Looking for liquidity and cash, a16z-backed Accolade files for IPO

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

We’re still in IPO-land this morning, working our way through the Accolade S-1 filing. Yesterday we dug through the Procore filing, a vertical software-as-a-service (SaaS) company. That was a former startup that we could get our arms around because it was part of a genre of companies that we talk about often.

Accolade isn’t like that. But don’t think that we’re dragging ourselves into the wrong part of the financial world; Accolade is backed by Andreessen Horowitz (a16z), Comcast Ventures, Carrick Capital, and New York-based Accretive. Accolade has raised several hundred million dollars in venture capital during its life, putting it squarely under the TechCrunch aegis.

So let’s explore its IPO filing and start with what the firm does and its capital history. After that, we’ll look at its (somewhat surprising) numbers. Sound good? Let’s begin.

What is Accolade?

This may come as a surprise to our friends abroad, but the healthcare system in America leaves quite a lot to be desired. It’s crap, mostly. Individual providers like doctors are usually good here in the United State, but the system that metes out healthcare domestically is bad.

Why? It’s outlandishly expensive, riddled with complexities, and built on an opaque pricing model (you rarely know what your care will cost until after) and inane repayment system (a public-private hybrid that makes precisely seven people happy, all of whom are billionaires).

I say all of that because Accolade is a bet that the system keeps being bad, and regular folks (you, myself) need help getting through the mess. Accolade says in its IPO filing that its “members face structural, clinical, financial, and administrative challenges in managing their health and wellness.” Correct. Its solution? An “engagement model [which] simplifies and streamlines the healthcare and benefits experience for our members by making guidance from our Accolade Health Assistants and clinicians available via phone, mobile application, and web portal whenever it is needed.” Honestly, that sounds pretty nice.

It’s rare that I read an S-1 and want to buy something, but here I am with Accolade. Not that I am the main market, mind, as the company notes that its “customers are primarily employers that deploy Accolade in order to provide employees and their families (our ‘members’) a single place to turn for their health, healthcare, and benefits needs.” So Verizon could buy Accolade for me, but it’s unlikely that I’ll pay for it myself (explicitly, of course).

Notably Accolade isn’t a way to spend more money, in total, on healthcare. Instead, the company touts savings, claiming an “average savings of approximately 4% of total employer healthcare spend” in year one and more after.

Before we head into the performance numbers and business notes, some fundraising notes. Accolade began to¬†really raise money back in 2013 when it put together a $30 million Series C. Accolade went on to raise around $100 million across ints Series E in 2015 and 2016. 2018 brought a $50 million Series F, according to Crunchbase data, and 2019 saw a small $20 million corporate round. So the company’s journey, starting with a $20 million Series A back in 2007, is long, well-funded, and, therefore, fascinating.

Business

Accolade makes money by charging a “contractually recurring per-member-per-month” fee, so the company has some elements of SaaS in that its top line recurs, even if its gross margins make it clear that this is far from a pure software company.

With that in hand, how good of a business has Accolade proved to be so far? Well, not so super good in the past, but things have started to look better in recent quarters. Let me explain:

  • Accelerating growth: Accolade grew just 23% from its fiscal 2018 to its fiscal 2019 (wrapping in early calendar 2019). However, in the nine calendar months of 2019 ending in November, compared to same period of 2018, the firm grew a sharper 47.5%. That’s much better! Naturally, the company’s growth rate could slow when we get an estimate for its full fiscal 2020 (the 12-month period concluded at the end of January) in the company’s impending S-1/A.
  • Improving margins: Like the company’s growth rate, its margins have also improved. In the nine months of 2018 ending in November, Accolade’s gross margin was just 28.1%. But in the same period of 2019, that figure grew to 41.3%, a huge improvement in the financial value of the company’s revenue.

That’s all quite nice! Improving revenue growth (an acceleration in expansion) and improving margins (improving revenue quality) at the same time means that the firm’s gross profit grew nicely from 2018 to 2019. Indeed, during the nine months of each concluding at the end of November, Accolade’s gross profit expanded from $16.8 million to $36.3 million (not including depreciation and amortization).

However, the company’s operating expenses (the variable costs we deduct from gross profit to discover operating income) were far larger than its generated margin. In the nine-month period ending in November of 2018, Accolade’s operating expenses of $64.6 million led to a $47.8 million operating loss. In the same period of 2019, $83.3 million in operating costs generated a $47.0 million operating deficit.

Ouch. And even worse, the last quarter we have data for (the three months ending November 30, 2019) Accolade posted an $18.3 million loss, its highest-yet net loss of any known period. Looking at adjusted EBITDA for the same period, a massaged profit metric, the company’s three-month loss slims to $13.8 million. Still not great, frankly.

The company is bleeding from a capital base that includes debt and not as much cash as the company probably finds comfortable. With cash of “$39.7 million as of November 30, 2019,” about $24 million in negative operating cash flow in the nine months ending November 2019, and $22 million in debt (a maxed-out line that costs more than 10% annually), the company is not exactly rich.

Accolade lists a $100 million placeholder in its S-1. It will want to raise more if it can. The company was reported to be worth around $620 million last year.

This is going to be a fun offering as the company’s trajectories are as positive as its current profits are negative. How to set a value to the firm is therefore a sentiment-driven challenge. And, thus, exciting.