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Phreesia, Inc. (NYSE:PHR)
Q3 2019 Earnings Call
Dec 10, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, ladies and gentlemen, and welcome to the Phreesia fiscal third-quarter 2020 earnings conference call. [Operator instructions] 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 our third quarter of fiscal 2020, which ended on October 31, 2019. As a reminder, Phreesia's fiscal year-end is January 1. 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 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 filed with the SEC this morning. You should not rely on 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 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 release and supplemental materials which were furnished with our Form 8-K filed after the market closed on December 9 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 CEO Chaim Indig.

Chaim Indig -- Chief Executive Officer and Co-Founder

Thank you, Balaji. Good morning, everyone. I would like to start by thanking my teammates, our clients, partners and investors for their continued support of Phreesia's mission to create a better, more engaging healthcare experience. On today's call, I will cover the highlights from our fiscal third-quarter 2020, provide an update to our fiscal 2020 guidance and provide some commentary on the expansion of our team.

We are pleased with the fiscal third-quarter results. Total revenue for the quarter was $32.8 million, up 33% year over year. The average number of provider clients was 1,573, up 5% year over year. Average revenue per client in the quarter was $16,637, up 25% year over year.

Patient payment volume was $463 million in the quarter, up 29% year over year. Adjusted EBITDA was $3 million, up $2.6 million year over year. Tom will dive deeper into these metrics in a few minutes. We are updating our outlook for fiscal-year 2020 ending on January 31, 2020.

We now expect total revenue to be in the range of $122 million to $122.5 million, compared to our previous range of $118.5 million to $119.0 million. We continue to expect fiscal 2020 adjusted EBITDA to be positive. As we indicated last quarter, we will incur higher costs related to being a public company and continue to invest to allow for continued growth. We believe one of our strengths is our team's ability to stay focused on maintaining, implementing and selling products for their clients' value.

I would like to specifically acknowledge Phreesia's implementation and client solutions teams for their continued effort. They've been very busy and we appreciate their efforts. We continue to expand the breadth and depth of Phreesia's leadership team during the third quarter. On November 1, Randy Rasmussen joined us as our Chief Accounting Officer.

Randy brings valuable public company experience to Phreesia and deepens our talented finance organization. His knowledge and experience will help us in many ways including our process to comply with Sarbanes-Oxley. Randy's hire is an example of the additional investments we are making as a public company. We appreciate the interest and support from the entire investment community including those of you who have introduced us to potential provider clients.

Please continue to send any referrals along, and Balaji can make sure our team qualifies and onboards them to the Phreesia platform. Now I will turn the call over to Tom for a review of the financials. Tom?

Tom Altier

Thank you, Chaim, and good morning, everyone. I'll review the income statement, balance sheet and cash flows for the fiscal third quarter and then make some additional comments on the updated fiscal 2020 outlook. First, revenue. Total revenue was $32.8 million, up 33% year over year.

As a reminder, we report our revenue in three line items: subscription and related service, which was $14.6 million in the quarter, up 34% year over year; payment processing fees, which were $11.6 million in the quarter, up 27% year over year; and life sciences, which was $6.7 million in the quarter, up 40% year over year. Let's start with provider revenue, which combines revenue from subscription and related services with payment processing fees. Provider revenue was $26.2 up, million 31% year over year. And the two drivers of the 31% provider revenue growth were average provider client growth and average revenue per provider client.

Average provider clients grew 5% year over year. Average revenue per provider client grew 25%. Once again, these results reinforce our go-to-market strategy. We land new client logos, and over time, we expand our footprint with them by up-selling and cross-selling more applications.

I also want to take a few minutes to read through payment processing for those of you who are new to the Phreesia story. Our payment processing revenue is based on the number of transactions and the dollar amount of patient payment volume that we process on credit and debit cards on the Phreesia platform. Our payment processing fees are generally calculated by a percentage of the total transaction dollar value process and a fee per transaction. In the fiscal third quarter, patient payment volume was $463 million, up 29% year over year.

Credit and debit patient payment volume represented roughly 83% of our total patient payment volume on the three months ended October 31, 2019. The remainder of the 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 third-quarter payment processing revenue was $11.6 million, up 27% year over year. I'll now cover life sciences revenue.

Revenue was $6.7 million, up 40% year over year. In order to understand the driver of the continued strength in life science performance, let me once again review our life science revenue model. Our clients are life science companies. Our revenue is based largely on the deliverable messages of contracted price per message to targeted patients.

Messaging campaigns are sold for a specified number of messages delivered to qualified patients over an expected time frame. Revenue is recognized as the messages that are delivered. The strong third-quarter performance was driven by our team successfully selling and expanding some of our current programs during the third quarter. Let me now provide a few noteworthy expense items in the fiscal third quarter.

I'll review several expense line items on an adjusted non-GAAP basis, which excludes stock compensation expense from 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. On an adjusted basis, cost of revenue was $4.3 million or 13.2% of total revenue, down 220 basis points year over year. This decrease as a percentage of total revenue is primarily the result of revenue growth in the quarter outpacing the growth of compensation expense related to our implementations in the quarter.

On an adjusted basis, sales and marketing expense was $7.9 million or 24.1% of total revenue, down 470 basis points year over year. As we have shared with you in the past, our investment in this area has some seasonality, and we expect to continue to invest in this area. Research and development expense was $4.5 million or 13.8% of total revenue, down 150 basis points year over year. We expect this expense line to increase as we invest in our platform, new applications and integration capabilities.

On an adjusted basis, general and administrative expense was $6.1 million or 18.7% of total revenue, up 40 basis points year over year. As we already indicated, this figure will increase as a result of costs that we are now incurring as a public company. Payment processing expenses in the quarter were $6.9 million, up 28% year over year and adjusted EBITDA was positive $3 million, up $2.6 million year over year. The increase reflects the combination of better-than-expected revenue growth and the general timing of G&A and sales and marketing expenses that I mentioned in the previous section.

Shares outstanding as of October 31 were 35.8 million. Cash on the balance sheet at October 31 was $91.4 million, down $8.7 million from July 31, 2019. The trend in the cash balance reflects the quarter-to-quarter variability of our working capital, and there were two uses of cash specific to the quarter worth noting. Roughly half of the $8.7 million cash outflow was for the legal and accounting fees related to our IPO and the prepayment of our new directors' and officers' insurance policy.

Accordingly, cash flow from operations for the quarter was an outflow of $3 million versus an inflow of $700,000 in the prior year quarter reflecting additional cash used on working capital. Capital expenditures for the quarter were $3.5 million, up $1.2 million year over year and the $3.5 million includes $1.5 million of capitalized software development. Before opening the call to Q&A, I wanted to provide some color on the fiscal 2020 outlook. When considering our $122 million to $122.5 million revenue outlook for fiscal 2020, please note the following.

The $3.5 million increase in our revenue outlook is based on our better-than-expected revenue performance in fiscal Q3. From a modeling perspective, we would not make any meaningful adjustments to your previous Q4 assumptions based on our Q3 results or updated guidance for the following reasons. First, as I mentioned earlier in my remarks about life sciences revenue, the strong third-quarter performance was driven by our team successfully selling and expanding some of our current programs during the quarter. We have discussed with many of you the lumpiness of our life science revenue, particularly at the end of the calendar year as agencies and advertisers make various decisions into the new year.

We feel comfortable about the outlook we shared with you on our last earnings call with respect to life sciences. Second, we have also shared with many of you our experience with patient payments trending lower in November and December and trending higher at the beginning of the calendar year with the resetting of patient deductibles. We typically come out of January with a better view of the annual deductible resetting season, which was why we operate on a January fiscal year. We remain comfortable with the outlook we shared with you regarding patient payments on the last earnings call.

On modeling expenses, G&A is expected to continue to increase in Q4 due to additional investments in our process to comply with Sarbanes-Oxley, as I discussed earlier. Accordingly, we are comfortable maintaining our positive adjusted EBITDA guidance for the year, but we expect moderation from our solid Q3 adjusted EBITDA due to higher spending. In summary, we are pleased with our third-quarter results. Operator, we can now open up the call for questions.

Questions & Answers:


Operator

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

Anne Samuel -- J.P. Morgan -- Analyst

Hi, guys, thanks for taking the question. Revenue per provider client saw strong growth in the quarter. I was hoping maybe you could speak to what you saw in terms of expansion within existing logos and then maybe any notable strengths within the modules.

Chaim Indig -- Chief Executive Officer and Co-Founder

Hi, Annie, thanks for the question. We had -- I think we had a nice even mix between expansion in upsell and cross-sell. I don't think we're breaking out the numbers at this point. But I think across the board, we saw the team do a great job of expanding our footprint, winning new accounts and also upselling and cross-selling a lot of our various applications.

Nothing to call out specifically. I'd say across the board, we saw a lot of interest from a lot of our clients on lots of things we do, and they kept expanding. So we felt it was a pretty strong quarter across the board.

Anne Samuel -- J.P. Morgan -- Analyst

That's great. And then on the gross margins, obviously, really nice expansion there. I was just hoping maybe you could dig a little bit more into what drove that expansion.

Tom Altier

Can you repeat that, Anne?

Anne Samuel -- J.P. Morgan -- Analyst

Sure. The gross margin saw really nice expansion in the quarter. I was hoping maybe you could just provide a little bit of color on what drove that.

Tom Altier

Yes. Obviously, we beat the revenue and we're able to maintain the implementation costs. I think that was the biggest factor in the revenue expansion for the quarter.

Anne Samuel -- J.P. Morgan -- Analyst

Great. Thanks very much, guys.

Operator

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

Ryan Daniels -- William Blair and Company -- Analyst

Yeah, guys. Congrats and thanks for taking the questions. Can you speak a little bit more to the inpatient opportunity? It sounds like R1 is having some good success launching your product into some chains. And I know you made a separate announcement about a client win in your Cerner integration.

So hoping you can offer a bit of an update there on how you're viewing the inpatient market.

Chaim Indig -- Chief Executive Officer and Co-Founder

Yes. Thanks for that, Ryan, and thanks for the question. I think it's still early for us to really go into a lot of details around how we're -- about the inpatient opportunity. I know that when we feel comfortable with it, we'll come out and talk a lot more about it.

But we -- where we -- also in terms of the R1 opportunity, the R1 RCM has been for years now a great partner. And we really appreciate them in their organization and the work we're doing together. We're going to let them take the lead on talking about some of the success. It's really -- I think it really fuels them to sing those praises.

What I also will say is that Lafayette has been -- that's a nice win. It's -- today, it's mostly ambulatory. We're really proud of the work we're doing in Louisiana with Lafayette, and that's a big Cerner Millennium win for us. But other than that, I don't think we're talking a lot about it as we think it's -- as we've said many times in the past, we think acute in the inpatient opportunity is great, but it's also really hard.

And we just want to be really thoughtful and cautious as it's still very early days.

Ryan Daniels -- William Blair and Company -- Analyst

OK. That's helpful color. And then wanted to ask a question on your work you're doing with social determinants of health. Any update on what's going on in North Carolina? I know that's one of the biggest programs in the country.

And then more broadly, we're hearing a lot about investments there from both payers and providers. So talk a little bit about how you're positioned to capitalize on that.

Chaim Indig -- Chief Executive Officer and Co-Founder

I appreciate you bringing that -- bringing up the work we're doing in social determinants. It's something that I'm really proud of. I know across the organization, it's probably one of the things people internally appreciate and most proud of, is the ability that we're able to screen and ask patients on intake their social determinant status. We work with North Carolina to build the instrument for the state.

We made it available to all of our practices in the state. And we've been turning those on -- turning it on as part of our intake throughout the state with some really nice success early on. The other -- the things that I don't think we expected is the response that would help us on recruiting in the state of North Carolina, where it's a big center for us and it really helps on recruiting. And also, frankly, it's really brought in a lot of opportunities, a lot of health systems and groups that didn't know that we could do that, that care about that as part of their mission and reach out to us to try to get our whole offering really and the hook for them was social determinant and the ability to screen patients on it.

And then finally, I just think it's really important for companies to do good, right? This is -- I don't think this is a huge revenue opportunity for us. I just think it's an important thing for us to be able to do the right thing, and I'm proud of that.

Ryan Daniels -- William Blair and Company -- Analyst

OK. Very helpful color. And then final one and I'll hop off. Just any update on the progress you're making with sales development reps and your ECP program? I know those are kind of key drivers to grow the organization and the workforce and drive future growth.

So any updates there? And maybe that's something that we need to wait for year-end, but curiosity requires me to ask a question.

Chaim Indig -- Chief Executive Officer and Co-Founder

That's another great question, Ryan. I think we're at north of 60 SDR right now on our -- with our provider organization. The team's doing great. We're onboarding them.

I think they're finding a lot of opportunities. We obviously don't hire a ton during this season just because of timing, but we'll probably pick up recruiting at the beginning of our Q1 next year. A lot of that just has to do with cyclicality of sort of when people start types of roles. But that team has grown from the low 30s at the beginning of the year to low 60s right now.

But we feel good about [Inaudible].

Ryan Daniels -- William Blair and Company -- Analyst

Yeah. Thank you. Great data point. Appreciate it.

Chaim Indig -- Chief Executive Officer and Co-Founder

Thanks, Ryan.

Operator

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

Sean Wieland -- Piper Jaffray -- Analyst

Hi, thanks, good morning. So life sciences revenue, a couple of quarters now that, that has been coming in ahead of expectations. I understand the visibility or lack thereof in that business. But maybe can you call out -- as your business scales, as you have more visibility around the IPO, is the competitive -- your competitive positioning or landscape there evolving there in your favor?

Chaim Indig -- Chief Executive Officer and Co-Founder

That's a great question, Sean. I think the -- is the competitive positioning improving? I think that team is just doing a really good job executing. I'm really proud of the life sciences team and their ability to suss out opportunities and deliver great ROIs for our clients and be able to position us appropriately. I do think more positively than I would have even assumed that going public gave a lot of visibility to our life sciences clients.

It gave them a lot more comfort, and we did hear a lot of positive undertones. But I'm not willing to do a victory lap as of yet and say we're always going to be up and to the right on it. I think I've been doing this for long enough that I remain cautious but optimistic. I think it's still early days to be able to change anything.

Sean Wieland -- Piper Jaffray -- Analyst

OK. Thanks for that. That's all I had. Thank you.

Operator

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

Jamie Stockton -- Wells Fargo Securities -- Analyst

Hey, good morning. Thanks for taking my question. Maybe just a quick follow-up on Sean's with life sciences. Tom, I think last quarter, you might have said that you expected that business to be kind of flat year over year just so that people have some idea of how this thing is going to trend sequentially.

Is there any update on that expectation?

Tom Altier

No. I think we're still in the same position on that, Jamie. We had a good quarter. But Q4, still a lot of uncertainty about it.

Jamie Stockton -- Wells Fargo Securities -- Analyst

OK. And then maybe just one other one as a follow-up to what Ryan was asking about earlier on the social determinants of health front. I mean is there anything else maybe like clinical trial recruitment in the life sciences business? Or something else that you think would be a similar way for you guys to expand kind of what you're doing and get more attention as a result of it?

Chaim Indig -- Chief Executive Officer and Co-Founder

So that's a great question. And I think the answer is yes, there's lots of things we think we can do. We're a platform. And right now, we make revenue from three different sources.

And long term, do we think there's other ways that we could monetize the platform while driving material value? Yes. And we're -- our general nature is test, try and learn and test, try and learn. And once we have enough data points to predictively -- to predict it and understand it and how we could grow it, I think our general view has been -- then after that, we talk to the market. But I don't think we're in any position now with enough long-term or even short-term visibility to say what those things would be.

But we strongly believe, and have since we founded the company, that there's lots of ways that we can monetize this platform and materially improve the experience people have with the healthcare system. If you do the right thing and you provide a lot of value, it's normal that you derive economic benefit from it, and we think that we will be able to long term. But we're very cautious but very optimistic about the long-term values.

Jamie Stockton -- Wells Fargo Securities -- Analyst

OK. Thank you.

Chaim Indig -- Chief Executive Officer and Co-Founder

Thanks, Jamie.

Operator

Your next question comes from the line of Connor Oleferchik with Baird. Connor, your line is open.

Connor Oleferchik -- Robert W. Baird and Company -- Analyst

Hey, thanks. This is Connor on for Matt. Payments gross margin improved on a sequential basis this quarter. Last quarter, you had mentioned that the payments margin would fluctuate but generally would be pressured on an annual basis.

Was the sequential improvement in the fiscal third quarter just part of the normal fluctuation? And was there anything to call out that drove better margin this quarter?

Tom Altier

I would say that it was sort of a normal fluctuation. I don't think, long term, our guidance would change as a result of what we experienced in the quarter.

Connor Oleferchik -- Robert W. Baird and Company -- Analyst

Got it. And then another -- we saw the press release with the Lafayette general win, which looked like a large provider client addition. We're curious if are you guys seeing any trends to call out with recent client additions? Are you guys adding larger clients compared to the recent past? Or are there any specialties where you're seeing more activity than others? Thanks.

Chaim Indig -- Chief Executive Officer and Co-Founder

I don't think we're seeing any variation in the trend we've seen over the years, which is that practices of all size, of all stripes, feel really strongly that by rolling out Phreesia, they get a ton of value for them and their patients and their staff. And one of the things I like to say is whether you're a large client or a small client, you're a notable client to us. And we're proud of the work we're doing with Lafayette General Hospital and serving the patients in the system in Louisiana, and there's others like it. And as our marketing team feels comfortable with it, they'll, I'm sure, put out press releases to talk about some of those wins.

I don't know if that answers your question.

Connor Oleferchik -- Robert W. Baird and Company -- Analyst

Great. Thanks, guys.

Operator

I am showing no additional questions. I will now turn the call back over to CEO Chaim Indig, for closing remarks.

Chaim Indig -- Chief Executive Officer and Co-Founder

I just wanted to take this moment to thank everyone on the call. All of our team members, again, we really appreciate your support in Phreesia and the mission we're on. And I wish everyone happy holidays, and see you all soon.

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

Balaji Gandhi -- Vice President, Investor Relations

Chaim Indig -- Chief Executive Officer and Co-Founder

Tom Altier

Anne Samuel -- J.P. Morgan -- Analyst

Ryan Daniels -- William Blair and Company -- Analyst

Sean Wieland -- Piper Jaffray -- Analyst

Jamie Stockton -- Wells Fargo Securities -- Analyst

Connor Oleferchik -- Robert W. Baird and Company -- Analyst

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