Accolade Sees Revenue Promise; Operating Breakeven Distant (NASDAQ:ACCD)

A Quick Take On Accolade

Accolade (NASDAQ:ACCD) went public in July 2020, raising approximately $220 million in an IPO that was priced at $22.00 per share.

The firm provides a healthcare management platform for enterprises and other clients.

Until we see the results of the recent restructuring and meaningful and sustained progress toward operating breakeven, I’m on Hold for ACCD.

Accolade Overview And Market

Seattle, Washington-based Accolade was founded to provide businesses and other organizations with the ability to offer their employees a comprehensive platform that provides all of their healthcare information in one integrated system.

In addition, the company provides health assistant and clinician services where applicable.

Management is headed by Chief Executive Officer Mr. Rajiv Singh, who has been with the firm since October 2015 and was previously co-founder of Concur Technologies, a business travel and expense software company.

According to a 2017 market research report by MarketsandMarkets, the U.S. market for population health management software and services is expected to grow from $13.85 billion in 2016 to $42.54 billion in 2021.

This represents a forecast CAGR of 25.2% from 2016 to 2021.

The main drivers for this expected growth are the implementation of the Affordable Care Act, aging of the U.S. population, increasing demand from enterprises for integrated health and wellness management solutions, and improved offerings from technology providers.

However, drags on market growth will include a lack of data management capabilities, slowness of migration from legacy on-premises systems and patient data security concerns.

Major vendors in or near the company’s space include:

• Cerner

• McKesson (MCK)

• Allscripts Healthcare (MDRX)

• Healthagen

• OptumHealth

• IBM (IBM)

• Epic Corporation

• Conifer Health Solutions

• Wellcentive

• Quantum Health

• Health Advocate

Management says its competitors are more from large health plan operators, traditional advocacy and navigation companies and adjacent startups.

ACCD’s Recent Financial Performance

• Total revenue by quarter has risen according to the following chart:

• Gross profit margin by quarter has grown per the chart below:

• Selling, G&A expenses as a percentage of total revenue by quarter have trended lower in recent quarters:

• Operating income by quarter has fluctuated greatly in recent quarters as the chart shows here:

• Earnings per share (Diluted) have also varied highly in recent quarters:

(All data in the above charts is GAAP)

In the past 12 months, ACCD’s stock price has fallen 70.4% vs. the U.S. S&P 500 index’s drop of around 19.7%, as the chart below indicates:

Valuation And Other Metrics For Accolade

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Amount
Enterprise Value / Sales	1.5
Enterprise Value / EBITDA	-1.5
Revenue Growth Rate	52.0%
Net Income Margin	-114.6%
GAAP EBITDA %	-99.7%
Market Capitalization	$560,403,968
Enterprise Value	$537,767,311
Operating Cash Flow	-$57,160,000
Earnings Per Share (Fully Diluted)	-$5.78

Click to enlarge

(Source – Financial Modeling Prep)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

ACCD’s most recent GAAP Rule of 40 calculation was negative (47.7%) as of FQ2 2023, so the firm has performed poorly in this regard, per the table below:

Rule of 40 – GAAP [TTM]	Calculation
Recent Rev. Growth %	52.0%
GAAP EBITDA %	-99.7%
Total	-47.7%

Click to enlarge

(Source – Financial Modeling Prep)

Commentary On Accolade

In its last earnings call (Source – Seeking Alpha), covering FQ2 2023’s results, management highlighted coming in ‘above the high-end of our guidance ranges for both revenue and adjusted EBITDA.’

The firm expanded its product portfolio and management cited a majority of its commercial employer segment customers as purchasing the additional products of Accolade Care and Accolade Expert MD, so the company is seeing the benefit of cross-selling here.

Leadership also noted the value of its diversification via commercial employer, health plans, government and direct-to-consumer.

As to its financial results, topline revenue rose 20% year-over-year due to growth in its direct-to-consumer segment and ‘member counts for our commercial customers.’

The company’s customer retention rate has been ‘about 95% of our customers on a year-over-year basis.’

However, the firm’s Rule of 40 results have been poor, with good revenue growth more than offset by substantial GAAP EBITDA losses.

Adjusted gross margin rose in part due to a performance guarantee revenue timing benefit and higher margin offering mix, possibly due to the direct-to-consumer segment.

Operating income and earnings are still running significantly negative, even after recent headcount reductions implemented by management.

For the balance sheet, cash and equivalents were $331 million at quarter-end and the company had $281.5 million in total debt.

Over the trailing twelve months, free cash used was $59.6 million, of which capital expenditures accounted for $2.4 million.

Looking ahead, management expects fiscal 2023 full-year revenue growth of 17% at the midpoint of the range while expecting an adjusted EBITDA loss of approximately $37.5 million at the midpoint.

The firm paid $82.4 million in stock-based compensation over the preceding four quarters, so its actual GAAP EBITDA loss in the next fiscal year will likely be well over $100 million.

While the firm is showing signs of continued growth with its expanding product offerings and ability to cross-sell those new offerings, the market continues to punish loss-making companies as the cost of capital rises.

Until we see the results of the recent restructuring and meaningful and sustained progress toward operating breakeven, I’m on Hold for ACCD.