Ladies and gentlemen, thank you for standing by and welcome to the Phreesia Fiscal Fourth Quarter 2022 Earnings 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, Senior Vice President of Investor Relations for Phreesia. Mr. Gandhi, you may begin.

Thank you, operator. Good morning, and welcome to Phreesia's earnings conference call for the fiscal fourth quarter of 2022, which ended on January 31, 2022. Joining me on today's call are Chaim Indig, our Chief Executive Officer and Co-Founder; and Randy Rasmussen, our Chief Financial Officer. A 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 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 include our SEC filings, including in our annual report on Form 10-K 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. These 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 after the market closed on March 30 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.

Hi. Thanks, everyone. Thanks for participating in joining us. You'll notice that Balaji didn't say we're at three different locations. They came over as we do this call together, really good to see Randy and Balaji in person. And I hope everyone had a chance to read our Stakeholder Letter, which was put out. So I guess we'll take the first question.

Your first question comes from the line of Anne Samuel with JPMorgan.

Congrats on a great quarter, and thanks for putting out a long-term target. Appreciate it. As we look at the growth over the next three years, I was hoping maybe you could provide a little bit of color on how we should think about the split between provider client growth and revenue per provider client. Because historically, you've said new clients should grow at about a 5% rate with revenue per provider client at mid-teens to get to that 20%, but the split has been a little bit different recently. So should we think about it maybe as a bump in clients early on and then later on, the revenue per provider client will catch up as those clients expand?

Anne, I think when you think about it, we have a table in the quarterly letter that shows, over time, the average revenue per client has continually gone up. I think when we look at it, our main selling motion is land and expand. So sometimes, there's timing between quarters where we land a client and the client number goes up, and then it follows up as we expand into that healthcare client and move the revenue up. And I think in a period where we've done a lot of investment, I think there's higher client growth than we have seen in prior periods. And so I think on a quarterly basis, you'll see that average revenue per provider client vary a little bit, but over the long run, it will rise year-over-year.

That's helpful. And then I guess just on the spending for this year, how should we think about the cadence? Should we think about it as perhaps higher initially, kind of as you are continuing to spend and as you move towards profitability, kind of coming down? Or should we think about it as evenly spread throughout this year?

I think when you look at it, when we look back at previous history, we were profitable historically. There were three years after we went public, where we were posting positive adjusted EBITDA every year. In '21 is really where we decided there's this great market opportunity and we should really invest in people. And most of that investment was in the last fiscal year that we had in '22. So most of the hiring and expense adds have already been done, and we feel like we're in a really strong position to reach the $0.5 billion target that we have for 2025. So when you look at the year of fiscal '23, what you're really seeing is a full year of expense. So we're not necessarily adding large numbers of additional resources or increasing expenses. It's more of the rise from relative year-over-year because there's 12 months of expenses included in the '23 numbers.

Your next question comes from the line of Sean Dodge with RBC Capital Markets.

This is Thomas Kelliher on for Sean. I had a question on subscription pricing. Did those existing contracts have any sort of pricing mechanisms built in that are related to inflationary pressures or otherwise? Or is that something maybe exclusively negotiated during contract renewals or just with new clients?

I mean it's typical for us to include language in there that gives us the ability to raise prices as contracts renew year-over-year. So generally, yes, we do have those types of provisions that allow us to increase price over time.

Okay. Good. And then on life sciences, I guess, how are you allocating those investment dollars there in that business? And I guess, where do you see the most opportunity going forward within that segment?

So maybe I didn't totally understand the question. So can you reframe it, so I understand this time?

Yes. Just I assume life sciences is receiving some of the same investments.

Yes…

I guess where is the focus there? Are there more newer products and services or capabilities, a bigger sales force or just anything to kind of help doing that?

All right. I'm going to wax on for a little bit here about our life sciences team. They are just doing amazing work, okay? So David has done a fantastic job. We have leaders that have been recognized in the industry. We're not just excited about the product, which I'm going to talk about in a minute, I'll talk about our Insights product, which has just won best product of the year from PM360, is that right?

Yes.

Best new product. I was with our life sciences team last week at their offsite meeting. And just the energy and the organization is just amazing. And we are going to keep investing there as we invest throughout the organization, but really just the performance and the collaboration that they have as a team has just been wonderful to be part of. And I'm pretty excited about the leadership there. And we're going to keep investing. We're proud of what they're doing.

Your next question comes from the line of Jessica Tassan with Piper Sandler.

So interested if you could maybe call out the TAM opportunity across subscription, payments and life sciences revenue lines in the payer market? I think you guys reaffirmed the roughly $9 billion TAM in the deck today. So just how do we think about the incremental opportunity that you see as you broaden your market to payers?

So I think we're still in the early days of the payer market. We have payer clients now. Some of our provider clients have, frankly, turned into payers over the last couple of years. I think we've all seen the market evolve and some of the change in language is also a representation that a lot of our clients have started to take on risk and ensure members. At the same time, we've also increased our offering to the payer market. So you could expect us as we have investments that start to point in the direction of what the market looks like, you could expect us to come back to market and articulate what we think the opportunity is and what our go-to-market will be. Balaji is pretty good at making us do that over time.

That's really helpful. I just have a quick follow-up: do you need any additional products, or are you primarily selling the same suite into that market, at least as you see it today?

So we're continuously, and we have for 17 years as an organization, investing in both our existing products and new products. I think all good technology companies are investing in new products for their existing and new users at all times, and we're committed to doing that. If we're not investing in new products, we might as well just call it a day, right? So expect us to continue as we have both for pre-public and post-public by investing in new products. Some of the ones we're pretty excited about that we've come out with. We're going into new markets around acute. We've come out with our Connect offering, super pumped at our Insights offering. So we expect to both sell existing products into that market and new products.

Your next question comes from the line of Richard Close with Canaccord.

Yes, I had a couple of questions. First of all, congratulations on a strong year. But questions with respect to the new client growth, obviously, you pointed out the 200-plus clients in the fourth quarter was almost as much as fiscal, I think, '19 and '20.

Is that so?

I'm interested in your outlook. Do you believe the pipeline is robust enough to sustain the same level of growth that you reported in the fourth quarter? Any insights on this would be appreciated.

Yes. I mean I think if you look at our target of $0.5 billion in 2025, I mean, that implies 27% to 29% annual growth. And as I said, we made a decision in '21 to put significant investment in the business, and we're seeing results from that. And that's really what gives us some level of comfort to put out a target like that because we do continue to see client adds and success in those organizations.

Richard, this is Balaji. Just on your comment about client growth, I think one of the other things we just said in the letter is we think we've got multiple paths to get there. And I think, Randy, to your question just talked about the cadence and the growth you see with land and expand. So I wouldn't look at any quarter as a reflection of how it might go in the future.

That's fair, and I appreciate that. Regarding life sciences, it's impressive that you have surveyed over 1 million patients this year. As we look into fiscal '23, with new marketing budgets set by pharmaceutical companies as the calendar year begins, I am interested in your thoughts. With a significantly higher number of provider clients, there will undoubtedly be more patient interactions, leading to increased demand for your life sciences business. Can you share any insights on the budgets you've observed from your life sciences clients and how we might expect that to translate into year-over-year growth for fiscal '23?

Richard, you're inquiring about how the budgets of our life sciences customers influence our growth outlook.

Not as much as the growth outlook. The pharma marketing budgets are typically set for the calendar year, starting in January. Given the significant growth in your client base, it stands to reason that you will have many more patient interactions. I suspect that life science companies may be increasing their budgets allocated to someone like Phreesia. Are you observing that?

I think I could say comfortably that we expect to do better this year than we did last year.

Your next question comes from the line of Daniel Grosslight with Citigroup.

I was hoping you could put a little bit of a finer point on expense growth in fiscal '23 and beyond. So if I look at the noncash expenses, per full-time employee, we've obviously seen a pretty dramatic increase this quarter, and that's carrying over to fiscal '23. But outside of just headcount adds and salary, are you seeing any structural shift in how you're managing that expense side of the ledger, i.e., are you having to invest more in product development as you enter into some of these newer markets like the payer market or as you get bigger into the health system market? Curious why we are seeing such a dramatic shift, not just in headcount, but in noncash expense per FTE?

I think when you're looking at noncash expense, are you talking about like stock compensation?

Sorry, expenses excluding noncash expense.

I believe G&A serves as a solid example. As we have considered our growth opportunities and the future size of the company, we have made significant investments over the last few years to ensure we have the scale needed to reach those goals. As mentioned in our quarterly letter, we feel we have accomplished the necessary staffing, systems, and investments to support a business scaling to a $500 million run rate. From a growth perspective, I think opportunities for further investment are limited since we have already made substantial commitments. Moving forward beyond fiscal '23, our focus will be on achieving operational leverage from those investments, which will enhance our overall efficiency.

Okay. But there's nothing, I guess, structural in how you're thinking about investing in new verticals and product development that's causing this pretty dramatic increase in expenses per FTE, right?

No. We were profitable. We like being profitable. We expect to get back to profitable.

Yes, makes sense. And then on the payment processing expense, that came in a little bit higher than historically around 61% of payment processing revenue versus historically, it's been around 58%. Is there anything that's causing this increase in payment processing expense specifically?

I think there's always a mix in how cards are processed. There are sometimes fluctuations in visit volumes that can affect results from one quarter to the next as the business grows. As you know, Visa and Mastercard have also announced price increases, which contributes to some variability over time. However, we also have the capability in our contracts to raise prices.

It's those fancy rewards cards that are killing us, right, rewards cards.

Your next question comes from the line of John Ransom with Raymond James.

A couple for me. Can you help us tease out the effect of Insignia on both revenue and members? How much that helped in the quarter?

Yes. I think when we announced Insignia last quarter, it's not material to the results from a revenue perspective. I mean you can see that the purchase price, it is a small tuck-in acquisition. So it doesn't really impact our outlook significantly.

Okay. Second question, I mean, if we just do the simplistic analysis of SDRs to next 12-month revenue, I mean, you more than doubled your SDR force from July of '20 to July '21. And yet you're calling for a nice uptick in revenue, but it looks like the revenue per SDR would have to drop pretty meaningfully to just grow top line acceleration by 500 bps when you're more than doubling the SDR. So can you kind of help me understand the relationship between revenue and SDR count? And is there something structural where that correlation, which is pretty tight for a couple of years, is kind of broken down?

From the perspective of the SDRs, they represent the beginning of the revenue cycle. It's important to note that we've made substantial investments in the past year, which accounts for 12 months of expenses. Consequently, you might observe a decline in productivity when analyzing revenue per headcount or revenue in relation to costs. However, I believe this dip is temporary. As these resources, which have been in place for a year, start to operate more efficiently, productivity will increase. There's also an initial training and onboarding period that contributes to this temporary decline in metrics.

Okay. And I know you've never grown out that path. And then lastly, I mean, we've learned that you've onboarded Tenet Healthcare as a hospital client. I guess I would have thought that might have engendered a press release and a little bit of a marketing opportunity for you. So what's your philosophy? Was that something they asked you not to do? Or is it just you guys are quite modest and want to keep your light under a bushel?

I think what's important is not to issue press releases; it's about doing good work for our clients, John. The work we've done over 17 years has paid off significantly. Usually, when we issue press releases, it's because we're asked to do so. My belief is that we should focus on delivering excellent results for all our stakeholders, and in the long run, this approach yields positive outcomes. I'm genuinely pleased that our clients speak positively about us both publicly and privately.

Let me speak to the mayors of the same and set those free sale promotions. I think we need to talk more about that.

You're not the only parent involved in marketing, and it can be quite frustrating. However, we have certainly increased our discussions about what we're doing with our clients across various social media platforms, even though I'm not personally active on them.

I look forward to your Instagram page. Thank you.

This concludes today's conference call. Thank you for joining. You may now disconnect.