Earnings Call Transcript
Phreesia, Inc. (PHR)
Earnings Call Transcript - PHR Q2 2023
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the Phreesia Fiscal Second Quarter 2023 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, Senior Vice President, Investor Relations for Phreesia. Mr. Gandhi, you may begin.
Balaji Gandhi, Senior Vice President, Investor Relations
Thank you, operator. Good morning, and welcome to Phreesia's earnings conference call for the fiscal second quarter of 2023, which ended on July 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 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, the stakeholder letter, and our risk factors included in our SEC filings, included in our quarterly report on Form 10-Q that will be filed with the SEC tomorrow. Our 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 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, CEO
Thank you, Balaji, and good evening, everyone. Thank you for participating in our second quarter earnings call. In case you didn't spend the last 30 minutes reading all of our earnings material cover to cover, let me share some key highlights and additional commentary. Revenue in the second quarter was $68 million, up 33% year-over-year. I want to thank the team for achieving our sixth consecutive quarter of over 30% revenue growth. In the quarter, our average number of health care services clients was 2,776. We added 250 average health care services clients sequentially, establishing a new Phreesia record for the fourth straight quarter. This represents 40% year-over-year growth. Health care services revenue, which is the combination of subscription and related services and payment processing revenue, was up 29% year-over-year in the second quarter. On a per average health care services client basis, subscription and related services revenue remained in the $11,000 range in the second quarter, reflecting both our land-and-expand go-to-market motion and the significant growth in average health care services clients. Payment processing revenue grew 20% year-over-year in the second quarter after having grown 38% year-over-year in last year's second quarter. Last year's second quarter stakeholder letter attributed the 38% growth to catch-up utilization from the reopening during the pandemic. Phreesia now impacts more than one out of 10 patient visits in the United States every day, helping patients become more activated in their health and achieve better health outcomes. The size of our network and the strong execution by our team helped fuel growth in Life Sciences revenue of 46% year-over-year, which was on top of the 95% year-over-year growth in last year's second quarter. Moving on to our outlook for the rest of the fiscal year, we now expect revenue for fiscal 2023 to be in the range of $273 million to $275 million, tightening our previous range of $271 million to $275 million. We expect average Healthcare Services clients to increase by at least 200 in the fiscal third quarter as our investments from the last couple of years continue to fuel our growth. The operating leverage we began to see in the first quarter gained momentum in the second quarter, and we expect to return to adjusted EBITDA profitability in fiscal 2025. Based on our strong performance, we've increased the adjusted EBITDA outlook for the fiscal year to a range of negative $109 million to negative $106 million from our previous range of negative $126 million to negative $122 million. We remain comfortable with our ability to finance our fiscal year 2025 growth plan and expect to end fiscal 2023 with $165 million to $170 million in cash and cash equivalents. We believe our investments over the last couple of years are helping us keep our product best-in-class, build more amazing new products, expand our relationships with existing clients, and grow our network with new clients. 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 open it up to Q&A now.
Operator, Operator
Your first question comes from the line of Anne Samuel with JPMorgan. Your line is open.
Anne Samuel, Analyst
Congrats on the strong local growth. I was hoping maybe you could provide a little bit of color on the EBITDA guidance raise. It's quite a bit more than the second quarter outperformance. I was just wondering, are there any incremental efficiencies you're finding in the back half? And if so, what are those?
Randy Rasmussen, CFO
Thanks for the question. I mean I think we're really proud of the team for focusing on spending money smartly. I think as we have stated in the past, when you think about each dollar that we spend very carefully, the team has done a great job watching the expenses. And I think that just continues in our culture. We think about every person that we hire and every dollar that we spend on software services as important. So it's just that continued focus on making sure that what we spend money on adds value to the business and helps us grow. And where we don't need to spend money, we pull back.
Anne Samuel, Analyst
That's great to hear. Maybe just another one. Your Life Sciences business was once again really, really strong, and that seems to be bucking the trend that we're hearing from other companies with Life Science customers. So I was just hoping you could provide a little bit of color there on what you're seeing in Life Sciences and if there's been any shift in the marketplace?
Richard Close, Analyst
First, the network's growing in its time. So, the investments we've been making in growing the network have really paid off in being able to just expand our footprint, deliver more messages to more patients that add more value second. Second, the team is just amazing. They've been doing a great job. And I don't think we would be where we are if we hadn't been investing in the products and in the people. And I'm just so impressed by the execution all the way through with our Life Sciences or, frankly, with everyone. But I'm calling it out based on this question.
Anne Samuel, Analyst
That's great. Congrats on a great quarter.
Operator, Operator
Your next question comes from the line of Glen Santangelo with Jefferies. Your line is open.
Glen Santangelo, Analyst
I just also want to follow up on the digital advertising question. I mean, could you give us a sense for maybe how much of that is already contracted when you look at sort of the balance of the year and maybe how much you have to win on a quarter-by-quarter basis? Because I'm just kind of curious with half the third quarter just about over, I'm kind of curious as to what type of visibility you maybe have in that Life Sciences growth for the balance of the year.
Chaim Indig, CEO
We have a good amount of visibility into the fiscal year, but there are some aspects we are uncertain about. January is particularly critical for us, and we don't have as much insight into it because many contracts are finalized in the following year's agreements. This is especially true if our clients operate on a fiscal year, which means that whatever we expect from that month will actually be reflected in the next fiscal year's results.
Glen Santangelo, Analyst
Right. So you're kind of suggesting you have pretty decent visibility up through December, right, but the final month of Q4 falls into theoretically, a different fiscal year for your clients. Is that what you're saying?
Chaim Indig, CEO
Yes, I'd say we have decent visibility.
Glen Santangelo, Analyst
Okay. I wanted to follow up with Randy regarding the balance sheet. This is the first time I’ve seen specific cash flow guidance forecasting the cash balance at the end of the year. If I look at that number, $165 million to $170 million, alongside your EBITDA guidance for this year and considering that you indicated fiscal '23 as being the low point in EBITDA, does that imply that you are confident in achieving your fiscal '25 adjusted EBITDA profitability targets with the cash currently on your balance sheet? Additionally, do you have any other sources of capacity we should consider?
Chaim Indig, CEO
Glen, I'm going to let Randy answer that question. But I think the reason we decided to put it out there and like print it, it's just a lot. So there's just no confusion, right? Because this way we don't stumble around with the answer that we think is important to a really important question. And then I'll let him answer it.
Randy Rasmussen, CFO
Glen, you're exactly right. We're confident where our cash balances are. We don't have any borrowings on our line of credit, and we have adequate cash to execute on our 2025 plan. So we're feeling really good about our cash.
Glen Santangelo, Analyst
And really, how big is that line of credit, just remind us?
Randy Rasmussen, CFO
It's $100 million.
Operator, Operator
Your next question comes from the line of Ryan Daniels with William Blair. Your line is open.
Ryan Daniels, Analyst
Nice quarter. Another one on the guidance outlook. I don't think in the past, you've offered guidance on net new client additions. You're expecting another strong quarter there of at least 200. So what's helping with the visibility there? Is that related at all to some of the trial packages you're allowing people and seeing high conversion there such that you have a pretty good feel that those are going to turn into paying clients by the end of the quarter?
Chaim Indig, CEO
Yes, we have good visibility for the quarter, and Balaji wanted to simplify the modeling process. We followed his advice and provided more clarity to make it easier for everyone to model.
Balaji Gandhi, Senior Vice President, Investor Relations
But Ryan, I don't think it's a change in our visibility for you; it's more disclosed with that.
Ryan Daniels, Analyst
Thanks, Balaji. I appreciate that. And then maybe just at the prepared comments, you have a comment in there about the potential to drive revenue per client for the subscription-related services up to $126,000 versus where it is today, so a tenfold increase. Can you talk a little bit longer term about how that will figure into the growth algorithm maybe after the bolus of new client additions starts to slow down, how you can push them to get more value from your system by expanding the services that they purchased?
Randy Rasmussen, CFO
Ryan, I'm going to answer the bigger part of the question. But I just want to clarify. I think you might be doing some quarterly math on annual math because I think we would consider the opportunity to be about 3x. You sort of took the quarterly subscription revenue we did per client and annualized that. It'd be about 1/3 of the $126,000.
Ryan Daniels, Analyst
Yes. No, I'm just referring to the comment in the release about when you created the TAM of $6.3 billion, saying 50,000 subs and $126 subscription-related services, so getting up from current levels to that level.
Randy Rasmussen, CFO
Got it. And maybe the second part of your question, Chaim can answer.
Chaim Indig, CEO
I think I remember correctly. It's about how we can encourage more people to purchase more of our products and expand. This simple philosophy began years ago when we started the Company. First, we fulfill our promises, provide as much value as possible to our clients, and treat them well. Then, we expand our reach. When we expand and continue to provide significant value while treating our clients excellently, they tend to buy more products and are open to trying new ones. As these products succeed and deliver strong returns on investment, clients naturally move on to additional offerings. This process is made possible by hiring talented individuals, compensating them well to create exceptional products, and executing effectively, which creates a positive cycle of keeping our promises and treating people well. We strive to maintain that.
Operator, Operator
Your next question comes from the line of Richard Close with Canaccord Genuity. Your line is open.
Richard Close, Analyst
Congratulations. Maybe somewhat of a follow-up to that last question by Ryan, but the average revenue per client declined. And obviously, you've had significant new client adds over the last several quarters, also introduced new offerings over the last year, referral management and, I guess, auto schedule, to name a few. But how are you thinking about the average revenue per client and timing of when maybe growth reaccelerates on that line item?
Randy Rasmussen, CFO
When we examine the average revenue per client, it also accounts for our payments business. The decrease we're discussing is primarily related to the payments sector, which is growing at 20%, while our client growth is increasing by 40%. This is the key factor. Over the last six quarters, the average revenue per subscription client has remained quite stable. However, in the past three quarters, we've been adding over 200 clients, compared to around 100 clients in the three quarters prior. We are pleased that the average revenue per client has stayed relatively constant despite the significant increase in our client base. From our viewpoint, this situation is quite healthy, and it is challenging to boost that figure when we are continually adding a large number of clients each quarter.
Richard Close, Analyst
Okay. And then maybe just on utilization, you made some comments there. And I was curious if you could provide a little bit more context stating revenue outlook incorporates our expectations for utilization in the current environment. Is there anything else to add in terms of just what you're seeing from utilization or expecting in the back half of this year?
Randy Rasmussen, CFO
I mean are you asking about patient utilization in the ambulatory setting? I mean we look at it regularly and think it's sort of embedded in how we think about our outlook for the year.
Chaim Indig, CEO
Or in the acute, we sort of see it all on a daily basis.
Richard Close, Analyst
Yes, maybe a little bit more context in terms of what is baked into your guidance? Are you looking for any improvement? Or is it just the status quo?
Chaim Indig, CEO
I would say that hoping for improvement isn't a viable strategy, Richard. Generally, I don't subscribe to that mindset. I'm quite practical about this, and as Randy pointed out, we don't anticipate a significant increase in utilization during the second half of the year. That's simply not what we are observing, and we're not receiving indications from our providers that they are preparing for any substantial influx.
Operator, Operator
Your next question comes from Ryan MacDonald with Needham. Your line is open.
Matt Shea, Analyst
This is Matt Shea on for Ryan. Thanks for taking the question and congrats on a solid quarter. I wanted to touch on payments. So, we've been hearing about rising patient self-pay balances at some provider practices, which, in some cases, are turning to bad debt. Curious, if you're seeing this with your clients? And if so, what impact rising patient balances might have on the payments outlook?
Chaim Indig, CEO
I haven't observed that in our numbers. If it were present, it would typically come to our attention. I also haven't been informed of any such issue. Additionally, we manage hundreds of thousands of active payment plans, and I don't see any significant changes in trends across those plans nationwide. Randy, have you received any updates?
Randy Rasmussen, CFO
Yes, I don't think we've seen anything that would indicate what we're talking about in our data yet.
Chaim Indig, CEO
Yes, but I can pretty much guarantee, there's someone at Phreesia listening to this call right now that's going to try to figure out if that is the case. But if we do hear it, I'm sure we'll talk about it, but we haven't seen it in our numbers.
Matt Shea, Analyst
Okay. That's good to hear then. One other one would be, so Epic held a user group in conference in August and announced single sign-on to unify their patient portals and also mentioned the desire to develop and deploy some text-based scheduling and intake solutions. So it sounds like patient portals are getting better in HR vendors and may be interested in moving into text-based offerings. So just curious if you could comment on the competition and competitors that your EHR vendor partners create. And then what impact Epic launching a text-based patient intake solution might have on your existing relationship?
Chaim Indig, CEO
I can't comment on any specific company, but I can say that it's a significant effort to operate at our scale. We've faced competition for our products since the inception of Phreesia, which I think is a positive aspect. However, scaling our operations with complex data and ensuring it works for a variety of patients in different settings is quite challenging. This complexity is why we are investing not only in our current products but also in future developments, which gives us confidence in our outlook. What we do is difficult, but I believe competition ultimately improves the landscape. I'd actually love to see improvements in American healthcare accelerate due to increased innovation.
Operator, Operator
Your next question comes from Stephanie Davis with SVB Securities. Your line is open.
Stephanie Davis, Analyst
Congrats on the quarter. I was hoping you can give us a refresh on the payment processing brand when you first sign up client? How should we think about the lag until you're at full run rate? And what sort of optical drag good acre revenue per just given your client growth continues to be outsized?
Chaim Indig, CEO
Yes. I'll address part of your question, and then Randy may cover the rest. There are a few points regarding payments. First, as we expand our locations, our payment processing increases. Additionally, as we grow the organization, we incorporate more payment options. This includes ramping up the number of cards on file and payment plans, which contributes to our overall payment growth. It's important to note that our payment numbers also experience seasonality. Payments typically don't grow steadily and are influenced by annual seasonality linked to deductibles, which is a helpful way to think about it.
Randy Rasmussen, CFO
We count the customer when the first dollar of revenue comes in. So as soon as they start using our payment solution, we will count them as a client. And as Chaim said, there's usually a ramp-up period where they're transitioning to us because there's always an incumbent payment provider in place. So, it may take three to four months for them to fully be onto our payment solution.
Chaim Indig, CEO
Or more...
Randy Rasmussen, CFO
In terms of complex there.
Stephanie Davis, Analyst
So another one on the payment processing side because that was really helpful. Is it safe to suggest that there was a shift away from last quarter's discounting given the quarter-over-quarter increase in transaction yield? Or is there anything else to call out there just given us a healthy step up?
Randy Rasmussen, CFO
I mean there's different things that can affect that. I mean that's also the mix of cards, like what they're paying with the Amex and Mastercard, if it's card-present, card-not-present, there's a lot of things that go into that can affect that effectively.
Chaim Indig, CEO
And there were some fee changes from the carriers.
Operator, Operator
Your next question comes from Daniel Grosslight with Citi. Your line is open.
Daniel Grosslight, Analyst
Thanks for taking my question and congrats on the quarter, guys. I'd like to follow up on one of Richard's questions around utilization. I know you mentioned kind of you're not going on a hope here. But if you listen to many providers in the public markets have said on 2Q is non-COVID utilization remains depressed. And then if you look at kind of the flu season that is happening in the Southern Hemisphere right now and speaking to doctors where they think kind of ambulatory utilization is going to go in the second half. Can you just put a finer point on how you're making utilization into your estimates now? Are your clients still at kind of less than pre-COVID utilization? And how should we think about that going into the second half of the year?
Randy Rasmussen, CFO
We review the data every week, and honestly, some weeks show increases while others do not. Overall, we believe we lack sufficient data to determine whether there is a COVID impact or not. As Chaim mentioned, we are not expecting any significant returns in utilization. Typically, our revenue remains stable throughout the year, with seasonality causing higher payment volumes earlier on, which then tapers off towards the year's end. During the middle of the year, when new clients come on board, our revenue tends to stay flat from quarter to quarter.
Chaim Indig, CEO
But we do have the data in real time. We used to have big screens in our offices where we could see utilization in real time.
Balaji Gandhi, Senior Vice President, Investor Relations
And Daniel, one thing I would say that public now for 13 quarters and I think in trying to help people at least do some modeling. The overall payment volume that we report every quarter, if you look at that, I think many of the analysts who look at it this way, if you look at that on a per client basis, it's pretty clear the commentary from our letter and Chaim's opening comments, that something unusual was going on with a lot of sort of catch-up utilization last year, and we're still working through that. I think that's pretty evident.
Daniel Grosslight, Analyst
Okay. Good. And then some folks selling into the provider market, not your direct peers, but other, I'd say, health tech provider-focused health tech companies have had some issues selling into the provider market; they're seeing elongated sales cycles, et cetera. You're not seeing that which is great. I'm just curious, what's resonating the most in the market now? And are you seeing any degradation in kind of the starting price and module upsells that would suggest that some folks are being a little more conservative given some pressures in the provider market?
Chaim Indig, CEO
I want to take this moment to commend our provider sales organization and our go-to-market team. The success we are experiencing is largely due to our client success team, our sales organization, our demand generation team, and our marketing team. They are doing an outstanding job. I feel excited every time I join the weekly calls. That’s my first point of acknowledgement. I want to express my gratitude, even though they will hear it during the all-company call later. Moving forward, it's essential to understand that this is part of our selling strategy. We've emphasized this for 13 quarters, and it’s crucial for everyone to recognize this as our approach to sales. At Phreesia, we believe in building trust. We do this by entering new accounts, delivering significant value, and expanding our presence, which earns us the right to further develop those accounts. We believe this is how we operate. While it may be more costly initially, the return on investment is significantly better, providing us with greater visibility and an improved client experience. Our products deliver incredible value.
Daniel Grosslight, Analyst
Yes. So, no degradation in kind of that starting price or no conservatism seen in folks buying up additional modules?
Chaim Indig, CEO
No. No, we haven't seen it yet.
Operator, Operator
Your next question comes from Jessica Tassan with Piper Sandler. Your line is open.
Jessica Tassan, Analyst
Congrats on the quarter, and thank you guys for squeezing me in. I was hoping you can maybe give us a little bit of detail about whether or not your Life Sciences revenue growth has anything to do with kind of your mix of specialists. And then just secondarily, I was curious to know how Life Sciences revenue is able to grow without kind of commensurate utilization per provider just because we've historically sort of thought of that the Life Sciences offering is being impression driven but would love to know if that's changed at all.
Chaim Indig, CEO
Yes, no problem. I'll address the second question first since I might have forgotten the first one. To clarify, our network is growing significantly. Most of our revenue from Life Sciences comes after we deliver targeted, consent-driven messages to patients. As the network has expanded, our overall usage has increased. Since going public, our network has more than doubled, and we've experienced substantial volume growth over the last 13 quarters, with one out of every 10 visits occurring in our network. It's not just the increase in specialists; the sheer number of patients we see has contributed to this. Having a long-term view and providing the right content to support effective care has been extremely valuable for patients, which has allowed us to greatly enhance our Life Sciences revenue. I'm not sure if that fully answers your question, but there you go.
Jessica Tassan, Analyst
No, I think you answered honestly all of them. I guess just my follow-up would be, is there sort of a Life Sciences ROI that you would be pointing us to? And then just curious to know, is patient insights, I think you guys mentioned this in the letter, is that a new billable product? And does it change your view of the TAM for the Life Sciences segment at all? And that's it.
Chaim Indig, CEO
So, we do have a website for Life Sciences, it's lifesciences.phreesia.com. You can totally go in, there's a bunch of ROI examples on that, it's a great website. So, go there every day. I do. It's wonderful. And then what was the other. Is there TAM...?
Jessica Tassan, Analyst
Yes, is it a billable product.
Chaim Indig, CEO
We usually bundle it because of its high value. We've received excellent feedback from clients about it, and we're currently helping them get accustomed to using it as part of our offerings. So at this stage, it's primarily bundled. If there are any changes to the total addressable market, I assure you that Balaji will ensure we provide an updated TAM and discuss it. However, that update is not forthcoming at this time.
Operator, Operator
Your next question comes from Jack Wallace with Guggenheim. Your line is open.
Jack Wallace, Analyst
Congratulations on another strong quarter and a successful first half of the year. I want to address the question regarding software sales per revenue per provider client from a different perspective. This might help clarify the relatively stable rate we've experienced over the past six quarters. You've had a number of accelerating client wins, and I'm considering how this year's cohorts compare to those from the past two years. Are these new customers purchasing more or less software compared to the earlier cohorts? Additionally, using the previous cohorts as a benchmark, what kind of increase in upselling have they experienced? It would be helpful to understand the trajectory, even if not on an annual basis, as you continue to expand your client base.
Randy Rasmussen, CFO
Yes, sure. I mean I think we are generating most of the new revenue from new client apps as you've seen in the numbers. So I think from the perspective of they are buying multiple products, I think it kind of varies by customer size. So I don't know if there's any distinct pattern. I think where we've seen it is just the sheer volume of new customers just has to trust that statistic or cut flat. As I mentioned before, we're adding a lot of clients price at the rate that we have if you look over the last six months or six quarter period. And we continue to also expand in those clients. I don't think there's a particular pattern or cohorts that that's an indication. I think we've just been.
Chaim Indig, CEO
We're just doing really well.
Randy Rasmussen, CFO
Has been selling in lots of different areas across the board.
Balaji Gandhi, Senior Vice President, Investor Relations
And Jack, the other thing is we did share four years worth of gross revenue retention and client retention. And then you obviously saw the subscription revenue per client holding in, in spite of adding almost earning that clients year-over-year. So I think that just sort of suggests that people are still starting to work with us in the same way.
Jack Wallace, Analyst
Yes, that's helpful. And then just a housekeeping item for me. How many SDRs do we end up with at the end of the quarter?
Randy Rasmussen, CFO
189.
Jack Wallace, Analyst
Got you. Thank you.
Randy Rasmussen, CFO
I am sorry 187.
Operator, Operator
Your next question comes from Joe Vruwink with Baird. Your line is open.
Joe Vruwink, Analyst
Great. I think in the past, you've discussed a 6- to 18-month time frame for really knowing the productivity of a new hire. And I guess we're kind of in that time frame for last year's class, and we're also now starting to see the revenue per employee metrics trending higher on a year-over-year basis. Is productivity all going according to plan? Or does the improved EBITDA outlook for the year essentially say this is now tracking better than your expectations?
Chaim Indig, CEO
I would say the team is performing exceptionally well, and we are tracking better than our expectations.
Randy Rasmussen, CFO
The allometric are tracking are moving in the direction that we bumped them to very strongly...
Chaim Indig, CEO
We expect productivity to go back to where it was. Yes. Our cost to acquire is looking really good. Our revenue per employee is looking good too; I think we're pleased.
Joe Vruwink, Analyst
Okay. Great. And then I know this fiscal year is meant to be the low watermark for EBITDA. I'm curious if you look at specifically the trend in subscription gross margin that increased sequentially, and obviously, you onboarded a lot of new clients. So I would imagine you probably had a stable customer success and implementation team behind that. Do you think it's too early to maybe call the trough in subscription gross margins, and we should kind of expect further improvement from these levels? Or might there still be some incremental investments needed there?
Randy Rasmussen, CFO
I mean in Q1, we had actually talked about that we had an expectation that gross margins less payments or the subscription margin as you're referring to, would go up in the low 70s. And I think this quarter, you see it improve. And that improvement, like everything else, we've done a little bit better than we thought. I think the organization is really thoughtful about spend and how we're using resources. So, we expect that margin to continue to improve in the second half.
Operator, Operator
Your next question comes from Joe Goodwin with JMP Securities. Your line is open.
Joe Goodwin, Analyst
So your employees have sequentially come down the past two quarters. And I'm just curious, is that natural attrition? Or is that for attrition? Any commentary would be great.
Chaim Indig, CEO
I believe it's a natural situation. I’m not sure how to address that question. Our team has effectively ensured that those we want to retain are properly compensated, and they have performed exceptionally well. While we experience some fluctuations, more importantly, our team has doubled in size from a year ago.
Randy Rasmussen, CFO
It almost tripled over three years.
Chaim Indig, CEO
And almost tripled over three years. And we tend to look at it not on a quarterly basis but trending over time.
Joe Goodwin, Analyst
Understood. Okay. You mentioned client retention earlier in the call. Has there been any change in the retention of your health care services clients or any impact from the macro environment?
Chaim Indig, CEO
No.
Randy Rasmussen, CFO
It helps consistent with. We look at it on a monthly basis, and it's consistent with where it's been in the past year or so.
Operator, Operator
Your next question comes from John Ransom with Raymond James. Your line is open.
John Ransom, Analyst
If we were to look at the customers you're adding today, you talked about 200 and then the ones you added this quarter. So let's just call it 450 round number. Is this customer class on average, a bigger set of providers as in bigger hospital systems or bigger doctor groups? Or is the average sort of TAM on a per provider basis today kind of the same as you've added all along?
Chaim Indig, CEO
John, they're all different sizes. They're enterprise clients. They're small. They're medium. The one thing they all are, though, is they're all land. And then we look to expand them. And we're absolutely seeing more large clients, but we're also seeing tons in the midsize, and we're seeing those that are part of networks. I think the team has just done a phenomenal job of selling across the spectrum and helping to provide Phreesia all those that needed. We think about it more enterprise versus health list.
John Ransom, Analyst
I believe we understand the core of Phreesia and that new capabilities are being added. If you were to highlight one or two of these new capabilities, are there any that are performing better than anticipated and could potentially drive significant revenue? Or should we view the Company as it currently exists, with these new features serving as enhancements to the core offerings?
Chaim Indig, CEO
Well, I don't think the Company is what it is. Like we've been making significant investments. I'd say the investment since we've been making around products and Life Sciences have been great. Hopefully, over the next quarters, we'll be making some other announcements and some new products that are getting a lot of traction we're excited about. But our access products have been unbelievably successful, and that's around appointments and how people get into providers. We've had insights. It's just been one of the most rocking products we've had in years. So I'd say, John, we've made big investments in R&D and people and those investments, we're starting to see pay off, right? We're building great products that are adding a ton of value...
Joe Vruwink, Analyst
You transitioned to virtual a couple of years ago. It seems that this shift has not hindered productivity or creativity.
Chaim Indig, CEO
We were already at a high level before COVID, so in many ways, this has created a more level playing field for everyone. Has it been more challenging for some? Yes, right now, Balaji and Randy are at my kitchen table.
Randy Rasmussen, CFO
What's for dinner, Balaji? Is it good or...
Chaim Indig, CEO
We have takeout.
Balaji Gandhi, Senior Vice President, Investor Relations
Next time, you'll have to cook at helping you.
Chaim Indig, CEO
But I think as an organization, our view is how do we make sure that we just do what's right for our clients and build great products. And our product organization has just done a phenomenal job of understanding what the client needs are and just iterating and building, testing and making sure that the products we build get used and provide a phenomenal amount of value. And we just care about making sure that we make health care outcomes and we track what I want to...
Joe Vruwink, Analyst
Sorry, I broke up. That's it for me. Thanks guys. Appreciate it.
Operator, Operator
There are no further questions at this time. I'll turn the call back to Chaim for his closing remarks.
Chaim Indig, CEO
I want to thank everyone for joining us for the call. I want to thank everyone on our Phreesia team and all of our shareholders, and I hope everyone has a great start to the month of September, and hopefully, we see everyone in the fall. All right, bye-bye.
Operator, Operator
This concludes today's conference call. You may now disconnect.