Accolade - Q4 2023
April 27, 2023
Transcript
Speaker 0
Day and
Speaker 1
thank you for standing by. Welcome to the Accolade 4th Quarter 2023 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 session. Please be advised, today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Todd Treatman, Head of Investor Relations, please go ahead.
Speaker 2
Thanks, operator. Welcome, everyone, to our fiscal Q4 earnings call. With me on the call today are our Chief Executive Officer, Rajiv Singh and our Chief Financial Officer, Steve Barnes. Shantanu Nandy, our Chief Health Officer, will join with the question and answer portion of the call later. Before I turn the call over to Rajiv, please note that we 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 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 or 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, Rajiv Saini.
Speaker 3
Thanks, Todd, and thank you everyone for joining us as we kick off fiscal 2024 at Accolade. It's an appropriate moment to acknowledge that today's Accolade is transformed from an advocacy and navigation company to a personalized healthcare company that delivers exceptional high quality healthcare to our 12,000,000 members across the country. We're unique in that we offer exceptional service powered by our frontline care teams And technology, clinical outcomes driven by our primary care physicians, therapists, nurses and pharmacists and an open platform that makes our partners and the brick and mortar healthcare system far more effective. We're building a customer focused nationwide healthcare company from those unique assets and we're excited about the future. Today's call marks the end of a transformational year for Accolade and the start of the next phase in Accolade's evolution.
In fiscal 2023, we delivered over 30% growth in ARR booking, Over 30% revenue growth in our virtual primary care offering, achieved our revenue and adjusted EBITDA targets and ended the year serving more than 800 customers and 12,000,000 lots. We've diversified our business across customer size and verticals, across solutions and across distribution channels. And given the strategic actions we made at the end of February, we enter fiscal 2024 with a more streamlined organization operating as one accolade that is materially closer to achieving positive cash flow. At a high level, here's what we learned in fiscal 2023. The market for personalized healthcare solutions remains strong and the demand environment shows no signs of weakening in spite of the broader macroeconomic environment.
Core to the differentiation of our personalized healthcare suite is the diversity of our offerings as a substantial portion of our new customers opted to buy more than one of our solutions. Our solutions are differentiated and drive high win rates as demonstrated by adding a significant number of new customers, including a large public university, a major hospitality company and one of the world's largest consumer brands. Our customers trust us and value our solutions as evidenced by the expansion of our relationships with many of them this year. And innovators and disruptors in healthcare view us as a differentiated platform, as demonstrated by the growth of our trusted partner ecosystem. At the outset of the year, we believe that these data points would emerge.
Today, we can state them as facts. Now, let's focus on our outlook for the next fiscal year and also give you a preview of what we plan to cover at our Capital Markets Day on May 8. We spent the last 18 months working hard to integrate the 3 solutions that we acquired. Those efforts have produced great results with a more unified customer experience and a strong customer reception to our vision for an integrated personalized healthcare offering. While we've been focused on integration, we've also spent that time allowing the businesses to run independently in many respects.
The rationale was very simple. We wanted to study and understand the businesses, retain critical talent and map out the logical integration points and synergies thoughtfully. Having accomplished those objectives, on February 28, we announced that we're bringing the various teams together under a single unified structure, 1 product organization, 1 clinical organization, 1 care delivery organization, 1 accolade. This is already having the effect of streamlining decision making and accolade and improving our operating structure as we scale to serve 100 more customers and millions more members. The common thread through every stage of our growth continues to apply today, a single-minded obsession with the member and the customer.
Steve will provide more detail later, but today we quantified our earlier statements about the improvement in adjusted EBITDA. Our updated guidance today shows that we Cut our expected loss in half this year thoughtfully with a strategy that allows us to execute well and serve our members and customers with extraordinary quality. Strong new bookings in fiscal year 2023 give us excellent visibility into fiscal year 2024 and beyond. For those of you who are new to Accolade, our initial contracts are typically 3 years. So our 33% growth in ARR bookings gives us good visibility into our current year revenue as well as a solid preview for fiscal year 2025.
Our confidence regarding achieving positive adjusted EBITDA as a business is extremely high. Looking ahead, The momentum we saw last year appears to be continuing in the current year, both in terms of the size of the pipeline and our P flow, as well as general market interest from both prospective and existing customers. The pipeline is larger now than it was at this time last year. Another notable item is the ramping interest in our trusted partner ecosystem from our current customers as well as prospects. We'll spend more time on this at Capital Markets Day, but new and existing customers and partners are recognizing the value of Accolade as a distribution channel and enabling partner for important healthcare innovation.
Perhaps more importantly, this is further evidence of the incremental value we drive via integration of best in class clinical solutions with our open platform, combined with our frontline care team's ability to deliver a high level of what we call Good utilization. In short, the demand for our services remains strong. The value we provide the companies in terms of ROI and cost savings And to their employees and their families via improved healthcare outcomes and lower costs continues to drive our value proposition and our pipeline. Additionally, we're especially excited about the growth we're seeing in virtual primary care. It's worth noting that while we may deliver primary To both commercial customers and directly to consumers, we view our primary care business as a single offering.
It is the same physician base, same customer platform and same member experience across the board, whether a patient comes to us directly as a consumer, through an employer or via a health plan partnership. Finally, it's become a hallmark of our business Our rapid diversification has provided numerous factors for growth. We're seeing opportunities to drive growth across all our distribution channels, Commercial, Health Plan, Government and Consumer. Now, let me give you a preview of our May 8 Capital Markets Day. When Accolade went public nearly 3 years ago, I wrote these words in our IPO perspective.
Strategic executives have long appreciated that the health and well-being of their employees It's something they must care about and invest in. Today, employee health and well-being is a business continuity issue. Employers can't afford to overlook it. Employers must give employees and their families trusted clinical guidance and personalized support to help them live their healthiest lives, physically, emotionally and financially. In 2020, when we published that perspective, Accolade was a navigation and advocacy company with $132,000,000 in revenue and serving roughly 50 customers.
We would become the 1st publicly traded navigation company. Today, we're forecasting FY 'twenty four revenue had approximately 3 times that level. We have more than 800 customers representing 12,000,000 lives and we are a fully integrated personalized healthcare business. Over that 3 years, the market has sought to identify the categories that will thrive in a difficult economic environment and beyond and the companies that will lead those categories. On May 8, Las Vegas, you will hear why personalized healthcare is the future of healthcare and why Accolade is well positioned to lead a massive new category as the 1st nationwide healthcare delivery company obsessed with the member experience.
Healthcare is a $4,000,000,000,000 market and yet you would be hard pressed to name many healthcare companies that are defined by their obsession with delivering extraordinary customer experiences. In other categories, companies like Chick Fil A, USAA, T Mobile and Zappos lead based on their single-minded focus on customer value. We're building that type of customer focused company in healthcare. On May 8, we'll explain what it means to be obsessed with the member experience in healthcare and how our unique blend of technology and humanity, what we call engineered care, is the right approach. We'll share new product demos and data points that demonstrate the ROI we deliver, both from a health and cost outcome perspective.
And we'll talk about the growing contribution and strategic importance of our primary care offering, as well as the increasing collaboration in healthcare and how we're building our ecosystem. We will dive deeper into our business model And as a real highlight, we'll be featuring a number of our customers and partners to help tell the story of the future of healthcare. We hope you can join us in Las Vegas or on the webcast. Reach out to Todd Friedman if you have any questions. Now, I'm going to turn the call over to Steve to review the financials and share our year end metrics.
Steve?
Speaker 4
Thanks, Raj. First, I'll recap the results for the Q4 of fiscal 2023 and then provide some details on forward guidance for the Q1 and full year for fiscal 2024. We generated $99,000,000 in revenue in the Q4 of fiscal 2023. Revenue highlights in the Q4 included the impact of new customer launches on January first. Whereas a year ago, we served more than 600 customers and 10,000,000 members, today we have more than 800 customers, representing more than 12,000,000 members.
Of that growth, many of our new customers launched on January 1, 2023, And the number of customers with more than one of our core services, advocacy, expert medical opinion and virtual primary care has more than doubled since this time last year. We also saw in the 4th fiscal quarter continued strength in our virtual primary care offering. Fiscal Q4 adjusted gross margin was 50 point 5% compared to 54.4% in the prior year period. The primary factor impacting the year over year comparison With the timing of performance guarantee revenues, which typically yield higher gross margins. In fiscal 2023, we Recognize a larger portion of PG revenue in the 1st 3 quarters of FY 2023 in comparison to the prior year.
Adjusted gross margin for the full fiscal year of 2023 was up slightly year over year. And adjusted EBITDA in the Q4 of fiscal 2023 was $2,800,000 representing 3% of revenues and an improvement compared to $1,800,000 2% of revenue in Q4 of fiscal 2022. For the full year, this translates to revenue of $363,100,000 and an adjusted EBITDA loss of $36,500,000 both in line with our guidance. And as a reminder, the Comcast contract ended at the end of calendar 2022. So when you adjust for that customer, our revenue growth in fiscal 2023 was north of 20% on a pro form a basis.
And turning to the balance sheet, cash and cash equivalents totaled $321,000,000 at the end of fiscal 2023 and accounts receivable DSOs were in line with prior quarters at about 24 days revenue outstanding. Finally, we had approximately 73,100,000 Now before we hit on forward guidance, Allow me to reiterate that we had a very strong selling season in fiscal 2023, as Raj noted earlier and in our January call. We signed $72,000,000 of ARR bookings in fiscal 2023, representing approximately 33% growth over fiscal 2022. That success is the foundation of our revenue growth forecast for fiscal 2024 and is already forming the basis for additional growth in fiscal 2025. In addition, let me touch on the 2 annual metrics that we've shared historically.
1st, ACV or annual contract value was $309,000,000 at the end of fiscal 2023, which compares to $286,000,000 at the end of fiscal 2022. If you exclude the impact of Comcast, dollars 309,000,000 of ACV represents about 20% growth over fiscal 2022. And gross dollar retention was 87% for the year. But again, if you exclude the impact of Comcast, pro form a GDR was 96 percent for the year, consistent with our historical trends in the mid to high 90s. Now turning to guidance.
We're updating our guidance today for fiscal year 2024 as follows. We start by reiterating that fiscal 2024 revenue will be approximately $410,000,000 representing year over year growth of approximately 13% or 20% excluding the loss of Comcast. For some color on the $410,000,000 of revenue, we expect that growth in our advocacy offering revenues We'll approach 20% excluding the impact of Comcast. Growth in our virtual primary care offering is expected to be more like in the mid-20s and EMO in the 20% growth range. We have strong visibility to these growth rates based on our ARR bookings in fiscal 2023, along with retention and expansions with existing customers, both of which are reflected in the ACV number, as well as continuing momentum in new bookings for fiscal 2024 and with PlushCare, our consumer channel for virtual primary care.
Regarding the T5 contract, the TRICARE pilot and our autism care demonstrations, we view these arrangements in aggregate as our government sector And expect those government revenues to collectively grow on a year over year basis in fiscal 2024. With respect to profitability and cost structure, as we noted in an 8 ks on February 28, we recently took some Strategic actions to realize cost synergies via workforce reductions associated with integrating our offerings. With those changes, we are meaningfully improving our forecast for adjusted EBITDA loss for fiscal 2024 to a range between 2% and 4% of revenues For $8,000,000 to $12,000,000 representing an improvement of about 50% from our prior guidance. With respect to the 1st fiscal quarter of 2024, we are providing guidance today of revenue in the range of $89,000,000 to $91,000,000 And adjusted EBITDA loss in the range of $15,000,000 to $18,000,000 As this is the first time we're providing quarterly guidance for fiscal 2024, I'd like to call out a couple of notes to help you with your models for the rest of the year. First, I'll comment about Q1 revenue and adjusted EBITDA.
You'll recall that last year in Q1 of fiscal 2023, we noted some expected PG timing that benefited revenue, gross margin and adjusted EBITDA. When you normalize for that impact of PGs and Comcast, our Q1 revenue forecast represents about 20% growth year over year. Additionally, the cost actions that we announced on February 28 will have much less of an impact in Q1 and they aren't fully realized in our model until the second half of the year. As such, the Q1 adjusted EBITDA guide includes a higher level of OpEx and we expect future quarters of the fiscal year to average for the remainder of 2024. Looking at the quarterly revenue trend for this year, We have consistently noted that it's important to look at the full year.
Timing of PGs on a quarterly basis is more difficult to predict, which is why we take a conservative view on timing of PG revenue achievement at the start of the year. Our level of annual PG Payment has been relatively consistent historically, and we expect the current fiscal year to be in line with our historical PG performance. As such, we generally model for higher PG recognition in Q4 and are making a similar assumption this year. If you were to normalize PG revenue recognition for historical periods, you would see a consistent growth rate in Q1 to Q3 and then a bump in Q4 as new customers come on board typically on January 1. And this year is no different.
Now with respect to our balance sheet, as I noted last quarter, our convertible notes are not due for 3 years. So with $321,000,000 cash on hand, We have more than adequate liquidity to achieve our financial plans without going back to the capital markets, placing us in a strong position to execute against our objectives. In conclusion, we very much look forward to our Capital Markets Day on May 8 in Las Vegas. In addition to the points Raj noted earlier, At the event, we'll provide a more in-depth view of key items driving our financial profile, including our growth opportunity, Plans for continued gross margin expansion and profitability and overall scaling the business. And we'll go deep on the business and financial drivers behind why we We continue to believe passionately in the strength, depth and breadth of the platform, the diversification of our offerings, revenue streams and customer base, and that we have an engine built for growth and sustainability, which will ultimately drive significant cash flow.
With that, we'll open the call to questions.
Speaker 1
Our first question comes from Ryan Daniels with William Blair. Your line is open.
Speaker 5
Yes, guys. Thanks for taking the question. Raj, one for you. I thought it was interesting that you talked about how you took some time to study the acquired assets and Sure, appropriate integration and that's what led to the restructuring and integration at the start of this year. So I think we appreciate The cost reduction and the improved or markedly improved EBITDA, I'm curious though if you can go a little bit more into the operational excellence and go to market strategy and value proposition for clients that, that greater integration should also allow.
Speaker 3
Yes. First of all, great to chat with you again, Ryan, and thanks for the question. If you were to think about the way we Talk to our personalized healthcare suite. We're really looking at an integrated healthcare delivery vehicle. The idea that Every element of our suite builds off of and adds complementary value to the other.
And so let me put that in the context of In advocacy interaction with a member, where the member is seeking to find a physician to address a condition that they're wrestling with, Our capacity in that moment to move from identification of an issue, triage, To a scheduled appointment with a physician in the next 15 minutes, to a resolution and a prescription of downstream care using our primary care service to lead to a physician search, Post that to find a specialist, all happening in one transaction that occurs within 15, 20 minutes of the first outreach accolade It's a representation of how advocacy can build up can be built off of into primary care and into our specialty care service. Capacity to deliver that integrated service is really what we're most excited about and what we think our clients are most excited about. One of the things I referenced In the prepared remarks, Ryan, with the idea that our clients last year who purchased our advocacy solution Also purchased one other solution or more from us in the last year. That's a reflection of both the differentiation of our value proposition and the differentiation of the integration of the services.
Speaker 1
Thank you. One moment for our next question. Our next question comes from Michael Cherny with Bank of America. Your line is open.
Speaker 0
I apologize, I'm going to have kind of 1.5 questions. Maybe the full question is, as you think about the cross sells you had and And pretty impressive number on the amount of customers that has more than one solution. What does that mean in terms of how pricing has evolved for your business and what the PMPM looks like And again, just one quick technical question for Steve. I don't believe you're guiding to cash flow positive in This year, I just want to make sure nothing's changed about when you expect to get cash flow positive. So thanks so much.
Speaker 4
Mike, good to talk with you and we'll give
Speaker 3
you the 1.5 questions and I'll start with the beginning of the answer and then Steve will chime in and hit the free cash flow question answer as well as anything you want to add to incrementally at price 16. One of the things that we're most excited about the business is this idea of this integrated offering is the capacity to offer pricing models that customers find the most valuable and meet the customer where they'd like to be. And so as an example to that, Mike, We're seeing very consistent pricing in the advocacy or advocacy navigation offering space. Those price points have remained relatively consistent and The makeup of those transactions in terms of the percentage of fees that are fixed versus variable or performance very guarantee oriented Have stayed relatively constant as well. Customers understand the value of the category, understand the return on investment and smart customers are willing to pay for that value.
Now as we add on incremental services like virtual primary care and mental health or expert medical opinion. There's multiple ways that the customer can take advantage of that service from us. They can buy on a PEPM basis where they have an all you can eat opportunity to take advantage of those services or if they prefer, they have an opportunity to buy on an as used basis In the case of our virtual primary care, a claims based bill or in the case of EMO, a case rate billing model. In either of those situations, Accolade is quite comfortable. We understand that we're going to drive enormous value for the customer either way.
And because we are fundamentally an engagement engine for Healthcare, we're very confident in the engagement rates we can drive for our own primary care and expert medical opinion services if the client chooses that variable model. Steve, anything you'd add? One thing I
Speaker 4
would before I jump to Mike's question on free cash flow, Raj, is the trusted partner ecosystem, which is becoming more and more of a center point for us strategically with customers. We'll hit on this a fair amount during the Capital Markets Day on May 8. But we often are paid a share, call it, an administrative fee for making those services available to customers. And that also drives incremental revenue, essentially utilization based kind of revenue. Again, we refer to it as good utilization because we're helping members get to these Point solutions that are often underutilized by customers.
So that would be an add on to the pricing dynamic And then with respect to free cash flow, Mike, no major changes from what we've talked about in the past, meaning For us, adjusted EBITDA is a pretty good proxy for free cash flow, plus or minus a couple of things, Working cash flow, timing of customer payments and that kind of thing, of course. And then in a year like this year where We did make some cost structuring changes. We do have severances that will get paid out. That will be some that along with some other one time type of items will occur this year, but other than that, roughly in line with what we've talked about before.
Speaker 1
Thank you. One moment for our next question. Our next question comes from Craig Hettenbach with Morgan Stanley. Your line is open.
Speaker 6
Yes, thanks. I have a question that touches on both PlushCare, the virtual care as well as the expert medical opinion business. So As the market normalizes here, can you talk about I mean, we've seen some signs of increased utilization and some strength in medtech companies. Can you talk about what you're seeing there, as well as the market normalizes and COVID recedes, How that influences kind of puts and takes around the kind of PlushCare business over the course of this year?
Speaker 3
Perfect. Craig, nice to talk with you. And Shantanu is our Chief Health Officer and Head of our Care Delivery Group is on the line as well. Shantanu, I'll open it up to you to add to anything that I might say here. Craig, When you look at the virtual primary care business, virtual primary care and mental health business, you look at it of course as you know in 2 vectors.
You look at our consumer Consumer business titled PlushCare, the Enterprise Business, AccoladeCare. The AccoladeCare business Being the fundamental increment in fiscal 2024, we sold AccoladeCare for the first time in Those clients are deploying in fiscal 2024 and we'll see their utilization add to our virtual primary care and mental health business in the year ahead and we're really excited about the traction we saw in that customer base or in our customer base in terms of taking advantage of Accolent Care. In terms of expert medical opinion, I think the real question you're asking there is, are we going to see increased utilization as the rest of the industry begins to see the first green shoots of increased utilization from a procedural and specialty care perspective. I think the answer to that is, if in fact that trend persists and we see that increased utilization across the rest of the ecosystem, You would expect it to have a positive impact on our business as well. Shantanu, anything you'd like to add to what I just chipped in there?
Speaker 7
Yes. I think the main thing I'd say, Craig, is that, like we're a national medical practice. And so I think we follow some of the trends of national primary care practices, which especially over the past year or 2, have seen increases and decreases. I think the primary difference between us and sort of most of the virtual telemedicine space is the fact that we're doing comprehensive primary care. And so I think that longitudinal nature of the service that we're providing and then, the experience that we're being able to provide, I think that's really what's driving the numbers that Steve talked about earlier is really the fact that We're delivering that kind of service and those kinds of outcomes, and that's a real differentiator for us.
Speaker 1
Thank you. One moment for our next question. Our next question comes from Jessica Tassen with Piper Sandler. Your line is open.
Speaker 8
Hi. Thank you guys so much for the question. So I was hoping you could just describe how Accolade is responding to Humana's Decision to exit the commercial market, when do you guys anticipate the majority of that activity is going to happen? And I know that Accolade kind of Tends to maintain relationships despite payer changes. So can you just help us understand early conversations and what you think the potential impact if that decision might be.
Thank you.
Speaker 3
Hi, Jeff. Thanks for the question. A couple of thoughts there and I appreciate you calling it out. 1st and foremost, our relationship we had a great relationship with Humana when they were in the commercial space. Their decision to exit the space Actually, it had very little impact in terms of either revenues or customer relationships inside the business.
And the rationale for that is Twofold. First, our customer relationships with customers who previously were on the Humana's commercial platform and leveraging Accolade services Persist, we're actually in either renewal conversations or in the midst of 2, 3 year relationships with those customers that won't change at all. That's number 1. And number 2, in fact, we're continuing to service Humana internally for their own employees. And so we'd expect there to be no impact on an ongoing basis to the business, number 1.
And number 2, While Humana while our relationship with Humana was a productive one in the commercial space, it was relatively modest in terms of its impact on new bookings in any given year. And we'd expect to be able to pick that up on our own.
Speaker 1
Thank you. One moment for our next question. Our next question comes from Dhrilinda Singh with Trulis. Your line is open.
Speaker 9
Thank you and thanks for taking my questions. First one quick And I have my main question. For clarification, why is your fiscal 2025 margin outlook on Slide 26 unchanged Despite you pulling forward the profitability given recent changes, I would have thought some improvement there for fiscal 2025. And my main question is around performance guarantee. I understand it can fluctuate quarter to quarter, but curious if you can share what are your expectations for full year performance guarantees in Fiscal 'twenty four compared to fiscal 'twenty three.
And conceptually, in terms of how these guarantees work, is it like you guys have to perform Better than a baseline to be valuable to employers? Does the baseline reset every year based on your performance from the prior year? Just trying to understand whether your performance last year Does it extend the bar higher for you to hit those guarantees? Maybe just help us understand that part.
Speaker 4
Yes, I'll be glad to and thank you for the question, Jalendra. First on fiscal 2025, we haven't changed anything in the presentation today. We'll speak to that more in Capital Markets Day on May 8. Our purpose today was to speak to our formal guidance for fiscal 2024. But take your point, we've made some cost structure The changes that should certainly take us through as part of the profitability profile going forward.
We'll hit that more specifically in our Capital Markets Day in a couple of weeks. With respect to the fiscal 2024 assumption, so When you look at that $410,000,000 revenue stream, which is about a 20% slightly ahead of 20% growth excluding Comcast, What we assume in there for performance guarantees is very consistent with what we've seen historically. And as a reminder to your point of how that works, For our enterprise customers who have advocacy in particular, we're particularly putting 10% to 15% of those fees at risk on a performance basis And then earning those cost savings as we either beat a healthcare index of inflation, essentially cost Trends for a particular customer or essentially guaranteeing a trend line off of a baseline when we enter into a contract with Over a multiyear period. What you typically see for Accolade is we're earning about 95% Of the total PEPM opportunity across our advocacy base, which pencils out to 75% to 80% of those savings PG is coming in consistently. And that happened in fiscal 'twenty three and it happened in years prior fairly consistently within that range.
And so we're going to keep those assumptions consistent with historical experience for fiscal 2024.
Speaker 1
Thank you. One moment for our next question. Our next question comes from Jeff Garro with Stephens. Your line is open.
Speaker 10
Yes, good afternoon and thanks for taking the questions. Maybe stay on the Performance Guarantee topic. And Steve, if I could ask you to describe how the Seasonality of Performance Guarantees has changed over time. I think historically it's been 4th quarter loaded And hence the conservative approach to the guidance, but curious to see how some of that has changed over time with The diversification of the customer base and then for Raj and Shantanu, if they could talk about engagement level too, I think that'd be helpful because Just think of that going kind of hand in hand with that strong 95% or so performance guarantee achievement. Thanks.
Speaker 4
Hi, Jed. Yes, thank you for that. And I'll take the opportunity as well to clarify a bit about the Q1 guidance, which actually Had something to do with the seasonality of the performance guarantees that I'll lay out and then hand it off to Raj and Shantanu on the engagement question. The way those Cost savings PGs typically happen is if they're claims based and they're measured off of a year end calendar year look back On a run out basis, we are going to measure those at the end of the year and we are going to forecast that those PGS come in at the end of the year. That's a conservative way of looking at it.
So when you look at this year's Q1 guide, we're essentially assuming that most of those are going to come out later in the year. However, what we've historically been experiencing is that we've been earning those earlier during the year. So take fiscal 2023, for example, we earned a lot of those PGS sooner than Q4 and booked them earlier, Thus, a little bit of the downward growth rate this fiscal 2023, Q4 compared to the prior year. It's why, Jeff, if you cut through all that, we always like to walk you through the idea of look at the overall annualized Growth rate because sometimes the timing of earning those PGs can happen 1 quarter or another and it doesn't really change the impact for the full year. So with that, when you look at the 4th fiscal 2024 guide and you're looking at that Q1 number, Keep in mind that we're assuming that PGs are going to be pushed out towards the end of the year.
Let me hand it to Raj first to Talk about engagement rates with customers and perhaps Shantanu in China.
Speaker 3
Yes, perfect. Jeff, I think the way to think about this and I appreciate the question very much. If you look at what customers contract with us for, they want to drive engagement, they want their employees to be more engaged in their own healthcare. They want to see trend line reduction, but oftentimes that trend line reduction is driven by engagement levels, the capacity to Turn those engagement levels into engagement with their own third party programs, things like our trusted partner ecosystem. And they want to ensure that their employees that are really satisfied.
So high NPS levels associated with the service that they're receiving. Those things tend to manifest themselves into the performance the very performance guarantees that Steve talked about. That's what customers want. Therefore, they bake those into their agreements. Our capacity to drive extraordinary engagement is really unprecedented in the market.
And so we're driving 50%, 60%, 70% engagement for most of the employers we serve. And when we achieve those engagement rates faster, we drive more value for the customer faster, which often manifests Savings early, engagement levels faster than expected, as well as net promoter scores that are extraordinarily high. And so to tie the two points together, when we drive engagement at the levels we're capable of, oftentimes we achieve performance guarantees in advance of the end of the year and that's what drives the advance booking of it.
Speaker 1
Thank you. One moment for our next question. The next question comes from Stephanie Davis with SVB Securities. Your line is open.
Speaker 11
Hey, guys. Thank you for taking my question. I was hoping you could walk through some of the puts and takes from the restructuring. If there's any lingering costs, how it's way on the P and L early in the year And how you're viewing the mix of cost savings flow through instead of just investing for forward growth, because of The faster ARR growth areas of the business.
Speaker 4
Hi, Stephanie, it's Steve here. Thank you very much for the question. So February 28, we announced the cost restructuring actions that you're speaking to. And the impact that you'll see is, if you look at the OpEx line of our P and L, and You'll see fiscal 2024 be roughly flat with fiscal 2023. So we took a fair amount of cost out starting at the highest level of the organization.
When you Think about putting 3 companies together Accolade, 2ndMD and PlusCare over the last 18 to 24 months, we were able to identify duplication both in people and some opportunities within systems and also integrate the back end of the company as Raj was explaining earlier and how we brought the offerings together. And net of that is, if you think about the OpEx for And I'm speaking about adjusted operating expenses now, so take out the effect of stock compensation and depreciation and amortization, which can make the numbers a little noisy. We're looking at taking adjusted OpEx from about 57% of revenue in fiscal 2023 down to about 50% of revenue in fiscal 24 and then having a cost structure that's fairly constant year over year. With respect to quarterly bump, You'll see the fuller effects of this happen on the second half of fiscal twenty twenty four. That's because we took those actions right around February 28.
We do have some transition happening in the Q1 and into the Q2 where there's some duplication of cost there as we get The effect of that in the second half. One other thing I'd like to reiterate, this is really
Speaker 6
about the
Speaker 4
OpEx side and the infrastructure side of the business. With respect to member serving, we're always focused on obsessing with member Experience being great. So we're very much investing in those frontline care teams and that experience, Obviously, doing everything that's great for that experience on the integration side, but also continuing to invest there. So this is much more about an OpEx and overhead Kind of cost reduction.
Speaker 1
Thank you. One moment for our next question. Our next question comes from Jonathan Young with Credit Suisse. Your line is open.
Speaker 12
Hi, thanks for taking my question. I guess Just going back to some of your comments about EMO and M plus Care kind of in the 20% to 20% -plus range. Kind of how are you thinking about that progressing throughout the year? And I guess it's somewhat similar to what you experienced in FY 'twenty three. So I guess should we take it that The consistent growth trends are solid positive in terms of how you're thinking about utilization throughout the year and any updated thoughts on if it's We could see a possible acceleration if you're taking a bit of a conservative stance there.
Thanks.
Speaker 3
Question, Jonathan. There's really 2 vectors that drive expert medical opinion. So what we call Accolade ExpertMD that drive growth for Accolade ExpertMD. The first is obviously new bookings. And so we've continued to see traction.
It's a market that continues to grow. It's a market that continues to drive value for customers, meaning it's an offering that continues to drive value for customers. And so new customer acquisition continues to grow at scale and at pace. The second part of the story is clearly the second the next thing you mentioned, which is utilization. In fiscal in 2020 2021 and even 2022, the entire industry saw compressed utilization of specialty care, surgical procedures, etcetera.
There are early signals that calendar 2023 is beginning to see some uptick in that utilization, if in fact That utilization does uptick consistently on a nationwide basis, as Shantanu mentioned earlier. We do provide our services, expert medical opinion or primary care across the country. If that persists, then there is potentially upside
Speaker 4
to what we've modeled, but what we've
Speaker 3
modeled is consistent with what we've seen over the last
Speaker 1
Thank you. One moment for our next question. Our next question comes from Stan Burnison with Wells Fargo. Your line is open.
Speaker 13
Hi, thanks for taking my questions. Raj, do you see any opportunities to leverage large language models like CHAT GPT to enhance your care navigation advocacy services? Would love to get your thoughts on this?
Speaker 3
Thanks for the questions, Dan. Absolutely, I think when transformative technologies Like large language models become mainstream and prevalent as they are today, it would be silly to imply that they're not going to have an impact on healthcare and therefore not going to have an impact on our business. They will. Now where we expect them to have impact is potentially in Areas like intent understanding, understanding the intent of the members as they're coming in, turning that intent into Possible intelligence as it relates to how we're routing them to the right level of clinician or the right level of expertise inside of our business. And we're actually already doing some experimentation in those areas that we're actually delivering in pilots to customers today.
And so we'd expect that these types of capabilities will still ultimately, we are still talking about healthcare. And so our capacity To leverage technologies like this to be smarter about how we guide people's care or how we drive value to people's care is still going to lead to a clinician, A clinician, a physician or a nurse or a therapist who can drive value for that person and do so with the human touch That's been so essential to the incredible NPS levels of our service and the clinical value of our service. Shantanu, anything you'd add there?
Speaker 7
I think the only thing I'd add is, one of the areas that we've been really effective in It's really building workflows that work for our clinicians and our physicians. I think when you look at the national problem of burnout, which has affected capacity across sort of traditional health systems. We see a major role, as Raj said, for technology to help enable that. That's already been the case for us. We have our own proprietary electronic health record, as an example, that's built and sort of purpose built for physician workflow.
And so those kinds of tools, The fact that we've invested in building them our own, I think, puts us in a really strong position to be able to invest in those new technologies Like those AI models, and then continue to improve that physician experience, which ultimately we see drives a better member experience and better outcomes.
Speaker 1
Thank you. One moment for our next question. Our next question comes from Richard Kolsch with Canaccord Genuity. Your line is open.
Speaker 2
Yes. Congratulations. Thanks on or congratulations on all the progress. Steve, I was wondering if you could talk a little bit about the 4th quarter revenue. You guys hit the midpoint.
And I'm just curious, Was there something that you didn't necessarily get since your IPO, you guys have been exceeding the top So being pretty conservative with your guidance and just trying to think about looking at the next year, how we should read What you have for the Q1 and the year?
Speaker 4
Sure. Hi, Richard, and thanks for the question and Completely appreciate your point and read your recent research on this exact topic. For Accolade, we have Very good visibility to our revenue stream when you think about the model. It's PEPM based. We have a view of membership.
So coming into any particular year or quarter, we have strong visibility. Where there is variability is usually along two fronts. One is the claims based performance guarantees that I was speaking about earlier and the other would be around Chase rate revenues or utilization based revenues. So at the margin, not quite getting to the top end of the range by $1,000,000 or $2,000,000 And any quarter could have to do with something along those lines where you might have a whole set of PGs you could go after and in our case in a high inflationary Year like calendar 2022, there's a PG or 2 that you don't get. I think the big Picture point for us as we look at this is the PG performance was very consistent in calendar 2022 With years past, meaning we achieved about 95% of the total PEM opportunity last year as well as in prior years.
But I would attribute it to that, not getting every PG opportunity quite achieved in calendar 2022, But nonetheless, feel very confident going forward in the forward guide.
Speaker 1
Thank you. One moment for our next question. Our next question comes from Sandy Drbul with Guggenheim. Your line is open.
Speaker 13
Thanks very much. My question is probably for Steve on the cost efficiencies. I don't think you've addressed this way. It sounds like, one, It's not going to be at the cost of goods line, but it's going to be below in operating. Any direction you can give us in terms of The savings, whether they're coming out of product technology, sales and marketing, G and A, where we should be thinking about rough percentages of where the savings Are going to come out, that would be really helpful to just sort of think about how it flows through and where the leverage is going to be going forward as we look out further future years.
Thanks.
Speaker 4
Hi, Sandy. Thanks for the question.
Speaker 3
Yes. So
Speaker 4
The cost structure benefits really were realized across all lines of the OpEx, the P and L. You'll See it, if you look in the where the cost charges are, it will be laid out in the earnings release or certainly the 10 ks, You see a good chunk of it come out of products and technology as well as some duplication in sales and marketing and certainly in G and A from having brought 3 companies together. So it's relatively spread evenly. I think the other takeaway for us is we're growing the business 20% top line. We continue to invest in each of those areas as needed, but we're able to take out some duplication there.
So it is primarily an OpEx story. There is a little bit of Fixed costs that may have impacted the cost of served line, which you'll see when you dig into that breakdown on the P and L, But primarily an OpEx story and spread fairly equally across the line. Sandy, Steve mentioned this earlier,
Speaker 3
but You're essentially seeing flat OpEx from fiscal 2023 heading to fiscal 2024 and that's the Ultimately, that represents a reduction in OpEx from about 57% of revenues in fiscal 'twenty three to somewhere closer to 50% of revenues in fiscal 'twenty
Speaker 1
Thank you. One moment for our next question. Our next question comes from David Larsen with BTIG. Your line is open.
Speaker 14
Hi. I'm assuming that Comcast would have been worth around $7,000,000 in revenue, in 1Q, fiscal 1Q of 2024. And then just doing some math, it looks like there was about $5,000,000 of performance guarantees, in fiscal 1Q of 2023. Is that Correct. And then also with the cost reduction efforts here, I think the WARN Act Calls for like 60 days notice.
Is that why we're not going to see the cost benefit until 2H of fiscal 2024? And Why wouldn't we start seeing that in fiscal 1Q of 2024 if it's only 60 days and by the latest fiscal 2Q of 2024? Thank you.
Speaker 3
Yes. Thanks for the question. I'll take the first part of it and Steve can take the second or I'll take the second part of it, Steve will take the first. Yes. This has nothing to do with the warrant active.
It is fundamentally about just being prudent about the way we run the business in terms of transition timeframes, ensuring that we not only have appropriate transition timeframes to ensure that the business is running smoothly And also, imperatively, that we do the right thing by people exiting the business and ensure that we're doing that in a way that we and all of our employees can be proud of.
Speaker 4
Steve? Sure. And back to your first part of your question, I think the tactical question around the puts and takes, you're right that there was about $7,000,000 Comcast revenue in Q1 of the prior year and then the remainder of north of $3,000,000 of PGs that were high gross margin PGs that effectively, where the timing item that I referred to in my remarks is just about right.
Speaker 1
Thank you. We'll go over to our next question. Our next question comes from Ryan McDonald with Needham. Your line is open.
Speaker 15
Hey, this is Matt Hsieh on for Ryan. Thanks for taking the questions. Wanted to touch on the T5 contract now that the TriWest award has been confirmed in the West. Do you guys have any greater sense of what your role will be with TriWest And what kind of investments you anticipate in conjunction with scaling for that August 2024 start? And then if you have any Dates around the Humana relationship in the East as well, would love to hear those.
Thanks.
Speaker 3
Thanks for the question, Matt. We're clearly One step closer to T5 being a reality. So we got through the first appeal. The first appeal was rejected. Then there was Essentially a rebid that led to the award that was just announced to both TriWest and the Humana.
Unfortunately, Matt, there is also an appeals potentially an appeals process to this new award. And so We're waiting until we get to the other side of the appeals window as are all the vendors who have been awarded at this point. And so Not much new to report. We continue to be bullish on the opportunity to participate in T5. We continue to see real opportunities where our technology and our services can be valuable to both of the awarded parties, whoever they may be post any incremental protests, and we think we're really well positioned to take advantage of them when they come.
Speaker 1
Thank you. I'm not showing any further questions at this time. I'd like to turn the call back over to Rajen Singh for any closing remarks.
Speaker 3
We really appreciate everyone making the time today. We're excited to see many of you on May 8 in Las Vegas. We hope you can join us for our Capital Markets Day then. Thank you all.
Speaker 1
Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.
Speaker 8
Goodbye.