Phreesia, Inc. (NYSE:PHR) Q2 2024 Earnings Call Transcript

Phreesia, Inc. (NYSE:PHR) Q2 2024 Earnings Call Transcript September 6, 2023

Phreesia, Inc. beats earnings expectations. Reported EPS is $0.34, expectations were $-0.75.

Operator: Good evening ladies and gentlemen and welcome to the Phreesia Fiscal Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will provide instructions for the question-and-answer session to follow. First, I would like to introduce Balaji Gandhi, Phreesia’s Chief Financial Officer. Mr. Gandhi, you may begin.

Balaji Gandhi: Thank you, operator. Good evening, and welcome to Phreesia’s earnings conference call for the fiscal second quarter of 2024, which ended on July 31, 2023. Joining me on today’s call is Chaim Indig, our Chief Executive Officer. A more complete discussion of our results can be found in our earnings press release and in our related Form 8-K submission to the SEC, including our quarterly stakeholder letter, both issued after the markets closed today. These documents are available on the Investor Relations section of our website at ir.phreesia.com. As a reminder, today’s call is being recorded, and a replay will be available on our Investor Relations website at ir.phreesia.com following the conclusion of the call.

During today’s call, we may make forward-looking statements, including statements regarding trends, our anticipated growth, our strategies, predictions about our industry, and the anticipated performance of our business, including our outlook regarding future financial results. Forward-looking statements are subject to various risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ materially from those described in our forward-looking statements. Such risks are described more fully in our earnings press release, our stakeholder letter and our risk factors included in our SEC filings, including in our quarterly report on Form 10-Q that will be filed with the SEC tomorrow. The forward-looking statements made on this call will be based on our current views and expectations and speak only as of the date on which the statements are made.

We undertake no obligation to update and expressly disclaim the obligation to update these forward-looking statements to reflect events or circumstances after the date of this call or to reflect new information or the occurrence of unanticipated events. We may also refer to certain financial measures not in accordance with generally accepted accounting principles in order to provide additional information to investors. The non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP results may be found in our earnings release and stakeholder letter, which were furnished with our Form 8-K filed after the market closed today with the SEC and may also be found on our Investor Relations website at ir.phreesia.com.

I will now turn the call over to our CEO, Chaim Indig.

Chaim Indig: Thank you, Balaji, and good evening, everyone. Thank you for participating in our second quarter earnings call. Our stakeholder letter and earnings release came out about an hour ago, so let me start the call by sharing a few key highlights of the material we released. Total revenue in the second quarter was $86 million, up 26% year-over-year. Subscription and related services revenue grew 26% year-over-year and the processing revenue grew 21% year-over-year and Network Solutions revenue was up 33% year-over-year. Adjusted EBITDA was negative $12 million, $14 million improvement year-over-year. Our average number of healthcare services clients in the quarter was 3445, up 24% year-over-year. We increased our total revenue for clients to $24,914, up 2% year-over-year.

I want to thank the team for delivering solid revenue growth while also driving another quarter of nice operating leverage. I speak for all of our employee owners when I say we look forward to returning to profitability. Let me hand it over to Balaji to talk about our fiscal 2024 outlook.

Balaji Gandhi: Thanks Chaim and good evening everyone. Moving on to our outlook for fiscal 2024, which ends on January 31, 2024 we are maintaining our revenue outlook for fiscal ’24, which is in the range of $353 million to $356 million implying growth of 26% to 27% over our fiscal 2023 revenue. We are raising our fiscal ’24 adjusted EBITDA outlook by $6 million on the top and bottom end of the range. Our new Adjusted EBITDA range is negative $54 million to negative $49 million from a previous range of negative $60 million to negative $55 million. The increase reflects continued operating leverage across the organization and continued progress on our path to adjusted EBITDA profitability. We are also maintaining our revenue and profitability targets for fiscal 2025.

Those targets are $125 million of revenue in a quarter during fiscal ’25 which implies $500 million of annualized revenue and returning to adjusted EBITDA profitability during the fiscal year 2025. We remain comfortable with our ability to finance our fiscal year 2025 targets with our current cash position. We believe our capital allocation strategy sets us up to deliver on our financial targets for fiscal 2025 and beyond. We continue to focus on driving shareholder value. Operator, I think we can now open it up for Q&A. Thank you.

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Q&A Session

Operator: Thank you. [Operator Instructions] We’ll take our first question from Ryan Daniels with William Blair.

Ryan Daniels: Yes. Good evening, guys. Thanks for taking the question. Balaji, one for you first on the quarter specifically. It looks like the cost of revenues were down year-over-year despite the strong revenue growth and I know in the shareholder letter you talked about some things you’re doing to optimize the platform spend. So can you go into a little bit more detail on that as it looks like pretty impressive cost controls there?

Balaji Gandhi: Yes. And first of all Ryan, just to point out specifically on this quarter, there was a little bit of benefit in terms of timing of certain payments. So I think as we said in the last couple of quarters, we feel pretty good about the improvement we’ve made on this line. And while there’s still opportunity, I think a lot of the improvement, the big improvement has been seen over the past four to six quarters. And to your other question, I mean a lot of this was, look we made a lot of big investments across the platform and we just — we I think we’ve talked about this at length about just growing into it. So I think what you just saw when gross margins were 500 to 1000 basis points lower was just us making that investment knowing we were going to go from 1500 clients to well over 3000 clients and wanted to make sure we support all those clients well.

Ryan Daniels: Okay. That’s super helpful. And then one bigger picture question, it kind of leads off of that. You’ve done a great job progressing at or ahead of your schedule to get to the run rate and breakeven in 2025 fiscal year. And I’m curious if you’re willing as we approach that time point to go beyond that and give us a little bit better view about what the financial model might look like in however manner you want to characterize it kind of beyond the 2025 goals you’ve established? Thank you.

Balaji Gandhi: Thanks, Ryan. Well, look let me try to be helpful on that topic. Maybe first just taking a step back and it actually Ryan relates to your previous question around gross margin. So we did make some pretty big investments and growing into those investments is a very important theme when you just think about our financial profile. But I think specifically let’s talk about G&A expense and so and Ryan you specifically you may remember this from our IPO process four plus years ago. We were spending annually about $30 million in G&A and about to go public with trailing revenue of just over $100 million. And we quickly recognized and we did a lot of research around this that to be a high performing public company with proper controls, processes, systems etcetera, it was going to be significantly higher.

And the research we did concluded it was somewhere in the neighborhood of $20 million a quarter or 80 million annually. So that’s a pretty big step up from the 30 we were at. And yes some of that is people, some of it is just systems and processes et cetera. And in our research we realized that a lot of companies delay that investment and we chose to not delay that and do it upfront. And so you saw in our income statement a big step up in G&A that started to build in fiscal ’21 and sort of peaked about seven quarters ago. And I think if you look at seven quarters ago or over the past seven quarters, G&A has been flat. And I think kudos to our entire team, both the people in in the G&A category itself, but also just all of the folks in other parts of the company, we have done a great job of growing into that and so generating operating leverage while we’ve held that flat.

So just maybe some numbers, it’s I’m just looking, it’s 48% growth from seven quarters ago in revenue with effectively 0% growth in G&A and I think that’s very important context for your question. So now maybe turning to your question around beyond ’25, we think that now that we’ve sort of gotten towards a path of growing into that G&A base where G&A is in the teens as a percentage of revenue which from all of our research we think that’s where we should be and we feel pretty good about that. So and again just to be clear, when we’re at about $500 million of revenue our G&A is around where it is now, it’s in the teens. And so beyond ’25, we can sort of see ourselves getting back to the profile we had when we went public, which is a 20% grower on the top line and growing profit.

And I think how this sort of step up in profitability manifest, we will continue to communicate that as we get closer. We’re still a bit away from that, but I think that was sort of the story we went out with. We’re just going to be a much bigger company with a lot more products, a lot of great people and I think we’ve had a track record of putting out some longer range targets to try to be helpful, but hopefully that answers your question Ryan.

Operator: We’ll take our next question from Jessica Tassan with Piper Sandler.

Jessica Tassan: Hi, guys. Thank you so much for the questions. So Congrats on the nice Network Solutions performance in the quarter. We’ve obviously seen this as an area of strength for — consistent strength for Phreesia despite kind of noise across the competitive landscape. So just hoping you guys can offer some perspective on the life sciences digital media market and on the role of programmatic marketplaces as a place to sell inventory?

Chaim Indig: Yes. So First off, look, I think the reason why we had a strong quarter is the strong team. Like all across the board, our team just executed really well on the network solutions side and that was our product organization, our sales organization, our content team, our analytics team and even our network team. There was a lot of coordination here. And look, I think it’s super competitive. It’s a hard market. I think we’ve been fairly consistent saying it’s not that easy going, but I think when you — we’ll keep attempting to do what we do, which is winning share and delivering really, really valuable messages to patients to try phenomenal ROIs continuously and those ROI’s frankly improve outcomes. And I think that’s what’s been really inspiring is, as a company, one of the things we’ve really focused on is not just thinking about it in terms of dollars and cents, but terms — we really think about it in terms of impact to patient and patient lives and the outcomes that they have and then we’re all pretty proud of here.

So the numbers were very much a team effort, but it’s something we’re really proud of. And then you asked about programmatic?

Jessica Tassan: Yes, just, just…

Chaim Indig: Go ahead.

Jessica Tassan: I’m just curious to know if you guys have a perspective on programmatic marketplaces and whether or not free to participate or if that’s even relevant to the success of your Network Solutions sales organization?

Chaim Indig: Today we don’t participate in programmatic. We’ve invested heavily in our machine learning and data science team and the products and being able to take content live thoughtfully for the right patients at the right time. So we — when we think about being able to deliver the right message, the right patient at right time, that’s something that frankly we think we have deep skill set in and I think programmatic is some — it’s not something that is actually new in the ad business. I think it’s maybe a little — it’s very much talked about, but it’s something that’s existed for as long as we’ve been in the business.

Jessica Tassan:

eForms:

Balaji Gandhi: Yes, thanks, thanks, Jess. Yes, I mean, I think you’ve seen over the past four or six quarters it can sort of be jump around a little bit. I think there was a quarter where it was — went down from 206 to 158, 158 to 169. I think we’re trying from listening to a lot of folks to try to like make sure we’re giving some visibility into the next quarter because we have it and that’s what we’re doing with the 175. I think — I don’t think there’s a ton to read into 136 versus 175 versus in the last quarter being 169, we continue to add a lot of new clients and feel really good about our ability to continue to grow the business. The teams are doing a great job. We’re very happy with the performance, and it’s where we thought it would be.

Operator: We’ll take our next question from Joe Vruwink with Baird.

Joe Vruwink:

eForms:

Chaim Indig: Yes, I’ll let Balaji answer the last part of the question because I didn’t really understand what you were asking. Maybe he can interpret it. So we were — well frankly we’re really excited about, I’m personally I am excited, but I know everyone that’s interacted with the Access team has been just blown away. We’re really talked about its capabilities. It got introduced to us and we’ve been booking, we’ve spending a lot of time with a lot of our clients and what we realized is that there were certain capabilities we just didn’t have and a lot of — and to have those capabilities you needed some really deep content. And when this got introduced to us and we realized that we shared a lot of common clients, we realized that this founder led organization was right for us.