Accolade Seeks $100 Million In U.S. IPO

Summary

• Accolade has filed to raise $100 million in an IPO, although the final figure may differ.
• The firm has developed an integrated healthcare and wellness platform for medium and large employers to provide their employees with health services.
• ACCD is growing rapidly while generating operating losses and operational cash burn as a result of its commercialization ramp-up efforts.
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Quick Take

Accolade (NASDAQ:ACCD) has filed to raise $100 million in an IPO of its common stock, according to an S-1 registration statement.

The firm has developed a personal healthcare information and management platform for businesses.

ACCD is growing rapidly and has very positive industry dynamics in its favor.

I’ll provide an update when we learn more details about the IPO from management.

Company And Technology

Seattle, Washington-based Accolade was founded to provide businesses 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.

Below is a brief overview video of Accolade's offerings:

Source: Accolade

The company’s primary offerings include:

• Total Benefits

• Total Care

• Total Health and Benefits

Accolade has received at least $287 million from investors including Accretive Care Partners, Andreessen Horowitz, Carrick Capital and Thomas Spann.

Customer/User Acquisition

The company currently has 53 customers across industries including media, financial services, technology, energy, retail and transportation.

ACCD currently serves over 1.5 million members and generates revenue on a per-member-per-month fee basis and pursues new customers via a direct sales model that targets medium to large employers.The company has generated what it refers to as a 'gross dollar retention' rate of 100% and 95% for the fiscal years ended February 28, 2018 and 2019. Normally retention rates are reported as 'net' and not 'gross,' so I'm assuming the net figures are less positive and are under 100%, so the company is likely experiencing net churn on a revenue basis which is less than ideal.

Sales & Marketing expenses as a percentage of total revenue have been uneven as revenues have increased, as the figures below indicate:

Sales & Marketing	Expenses vs. Revenue
Period	Percentage
Nine Mos. Ended Nov. 30, 2019	26.3%
FYE Feb. 28, 2019	24.7%
FYE Feb. 28, 2018	29.0%

Click to enlarge

Source: Company registration statement

The Sales & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales & Marketing spend, rose to 1.2x in the most recent reporting period, as shown in the table below:

Sales & Marketing	Efficiency Rate
Period	Multiple
Nine Mos. Ended Nov. 30, 2019	1.2
FYE Feb. 28, 2019	0.8

Click to enlarge

Source: Company registration statement

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 trajectory. ACCD’s most recent calculation was only 1% as of the nine months ended Nov. 30, 2019, so the firm needs a lot of improvement for this metric.

Market And Competition

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 (CERN)

• McKesson (MCK)

• Allscripts Healthcare (MDRX)

• Healthagen

• OptumHealth

• IBM (IBM)

• Epic Corporation (OTC:EPOR)

• Conifer Health Solutions

• Wellcentive

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

Financial Performance

Accolade’s recent financial results can be summarized as follows:

• Sharply growing top line revenue, at an accelerating rate

• Increasing gross profit and gross margin

• Uneven but significant operating losses

• Variable but large cash use in operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Nine Mos. Ended Nov. 30, 2019	$ 88,066,000	47.5%
FYE Feb. 28, 2019	$ 94,811,000	23.4%
FYE Feb. 28, 2018	$ 76,828,000
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Nine Mos. Ended Nov. 30, 2019	$ 36,329,000	116.6%
FYE Feb. 28, 2019	$ 34,243,000	46.4%
FYE Feb. 28, 2018	$ 23,393,000
Gross Margin
Period	Gross Margin
Nine Mos. Ended Nov. 30, 2019	41.25%
FYE Feb. 28, 2019	36.12%
FYE Feb. 28, 2018	30.45%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Nine Mos. Ended Nov. 30, 2019	$ (40,593,000)	-46.1%
FYE Feb. 28, 2019	$ (44,586,000)	-47.0%
FYE Feb. 28, 2018	$ (51,479,000)	-67.0%
Net Income (Loss)
Period	Net Income (Loss)
Nine Mos. Ended Nov. 30, 2019	$ (49,226,000)
FYE Feb. 28, 2019	$ (56,496,000)
FYE Feb. 28, 2018	$ (61,286,000)
Cash Flow From Operations
Period	Cash Flow From Operations
Nine Mos. Ended Nov. 30, 2019	$ (23,983,000)
FYE Feb. 28, 2019	$ (16,548,000)
FYE Feb. 28, 2018	$ (38,285,000)

Click to enlarge

Source: Company registration statement

As of November 30, 2019, Accolade had $39.7 million in cash and $99.8 million in total liabilities.

Free cash flow during the twelve months ended November 30, 2019, was a negative ($25.5 million).

IPO Details

Accolade intends to raise $100 million in gross proceeds from an IPO of its common stock, although the final amount may differ.

Management says it will use the net proceeds from the IPO as follows (generic language):

We currently intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures, and which may include the repayment of indebtedness. We may also use a portion of the net proceeds for acquisitions or strategic investments in complementary businesses, products, services, or technologies. However, we do not have agreements or commitments to enter into any such acquisitions or investments at this time.

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Goldman Sachs, Morgan Stanley, BofA Securities, Piper Sandler, Credit Suisse, William Blair, Baird and SVB Leerink.

Commentary

Accolade is seeking funding from public market investors to fund its commercialization and expansion efforts.

The firm’s financials show a company that is growing revenue and gross profit quickly and at an accelerating rate of growth, which is impressive.

However, operating losses and operational cash burn are both high, as one would expect during a ramp-up phase.

My one concern is the firm isn’t even close to the Rule of 40. While the comparison to a SaaS company is not exact, this higher apparent loss-to-growth ratio is something to be aware of.

Sales & Marketing expenses have been uneven during revenue growth; its Sales & Marketing efficiency rate has risen to 1.2x in the most recent reporting period.

The market opportunity for providing employers with an integrated health and wellness system appears large and expected to grow at a very strong rate in the near future, so ACCD has very positive industry dynamics in its favor.

When we learn management’s assumptions about the IPO’s pricing and valuation, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Mr Bad Example]

Let me disagree with "aging of the U.S. population" as a driver of expected growth.
One aspect of aging is exiting from employment. And presumably exiting from that employer provided healthcare platform.
Moreover, assume that employee is replaced. Then the number of users for that Accolade customer remains constant, not growing.

[alidariusali]

@Mr Bad Example you've lived up to your name my good sir.