Phreesia Q3 2024 Earnings Call Transcript

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Provided by Quartr
December 5, 2023

There are 12 speakers on the call.

Operator

Good evening, ladies and gentlemen, and welcome to the Fresha Fiscal Third Quarter 20 24 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, Frisia's Chief Financial Officer. Mr.

Operator

Gandhi, you may begin.

Speaker 1

Thank you, operator. Good evening, and welcome to Phreesia's earnings conference call for the fiscal Q3 of 2024, which ended on October 31, 2023. Joining me on today's call is Chaim Indig, our Chief Executive Officer. A more complete discussion of our results can be found in our earnings press release and in our related Form 8 ks 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 at ir.friesia.com.

Speaker 1

As a reminder, today's call is being recorded and a replay will be available on our Investor Relations website atir.friesia.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 actual results, performance or achievements to differ materially from those described in our forward looking statements. Such risks are described more fully in our earnings press release, our stakeholder letter and our risk factors included in our SEC filings, including in our quarterly report on Form 10 Q that will be filed with the SEC tomorrow. The forward looking statements made on this call will be based on our current views and expectations and speak only as of the date on which the statements are made.

Speaker 1

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 ks filed after the markets close today with the SEC and may also be found on our Investor Relations website at ir.friesia.com. I will now turn the call over to our CEO, Chaim Endig.

Speaker 2

Thank you, Balaji, and good evening, everyone. Thank you for participating in our Q3 earnings call. Our stakeholder letter and earnings release were published about an hour ago. Let me start the call with a couple of highlights. For starters, I am pleased with our Q3 performance, both financially and operationally.

Speaker 2

Total revenue in the Q3 was $91,600,000 up 25% year over year. Adjusted EBITDA was negative $6,600,000 an $11,700,000 improvement year over year. During the quarter, we completed a small acquisition of Connect On Call, which complements our current product suite with an innovative medical answering solution that improves patient experience and makes it easier for on call providers to respond to patient calls. Before Balaji discusses our fiscal 2024 and 2025 outlook, let me briefly address Our decision to delay the achievement of $500,000,000 in run rate revenue to fiscal 2026. Over the past couple of months, we determined that in order to achieve $500,000,000 in run rate revenue in fiscal 2025, We would need to increase our spending to a level that we were simply not comfortable with in the current economic and capital markets environment.

Speaker 2

Therefore, we have made very intentional decisions to delay certain planned investments in the payer space, which will accelerate our adjusted EBITDA growth. We continue to work with CMS and other payers to measure and improve performance and activation. We believe this work will drive revenue, adjusted EBITDA and health outcomes improvements over the long term. We believe our decision will enhance shareholder value. Let me now hand it over to Balaji.

Speaker 1

Thank you, Chaim. Let me start by addressing our outlook for fiscal 2024. We are maintaining our revenue outlook for fiscal 2024 at $353,000,000 to $356,000,000 implying year over year growth of 26% to 27%. We note that the maintenance of our $3,000,000 revenue range is mostly related to our Network Solutions revenue line, where we have a wider range of revenue scenarios in the month of January, which represents a new spending year for our life sciences clients. We are raising our fiscal 2024 adjusted EBITDA outlook to approximately negative 39,000,000 from a previous range of negative $54,000,000 to negative $49,000,000 This represents a $12,500,000 increase from the midpoint of our prior outlook, highlighting the strong operating leverage we continue to generate across the business.

Speaker 1

We also believe it is important to provide an early outlook for fiscal 2025 given our evolving capital allocation philosophy that Haim discussed earlier. We expect fiscal 2025 revenue to be in the range of 424,000,000 to $434,000,000 Our fiscal 2025 revenue outlook at the midpoint implies growth of over 20% above our fiscal 2024 outlook range. The revenue range provided for fiscal 2025 assumes no additional revenue from potential future acquisitions completed between now and January 31, 2025. We are updating our expectation of $500,000,000 and revenue run rate to now be achieved in fiscal 2026 compared to our previous outlook of fiscal 2025. The later expected achievement is the result of a very intentional decision we have made to delay certain investments in the payer space.

Speaker 1

We prefer to target growth in the 20% range, while accelerating our profitability growth. To that end, we now expect adjusted EBITDA to be in the range of positive $10,000,000 to positive $20,000,000 compared to our previous target of achieving profitability at some point during fiscal 2025. The increase in our fiscal 2025 adjusted EBITDA outlook is mostly tied to the delay in planned investments in the payer space. As we think about revenue growth, it is critical to consider the multitude of factors that can drive our revenue growth, which we believe is a very unique and attractive aspect of Frisia's business model. We continue to grow Average Healthcare Services clients by leveraging our proven go to market team.

Speaker 1

It's also important to appreciate that the growth in our Healthcare Services Client network drives network solutions revenue. We remain comfortable in our ability to finance our fiscal 2025 outlook, given the significant progress we have made in improving cash flow and with our current cash position. Separately, you will notice that we entered into a new 5 year $50,000,000 senior secured revolving credit facility with Capital One. This new facility replaces our former facility with Silicon Valley Bank. We believe the new facility will give us additional financial flexibility through its 5 year term.

Speaker 1

Operator, I think we can now open it up for questions.

Operator

Thank We do ask that you please limit yourself to one question to allow everyone a chance to signal. We'll take our first question from Ryan Daniels with William Blair. Ryan, your line is open. Please go ahead.

Speaker 3

Yes, sorry about that guys. Thanks for the question. Congrats on the strong quarter. Balaji, maybe one for you just on the focus on profits versus investments in some of the novel products. I think it's a positive here given the current capital market environment and I think investors will applaud that.

Speaker 3

But I'm curious if it's Is it more the capital markets and just the desire to preserve capital? Or were you seeing more hesitation among payers about using the platform or just kind of lower return on your marketing dollars there that really caused you to pull back? Thanks.

Speaker 1

Yes. Thanks, Ryan. Thanks for the questions. I think one thing to remember is we're always evaluating our investment decisions along the way. And so specifically to this, I mean, absolutely, the cost of capital weighed into this and it's changed dramatically in the past 18 months.

Speaker 1

So we have to calibrate. So think about it more as time that we would realize revenue versus the investment dollars that we have more than anything

Operator

All right. We'll take our next question from Vishal Patel with Piper Sandler.

Speaker 4

Hi. Thanks for taking the question. This is Vishal Patel on for Jeff Passon and congratulations on the strong quarter. Could you help us with some color on the Connect on Call acquisition? In particular, what capabilities does the product add?

Speaker 4

What is its pricing model and go to market

Speaker 2

So that's a couple of questions and I'll try to answer some of them and some of them are it's still too early for us to share. Look, at the greatest level, all of us have patients who had to call a doctor after hours. And doctors most doctors are required Provide after hour service and most of those services are people, right? And they're the same people that offer answer the phones for funeral parlors or your plumber. And when we talk to providers and we have so many of them and we talk to them about their how they interact with patients, this was an area That was just they were never happy with.

Speaker 2

We never heard of a provider that was very excited about their after hours service. And When we finally connected with the 2 doctors that had started Connect on call, we just saw a beautiful product That's well integrated. And what's nice about is they like as providers, they were also their group actually uses Phreesia. And they told us they're like, look, we just we always assumed that we would never be able to do what you guys do. And we looked at what they did and it was just is a beautiful product.

Speaker 2

And we've been we're in the early stages of letting our clients know about it. The reaction Has been phenomenal. But look, at the end of the day, we're really viewing this as a replacement of the after hours agents. And the response from our clients has been just phenomenal. And I expect us to talk more about the go to market over Coming quarters, coming years, but we think this is a phenomenal capability.

Speaker 2

And we're going to keep obviously, We have the resources and the ability to just keep investing in it. It was a really, really, really small company that we bought.

Speaker 4

Awesome. That's helpful. And if I could just sneak one in really quickly. About a year ago in your quarterly stakeholder letter, You mentioned that Freezer was able to win more deals by being more competitive on pricing. How is your perspective on pricing in the payment processing business evolved since then?

Speaker 4

And how are you balancing pricing in that business versus retention and growth? Thank you so much.

Speaker 1

Yes, Vishal, That comment, I mean, I would think of that the topic in general to be something that's very fluid. We're constantly revisiting Pricing and I think the comment specifically there was we had lowered price, and it had helped us in terms of market share. I think if you follow our take rate, which we disclose every quarter, it's sort of bounced around, but it's sort of found this home sort of in the 2.8 to 2.9 range, but don't think of that as any sort of one specific milestone. We're constantly experimenting with it.

Speaker 4

Got it. Thank you.

Operator

We'll take our next question from Glenn Santangelo with Jefferies.

Speaker 5

Yes. Hey, thanks. Good evening, guys, and thanks for taking my question. Hey, guys. I want to talk to you about sort of the revenue growth guidance for fiscal 'twenty five.

Speaker 5

I mean, Balaji, I heard your comments just over 20 It looks like 21% midpoint over midpoint. And what I guess I'm kind of curious about is if we assume that the payment processing business Doesn't really move much in either direction. I'm kind of curious about what you're sort of implicitly saying about the subscription business next year Versus Network Solutions, I mean, clearly another good quarter in Network Solutions. It's still growing much faster than that 21% sort of growth rate, but recognizing that it is slowing and you're calling for some volatility in the Q4. So I'm just kind of curious about what you're saying about each of those two businesses as it relates to F-twenty 5.

Speaker 5

Thanks.

Speaker 1

Yes. Thanks, Glenn. So first of all, I mean, let's recognize that it's December 5, So fiscal year is not even over yet. But that's right. I think the way you should read that outlook we provided It's no different than in the past, which is payments does grow slower than the other two revenue lines.

Speaker 1

To your point, you don't really create more payments. Most of that growth is coming from the fact that we're growing our network. And then there's some seasonality to it. So I wouldn't say there's no growth plus or minus. It's just that the growth itself largely comes from Growth in our network and it will be slower than the other two revenue lines.

Speaker 1

That's probably always we'd say now or probably ever.

Operator

We'll like our next question from Richard Close with Canaccord Genuity.

Speaker 6

Yes. Thanks for the question and congratulations on the acquisition in the quarter. Just maybe digging in a little bit more On Ryan's question, so on the payer update, I'm just curious, has the opportunity changed There at all, is it just not materializing as fast? Just anything that maybe caught you off guard on that

Speaker 2

No, I don't think look, We've been growing the payer opportunity, Richard, for many years. And I think our view was just the rate and pace of that investment And where we allocate dollars, look, I don't think payers are going away anytime soon, and I don't think they move very fast. So I think our general view was they don't move fast. Let's not try to make them move too fast by throwing dollars at it. And frankly, I think all companies make decisions around capital allocation.

Speaker 2

And our view is We want to get back to profitability as pretty much as soon as we can, while still driving significant growth in business.

Speaker 1

Okay. Thank you.

Operator

We'll take our next question from Daniel Grossleit with Citi.

Speaker 7

Hey, guys. Thanks for taking the question here. I just have a question on the push out of that $500,000,000 based on the run rate to fiscal 'twenty six and be largely squaring that with your comment About you guys remaining committed to achieving 20 ish percent plus growth. I don't know if that comment was specific to kind of medium term From guidance or what. But I'm curious because at a 20 ish percent -plus run rate, Fiscal $215,000,000 I'm curious kind of what's driving that step down

Speaker 1

Hey, Daniel, you cut out there a little bit at the end. Do you mind repeating maybe the second half of your really just repeat your question, I guess.

Speaker 7

Sorry. How's my volume now?

Speaker 1

Better. Yes, much better. Can you

Speaker 7

hear it? Better. Okay. So the question really is, if you look at fiscal 'twenty six and that $500,000,000 based on an annual run rate Target in fiscal 'twenty six, it does imply revenue growth lower than 20% in fiscal 'twenty six. And Balaji, you mentioned that You're committed to kind of growing revenue 20%.

Speaker 7

So I'm curious kind of what's the delta there that's driving that step down in year over year growth From fiscal 2025 to fiscal 2020 6.

Speaker 1

Yes. I mean, Daniel, I think we haven't made any comments about 26, other than talking about pushing $500,000,000 run rate out, I don't think it's appropriate to start like really digging in and unpacking 26%, but I think both Jaime and I on this call, but also on prior calls said we've made a lot of investments to position ourselves for 20% growth beyond 25%, but I think that's really all we can say at this point.

Speaker 7

Got it. Thank you.

Operator

We'll take our next question from Scott Schoenhaus with KeyBanc.

Speaker 8

Hey, Hyman and Balaji. Thanks for taking my question. So it looks like from just the initial research on Connect On Call, it has a diverse Client base, you said in your press release, it was or your investor letter about 67 new provider clients. And then you have the additional Access e form Clients, is the goal here to really create kind of a new install base where you can cross sell your legacy solutions? Obviously, you can add on these bolt on solutions, but you inherently have this new customer base that you can cross sell your legacy solutions to.

Speaker 8

I'm just trying to bridge and think about 'twenty five guidance and what that means for average revenue provider client growth. Thanks.

Speaker 2

Yes. I'll try to answer the question as best I can. So I guess, whenever we have done an acquisition, we've and We've obviously always introduced them to Phreesia and to see if they'd be interested in buying our current like our existing product On top of whatever they have from the small product company that we bought. But when we think about acquisitions, We go through analysis, our product organization does around buy, build or renting capabilities, right? And so if you think about healthcare, it's still in the early phases of Digitizing, right.

Speaker 2

Like if we think about access e forms, we're talking about like it was technology it's technology that We acquired so that you can move away from having people sign like have physical paper that had to look a certain way For government forms or payer forms. We're talking about replacing paper, right? And for Connect on call, That's a capability. It's like we're replacing a call center operator that costs just a phenomenal amount of money To practice to have someone answer your phone and take down a message. Like it still blows my mind that that even exists.

Speaker 2

It's like and when we talk to doctors, they're mostly just using very, very old like that is what they're using. They're using Call centers that they pay per minute with minimums every single month and we just think about that as a capability that This drives a phenomenal like by adding this technology and these capabilities, we add just a phenomenal amount of value to our client base. It's been a strategy that's worked unbelievably well for us for almost 20 years.

Operator

We'll take our next question from Ryan MacDonald with Needham and Company.

Speaker 9

Hi. Thanks for taking my questions. Hi, it was great to see that PAM was included in the MIPS calculation for 2024. As we think about the rollout of that and sort of how you monetize moving forward, 1, is this going to be included in all calculations Just right off the bat in 2024 or are you sort of rolling out gradually in specific patient populations? And then 2, as you think about how the effect Impact of monetization, is this going to be a potential usage based monetization, license fee?

Speaker 9

And what does this mean maybe potentially for adoption amongst Provider customers over time. Thanks.

Speaker 2

Yes. So from a mix measure, it is up to the practice and I'm Absolutely. We have experts at Phreesia that could do a much better job of answering these questions. So, I'll take my really high level answer as it be. But this is first off, this is just massive and material in getting Broad scale awareness and adoption of the PAM as a measure or As the measure gets adopted, we believe very strongly will materially change outcomes, both health outcomes and clinical outcomes for these patients.

Speaker 2

And practices, we believe, will over time very much adopt this measure as what it is seen in policy and clinical worlds as the best of breed. And so from a MIPS standpoint, it's up to the practice as to what they submit As part of their MIPS measures. So that's I want to say it's like 1500 pages and you depending on your specialty, there's different Categories of what you could pick, how you pick it. And in year 1, this measure, the PAM, Pro PM is included as a bonus measure. So it's between 7 10 bonus points to the practice, which can contribute up to 1% in additional revenue to them on their Medicare revenue.

Speaker 2

So it's significant, in terms of its impact, but it's part of what you get when you get Phreesia. And we're pretty excited about making this part of Phreesia. And so we're running 100 of 1000 of PAMs right now.

Operator

And we'll take our next question from Jeff Garo with Stephens.

Speaker 2

Yes. Good afternoon and thanks for taking the question. I want to ask for some more color on what you are seeing in the life sciences end market. Curious how you would describe customer behavior coming into year end around remaining budgets and those customers And there are planning cycles for next year. Thanks.

Speaker 2

Look, I think it's still early in the cycle, What we have seen is that clients, life sciences clients are really very much focused on scale and ROI and tried and true platforms that could deliver both of them. And I think It's been very nice to see that we're continuously at the top of their buy list. So but it's still early. And I think the team is out there Working their butts out for all of us and we're pretty we have a lot of hope that next year will be another really strong year.

Operator

We'll take our next question from Jack Wallace with Guggenheim Partners.

Speaker 10

Hi. This is Mitchell on for Jack. Thanks for taking the question. So just considering the trial promotion period and the recent acquisitions, How much of the near to medium term growth algorithm in the software subscription segment is based on revenue per client expansion? Thanks.

Speaker 1

Can you repeat that again?

Speaker 2

I'm sorry.

Speaker 10

Yes. Just considering the recent the Trial promotion periods and the recent acquisitions, we're just wondering how much of the near to medium term growth algorithm Within software subscriptions, it's kind of based on revenue per client expansion.

Speaker 1

Got it. Got it. So I think and we mentioned this in the letter. I mean, I think just the fact that Connect on Call, in particular brought a number of clients, I mean, in the 100, With very little revenue, I mean tiny, I mean, so in fact, on a quarterly basis, it's like in the 100 of dollars revenue per client. So that has an impact of just dragging that number down.

Speaker 1

I think outside of that, I think it's more of what we've talked about, which is You have to think about the totality of our revenue and the fact that we have different ways of generating revenue across the client base inclusive of Network Solutions. I don't think outside of that one comment and how that impacts 3Q. It impacted 3Q a little bit. It will impact 4Q a little bit

Operator

We'll take our next question from Sean Dodge with RBC Capital Markets.

Speaker 11

Hey, good afternoon. This is Thomas Keller on for Sean. Thanks for taking the question. I wanted to maybe following up on the earlier Question on pricing. I think that one was mostly targeted toward payment processing.

Speaker 11

I wanted to refocus that on the subscription platform. So more specifically, when prospective customers are evaluating different intake solutions, what are the key factors that they're going to make decision? Like where does price fit into there? Are you able to rank those factors and, have those evolved at all over the last couple of years? Thanks.

Speaker 2

When we work with any of our provider clients, they want to know capability I think capabilities and value are the number one things that They talk about 1st and foremost. And frankly, we tend to win on both of those like hands down against Lots of little point solutions and solutions that are often tied to specific mark, PMR markets or specialties. And our ability to provide just the breadth of solutions at the same time that we drive a phenomenal ROI and are willing To show that we can, more frankly, really quickly, while also at the same time, just being able to intake the vast majority of their patients. But more and more, we're not just selling on intake. We're selling on the breadth of being able to drive more patient visits, drive more appointments, Drive a lower cost of running the practice.

Speaker 2

I'd say intake is becoming less and less of the reason why people are buying us even though it's Still our number one driver.

Speaker 1

All right. Perfect. Thank you.

Operator

All right. And at this time, there are no further questions. I'd like I'll turn the call back over to Jaime and Dake for any additional or closing remarks.

Speaker 2

I'd just like to thank everyone For joining us on the call, I'd like to thank team for another good quarter and I wish everyone a happy holiday And we look forward to continuously talking to all of you. Cheers. Happy holidays and Happy New Year.

Operator

And that does conclude today's presentation. Thank you for your participation today. You may now disconnect.

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