Good morning, ladies and gentlemen and welcome to the Phreesia Fiscal Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

I would now like to introduce Balaji Gandhi, Vice President, Investor Relations for Phreesia. Mr. Gandhi, you may begin..

Thank you, operator. Good morning and welcome to Phreesia’s earnings conference call for our second quarter of fiscal 2020, which ended on July 31, 2019. As a reminder, Phreesia’s fiscal year end is January 31. Participating on today’s call from Phreesia are Chief Executive Officer and Co-Founder, Chaim Indig and Chief Financial Officer, Tom Altier.

Following prepared remarks from Chaim and Tom, we will conduct a Q&A session. A complete disclosure of our results can be found in our earnings press release issued yesterday evening as well as in our related Form 8-K submission to the SEC both of which 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 following the conclusion of the call.

During today’s call, we will make forward-looking statements pursuant to the Safe Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act, including statements relating to the expected performance of our business, future financial results, including guidance for the full fiscal year 2020, our strategy, our partnerships and expected launches of products and services, long-term growth and overall future prospects.

These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call.

In particular, those described in our risk factors included in our final prospectus for our initial public offering filed with the SEC on July 19, 2019 and the risk factors included in our Form 10-Q that will be filed before September 16, 2019. You should not rely on our forward-looking statements as predictions of future events.

All forward-looking statements that we make on this call are based on assumptions and beliefs as of today and we undertake no obligation to update them except as required by applicable law.

We will also refer to certain financial measures not in accordance with Generally Accepted Accounting Principles in order to provide additional information to investors. These non-GAAP measures should be considered in addition to and not as a substitute for or an isolation from our GAAP results.

A reconciliation of GAAP to non-GAAP results may be found in our earnings release and supplemental materials which were furnished with our Form 8-K filed after the market closed on September 9 with the SEC and may also be found on our Investor Relations website at ir.phreesia.com. With that, let me turn the call over to our CEO, Chaim Indig..

first, the average number of provider clients; second, the average revenue per provider client; third, patient payment volume. Let me cover the highlights of our fiscal 2020 second quarter, which ended July 31. Total revenue for the quarter was $30.8 million, up 24% year-over-year. The average number of provider clients was 1,558, up 6% year-over-year.

Average revenue per provider client in the quarter was $16,472, up 23% year-over-year. Patient payment volume was $464 million in the quarter, up 30% year-over-year. Adjusted EBITDA is $0.7 million, down $1 million year-over-year. Tom will spend significant time on these metrics in a few minutes. Let’s talk about our guidance.

We expect to provide an outlook for total revenue and adjusted EBITDA on an annual basis here at the beginning of each fiscal year and updates to those annual figures on the quarterly basis. Our outlook for fiscal year 2020 ending January 31, 2020 is as follows. We expect total revenue to be in the range of $118.5 million to $119 million.

We expect fiscal 2020 adjusted EBITDA to remain positive. Going forward, we expect our adjusted EBITDA margin to increase annually. We have seen an increase in public company expenses and have incorporated them into our adjusted EBITDA outlook. Our longer term adjusted EBITDA margin is 20%.

With that, I will now turn the call over to our CFO, Tom for a detailed financial review..

Thank you, Chaim and good morning everyone. Let me take a few minutes to run through the highlights of our income statement, balance sheet and cash flows for the fiscal second quarter. I will also provide a bit more color on our fiscal 2020 outlook. First, revenue, as Chaim mentioned, total revenue was $30.8 million, up 24% year-over-year.

We reported revenue in three line items, subscription and related services, which was $14 million in the quarter, up 34% year-over-year, payment processing fees, which were $11.7 million in the quarter, up 27% year-over-year, and life sciences, which was $5.1 million in the quarter and flat year-over-year.

It’s also useful to track our combined revenue from providers, which adds subscription and related services to payment processing fees. Said differently, provider revenue covers our entire business less our life sciences revenue. Provider revenue in the quarter was $25.7 million, up 31% year-over-year.

Now, let’s dig a little deeper into provider revenue. The two drivers of the 31% provider revenue growth are average provider client growth and average revenue per provider clients. Average provider clients grew 6% year-over-year. This is consistent with the mid to single-digit growth we have experienced over the past six quarters.

Average revenue per provider client grew 23%, also consistent with trends over the past six quarters. We believe these trends provide a solid indicator of our growth formula. We land new client logos and over time we expand with more providers to each client and up-sell more patient intake modules to each client. Now, let’s talk about life sciences.

Life sciences revenue was flat year-over-year, but up a strong 26% sequentially. In order to understand the driver of the strong sequential performance, let me review our life sciences revenue model.

Our clients, our life science companies, our revenue was based largely on the delivery of messages that contracted price per message to targeted patients. Messaging campaigns are sold for a specified number of messages delivered to qualified patients over an expected timeframe. Revenue was recognized as the messages are delivered.

Now, let’s go back to the $5.1 million in life sciences revenue in the fiscal second quarter, which was up 26% sequentially. Our team delivered the specified number of messages over a shorter timeframe. This outperformance brought forward additional revenue into the quarter.

Before we get into some highlights on expenses, I also want to take a few minutes to talk about payment processing. Our payment processing revenue was based on the number of transactions and the dollar amount of patients came at volume that we processed on credit and debit cards on the Phreesia platform.

Our payment processing fees are generally calculated by one of two messages and sometimes both. Those methods are a percentage of the total transaction dollar value processed and the fee per transaction.

In fiscal second quarter, our patient payment volume or the total dollar volume of transactions on our platform was $464 million, up 30% year-over-year. Credit and debit patient payment volume represented roughly 82% of the total patient payment volume in the three months ended July 31, 2019.

The remainder of our patient payment volume in the quarter was composed of credit and debit transactions, for which Phreesia acts as a gateway to another payment processor as well as cash and check transactions. As I mentioned earlier, fiscal second quarter payment processing fee revenue was $11.7 million, up 27% year-over-year.

Payment processing expenses in the quarter were $7.1 million, up 33% year-over-year. The margin on our payment processing revenue in the second quarter was 39% versus 42% in the prior year quarter. So our payment processing profitability decreased by 280 basis points year-over-year. You should expect quarter-to-quarter fluctuation in profitability.

We would expect to see moderate pressure on an annual basis over time due to lower take rates and higher interchange costs. Now, let me provide a few noteworthy expense items in the fiscal second quarter. I will review several expense line items on an adjusted non-GAAP basis, which excludes stock-based compensation expense from each line item.

Please note that a full reconciliation of GAAP to non-GAAP measures, including adjusted EBITDA is included on our earnings press release and our 10-Q filed with the SEC. On an adjusted basis, cost of revenue was $4.2 million or 13% of total revenue, down 100 basis points year-over-year.

On an adjusted basis, sales and marketing expense was $7.9 million or 25.5% of total revenue, down 60 basis points year-over-year. On an adjusted basis, research and development expense was $4.5 million or 14.7% of total revenue, up 210 basis points year-over-year.

The 210 basis point increase on an adjusted basis reflects our ongoing focus on partner integrations and product development. On an adjusted basis, general and administrative expense was $6.4 million or 20.9% to total revenue, up 260 basis points year-over-year.

The biggest driver of this increase as a percentage of total revenue, were the costs that we are now incurring as a public company. Adjusted EBITDA, which excludes stock-based compensation from EBITDA, was positive $0.7 million, down $1 million year-over-year.

The decline reflects the combined impact of the expense items I discussed earlier, particularly the cost associated with preparing to become a public company. Fully diluted shares outstanding as of July 31, was $35.8 million and cash on the balance sheet at July 31 was $100.1 million, up $94.1 million from April 30, 2019.

The increase of $94.1 million represents the net impact of $127.2 million in net proceeds from our IPO and the repayment of $17.7 million outstanding balance on our revolving line of credit plus the dividend of $15 million to our former preferred stockholders.

Cash flow from operations from the quarter was $0.6 million versus $1.9 million in the prior quarter, reflecting the higher expense trends as previously stated.

Capital expenditures for the quarter were $2.9 million, inclusive of $1.5 million of capitalized software development relatively unchanged from the year-over-year comparables of $2.9 million and $1.3 million respectively. Before opening the call to Q&A, I wanted to provide some more color on our fiscal 2020 outlook.

When considering our $118.5 million to $119 million revenue outlook for fiscal 2020, please note the following. When you model provider revenue, note that patient payments tend to be higher at the beginning of the year with the resetting of patient deductibles. This is an annual cycle that we all personally see happening here.

We expect life sciences revenue to be relatively flat year-over-year. And finally, G&A expenses will be higher on a quarterly basis largely due to much higher than anticipated directors and officers’ liability insurance and accelerated compliance with Sarbanes-Oxley.

Due to the strong performance of our share price, we may need to be Sarbanes-Oxley compliant as early as next year. We estimate these two factors will increase G&A expense by around $3 million to $4 million on an annualized basis.

That said, we continue to see solid operating leverage across our business as we grow and we continue to target adjusted EBITDA margin in the 20% range long-term. All-in-all, we are very pleased with our fiscal second quarter results. Operator, we can now open up the call for questions..

Thank you. [Operator Instructions] Your first question comes from the line of Anne Samuel with JPMorgan. Anne, your line is open..

Hi, guys. Congrats on a great quarter and thanks for taking the questions.

I was hoping you could maybe provide a little bit more detail on the social determinants of health announcement, what kind of implications that might have on the cross-sell opportunity going forward?.

I’d say it’s really early to describe how it’s going to affect revenue and we are really not comprising any guidance change for revenue but we think it’s strategically important in the alliance unbelievably well to our mission.

I am pretty excited and I know everyone here at Phreesia is excited to be partnered with the state on this groundbreaking program. And we think frankly social determinants are going to become a huge part long-term on how people help manage the cost of their own healthcare and frankly improve their outcomes.

So, in fact that we are partnered with probably the largest SQH program in the country right now is just exciting to us..

Great. And then just one on the revenue line, your revenue was slightly better than our expectations this quarter, I was just hoping maybe you could speak to what drove some of that upside and then just how to think about how that will flow through to the back half of the year? Thanks..

Well, I will answer the first part and then I will let Tom answer the second part of the question. So, look, I would say, the team did just a phenomenal job of just taking practices live faster and driving more add-ons, little bit faster than we had expected. I wouldn’t suggest that that’s going to happen as we went through this IPO process.

Everyone just really kicked into gear and I am really proud of the team and how they execute in this past quarter..

Annie, with respect to revenue going forward for the rest of the year, keep in mind that payment as I mentioned on the call, payment processing revenue was highest in the first quarter and tends to moderate as we go through the year and also life sciences revenue can be bit lumpy and may not stay at the levels that we are seeing in Q2..

That’s very helpful color. Thanks, guys..

Your next question comes from the line of Ryan Daniels with William Blair. Ryan, your line is open..

Yes, good morning guys. Thanks for taking the question. Congrats on a strong quarter out of the box.

Want to follow-up, Tom, you had mentioned partner integration costs, I am curious if you could provide any color on the work that you are doing with Epic and Cerner integration activities and maybe how that’s existing in either the new sales or the pipeline or even customer retention and if it’s maybe too early to see those benefits manifest maybe what your expectations would be as those integrations develop?.

Ryan, that’s correct, we are doing those integrations, but we think it’s too early at this time to really give you much color on what those will result in the rest of this year and 2021..

Okay.

And maybe something you didn’t mention but update on the work you are doing on the inpatient facilities, I know you have got a partnership with R1 based on their public comments, it seems like they are rolling that out at some fairly large acute care hospitals and I know it has not been a core focus in the past, but seems like a interesting novel TAM for you to target, so maybe you can talk a little bit about that market opportunity and kind of what you are seeing there? Thanks..

So, we really appreciated our partnership with Joe and his team at R1. I think that together, along with the clients that we serve, we have seen really good early success.

I think as we started having real metrics, Ryan, to be able to discuss, we will be coming out to the street to talk a lot about that, but I still think it’s pretty early to discuss just really put a long-term view on the values at acute opportunity.

The one thing I will say about acute is it’s complex and hard and we want to be able to really make sure that we serve those populations appropriately. I am really excited about the opportunity and also in fact they also want to echo one of the things Tom was saying about Epic. Our partnership with them has been wonderful.

They have been a great organization to work with..

Alright. Thanks for all the color guys. Congrats again on the strong start..

Gentlemen, your next question comes from the line Jamie Stockton with Wells Fargo. Jamie, your line is open..

Good morning.

So I guess maybe just following up on Ryan’s question about Cerner and Epic, if we kind of take a step back and look at the broader environment, NextGen talked about maybe some trend towards subscription deals that is impacting them a little bit, you got I am sure some noise around being a MGE and putting those businesses together, can you just gives us a sense of what the environment feels like right now if there is anything that’s changed.

Just anything on that front will be great?.

Well, I don’t think we have seen anything materially changing in the environment that we haven’t seen continuously which is physicians and healthcare systems continuously looking to drive instant value or as quick as they can value into their organizations and their propensity to continuously invest in solutions that have strong ROIs.

I know I think a lot of those partners that we have, they have been doing phenomenal work and I can’t speak for them, but I can speak for our organization and I think we really just kept our head down and can really just tried to provide a good ROI to our clients with great products and month-in and month-out just do the things we say we are going to do..

Okay, that’s’ great. And then maybe just on the life sciences business here that you guys had really solid execution during the quarter and got some campaigns maybe down a little sooner than you might have otherwise expected.

Can you talk about what your approach is to that business, let’s say over the next 2 or 3 years whether or not you are trying to grow it from this point, just anything that you are doing as far as trying to elevate what has been kind of a flat business for the last few years?.

I think we are still guiding in the near-term for it to be relatively flat. I think where we really – we feel good about that business today. I think most of our core re-sourcing has gone and will continue growth around the products in our provider business.

If anything changes, I am sure will come to the market and everyone, because we think it’s – we are really excited about it.

We are really pleased with what that team has been doing and we appreciate that it was a little bit bigger than I think we thought it would be and this past quarter and we are trying to set the appropriate expectations moving forward, but we are proud of that organization and what they do.

We just think in the near-term we are sort of guiding that it’s in the flat range..

Okay, thank you..

Cheers mate..

Gentlemen, your next question comes from the line of Sean Wieland with Piper Jaffray. Sean, your line is open..

Thank you. Good morning.

On the revenue per client metric that you have given us, can you break that down into how much of that is being driven by natural organic growth of the clients and their business growing, how much of that is increased penetration of their existing products that they bought and how much of that is uptick on the new products and what new products are they taking up?.

That’s a great question. So I think the answer is we are selling more clients. We are expanding those clients. And they are buying more applications that we build and we are seeing it spread across, I don’t think we are going to breaking down which aspect it is, but I’d say in three of those we are seeing continuous uptick.

I am very happy with the expense, I am very happy with the new wins we are seeing and I think all of us are very happy with the uptick we are seeing in up-sell and cross-selling our additional applications and products..

What about calling out some specific apps that they are taken out?.

So I’d say the one thing that I will call out that we are seeing broad adoption across the board is mobile. And I would say that in almost every account we are seeing mobile adoption and the uptick being just unbelievably high, which makes us happy and frankly it flows all the way through it.

And we think it’s just a phenomenal experience and one we have been building for years..

Alright, thank you.

And then on the life sciences business, so I hear you on the early delivery, is there a delta in the cost structure when you deliver these campaigns earlier and in these agreements, whose control is the cadence of these messages, is it you or is it the client?.

Sean, there is no uptick in costs if we deliver earlier.

And can you repeat the second part of that question?.

Yes just wanted to know who is really controlling the cadence of how these messages goes out, is it you, is it the life sciences clients, is it the provider?.

It’s – so, we set a general budgeted range with our life sciences clients. And as it’s accelerating, the teams will usually communicate back to them indicating and making sure that they are comfortable with the acceleration.

So, it’s something where we don’t just do it without really making sure that our clients are on board with it and sometimes they would like us to pace it throughout the year and sometimes they are rapidly excited to reach as many patients as quickly as possible. It’s really depended on the brand and/or the program that they are driving towards.

That’s a great question..

Alright. Thank you very much..

We are showing no further questions. I will turn the call back over to Phreesia’s CEO, Chaim Indig for closing remarks..

Thank you very much everyone for joining us. We really appreciate your time. We are very happy about the quarter that we just came out of and we look forward to the next couple of quarters and I look forward to meeting lot of you over the next couple of months. Cheers. Thank you very much..

Thank you. This concludes today’s conference call. Thank you for your participation. You may now disconnect..