Earnings Call Transcript - PHR Q2 2021

Operator, Operator

Good morning, ladies and gentlemen and welcome to the Phreesia Second Quarter 2021 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.

Balaji Gandhi, Vice President, Investor Relations

Thank you, operator. Good morning and welcome to Phreesia’s earnings conference call for the second quarter of fiscal year 2021, which ended on July 31st, 2020. 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. 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, including statements relating to the expected performance of our business, future financial results, our strategy, our partnerships, expected launches of products and services, long-term growth, overall future prospects, and the impact of the COVID-19 pandemic on our business. 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. 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 in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP results may be found in our earnings press release and supplemental materials, which were furnished through our Form 8-K filed after the market closed on September 8th with the SEC and may also be found on our Investor Relations website. I will now turn the call over to our CEO, Chaim Indig.

Chaim Indig, CEO

Thank you, Balaji. Good morning everyone. As fall approaches, we hope that everyone's families are safe and healthy. Once again, participating on today's call from three different locations, so we appreciate your patience with us. Our second quarter results demonstrate the agility, depth, and overall commitment of our entire organization in a very challenging environment. I'm proud of Phreesia's ability to serve our clients, take care of our team, and further our mission of creating a better, more engaging healthcare experience as our communities grapple with the current pandemic. For the fiscal second quarter, total revenue was $35 million, up 14% year-over-year. The average number of provider clients was 1,668, up 7% year-over-year. Average revenue per provider client was 17,360, up 5% year-over-year. Adjusted EBITDA was $1.2 million, up approximately $400,000 year-over-year. The pandemic has forced healthcare providers across the country to rethink every aspect of their day-to-day operations. Phreesia's network gives providers tools they need to keep their patients and staff safe while operating reliably and efficiently. I would like to highlight two new clients: AdventHealth and Health First. AdventHealth became a client in mid-March. We worked closely with the Advent team to accelerate the rollout in order to help Advent's scale and reduce exposure between patients and staff during in-person visits. In order to move rapidly, we supplemented the rollout team with our sales development representatives, also known as SDRs. Our teams took nearly 1,000 of Advent's ambulatory practices live. We also took 44 Advent acute care hospitals live over the first 90 days. All of this work was done remotely by both teams. This is a very complex and well-coordinated rollout. Phreesia's network and APIs are now embedded into Advent's consumer-facing ecosystem. Next, I'd like to talk about Health First, a fully integrated delivery network in Central Florida. Phreesia went live with Health First during the second quarter. Similar to Advent, our teams worked collaboratively and moved quickly. Most of Health First's ambulatory locations went live in less than a month. Health First is currently expanding its deployment of the Phreesia network to its four acute care hospitals. At Phreesia, we believe that if we continue to invest in our people and product and take care of our clients, our clients will derive significant value from being part of our network. KLAS Research recognized our team as an outperformer in its recent review of vendors' response to the pandemic, specifically citing our team for being upfront, strategic, and flexible. I would like to congratulate my teammates on this acknowledgment. In July, Phreesia welcomed Lainie Goldstein to our Board of Directors. Lainie has been the CFO of Take-Two Interactive for 17 years and brings more than 30 years of financial and business experience in the software, entertainment, retail, and apparel industries. In August, Allison Hoffman joined as our General Counsel, bringing 25 years of legal and people management experience to Phreesia, including leadership roles at public and private companies in various industries, in various stages of growth. I'll now turn the call over to Tom.

Tom Altier, CFO

Thank you, Chaim and good morning, everyone. I'll review the income statement, balance sheet, and cash flows for the fiscal second quarter, including some considerations for the rest of the fiscal year. First revenue, total revenue was $35 million, up 14% year-over-year. Subscription and related service revenue was $17.1 million in the quarter, up 22% year-over-year, primarily due to new provider clients added during the quarter, expansion and cross-selling of existing provider clients and higher related services revenue. Payment processing fee revenue was $11.8 million in the quarter, up 1% year-over-year. While many healthcare providers have reopened and trends are improving, patient visits for the quarter continued to be below their pre-COVID-19 levels. Payment processing volume across the Phreesia network was only slightly higher in the fiscal second quarter compared to the first quarter. This is because visits were significantly higher in the first half of the fiscal first quarter, which took place prior to March 13th when the United States declared a national emergency with respect to COVID-19. Life Science revenue was $6.1 million in the quarter, up 18% year-over-year. Provider revenue which combines revenue from subscription and related services and payment processing fees was $29 million, up 13% year-over-year. The two drivers of the 13% provider revenue growth were average provider client growth up 7% year-over-year and average revenue per provider client up 5% year-over-year. Life Science revenue was $6.1 million, up 18% year-over-year. Our Life Sciences revenue is based largely on the delivery of messages at a contracted price per message to targeted patients and our team was successful in delivering more messages than in the prior year period. Moving on to expenses, I will review several expense line items on an adjusted non-GAAP basis, which excludes stock-based compensation expense for each line item. Please note that a full reconciliation of GAAP to non-GAAP measures including adjusted EBITDA is included in our earnings press release and our Form 10-Q filed with the SEC. Cost of revenue was $5.1 million or 14.7% of total revenue, up 110 basis points year-over-year and reflects a ramp up in client services and support during the period. Sales and marketing expense was $9.3 million or 26.6% of total revenue, up 110 basis points year-over-year as we continue to invest in future growth. Research and development expense grew 10% year-over-year to $5 million and down 50 basis points year-over-year as a percentage of revenue. General and administrative rate of expense was $7.7 million or 22% of total revenue, up 110 basis points year-over-year. As we have previously indicated, this figure has been increasing as a result of continued ramping of public company expenses. From a modeling perspective, we expect to begin to see operating leverage in the back half of fiscal 2022. In general, the increases in cost of revenue, sales and marketing and G&A expenses as a percentage of revenue are consistent with our comments in June that we began hiring and would expect to see that hiring reflected in our expenses through the remaining three quarters of the year in support of anticipated growth. Payment processing expense was $6.7 million, a decline of 5% year-over-year. While payment processing revenue was up 1% year-over-year, expenses were down 5% year-over-year. These trends are due to the mix of transaction type and lower cost routing of payments, mirroring trends we saw in the fiscal first quarter. Adjusted EBITDA was $1.2 million, up from $741,000 in the prior year. This increase reflects the combination of higher total revenue and lower payment processing expense. Shares outstanding as of July 31 were $37.9 million. Cash on the balance sheet on July 31 was $84.2 million, down $6.1 million from April 30th. Cash flow from operations for the quarter was an outflow of $2.4 million versus an inflow of $600,000 in the prior year quarter. And capital expenditure for the quarter was $4.3 million, up $1.4 million year-over-year and that $4.3 million includes $1.6 million of capitalized software development. We will invest more cash into the business in fiscal 2021 compared to fiscal 2020 as we ramp up hiring across the organization to support our anticipated growth. To reiterate Chaim's comments, I am very proud of our team's ability to stay focused during the pandemic, positioning us to grow with our clients. And we're encouraged by the trend towards more providers getting back to delivering care to those who need it. Now, we are ready to take your questions.

Operator, Operator

Thank you. We will now begin our question-and-answer session. Your first question comes from Anne Samuel with JPMorgan. Anne, you may proceed.

Anne Samuel, Analyst

Hi, guys. Congrats on a nice quarter. As we think about provider client growth, how should we be thinking about the length of your sales cycle? And is there still any lingering carryover from COVID disruption that happened in March and April that might still be impacting that number as we look forward?

Chaim Indig, CEO

Good morning, Anne. Thank you for your question. One important aspect to consider is that during our second quarter, we focused on getting as many clients live as quickly as possible. We made efforts to move our clients into active status sooner because both we and our clients believed that Phreesia was essential in keeping their patients and staff safe through zero contact. Earlier, we mentioned that we shifted many of our Sales Development Representatives into implementation roles to expedite the go-live process as much as possible.

Anne Samuel, Analyst

Okay, that makes sense. And then I guess, on Life Sciences, that was obviously once again, really strong growth. Were there any shifts or unusual items in that? And then looking out at the next quarter, you're up against a really difficult compare because you had such a great quarter last year. How should we think about lapping that?

Chaim Indig, CEO

I think our Life Sciences' team has done just a phenomenal job. What we're seeing now is the investment we've been making over the last 12 to 18 months in building up that team and investing in data science and new product offerings. But I do think it was a pretty hard comp last year and we're doing it in a very challenging environment. But I know that team's working as many hours as possible in the day to make sure that we're able to deliver very relevant messages to the right patients so that they can get the care they need from their providers.

Anne Samuel, Analyst

Great. Thanks, guys.

Chaim Indig, CEO

Thanks, Anne.

Operator, Operator

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

Ryan Daniels, Analyst

Yes, guys. Good morning. Thanks for taking the question. Sounds like a very positive data point when you speak to the hiring in the outlook for growth. Can you give us a little bit more detail on number one, key focus areas for hiring? And number two, the SDR reps, are they moving back into the sales position at this point? Or are they still somewhat deployed in other areas? Thanks.

Chaim Indig, CEO

Good morning, Ryan. Thank you for your questions. I will do my best to address all of them. We are hiring across the organization in areas such as engineering, finance, and our career program that supports implementation. This includes our sales development representatives, client success team, and tech support team. We've observed an increase in hiring and are managing this in a remote environment. From the standpoint of sales development representatives, we began transitioning many back towards the end of last quarter. Therefore, we anticipate seeing the results of this ramp-up in the next two quarters. We finished the last quarter with 59 SDRs, and as of this morning, we have just over 70—specifically, 71 SDRs. This sales initiative is gaining momentum, and those individuals have returned to their roles as SDRs if they chose to do so.

Ryan Daniels, Analyst

Okay, perfect. Very helpful. And then as a follow-up just on the in-patient space, seems like a lot of systems are really starting to make more active investments in things like virtual waiting rooms and digital check-ins and patient navigation through the system. Are you seeing that in your book of business too? I know you announced some large partnerships where it's both their in-patient and out-patient units, but are you starting to see a little bit of uptick in the in-patient market as well? Thanks, guys.

Chaim Indig, CEO

So, I can't comment on the broader market, but what I can say is that, for us, the acute in-patient space is an area that we've been meaningfully investing in over the last couple of years and I still think it's very early to articulate what that market looks like. What I do know is that hospitals want to have a common front door with their ambulatory groups. They also want to streamline how they intake patients and provide a better, more thoughtful patient and consumer experience. And especially during this time period, they'd also like to make it zero contact. And so we had seen, with a lot of our current clients, a fair bit of interest.

Ryan Daniels, Analyst

Great, thanks for the color and stay safe guys. Thank you.

Chaim Indig, CEO

Sure. You too.

Operator, Operator

Question comes from line of Stephanie Davis with SVB Leerink. Stephanie, your line is open.

Stephanie Davis, Analyst

Thank you. And thank you for taking my question, guys. Good quarter. Given the growth in telemedicine access that you guys have participated in, which likely captured some appointments that would have been skipped pre-pandemic. Is it possible that a return in volume could actually be more than 100% of your prior volume as you're still only 9% off right now from prior levels and telemedicine business?

Chaim Indig, CEO

Stephanie, I can't predict the future, but I believe we are not providing guidance at this time. However, telemedicine is a new avenue for patients to access care, especially for those who face barriers due to social determinants of health and wouldn't have otherwise had access to specialists or primary care providers. This is a positive development. While I can't forecast what will happen in the next 12 to 24 months regarding care and access, I do know that providers are eager to care for patients in need. Telemedicine enables them to reach patients in ways that weren't possible before. That said, providers have limited time available; they are already working long hours, and this was true both before and during the pandemic. There is only so much time in a day for them to see patients.

Stephanie Davis, Analyst

One more follow-up on volume. I know you've discussed this during the IPO, but what kind of impact do you generally observe from flu season? How should we consider the advantages and disadvantages of a weak flu season or a season with no flu at all?

Chaim Indig, CEO

Due to the structure of our network, I believe the flu has less of an impact than it might have if we were heavily focused on primary care or urgent care. While it's unfortunate when people fall ill, particularly during a pandemic, I hope this flu season is mild. In discussions with our pediatric groups, which tend to have a higher number of sick visits due to the nature of their patients, they are currently experiencing slightly lower sick volume. Overall, this represents a small fraction of our total volume, and I wouldn't say it significantly affects our overall performance.

Stephanie Davis, Analyst

All right. That's helpful. Thank you guys.

Chaim Indig, CEO

Thanks, Stephanie.

Operator, Operator

Your next question comes from the line of John Ransom with Raymond James. John, your line is open.

John Ransom, Analyst

Hey, good morning. Just wanted to prod a little bit on this hospital opportunity. I think we all know what it is you do for physician offices on the intake side? What's exactly different about what you do at the hospital level? And how long did it take you to build up the capabilities? And what additional capabilities, if any, do you need to continue to roll forward in that new TAM?

Chaim Indig, CEO

So, that's a great question, John. I don't want to go into very long specifics on what we're doing. But if you think about it, the value proposition areas, people wait in line when they go to the hospital to check in to go either for the service or for the urgent care that they need in an emergency room or for their surgeries or to give birth and they still have lots of paperwork to fill out. They still have to give all their information. The constraint is the registrar. A lot of that initial experience that they have at a hospital is still sitting in the waiting room and/or telling a patient where and when they need to go somewhere. We're building and deploying those capabilities. So, if you think about a hospital with maybe multiple entrances and different access points, it's streamlining those access points so that patients can intake faster into the facilities and be directed on where to go, providing a significantly better experience with often better economics because you need less staffing. In a COVID environment, it's safer because it's done with no contact.

John Ransom, Analyst

Okay, how many dedicated marketing personnel do you have for the hospital sector? Are you primarily relying on referrals from R1?

Chaim Indig, CEO

We do have dedicated people working on the inpatient market for us.

John Ransom, Analyst

Okay. All right. Thanks so much.

Donald Hooker, Analyst

Good morning. Chaim, could you provide a high-level perspective on the operating environment? If we were to experience a significant second wave of COVID-19, what lessons learned from the first wave could help differentiate the approach to the second wave?

Chaim Indig, CEO

That's an interesting question. Our number one priority is keeping everyone safe: our staff, it's our providers, it's patients. Whether it's first wave, second wave, third wave, I just think COVID-19 is here with us today, and we don't have the vaccine. So we're treating it as if we're still in the main wave. Most of our people are not traveling, and the vast majority of our implementations are done remotely. Only absolutely necessary conditions warrant any in-person presence. The way we're treating the environment right now is that we're still in that first wave. We're being very cautious; we've kept all of our offices closed and we intend to remain virtual moving forward.

Donald Hooker, Analyst

Okay. And maybe just my follow-up would be in terms of the new provider ads, client ads in the quarter which look great. Can you comment on whether there were any sort of pockets of demand? That's such an unusual environment; were there any sort of areas that drove that year-over-year growth? Or if not, was it more broad-based?

Chaim Indig, CEO

I think what we did was we focused on everyone that was in a queue to go live and we did everything possible to get them live as fast as possible because it just made a meaningful impact on their organizations and their patients. We've heard it in the KLAS analysis, from our practices; I've gotten just a ton of emails about what we've been able to do to help these practices just open back up. I'm really proud of the organization for mobilizing and prioritizing keeping people safe. It aligns with our mission and it’s something I'm proud of, personally.

Sean Wieland, Analyst

Thank you very much. Good morning. Maybe could you call out what the acute care revenue was in the quarter or maybe number of clients that you've got live on that now?

Chaim Indig, CEO

We don't disclose that today and we'll let you know when we do, how many clients live or revenue number, but it's still pretty early and it's pretty small.

Thomas Altier, CFO

Yes, that's correction, Sean.

Sean Wieland, Analyst

How about on the same-store sales growth is up with obviously volumes being down, wanted to get a little bit more insight as the primary drivers of the same-store sales growth? For example, what percentage of clients have that today? And maybe what are some of the other key drivers of that same-store sales growth?

Chaim Indig, CEO

I don't have the numbers handy. I can get back to you on what percentage are running some version of zero contact. But from a same-store sales perspective, it's a mixture of expansions, cross-sell, and up-sell and making sure that we're providing all the necessary workflows so these practices can do what they need to do to see patients. But I'd say it's mostly driven by expansion.

Sean Wieland, Analyst

Okay, that's helpful. Thanks.

Operator, Operator

Your next question comes from the line of Glen Santangelo with Guggenheim. Glen, your line is open.

Glen Santangelo, Analyst

Yes, thanks for taking the question. Hey, Chaim, I also want to follow up on the in-patient side. I get it that the revenues are small today, but I was really trying to understand maybe how the economic arrangements work with these customers and how that may be different from physicians to help us think about how the impact of an AdventHealth or Health First might change or augment the growth algorithm. How should we think about those financial relationships?

Chaim Indig, CEO

That's a great question. But I don't want to share our pricing model for competitive reasons. But I'm assuming you understand that eventually, I’m sure Balaji will have a slide next time we tell that.

Glen Santangelo, Analyst

Okay, maybe if I could have a follow-up on an earlier question about the sale cycle. I think in the past, you said it takes about 90 days to bring a physician online after you sell them, and if we think about maybe April, May, and June being sort of the height of the pandemic, is it reasonable to think that as we look out to this next quarter that we may see the impact of maybe slower results in the height of the pandemic play out in this next fiscal quarter?

Chaim Indig, CEO

I think that's fair to say, and I think that's a good call. I think in this next quarter, we're going to see a lot of those practices that we probably would have taken live already, live. And our priority is making sure that we're servicing and setting up the next couple quarters beyond that. Definitely, we're seeing growth in this quarter.

Daniel Grosslight, Analyst

Hi, guys. Thanks for taking the question. I want to kind of follow up on Glen's question there on the sales cycle, because you have that 90-day implementation on getting a provider aboard and then 90 days from that to really kind of generating revenue here. So, I guess, as we look at the providers that you signed during the most difficult time period, which will show up the next couple of quarters, how does the entry point in terms of pricing compare to that of those who you sold pre-pandemic?

Chaim Indig, CEO

That's a great question. We're not obviously for competitive reasons going to talk about the pricing. But our core priority is always making sure that we align with the needs of our providers and our Life Sciences companies so they can treat and care for patients the way they need to and want to. But at this time and probably in the future, we will talk about sort of promotions and pricing.

Daniel Grosslight, Analyst

Okay. And then maybe just a little bit of a higher level, it seems like the data you put out with Commonwealth as utilization kind of plateauing at around 9% below the pre-COVID baseline. How does this compare to what you were expecting heading into the quarter? And I understand you're not giving guidance here, but at a high level, what are your expectations for healthcare utilization for the rest of the year and what signposts do you think you'll need to be able to really provide fiscal year guidance?

Chaim Indig, CEO

I think what's really important is that I don't know what to expect. We consider multiple scenarios during our planning process to account for the highs and lows. We didn't anticipate the growth we experienced in Q2. Our providers didn't expect it either. On a monthly or even weekly basis, as we evaluate these utilization levels, we're noticing various movements across the United States. Different specialties are recovering in different ways and in various regions. Spikes in certain communities affect both patients and providers. I don't want to speculate and suggest I could predict what the future holds. I have no idea.

Sean Dodge, Analyst

Thanks. Good morning. Chaim, regarding the value proposition and your comments on the strengthening Phreesia has experienced after the pandemic, if we consider the possibility of payment volumes eventually returning to normal, how do the enhancements you've observed influence your perspective on the company's potential long-term growth trajectory? Do you believe the company has come out of the pandemic in a stronger position, and if so, to what extent?

Chaim Indig, CEO

I believe we entered the pandemic in a strong position, and I think we will emerge from it in a similarly strong position, relatively speaking. The significant change will be in the healthcare system, affecting patients and the strength of the provider and health system community, as they have faced considerable challenges, with many losing their lives or experiencing severe illness. Our focus remains on ensuring the safety of patients and providers, which is a key aspect of our current value proposition. This focus does not diminish our strong returns on labor, cash flow efficiency, data collection, or the improved experiences for both patients and staff; rather, it complements them. I believe it has accelerated the development of many initiatives we had already begun. It alters the way we approach intake, and all of these changes are positive. I don't want to speculate about the potential future scenarios. What I do know is that we are positioned well for the future, and I’m quite optimistic about the opportunities ahead. The deferral program had some impact on cash collections.

Sean Dodge, Analyst

Okay. Is there any bookends you can put around the maybe the proportion of clients or number of clients that are taking part in that?

Chaim Indig, CEO

Between a quarter and a third, I think took advantage of it.

David Larsen, Analyst

Can you discuss the growth rate in revenue per provider? The number of providers on your platform increased by 7% year-over-year, which aligns with last year's growth. However, why did the revenue per provider growth rate decrease from 23% to about 5%? Is there something about the pandemic that is making it more difficult to sell a full portfolio of modules, or is 5% a reasonable figure to project moving forward?

Chaim Indig, CEO

I'll let Tom give more info. But on a high level, I think what you're also seeing is the pressure on payments.

Thomas Altier, CFO

You got to think about that 1% growth in payment volume and payment revenue and the impact on that.

Chaim Indig, CEO

At Advent, we are currently operational in 44 hospital facilities. This includes inpatient services. Tom can clarify if necessary, but we are in the process of launching services at the Health First acute facilities, which I believe number four in Florida.

Thomas Altier, CFO

That's correct. Yes.

Donald Hooker, Analyst

One-third of denials happen because of inaccurate patient registration. So, I imagine that there's going to be a significant improvement in bad debt after they deploy Phreesia. Are you doing any sort of analytics around that to show the value that you're bringing to these facilities?

Chaim Indig, CEO

It's safe to say that we think generally as an organization that when we deploy out a solution, we're continuously looking to be able to validate and articulate our return on investment for our clients and we try to do it as quickly as possible. So, what I can say is that it’s something that where we've looked at and as we further talk about our acute solution, I'm sure we'll be articulating where we think the ROI was.

John Ransom, Analyst

All right, just going back to payments revenue, how is that trending toward the end of the quarter versus the beginning of the quarter? And maybe you could give us a peek at how it's trending this quarter just for modeling purposes how to think about that? Thanks.

Chaim Indig, CEO

It improved during the quarter, John.

Balaji Gandhi, Vice President, Investor Relations

And John, this is Balaji. I think the Commonwealth data is a valuable tool. You can look at the volume data there, but I can't really discuss anything beyond that. The Commonwealth data goes through early to mid-August, which is quite informative.

Chaim Indig, CEO

I want to thank everyone for joining us today. I hope that your families, yourself, and your organizations are all staying safe. Hopefully, we don't see a spike in COVID-19 in the second half of this year, because I'd like everyone to be healthy and safe. Cheers everyone. Hope to see you again soon.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. On behalf of Phreesia, thank you for participating. You may now disconnect.