Accolade - Q3 2021
January 7, 2021
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by and welcome to the Accolade Inc. Fiscal Third Quarter Earnings Call. At this time, participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference may be recorded.
I would now like to hand the conference over to your host, SVP of Investor Relations, Todd Friedman. Sir, please go ahead.
Speaker 1
Thanks, operator, and 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 Nindi, our Chief Medical Officer, will join us for the question and answer portion of the call. Before turning the call over to Rajiv, please note that we will be discussing certain non GAAP financial measures that we believe are important in evaluating ACCOLATE's performance. Details on the relationship between these non GAAP measures to the most comparable GAAP measures and reconciliations thereof can be found in the press release that is posted on our website.
Also, note that certain statements made during this call will be forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such forward looking statements are subject to risks, uncertainties and other factors that could cause the actual results for Accolade to differ materially from those expressed or implied on this call. For additional information, please refer to our cautionary statement in our press release and our filings with the SEC, all of which are available on our website. With that, I'd like to turn the call over to our CEO, Rajeev Singh.
Speaker 2
Thanks, Todd. Hello, everyone. All of us at Accolade would like to wish you a happy New Year, and thank you for joining us to discuss the results of our third quarter for fiscal year twenty twenty one. It's a busy time of year for us with the pandemic and vaccines at the front of our members' minds and a set of new customer go lives in early stages given the beginning of the new calendar year, and we're excited to report on our progress. Put succinctly, we entered 2021 in a stronger competitive position than any time in Accolade's history, and the key metrics bear it out.
Revenue of $38,400,000 and adjusted EBITDA loss of $11,400,000 were both ahead of our guidance. We raised additional capital via our follow on offering in October to further strengthen our balance sheet. The third quarter represents the end of the traditional health care selling season, and we saw record adds in terms of new customers and members. We saw continued momentum across all market segments and product offerings, further demonstrating that mainstream customers, the consulting and broker community, carriers and other partners are embracing our leadership position in this important category. In fact, less than two years ago, at the end of fiscal twenty nineteen, Accolade had 20 customers.
About eighteen months later, at the time of our follow on offering in October, we had nearly five times that number, and our momentum has continued into this quarter. Our customers are seeing tangible results and sharing their results with their peers. One customer I'll call out today is Ocean State Job Lots, who reported at two times ROI in their first year with 90 plus percent high cost family engagement and 97% customer satisfaction. Customers are also speaking about our new solutions. We hope you take a minute to go to our website where you can watch the replay of the Johnson Controls webinar where they discuss their results with Accolade COVID Response Care.
For example, they saved more than 17,000 workdays by avoiding unnecessary quarantine. On that topic, we're seeing strong traction with Accolade COVID Response Care, where we have continued to sign new customers and have launched a partnership with LabCorp Pixel to deliver COVID tests to the home. In a similar vein, initial results from our first mental health integrated care customer are showing positive trends. It is early to share the data or make assumptions, but we're very pleased with those early returns and remain enthusiastic about the impact our partnership with Ginger can have on our customers and their employees' mental well-being. On the strength of all these factors, we're raising top line guidance for the 2021 fiscal year by 3,000,000 which Steve will discuss in more detail later in the call.
More qualitatively, we see broad macro trends that are shaping the healthcare industry and impacting all companies across the healthcare spectrum. We don't need to explain to you how or why health care has become so broken in The United States. If you're on this call, you already know that because you've chosen to get to know us better and understand how we're trying to change the system. The COVID pandemic has been tragic in many ways, and it has exposed some of the worst characteristics of the industry. Healthcare is still too costly.
It is still too complex. And in too many places, it is far too hard for the average person to access quality care or get the information they need to make the right decisions. Underlying all that chaos, however, we have seen how good our healthcare system can be. Frontline workers, nurses, doctors, lab technicians, custodians, researchers, together they have all been working tirelessly to find a vaccine to heal the sick and to comfort the grieving. In our darkest moments, we've seen just how powerful the system can be when our industry comes together to solve a problem, and at Accolade, we believe that is the future of health care, and it underscores everything we do.
We believe that the future of health care must be integrated and collaborative and reimagined with the consumer or the member at the center of everything. We're investing in evidence based clinical programs to help our customers and their members choose the right care and realize the best outcomes. We understand that the best way to bend the cost curve is to embrace those principles and to focus on total population health. Because focusing on only the highest cost patients this year, like most of our industry does, doesn't help you identify and prevent the challenges of next year. And we believe that consumers have never had a greater need for high touch, empathetic benefit navigation and advocacy services and clinical programs to help them negotiate this increasingly complex marketplace.
The pandemic has elevated and accelerated the discussion about the need to fix the health care system, and Accolade is squarely positioned at the confluence of these macro trends. The distribution of the COVID-nineteen vaccine in The United States is a great example of this need. Our incredibly high engagement rates and member satisfaction levels mean we are the go to source for information in times like these, and we have an opportunity to turn tactical interactions into strategic moments. Take the example of a member calling in to find out if vaccines are fully covered by their employer. At Accolade, we turn those moments, and yes, most employers are covering the vaccination, into opportunities to answer some of the more strategic questions that members are facing.
Is it safe? Do I have to get it? What are the potential side effects? All the while increasing the possibilities to get that member to the right outcome. The need for our services clearly could not be more significant than it is right now.
It is with that backdrop that I would like to begin to address a question that many of you have asked from the time of our IPO. We were very proud to include the data from an independent study with AON referenced in our IPO prospectus that demonstrated tangible cost savings to Accolade's customers. I'm excited to share for the first time that Aon not only updated their research, but they expanded the study. They examined a broader list of customers to include those with 1,000 to 30,000 employees. The results reaffirmed what we saw in the original study.
ACCOLADE delivers tangible, measurable improvements to companies of all sizes, bending the healthcare cost curve in a material way. The rigor of the Aon study creates a strong degree of confidence that these results represent conclusions that are relevant to a broad range of employers in the market. Now for the sake of my marketing team, have to say that the full report will not be published for a few weeks now and wraps up their work shortly. But I highly encourage you to go to our website and sign up to receive the study when it's released. We're proud of the customer's results.
The 1,200 plus employees at Accolade go to work every day with a purpose passion to serve our customers' employees and their families and their businesses. Our model, integrated clinical programs, superior member engagement, measurable value to customers and partners, ability to rapidly iterate on solutions to meet specific needs, ultimately delivers better outcomes and lower healthcare costs. The Aon study quantifies those benefits and validates the Accolade vision. Here are a few of the highlights. All customers in this study saw lower healthcare cost trends relative to their control group in their first year of engaging with ACCOLADE, and see continued lower trend in the second year.
ACCOLADE lowers employer costs in many clinical categories, from mental health to diabetes, and hypertension to asthma. ACCOLADE reduces employer healthcare costs across the member population, including age groups, demographics, geography, and condition levels. That is a very high level preview of what you will see in the full report, but I encourage you to read the full report for one simple reason. If you can understand how Aon came to their conclusions and you understand the way they value validated our value proposition, then you will understand why employers choose Accolade. It is why I said at the start of the call that we are better positioned today competitively than at any other time in our history.
With that, I'd like to turn the call over to Steve to cover financials and other operating highlights.
Speaker 3
Thanks, Raj. I'm pleased to report on our results for our third quarter of fiscal twenty twenty one, which ended on November 30 and provide an update to our guidance. We generated $38,400,000 in revenue in the third fiscal quarter, representing 30% year over year growth. This is $1,400,000 ahead of the top end of the range of our guidance, which we provided during our last earnings call. Revenue growth was driven primarily by strength in new customer adds and therefore members, particularly in the enterprise and mid market segments.
Adjusted gross margin of 41.8% was roughly flat compared to 41.1% in the prior year period, reflecting investments we've made in new customer launches, including the Defense Health Agency, which launched in May. Adjusted operating expenses improved to 71% of revenues in Q3 of fiscal twenty twenty one versus 88% of revenues in the prior year period, reflecting operating scale efficiencies as we continue on our path toward breakeven. I'll revisit this point about spend during my guidance remarks. I'll Adjusted EBITDA loss in the third quarter of fiscal twenty twenty one was $11,400,000 which compares favorably to $13,800,000 in the prior year third fiscal quarter and was nearly $600,000 better than the top of our guidance from our last earnings call. The outperformance in adjusted EBITDA is primarily attributable to higher adjusted gross profit driven by the revenue overperformance versus guidance.
Turning to the balance sheet. On the strength of our IPO in July and our follow on offering in October, cash and cash equivalents at the end of fiscal Q3 totaled $418,900,000 with no debt outstanding. Our cash balance reflects $2.00 $8,000,000 of proceeds from the follow on offering, net of fees and offering expenses. Next, I'll update you on our accounts receivable balance. AR increased to $15,400,000 at the end of fiscal Q3, representing about thirty seven days revenue outstanding, driven in part by an increase associated with our airline customers.
You'll recall from our last quarter that we are working with our airline customers to help them manage their cash needs during COVID, primarily by changing their payment schedules. Both customers remain on schedule with their payments, and the schedule is designed to keep cash receipts from those customers unchanged within our fiscal year. In addition to the airline's impact, the AR balance also reflects receivables associated with new customer go lives. On a go forward basis, we expect DSO to normalize in the 20 to 30 range. Finally, we had approximately 55,200,000.0 shares of common stock outstanding as of November 30.
Now turning to guidance. For the fiscal fourth quarter ending 02/28/2021, we expect revenue in the range of 51,000,000 to $54,000,000 representing 18% growth over the prior year at the midpoint and adjusted EBITDA loss in the range of $2,400,000 to $5,400,000 For the full year ending 02/28/2021, we expect revenue in the range of 162,000,000 to $165,000,000 reflecting a 3,000,000 increase to the range previously provided, which reflects 23% growth over the prior year at the midpoint and adjusted EBITDA loss in the range of $32,000,000 to $35,000,000 And now I'll turn it back over to Raj for his concluding remarks.
Speaker 2
Thank you, Steve. Amidst incredibly challenging times, we remain focused on our mission and our vision to help every person lead their healthiest life. That single-minded focus has continued to lead to strong results for the company. With that, operator, I'd like to open the call up to questions.
Speaker 0
Thank you, sir. Our first question comes from the line of Jeff Garo of William Blair and Company. Your line is open.
Speaker 4
Yes. Good afternoon, guys, and thanks for taking the questions. I want to ask a couple of questions about the fourth quarter guidance. And I guess maybe more specifically about new customer launches and performance based fees. So first on performance based fees, you've talked about a majority of those performance based fees occurring in your fourth fiscal quarter historically.
With the visibility you have now on fiscal twenty twenty one performance, how has the seasonality of performance based fees played out during the year?
Speaker 5
Hey, Jeff. This is Steve. Thanks for the question. You're right. The cost savings based performance guarantees, we almost in every case defer and recognize those in the fourth quarter as we track and see the healthcare spend finalized in December.
And then we see that ultimate tally in January and February. And so this year would be similar to those prior years where we've deferred and would recognize those in the fourth quarter. Some customers, we pick that up along the way, but that is generally the case. That's why when you look at our P and L, you see somewhere in the range of onethree to about 35% of a year's worth of revenues occur in the fourth quarter because we're picking up those cost based revenues there. And I would say that that shape looks similar this year as it has in prior years.
Speaker 4
I know claims need to be reconciled, you know, for some time after we pass the end of the calendar year. But any visibility or degree of confidence in achieving a similar level of performance based fees compared to your annual contract value or ACV versus what you've done historically?
Speaker 5
Right. So it's certainly an incredibly unusual year in terms of the pandemic and spend. What we're seeing now remember the way that our contracts work is we generally we earn that revenue when we beat the index or we beat the market. And even in this environment in which healthcare spend decreased quite a bit immediately after the pandemic and now is rising back up as people come back into the healthcare system, Our data is showing that we are continuing to save against those indices. With all of that said, Jeff, we are maintaining some conservatism even within the guide that we're providing today because it is such an unusual year in the end of year guidance that we provided.
Speaker 4
Understood. That's helpful. One more for me. Back to the fourth quarter guidance and the impact of new customers launching on January 1. I know there's some diversification there, but you referenced it in the prepared remarks, many customers starting on January 1.
And you talked about strong customer account growth throughout the year. And I look forward to an update in a few months when you close out the fiscal year on where you end there. But in the interim, could you discuss the mix of signed customers that were live as of the end of this November fiscal quarter versus those that went live as of January 1?
Speaker 5
Sure. I can give you some color on that. One
Speaker 2
of
Speaker 5
the reasons we're so pleased with being able to provide an increase in guidance today in the midst of a pandemic is the underlying core strength of business that we're seeing. And Raj mentioned in his remarks, we're seeing strong growth in terms of new bookings across market segments, meaning size of customer and offerings. And we've had a strong bookings year. So many of those either went live in terms of open enrollment services in November timeframe or launched on January 1. And some of that uplift in our guidance relates to a strong new booking season customers that launched on oneone.
Speaker 4
Got it. That helps. Thanks for taking the questions, guys.
Speaker 5
Thanks, Jeff. Thanks, Jeff.
Speaker 0
Thank you. Our next question comes from the line of Robert Jones of Goldman Sachs. Your line is open.
Speaker 6
Great, great. Thanks for the questions. I guess maybe I know we'll have to wait until next quarter to get the ACV number and guidance. But maybe just wanted to try to get some preliminary thoughts on how you're thinking about revenue growth shaping up And maybe just to frame it a little, some of the major announcements that you've shared so far with Johnson Controls, which you mentioned, Humana, University System of Georgia, just making some rough assumptions around normal course of economics on members, employees.
It seems like you can get a lot of the way there, if not beyond your kind of long term 25% revenue growth target. So just wanted to kind of level set ahead of the specific numbers next quarter. Is there anything specific around the wins this year that would be different than historical wins? Or is it right to think that some of the wins you guys have already announced that are in the book, if you will, can really kind of set you up well against your long term targets for next year?
Speaker 5
Hi, Bob. This is Steve. I'll start. And a couple of things on that. You know, the wins from this year are very much a part of what gives us confidence in raising the guidance and the view that we're providing today for this year.
We will provide guidance for fiscal 'twenty two in next quarter. But that all said, we're really bullish on the business and the long term growth rate that we've spoken about, that twenty five percent plus kind of growth rate that we think is achievable. We do temper that a bit given the COVID environment that we're in, the fact that there are unemployment issues that given our per member per month revenue model does give us pause. It puts us in a place where we want to have some conservatism in the way we think about the numbers while we're incredibly bullish about the core underlying business. And those bookings this year that we've spoken about I think are in line very much so with the kinds of bookings we've done before from a pricing standpoint.
We're seeing it again across offerings, oftentimes with bolt ons in our trusted supplier program or COVID response care capability and so forth.
Speaker 2
Yes, Bob. This is Raj. I'll just chime in to Steve's point. The bottom line is that throughout the course of the year, we've been very consistent around the fact that every market segment and all of our core products have seen traction. And we and therefore, we've been able to raise guidance throughout the course of the year.
So we continue to see a strong demand environment. We'll obviously update guidance as it relates to next year, coming up next quarter. But the outlook and the makeup of that the types of customers signing on has been positive all year.
Speaker 6
Yes. No. No. That's encouraging. And I guess just maybe one follow-up.
You guys you mentioned the raise from the proceeds from the follow on offering, strengthened the balance sheet. Balance sheet was in pretty good shape to begin with. Anything you would want to highlight as far as just priorities in use of proceeds, use of cash as we think about where the balance sheet sits today post that raise?
Speaker 2
Steve, how about if I take a quick swing at that one and then you add on anything I missed? I think bottom line is we think we sit in a marketplace with enormous growth opportunities with a huge target addressable market and in a leadership position where we're acquiring customers across segments and across products at a rapid clip. And so strengthening the balance sheet was entirely about investment, investing in the business clearly in terms of continuing to fund that growth. And beyond that, to strategically identify opportunities where we can expand our product portfolio and or expand the types of value propositions we can deliver to our existing customers and the new customers, we're consistent against both of those objectives. Outside of that, not much more to give you, obviously, before we announce new products or new offerings or potential new capabilities, but that's where our focus is.
Okay. Great. I appreciate it. Thanks.
Speaker 7
Thank
Speaker 0
you. Our next question comes from the line of Ricky Goldwasser of Morgan Your question please.
Speaker 8
Yes hi good afternoon. My question is focused on the partnership with Ginger. Can you maybe give us some updates there and the uptake that you were seeing with both existing customers in the new win?
Speaker 2
Sure. Let me let Shantanu speak to the relationship and sort of the how it's working. I will tell you, we've acquired our first customer. We're we see we think the pipeline is very strong there, and we see significant demand. Choplin, do want to jump in and talk a little bit about how the relationship's going?
Speaker 9
Yeah, absolutely. Thanks, Ricky, for the question. You know, I think, first of all, from a demand perspective, you know, as a physician, you know, acutely aware of how much mental health, is really a crisis around the country, and I think that's being reflected in the interest that we're seeing. And I think there's also a broader recognition from the market that with a lot of different point solutions out there that I think there's a lot of interest for solutions that can know, drive outcomes and ultimately lead to cost savings. And so I think all of those are, you know, creating significant, tailwinds around the partnership with Ginger, which the whole idea was to create, you know, a solution that integrated physical and mental health with an eye toward outcomes, which we thought was pretty differentiating from how the rest of the market, in mental health has pursued it.
And so, with that, you know, the two teams have gotten into a really great cadence, starting to learn a lot from that first customer that Raj mentioned and, you know, a lot of great early indications that were having the impact that we wanted to see at the outset.
Speaker 8
So as we think about the relationship and the uptake of customer, is this sort of kind of an add on offering that we could see adding upside middle year I. That not necessarily customers bring on as they launch the program, but something that they would add on as the year progresses?
Speaker 2
Certainly, Ricky, we would expect that offerings like this one, like we saw with COVID response care this year, actually COVID response care this year, are products or offerings that are capable of launching midyear, while some of our core offerings are capable of launching midyear, as has been noted previously, many of them launch predominantly on oneone coincident So I think the short answer to your question is, yes, it's very feasible, and it will be largely dependent upon the culture of deployment of rollouts at the customers who are purchasing.
Speaker 8
And then when we think about the delta between the revenue guide, Grace, and the EBITDA guide, it seems that there's less of flow through. Can you maybe talk a little bit about the investments that you are doing and how should we think about these investments as we kind of like also update our model for next year understanding that it's too early for guidance yet?
Speaker 5
Sure. Ricky, this is Steve. Thanks for the question. A couple of things. As we raise guidance in terms of revenue and seeing a very core strong core underlying business, it's really important to us to maintain that profitability target, but not in a rush to outperform per se on the bottom line given all the opportunities we see to invest in growth.
For example, investing in distribution around sales and marketing, not just adding quota carrying reps so to speak, but also building strong relationships in channels with brokers and consultants and others in those channels the way we work with Humana for example, investing behind those opportunities to drive smart growth with attractive unit economics is how we think about it. So when you step back I would harken back to guidance we've spoken about in the past which is this idea of a demonstrable step towards breakeven as we drive attractive growth. So that idea of roughly two years out to breakeven or roughly breakeven profile is still how we think about the business. So big market opportunity, creating value by pursuing it with attractive unit economics to get to responsible breakeven type of profile over the next couple of years.
Speaker 8
Thank you.
Speaker 2
Thank you.
Speaker 0
Thank you. Our next question comes from Michael Cherny of Bank of America. Your line is open.
Speaker 10
Thanks so much for taking the questions. Pulling a little bit more on that thread relative to the EBITDA side, tying back to a couple of other questions that you addressed earlier. As you think about that future growth and you talked about the mid-20s, give or take, long term growth targets that you've had, would there be any desire I guess how would you contemplate especially with some of the new products the potential to essentially spend to accelerate that growth? Or is it more a fact of wanting to stay measured, roll out products as is and not get too ahead of your skis in terms of new customer momentum? Just trying to think about the puts and pulls on that long term trend and how you think about managing those cost investments along those lines.
Speaker 2
Steve, can I hit that from a first of all, hi, Mike?
Speaker 5
Nice to
Speaker 9
see you again.
Speaker 2
Steve, let me take that from a philosophical point and then kick it to you to add any color. From my perspective, Mike, the way we think about it, we've tried to be very disciplined consistently in terms of the way we talk about our business and the way we run our business that we see a 25% growth rate as far as the eye can see and that we're going to run the business in a disciplined fashion, trending towards that breakeven point out in fiscal 'twenty three, with the acknowledgment as well that to the degree we see growth opportunities that are more material than that 25%, that in a huge target addressable market with a leadership position, that will evaluate those opportunities and potentially and bias towards spending against those opportunities. And so to the degree we're outperforming, you're going to see us spend into that outperformance to continue that growth trajectory and continue to distance ourselves from the competition as it relates to both innovation and customer acquisition. And
Speaker 5
I think
Speaker 2
the reverse is also true. Well, you'll see us discipline from a top line and growth perspective, and you'll see us discipline from a bottom line perspective to a degree that growth doesn't materialize. Steve, do you to give it you?
Speaker 5
Yes. Mike, the only thing I'd add to that is as you see us, for example, in this quarter outperforming on the top line and pursuing those opportunities, as Raj just spoke of, a discipline towards maintaining those bottom line targets as a step towards breakeven. So we have a very, I think, healthy tension as we run the business, Mike, between pursuing growth, pursuing growth at attractive unit economics levels while we maintain that discipline to roughly breakeven. When you dig into the metrics behind our business, when we're we have longish term contracts, three year type of multiyear contracts on a PMPM basis that are very predictable, you could make a strong argument to invest even more in growth where we are today, investing in 20 or so percentage of revenue in sales and marketing. But we're doing so with a real eye towards maintaining that step towards running disciplined business towards breakeven, balanced with the growth opportunity in front of us.
Speaker 10
That's very helpful. And I guess one follow-up that Raj, you kind of gave me the opening for. You had obviously a nice selling season momentum in terms of the number of new customers added. Can you give us any sense of the push and pull you had in some of the discussions during the selling season? We hear so much from companies about basically everything is COVID, COVID, COVID and and figuring out how to return to work and all these other dynamics.
Well, you actually can help with that on that front and have a ready made solution. So I I guess as you as you sat through, whether it's that specifically or just pitching the total wares of Accolade, how did those discussions start to shape out? And how were some of
Speaker 9
the proof
Speaker 10
points really able to shine through to allow you to drive the customer additions that you had?
Speaker 2
Thanks for the question, Mike. I think if you think about us, if you rewind or excuse me, zoom out to the highest level, what Accolade provides is extraordinary relationships with members who are seeking health care but confused by the health care system. We build trust with those members. That trust yields more interactions, therefore high engagement. Because we do a good job of guiding them to the right place, we lower cost.
If you zoom out to that, there's been no more profound set of needs as it relates to health care questions and decision making that has occurred in the last twelve months with COVID and now rolling into the vaccine. So first testing, then the vaccine, and then, of course, the mental health challenges and a big bit of exacerbation in the country. And so everything that prospects have been talking about in many respects, Mike, have been things that they needed to be able to get data to their employees, start with education, move towards guidance, and then yield better results. And so in a shorter way of saying things, our entire business is built on building relationships and leveraging those relationships to drive good guidance towards better clinical outcomes and lower costs. And this year, that need has been more profound than ever.
And thus, we've been able to sit in a lot more boardrooms than we than maybe other vendors who might be more condition focused.
Speaker 3
Great. Thank you.
Speaker 0
Thank you. Our next question comes from the line of Jalinda Singh of Credit Suisse. Your line is open.
Speaker 7
Hi, thanks everyone. Just want to follow-up on the question earlier about implied Q4 guidance. Is it fair to say that around two third of that revenue is fixed? And the $3,000,000 range you have on the guidance, is that all a function of savings based revenue and operational performance revenue? Because I'm assuming that the fixed portion is pretty much locked in at this point with most of your contracts gone effective oneone.
Just curious if you can give some a little bit more color around where is the variability there? And when you say that you're building some cushion there for fiscal Q4, Is it more on the savings side or some other variables we should be aware of?
Speaker 5
Jalandra, it's Steve. Thanks for the question. Yes, you're in the right ballpark in the fourth quarter that you can think about as somewhere in the range of a third being variable based revenue. The reason when you think about what's in there, when we think of fixed revenues, think of that PMPM revenues, members times the PMPM rate. There's always some uncertainty around how many employees are going to be on the roles, so to speak, when we're in the midst of a situation like we are right now.
So we maintain some conservatism on those so that we don't get ahead of ourselves given that employers are still managing their businesses through the pandemic. And then with respect to PG's similar type of approach where we want to have some conservatism around it given the unusual environment that we're in. And so you're seeing that in the guide that we're providing today. All of that to say a lot of that uplift relates to the new customers we've booked and the growth that we're seeing and the confidence that we have in the business.
Speaker 7
Okay. And then last quarter, you talked about results benefiting from the slower hiring ramp. I was just curious that if you still continue to remain conservative on hiring even when the demand environment looks okay for you guys. Just curious like how you're thinking about that.
Speaker 5
Sure. So you'll see this year or this quarter, I should say, the third quarter OpEx as a percentage of revenues grew a bit on a sequential basis. That's the impact of us letting out the reins a bit as we came out of the initial part of the COVID pandemic back in March, April, May, and the confidence that we saw as we booked more customers, prepared for customer launches in the fourth quarter, and are seeing the demand environment remain strong. So it's always about maintaining that balance of hitting those bottom line targets and reinvesting oftentimes back into that growth as we over perform on the top.
Speaker 7
Okay. And the last question, Raj, I was wondering if you can spend some time on the competitive landscape. We have come across several digital health companies which historically focused on some point solutions or some set of services and now looking to explore the employee navigation, employee engagement services for employers. I know it is still an underpenetrated market, but do you think COVID has resulted in increased competition in this space and more interest from other players where you come across doing RFPs? Any thoughts on that?
Speaker 5
Raj, you may be on mute.
Speaker 2
Oops, I was on mute. I just gave a great answer, Jalinder. But I'll try to hit it again. First, it's great to talk to you. Thanks for the question.
When you think about the competitive landscape in advocacy, navigation, benefits and health management, I think the space has been fairly competitive for a long time with digital only providers who have attempted to solve the problem fundamentally by providing digital tools to consumers to be able to manage their health care decision making. That's proven to be ineffective for a number of years for a variety of reasons that we've outlined in previous conversations. You've also seen companies really focused on either conditions or very specific populations, high cost claimants or those who are dealing with acute conditions. I think you continue to see activity in those spaces. Those categories might choose to potentially position themselves more in navigation or advocacy, largely because that this category, navigation and advocacy, is growing really quickly, and therefore it might be advantageous to position themselves there.
But we haven't seen a material change in companies entering this space with the variety of tools needed to be able to deliver value to customers. For us, that, as you know, means frontline care teams that can build trusted relationships, clinical teams that can guide people through clinical programs that are evidence based and that lead to better clinical results, all of which drive cost savings that you're willing to sign up to right down to the dollar. So has the competitive landscape changed in that regard? No. Have we seen more companies doing the same thing but announcing that they are engagement companies or that they're navigation companies?
Absolutely.
Speaker 7
Okay. Thanks.
Speaker 0
Thank you. Our next question comes from the line of Sean Wieland of Piper Sandler. Your line is open.
Speaker 11
Thanks very much. So my question is on the recent price transparency rule for providers. And I wanted to get your sense of how you see this longer term impacting your value proposition in the care navigation space.
Speaker 2
Anthony, do want to grab that one?
Speaker 9
Yeah. Absolutely. It's it's a great question. You know? As you know, one of the most common, you know, points in someone's care journey that we help them with is is finding a provider.
And we've made a lot of investment in being able to personalize that that that decision and help match people to the best provider for them. I think for us, the new transparency rules is is actually really exciting. So I think what that allows us to do is have, even more granular data that we can use in concert with other data. I mean, we know as a patient, price is important. It's a critical input into a decision, but so is the quality of providers, so is the appropriateness of the care of the provider, so is the safety and quality of the facility that they're in.
And so we look at it as really, additive to what we're able to provide, which is we're able to combine multiple data points together, including price transparency data, and deliver that in a way that consumers can understand and actually help them, you know, make that right decision for them and ultimately get the better health outcomes. So, we're very bullish on the new regulation.
Speaker 11
That's great. Thank you. And then, I just wanted to, check-in again on the airlines. They announced that they were bringing back some of their furloughed employees. Did that have any impact on your guidance?
Speaker 5
Sean. This is Steve. I would say a little bit, but not a lot. Certainly the majority of what you're seeing in the guide is the underlying business launches on oneone and so forth. The airlines we maintain conservatism around in the fourth quarter primarily because it's not clear exactly when and how many of those employees come back and just the overhang that the airlines are obviously still, you know, punching through a a low travel environment.
So we're we're maintaining some real rational conservatism there.
Speaker 11
Okay. And, Steve, you said that that you're managing cash collections for the airlines to be flat for the fiscal year. Is there any kind of catch up payment that is planned for next fiscal year?
Speaker 5
We don't comment specifically on customer contracts, Sean, but I would say this, that, that was primarily meant to address the acute situation of the pandemic and to keep, any the changes in the contract, try to keep that inside the fiscal year. So otherwise, those relationships continue to be strong and those contracts are the way that they're originally structured.
Speaker 11
All right. Thanks very much.
Speaker 5
Thank you.
Speaker 0
Thank you. Our next question comes from the line of Matthew Gillmor of Baird. Your line is open.
Speaker 12
Hey, thanks for the question. Maybe going back to the Aon study, I was curious if that was specific to total health and benefits or to some of the other products. And then more broadly, is this a segment of the market, the smaller employers? Are they more sensitive to studies like this? Or is it a similar dynamic to the prior study for large employers in terms of the importance from this?
Speaker 2
Anthony, do want to grab that one?
Speaker 9
Yeah. Absolutely. It's a it's a great question. We we love talking about that study. You know, I think on the first, yes.
This is, this is a total health and benefit customers, and that's really a function of the fact that we wanted to do the most rigorous study design possible. And so what that meant is we wanted to have a baseline year. We wanted to go look at, customers at one year and look at them in two years. And so just in terms of where the business was two years ago, the preponderance of our customers were in total health and benefits. In terms of your second point, I think it actually ties to the earlier, question about competitiveness too.
I think where we are today, with different navigation services out there, I think the market's matured to the point where ultimately what they care about is cost and outcomes. And that's extremely difficult to achieve in health care, as you know. And so for us, I think the Aon study is significant competitive differentiator, right, because it allows us to say that independently through a very rigorous study design, we're able to demonstrate, you know, significant and sustained cost savings. We think that's difficult to replicate, frankly. And it's important to all sizes of customers because ultimately, one of the greatest challenges that small customers, large customers facing is the significant cost.
And as we're looking at the next year and seeing predictions of potentially another double digit year in terms of a cost trend, we think that's going to be of critical importance to all sorts of customers.
Speaker 12
Okay, great. And then, I guess I wanted to ask about the TRICARE contract. I know in the past you said that implementation has gone really well. I was hoping you could remind us, about the process that they'll go through to determine when to potentially expand the number of lives you're supporting. Does that take place in calendar twenty twenty one?
Or is that further out?
Speaker 2
I think the best way to think about that this is Raj again. The best way to think about that is we need a measurable period upon which we can demonstrate value associated with the agreed upon measurables for the contract. Those agreed upon measurables for the contract, just to take one step back, look fairly similar to the types of performance guarantees and incentives that we've educated the market on as it relates to our consumer customers or excuse me, our commercial customers. That deployment really went live in the early part of this year, in May excuse me, the early part of last year, calendar twenty twenty. We would expect that we need at least a year, potentially a little longer, to be able to show the effects of all of the capabilities that we deliver to those consumers.
And then claims run out against that year or potentially longer. So we don't have an exact time frame where the government will make that decision. We would expect it would be in late twenty twenty one calendar or early calendar twenty twenty two. We continue to I've given you more color commentary on where we are. We continue to expand to the growth side of the population in terms of members engaged, and we continue to see really strong results as it relates to engagement levels within those populations as well as satisfaction levels.
Speaker 12
Great. Thanks a lot.
Speaker 5
Sure.
Speaker 0
Thank you. Our next question comes from the line of Hannah Blade of D. A. Davidson. Your question, please.
Speaker 13
Hi. I first wanted to ask a bit of a follow-up on the price transparency rule. Obviously, the rule itself will not change the impact of high prices and overall spend levels or your overall consumer demand. But do you have any concerns that more consumer friendly price menus may impact the number of annual encounters you have with your members?
Speaker 2
Jonathan, do you wanna grab that one?
Speaker 9
Yeah. It's it's a great question, Tatiana. You know, I think for us, the decision around making, choosing a provider is an incredibly complex and personalized decision. Right? I mean, I think all of us have been in that position of trying to find a doctor, and and and price and cost is certainly a critical input.
But we do really look at it as just one input. Right? And a lot of care decisions as a consumer, you may want to pay for a higher cost, provider if there's a commensurate increase, in value that you can get in terms of the quality or the complications that you're going to face. And that's what we see, and that's what our record has been with serving these members is that what's really missing is not necessarily a single self-service tool, but it's the ability to integrate disparate pieces of information and deliver it in a personalized empathetic way that ultimately is what our consumers are looking for and ultimately what drives the greatest value. And so we don't anticipate that this alone is going to, decrease the engagement that we see.
We think it's gonna continue to be able to strengthen what we can we can, deliver to our members.
Speaker 13
Awesome. Thanks. And just one follow-up. When thinking about that initial PMPM rate, on a customer land, how does that vary when Accolade is replacing other solutions versus a Greenfield customer? Thanks.
Speaker 7
Way to think about
Speaker 2
sorry, go ahead, Steve.
Speaker 5
Sure. Sorry, Raj. Hannah, this is Steve. So the way to think about that is, generally speaking, if you think about total health and benefits we're oftentimes replacing member services, provider services and clinical services that the health plan is providing. And so there is some potential for savings there.
But the way to think about it really that we think about it with our customers is in terms of the ROI that's generated. And you harken back to that Aon report and the returns and the savings that we're generating for customers is, we think of it in that way, the return on the PMPM, fee that the customer is investing.
Speaker 13
Great. Thanks, guys.
Speaker 0
Thank you. Our next question comes from the line of Richard Close of Canaccord Genuity. Your line is open.
Speaker 14
Great. Thank you for the question. Maybe a follow-up on Mike's questions on client discussions. Raj, I was wondering if you could talk a little bit, give us some insight in terms of maybe how discussions with potential customers changed from the beginning of the year to the end of the year and how it maybe compared to past years, what they were mainly focused on. And I think you said demand, overall demand is accelerating.
Is there any way or any metric you can provide to sort of quantify that?
Speaker 2
First off, thanks for the question, Richard. The let me start with the beginning, and I'll and with the early part of the question, which is how are the conversations evolving over the course of the calendar year and perhaps really even from years previous to a pandemic year like the one we have this year? By and large, what I would say is for sure is by segment, we saw in the middle part of the year, as we were hitting the heart of the pandemic and the first wave of the pandemic, customers were very, very preoccupied, understandably, with COVID, COVID testing, access to care and an understanding of how to keep their employees safe. Our immediate response to that was not only Accolade COVID response care to help people return to work, but also a set of clinical programs available to all of our customers to help them manage their employees' employee education and access to care, etcetera. Beyond that, the conversations have continued to then move into a sense of what population health looks like for 2021.
I think post the first wave of the pandemic, the conversations moved into we believe that costs are potentially depressed in 2020. In 2021, to the degree of the return, how can we manage that? Again, an area where we think we can play a really significant role for prospects and customers as it relates to engaging in total population health management via risk stratification of clinical programs. Today, it's a little early to tell, with the second wave upon us and the
Speaker 3
vaccine upon
Speaker 2
us, where the conversations will lead us. We do know that they're growing as it relates that the conversations continue and that our relevance continues to be really, really high. Last point, I think, Richard, as it relates to any metrics we could guide you to, I think we're really focused on growth in each of the core market segments and across each of the core products. We'll update guidance next quarter for in terms of where we are from an ACV perspective and our expectations for the next year. Beyond that, I think it's more a qualitative view on the continued strength of the business as evidenced by the top line growth of the company.
Speaker 3
Okay. That's very helpful. And if
Speaker 14
I can slip one in for Steve. Appreciate the comments on the visibility and with respect to performance fee. And I think we've discussed previously about two thirds of performance fees are based on operational metrics, maybe the Net Promoter Score, engagement and customer satisfaction. I would think that you performed very well on those engagements during COVID. Is there any insight you can provide in terms of how that has trended during the year?
Speaker 5
Sure. And thanks for the question, Richard. Good to talk to you. First of all, you're right that of the variable revenue or performance based revenue, about two thirds of them are operational types of performance guarantees like engagement rates, consumer satisfaction as measured by NPS or CSAT, engagement of families and membership. Those have trended very well during the year.
Obviously, it took a different shape and way that that happened from the beginning of the year when COVID first hit to where it is today. But all along, we've been helping members and those have borne out through those kinds of operational PGs. Then as it relates to the other part, the cost savings PGs, those are primarily measured in the fourth quarter contractually in determining the dollar amount that we earn. But we're able to track them as we move through the year. And I would say we've got good visibility baked into the guidance that we provided as it relates to those PGs.
Speaker 3
Okay. Thank you very much.
Speaker 0
Thank you. Our next question comes from the line of David Grossman of Stifel. Your line is open.
Speaker 15
Good afternoon. Thank you. I want to go back to some of your prepared remarks, and maybe I didn't catch this right, but I thought you said that ramping new business could be a temporary drag on gross margin. And I just wanted to make sure I heard that right. And if I did hear that right, maybe you could perhaps better, you know, help me better understand that dynamic.
Speaker 5
Sure. Hi David, it's Steve. When you look at one way to think about that is you're right, in October, November and going into December and January '1 go lives, we're certainly investing in launching new customers. Part of that is staffing up. You'll see historically our fiscal third quarter which includes that October, November timeframe, gross margins do compress a bit.
That's reflecting the staffing up for those oneone launches. And part of what you're hearing from us in the fourth quarter guide, not only strong top line but also investment in those new customer launches to ensure that they go really well while we also invest in growth parts of the business for new business around innovation and sales and marketing. That's a bit around the dynamic that we see in third and fourth quarter.
Speaker 15
Got it. Thanks for that. And then another question just about the business model. I'm curious whether you can give
Speaker 5
us a sense
Speaker 15
of how much automation the market and the model can tolerate as the business matures and where we are in that journey, particularly in the large company segment. Is there some kind of curve that it follows as you get to know these clients better? Or I know it varies by customer size, but is are there any other factors we should consider as we think about how many you know, kind of physical interactions you will have versus how many will be automated over time?
Speaker 5
I'll start on that. Raj, if you'd like to chime in. Yeah. There are a couple of ways we think about that, David. And I step all the way back to our model at its core, which is we believe very strongly that the engagement of members and getting them to the right health outcome is important to combine that clinical expertise, the empathetic touch along with the technology and innovation behind it to help it scale.
And we're constantly balancing those and investing in that. As customers mature, for example, we see mobile app interactions and self-service interactions increase as customers get to know us better. So there is that efficiency built into customers as they mature with us. But as we introduce more offerings and continue to add on to that relationship, it's kind of a constantly moving target across customers. But there certainly are those kinds of efficiencies that can happen with customers as, we grow with them.
Speaker 2
One last point because I know we're running out of time. Just a quick addition to that. As we add interactions with customers and add data about those customers from the various data sources, we're able to better risk stratify those populations and then therefore prioritize and guide them to the right programs in a highly prioritized risk stratified fashion. And that might be the in addition to the technology levers that Steve mentioned, the single biggest drivers of long term step functions from a margin perspective.
Speaker 0
Our next question comes from Stephanie Davis of SVB Leerink.
Speaker 13
Hi, this is Joy Zhang on for Stephanie. Just wondering if you can talk about if there were any levels of revenue reserves going to the quarter and was any of that reversed?
Speaker 5
Hi, Julie. Meaning with respect to the third quarter and if the rest beat is your question, I think beating the guidance
Speaker 2
that
Speaker 5
we provided was multifaceted. Some of that was related to stronger membership growth. So you can make a point that we had a level of conservatism that fortunately showed up better even than we had in our model. So there are elements there where we outperformed in terms of just membership. Reminder that we have a very diversified customer base across industries.
So where we do see some industries under pressure like the airlines, those are well made up for from customers in retail and technology and financial services. So there was certainly some of the beat there. Other parts of the outperformance came from new offerings like COVID Response Care that Raj spoke about and Accolade Boost and some trusted supplier upsells in period revenues. And then finally, just continued strong performance on the PGs and the operational, performance guarantees as we just talked about on a question or two ago.
Speaker 13
Got it. Thank you. And as a follow-up, can you provide any color on what the current mix of airline, revenues are and what the mix of Comcast is?
Speaker 5
The so airlines and Comcast, was that your was that your point?
Speaker 13
Yes.
Speaker 5
Yep. So, you'll you'll see references throughout, our 10 Q about major customers that those percentages are roughly consistent quarter over quarter. You saw Comcast top back up, our largest customer, in line with expectations. But nonetheless, the big trend is that as the business grows, each single customer becomes less a percentage of our total revenue, which is obviously healthy from a diversification standpoint. So that trend, continues, and we expect it to continue into the future.
Speaker 13
Got it. Thank you.
Speaker 5
Thanks.
Speaker 0
Thank you. Our next question comes from David Larson of BTIG. Please go ahead. Mr. Larson, your line is open.
Please make sure you're not muted.
Speaker 16
Sorry about that. Congrats on a good quarter. With the revenue growth of 30% this quarter, I mean, it seems to me like 25% growth longer term that might be a little bit conservative. I mean, I'm just thinking about fiscal twenty twenty two. The variables in my mind are people going back to the doctors' offices and claims sort of catching up from the delayed care that had happened over the past year?
And then also the labor markets, can you maybe just talk a little bit about that? Do you need to see a significant improvement in the labor markets to meet that sort of 25% growth in revenue bogey? And then with the claims sort of catch up, assuming that does happen, in your minds, is that a potential tailwind or a headwind or a neutral? Thanks.
Speaker 5
David. It's Steve here. So a couple of things. Obviously we're pleased with a 30% growth rate in the third quarter. And I understand your underlying point.
We'll come back with future guidance. Importantly, I don't think we're dependent upon, you know, very discrete or specific employment factors into that long term targeted growth rate of 25%. What we're looking at there is very early stages of an extremely large market in which, most recently reported just under 100 customers against a market of 20,000 plus opportunities. That's where that growth comes from, that strong demand environment that Raj was speaking to. That's what gives us confidence in that kind of 25% plus growth rate opportunity.
And then with respect to claims catch up, we view it as more neutral because our contracts are generally structured that our costs need to do better than market. So whether spend environments are lower like they were this year or higher, like we all expect them to be next year, the Accolade service ought to show up just like the Aon study we talked about earlier will describe that we do better, materially better than the market because of our model. I think that's the takeaway for us. It gives us confidence in the strength of the business and the opportunity in front of us.
Speaker 16
Okay. One more really quick follow-up. Assuming claims costs do come in significantly higher in fiscal twenty twenty two relative to fiscal twenty twenty one and assuming that you can provide, you know, the typical percent cost savings, might that result in higher sort of performance fees in fiscal 4Q 'twenty two? Or is that not how the contracts are structured?
Speaker 5
Generally not, David. There is a cap on them. We do that. We think it's smart. Our customers appreciate it.
They want to know how to budget for the service. So there isn't this unlimited upside in the contract. Our view is continuing to provide that value, really strong ROI for customers that will result in high, returns for the customer and which should show up in retention and new customer acquisition.
Speaker 16
Okay. Great. Thanks.
Speaker 0
Thank you. At this time, I'd like to turn the call over to Ranjeev Singh for closing remarks. Sir?
Speaker 2
Thank you, operator. We appreciate all of you being here and tuning into our Q3 update. We look forward to talking to you next quarter and looking ahead to fiscal 'twenty two. Thanks very much.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.