of deal.

Speaker 3

So we don't necessarily think of it as just straight up advocacy. We look at it as B2B going to market with an integrated solution. So if you look at our bookings growth over time, that's really the indication for what we think of as one of the underlying health points of the health of the business and driving revenue growth overall by increasing those platform revenues year over year.

Operator

Our next question comes from Jessica Tasson with Piper. Your line is open.

Speaker 9

Hi, guys. Thank you for taking the question. I wanted to ask just when we think about the selling season and FY 2025 bookings ARR for 20 26 conversion, kind of how much of the bookings number is guaranteed revenue or PMPM revenue versus variable? And is that kind of mix in line with the historical twothree, onethree? And then how should we going forward think about the coverage of the low end of your revenue guide versus kind of your high visibility or PMPM revenue visibility?

Speaker 9

Yes. Thanks.

Speaker 3

Hi, Jess. This is Steve. I'll start it off. So first of all, in terms of selling season this year, with it not being complete to Raj's point yet, there's still cards to be turned over. But if I look back historically, particularly over the last couple of years, more of the business has become the opportunity we have with health plans that are not the same as an employer going live, let's say, on January 1.

Speaker 3

So a bit more of the percentage is tend to lean that way as part of that dynamic. So one, you have a launch date that might be different than January 1. And 2, more of an opportunity, whether it's a hunting license to partner with that health plan to acquire customers together or to launch a program like Virtual Blue into an individual and family plan network, those can ramp over time. So that's a dynamic that persists. In terms of the ranges of guidance that we provide in terms of when you think about the PETM versus the usage based revenues.

Speaker 3

When we look at, for example, this year, the full year guide on the Q4, I'd say it's a very similar dynamic that we've had in prior quarters. We look at that Q4, there's about 30 little low 30 percent of the total year's revenues expected in there and that's driven by savings CGs, which are really PETM revenues, although we have to achieve them, they're typically measured on a calendar year basis, new launches of ARR and then finally the variable or the usage based revenues across EMO, VTC and then direct to consumer. I would say those dynamics are pretty similar this year than we've seen in last year and years prior as far as our assumptions on that range.

Operator

And our next question comes from Jared Coffs with William Blair. Your line is open.

Speaker 10

Hey guys, thanks for taking the questions. And this is Jared on for Ryan Daniels. A lot of good questions around the selling environment. Maybe I'll just ask one relative to the model. It looks like the gross margin declined sequentially in the second quarter.

Speaker 10

I assume a lot of that is related to performance guarantees, but maybe I just ask for any additional color you'd share there. And then any expectations as to how we should think about kind of the second half modeling balance between gross margin and OpEx relative to your EBITDA guidance?

Speaker 3

Got it. Good morning, Jared. So yes, the sequential decline is almost completely attributable to the fact that in Q1, we had a significant pull forward of a PG of about $6,000,000 which is really 100% margin. So if you normalize for that and look at the full year, we expect to be in approaching or coming up on 50% gross margins for the year. And so it's typical for us to be in the mid-40s upper 40s in Qs 1, 2, and 3 and then above that range for Q4 as we recognize more performance guarantee revenue, which is high margin or 100% margin in many cases.

Operator

Our next question comes from Stephanie Davis with Barclays. Your line is open.

Speaker 11

Hey guys, thanks for taking my question. I wanted to dig into that 2nd MD takeaway comment. This is now the 2nd sell in Qfin where we've had a decent amount of takeaway commentary. So first part, when you're winning the takeaways, is it generally against the narrower point solutions? Or are you seeing a mix of platform takeaways as well?

Speaker 11

And secondly, when you look at the broader selling season, are you seeing more a mix of greenfield versus takeaways in your opportunity set? Or are you seeing it kind of lean one way as you've expanded your channels like the health plan channel?

Speaker 2

Yes. Thanks for the question, Stephanie. And let's start with the second question first, because I think it's the most important. The majority of opportunities we're closing continue to be of the greenfield variety. New opportunities being created by customers who haven't yet really experienced the power of a personalized healthcare platform, who maybe in the past have been seeking those types of solutions from their carriers, but then now looking at healthcare disruptors like Accolade as viable alternatives and driving the growth of our business.

Speaker 2

That said, there are competitive takeaways. We talked last quarter about 1, we talked this quarter about 1. In one case, it was a platform takeaway and us becoming the advocacy and navigation solution, which included and ultimately a core reason for our takeaway last quarter was the breadth of our platform, the integration of that platform and the advanced nature of our technology strategy as we relate to weaving partners in that move that customer from a different vendor over to Accolade. This quarter was I wouldn't call it a point solution in that it's an expert medical opinion opportunity that gives us an opportunity to expand into other areas of their business. And so, we view every opportunity with a customer, whether it's an expert medical opinion, primary care or advocacy as the first step in demonstrating our value and then expanding inside that customer to drive what we call platform connected revenues as it relates to our P and L.

Speaker 2

And so in both cases, I think what's most important as a wrapper around the answer is in the vast majority of our new wins are greenfield opportunities because the market continues to expand on a macro basis. Where we're seeing takeaways, our customers who might have been lured by lower prices, by ROI guarantees in the past, now returning to a level of we understand what proven results look like, we understand what referenceability looks like and we're leaning into proven results like those that Accolade can deliver in any of the different solutions that we're offering.

Operator

The next question comes from Alan Lutz with Bank of America. Your line is open.

Speaker 2

Good morning and thanks for taking the question. Raj, can you expand a little bit on the DeVry relationships? It seems like they have expanded with you and obviously you talked about their low medical trend. Can you talk about maybe opportunities to use their model or what you've done with them? And what's the opportunity there to expand with your other customers that maybe aren't using the broader set of solutions?

Speaker 2

Thanks. Yes. I love that question and I appreciate it very much. I think DeVry is an incredible customer because they're so leaned into partnering with us to define a healthcare strategy for their employees on a macro basis where Accolade as the platform is a driver Accolade is a platform inclusive of the data that we collect on their behalf is a driver of their overall strategy as it relates to plan design, as it relates to partnerships, as it relates to how they're defining co pays and deductibles with their employees. All of that work in partnership with us has given them and obviously we should give credit where credit is due.

Speaker 2

The derived benefits team and HR team has been exceptional in managing trend using our platform, but also in terms of educating their employees and weaving together the right set of benefits and partners. In that context, I believe we have a role to play with all of our customers in that very same regard. And you'll see us doing that more and more with customers. DeVry's webinar, which is by the way, for those who haven't listened to it also on the Accolade website, atacolade.com is the first opportunity for us to enunciate for the rest of our customer base and for new partners or new customers down the road that we can play a broader role than just delivering the technology and personalized healthcare platform. We can actually be strategic advisors in helping you define how you want your program to work, where you want trend line to be and why you think it should work that way.

Operator

And our next question comes from Ryan MacDonald with Needham and Company. Your line is open.

Speaker 4

Thanks for taking my questions. I wanted to touch on sort of the optimization of marketing spend and as you kind of roll that into the model in practice now, sort of are you seeing any differences in utilization rates across either whether it's D2C PlushCare or platform connected revenues on the enterprise side? And then as you're going through the selling season, how are you sort of messaging, especially on the platform connected revenue side to prospective customers? And what kind of feedback are you getting from that thus far? Thanks.

Speaker 2

Yes. Let me Steve, if it makes sense to you, I'll start with that one and then you can jump in there. Let's start with the direct to consumer business. That's a week over week exercise, Ryan, of us monitoring the customer acquisition costs, acknowledging that different cohorts of customers will drive different lifetime values. And therefore, we're going to be very smart about marrying up lifetime value of a customer against customer acquisition costs.

Speaker 2

And on a week over week basis, particularly in a market like this one where there's intense competition for weight loss customers or you name it, We're going to stay disciplined as we've talked about in the past and on occasion it will impact utilization. To the degree it does, what we're finding is we're continuing to be able to attract and retain customers in that direct to consumer business at an attractive clip on the long term lifetime value of the customer. As it relates to platform connected revenues and the marketing spend associated with driving new member acquisition for platform connected revenues, which for everyone else on the call as a reminder is defined as anything on the advocacy platform, primary care visits, expert medical opinion cases or trusted partner enrollments. Oftentimes that conversation with our customers is tied in tandem with a question that we just talked about. How much trend line are we trying to drive?

Speaker 2

Where are you against what you're trying to achieve for the year? It's October. What are we trying to achieve in the back half of the year when most of your members have already gone through their deductible and are starting to consume healthcare at pace? In those situations, we're actually working in that vein, Ryan, to go to customers to share in costs. Would you like to run more campaigns into your book and help us defray some of those costs because we believe it will drive trend line value for you on a long term basis.

Speaker 2

That's a relatively new motion for us because we have so much data, we can actually point to where we think the opportunity is and where we think the spend should be allocated. But so far those conversations have been very productive with our customers. Steve, anything you'd add?

Speaker 3

Just doubling down on the health plan side of that as well, Raj. I think in the end, this is a joint effort oftentimes with us and our customer or partner. So we do our own outbound marketing, our own programs and also it's important that the customer lean in with whether it be helping us reach their members, promoting to incentives or otherwise to populations. We have that type of dynamic and the DeVry example is really a perfect one in which the titer, in this case, the DeVry is so completely aligned with believing in that these will lead to better health outcomes, but also they need to play a part in promoting and supporting the program. When that happens, we can also spend our dollars really widely in terms of stratifying population, doing outreach programs, whether they be online and or in some cases snail mail depending on the type of population.

Speaker 3

All those coming together are important to driving those revenues at an efficient rate.

Operator

And our next question will come from Stan Berenstien with Wells Fargo. Your line is open.

Speaker 12

Hi, thanks for taking the questions. If we look at the direct to consumer business, can you just comment under the hood, if we look at the demand drivers there, any changes in themes? To what extent does GLP-one perhaps contribute to the demand that you're seeing and any changes versus the last 12 months there? Thanks.

Speaker 2

Yes. Thanks for the question, Stan. I would say, given the timeframe that you just laid out in terms of the last 12 months, I wouldn't say there's any tangible change. There's ebbs and flows associated with changes in that demand cycle based on drug shortages, etcetera. But by and large, GLP-one demand has been kind of a constant in the overall flow of consumer primary care.

Speaker 2

I think most importantly in that story and you've heard it from us before, so I'll say it briefly. Most companies out there that are offering GLP-one alternatives are doing so in a very transactional drug oriented or focused model. We are a primary care service. And so customers come to us because they're seeking a primary care physician in a longitudinal relationship. In some of those cases, when they're looking for a primary care doc, they also are looking for that medication.

Speaker 2

But there's a notable difference in why they come to us versus why companies might be going to other places that are maybe more focused on acquiring customers for just the purpose of delivering GLP-one medications.

Operator

And our next question comes from David Larsen with BTIG. Your line is open.

Speaker 13

Hey, congratulations on the good quarter and delivering good trend line for your clients. Can you talk about the trusted partners ecosystem a bit more? Like what is the revenue model there? Any sense for how much revenue contribution there was from your trusted partners? And then just maybe any highlights or anecdotes, it seems to me like one of the values Accolade brings to clients is you're a one stop shop, which includes plugging in best of breeds when possible.

Speaker 13

So any color there would be very helpful. Thank you.

Speaker 2

Yes, Dave. Thank you for the question. If you think about why Accolade is so powerful as it relates to being a health platform for our customers. It's of course the advocacy service and the relationships we build our own primary care and expert medical opinion services, but also this incredibly rich ecosystem that we've woven together across a wide variety of condition oriented solutions. Sometimes people refer to them as point solutions.

Speaker 2

Those solutions have been curated with an eye towards clinical rigor, trend line improvement and exceptional service. And because we've done that curation on behalf of our customers, many of our customers, majority of our customers choose in some way, shape or form to acquire partners or to acquire those solutions on Accolade paper. Now there's a the reason they do that beyond the clinical rigor value, etcetera, that I just spoke to is we actually integrate with those solutions. And so while the industry is right with press releases about partnerships, very rarely do those partnerships turn into the level of integration that our partners have committed to with Accolade, where we're seeing a round trip or what we call closed loop reporting. We understand not only whether someone's been referred to a program, but whether they actually enrolled in the program, when they enrolled in the program, if they graduated, if that is a concept of that program and the value that we achieve from it.

Speaker 2

And we do that with the vast majority of our partners. That level of integration gets deeper each year as we align more R and D resources to building out depth with our partners. What's that allow us to do? It allows us to improve clinical engagement, to drive better ROI for the customer and in turn directly have an impact on trend line. Now that's going to be different for every customer based on their need.

Speaker 2

If you're a customer with a large diabetic population, then a particular segment of our partner solutions might be most valuable to you. The same story is true if you've got a particular challenge with musculoskeletal. Our capacity to understand your need, guide you to the right partner and then prove that that partner is exceptionally valuable through closed loop reporting and the integration we've built with our trusted partners is why we're differentiated in the market and why customers are really flocking to those solutions via Accolade as opposed to buying them independently.

Operator

And our next question comes from Jack Wallace with Guggenheim. Your line is now open.

Speaker 12

Hey, thanks for taking my questions. You called out in your prepared remarks a step up in some expenses in the second half of the year. How should we think about the bucketing and the cadence of those costs? Thank you.

Speaker 3

Hey, Jeff. Good morning. This is Steve. So a couple of things. You mentioned, I think you said the back half of the year a step up in some costs.

Speaker 3

What really what I'm thinking about there is I spoke earlier about gross margin line, we expect that to be at or right around 50% gross margin. So if you look at sequential operating expenses, we had a very favorable Q2 in terms of bottom line. We had favorable Q1. What I'm thinking about there is timing of marketing spend, primarily around direct to consumer. To Raj's point earlier, we're being very disciplined about when and to what extent we invest there.

Speaker 3

And also on the B2B side as well, whether that be marketing programs or opportunities that we see during the year, where there's some movement along those lines. So if you look at the Q3 guide, the adjusted EBITDA loss of about $4,000,000 at the midpoint, that will be consistent with that point. We had a fee in Q2. Some of that was due to the revenue comment that I made earlier, a bit of that is due to operating expenses that will move from Q2 into Q3 and Q4. And maybe just a final point would be given our focus incredible focus on profitability this year, we'll evaluate every opportunity whether that pushes to Q3 or perhaps even to Q4.

Speaker 3

That is the governor for us at this point in time to be very focused on achieving profitability within that revenue range.

Operator

At this time, I would now like to turn the call back over to Rajeev for closing remarks.

Speaker 2

We appreciate all of you being here today and look forward to our follow-up conversations And we'll talk to you shortly.

Operator

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

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Key Takeaways

  • Solid Q2 results: Revenue of $106.4 million topped guidance and adjusted EBITDA exceeded forecasts, while free cash flow was $3.1 million, leaving a net cash position of $23 million.
  • Strong pipeline & competitive wins: Continued year-round selling momentum across employer, health plan and government segments, highlighted by a key expert medical opinion takeaway with Second MD.
  • Diversified revenue mix: Usage-based services comprised about 32% of Q2 revenues, complementing PMPM contracts in advocacy, primary care and expert medical opinion.
  • Efficiency actions driving profitability: Office-location adjustments and marketing spend optimization are on track to support positive full-year adjusted EBITDA of $15–20 million and revenue of $460–475 million.
  • Customer success spotlight: DeVry University achieved just 2% medical trend over four years—versus a 6–10% industry average—by leveraging Accolade’s AI-powered, physician-led advocacy and integrated partner ecosystem.
AI Generated. May Contain Errors.
Earnings Conference Call
Accolade Q2 2025
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