Good morning, ladies and gentlemen. Welcome to the Phreesia fiscal second quarter 2022 earnings conference call. At this time, all participants are in 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.
Thank you, operator. Good morning and welcome to Phreesia's earnings conference call for the fiscal second quarter of 2022, which ended on July 31st, 2021. Joining me on today's call are Phreesia's Chief Executive Officer and Co-founder, Chaim Indig, and Chief Financial Officer, Randy Rasmussen. A complete disclosure of our results can be found in our earnings press release issued yesterday evening, as well as in our related 8-K submission to the SEC. Our 8-K filing also includes our quarterly stakeholder letter. 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 following the conclusion of the call. During today's call, we will make forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act.
Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Furthermore, actual results may differ materially from those described in the forward-looking statements and may be affected by a variety of risks and factors that are beyond our control, including, without limitation, statements about our future financial performance, including our revenues, cash flows, cost of revenue, and operating expenses, our anticipated growth, our predictions about our industry, the impact of the COVID-19 pandemic on our business, and our ability to attract, retain, and cross-sell to healthcare provider clients.
Statements are also subject to other risks and uncertainties, including those more fully described in our filings with the SEC, including in our quarterly report on Form 10-Q that will be filed with the SEC later today. Forward-looking statements made on this call 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 any 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, except as required by 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 with our Form 8-K after the market closed on September 1st with the SEC and may also be found on our investor relations website at ir.phreesia.com. As a reminder, we are participating on today's call from three different locations, so we appreciate your patience with us. I will now turn the call over to our CEO, Chaim Indig.
Hello. As Balaji mentioned, yesterday after the markets closed, we filed our fiscal second quarter earnings press release and stakeholder letter. We hope everyone has had a chance to review our results. Phreesia achieved an important milestone in our ninth quarter as a public company by surpassing $50 million in revenue for the first time. Our revenue and growth in the second quarter could not have been achieved without the continuous and accelerated investments we have made across the organization. We appreciate everyone finding the time to join us before the Labor Day long weekend, particularly all of you in the Northeast who are having to manage last night's storm. We hope all of you are staying safe. Operator, we can open up the call for Q&A.
Thank you. As a reminder, to ask a question, please press star one on your telephone keypad. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from Anne Samuel from JPMorgan. Your line's open.
Hi, guys. Congratulations on those solid results. I was hoping maybe you could talk a little bit about balancing operating expenses with growth. Your operating expenses were up pretty significantly in the quarter, and was just hoping you could help us understand what that means for your future growth expectations, just given the second half guide looks a little bit closer to their 20% long-term target. Thanks.
The last part of your question, Anne Samuel, it's cut out for me. Can you just repeat it? Sorry about that.
Sure. I was just hoping that you could help us understand what the expenses in the quarter mean for your future growth expectations, just given the implied back half guidance just looks a little bit close to your 20% longer term target.
Sorry.
Anne, I can take this. I think if we look at the quarter, as Chaim said, this is our first quarter over $50 million, which we're really proud of as a company. We did really well. We grew 46% overall, 35% in provider revenue, and we're really strong in life sciences at 95%. I think as we look at the second half of this year, we had mentioned this in the Q1 call, is that COVID affected us quite a bit last year from a patient volume and payment spending level. In our payments business, it's driven by the patient responsibility piece, and so that's typically higher at the beginning of the year when the deductibles roll over, and it declines during the year.
I think as we look forward this year, a lot of that payment revenue subject to some of the dynamic nature of COVID and the pandemic and what that impact will be on payment levels and patient visits.
That's really helpful. Thanks. Then maybe just hoping you could provide some color around what return to work looks like for you and your client base and if vaccinations or the Delta variant are playing any part in that?
I'm really glad you asked that question. Our general view is that we are a virtual company, but we have started to really get together as teams and organizations throughout the country. As a company, we have mandated vaccines. A lot of our clients have mandated vaccines. We're also being wildly cautious about how we engage, when we engage. We think engagement with each other and with our clients is very important, and we're really excited to be getting together internally. A lot of our team has grown significantly, so people actually getting to know each other face-to-face, I think, is very important. Also being front and center with our clients, which it's been really nice to see them, and a lot of our prospects.
That's really helpful. Thanks, guys, and congrats on the quarter.
Thanks, Anne. Be safe.
Your next question comes from Ryan Daniels from William Blair. Your line's open.
Yeah, guys, thanks for taking the question. In your prepared comments last night, you talked about more expansion in entry-level packages as well as kind of driving more module add-ons. I'm curious if you can offer more color on the average deal ciles at entry. Is that bigger customers buying more? What type of add-on velocity or specific products are you seeing more actively in the current market? Thanks.
Ryan, I think you're in the only part of the country that hasn't been hit by anything, first off. Good job on being in the middle of the country. I think our view is we want people to start being Phreesia clients as easy and as fast as possible. As an organization, we want to give them whatever tools they need in whatever location. Sometimes, and more often than not, it's on land, where we're building trust with the organization as a product-led growth organization. Sometimes it's with one of our various products, and we're getting it in at a pretty low cost so that they could start getting really comfortable with how we could help them accelerate their patients, accelerate their cash flow, deal with labor shortages.
We're providing a suite of all the different ways we can help improve how hard it is right now to run a health system, a physicians group, or a small practice. We're doing it in small chunks. We're doing it in large chunks. We're doing it with different types of products. Having that arsenal of different abilities empowers our organization to do what we do great, which is help our clients deal with the multiple challenges that they face while at the same time starting to build that really strong trust relationship that we build with our client base.
Okay, appreciate that color. Just as a follow-up on the investment spending, obviously a leading indicator tends to be your level of SDR. Can you speak a little bit to the sales and marketing expense, and is the uptick there related to current quarter commissions for future sales? Maybe you could talk about the size of the SDR base versus a year ago, or is it more of a return to normalcy and really advertising and marketing to drive new customer leads at the top end of the funnel? Thanks, guys.
I would say we're spending across the board in sales and marketing, is that right? I think our marketing, our lead gen team has been doing phenomenal. To answer your question, I want to say, I think we were at 174 as of the end of July, SDRs, Ryan. At the start of the year, we were at 100. Albeit I do want to stress this is usually a high watermark for the year because we tend to do a lot of graduate hiring. This tends to be in the summer, people graduated, and this is often their first job, so we're really excited that they've chosen Phreesia as the first place they work. Also a continuous ramp-up on our implementation organization and our CSM team which is really helping to facilitate taking clients live and getting them using more products.
Okay. Very helpful. Thank you, guys. Congrats on that strong quarter.
Balaji wants to clarify, I think it was 106, not 100 at the start of the year. Is that right, Balaji?
That's right.
Yeah. All right. Sorry. I want to get it right.
Your next question comes from John Ransom from Raymond James. Your line's open.
Hey, good morning. A couple things. You're sitting on a lot of cash, which is a high-class problem. What complications, if any, does that create in terms of time spent evaluating potential opportunities? Secondly, maybe just a little more understanding. Obviously, you're spending a lot more on not just marketing, but product development. I know you've put a lot of effort into appointment scheduling, but what other kind of linear extensions to your product suite are you investing in this year, and how should we think about that adding to your opportunities in the out years?
Well, John, that was so many questions. I'm going to have a hard time remembering them all. I should have written them down.
It was just two.
All right.
I know you can remember.
All right. We are, and will always remain very thoughtful in our use of capital. Because we believe as an organization, capital allocation is one of the most important things we do. In terms of M&A, one of the reasons we feel very comfortable about the aggressive investments we are making is that based on what we've seen in the market in terms of acquisition opportunities, the returns we're getting on our organic growth initiatives are looking very attractive. We will continue to empower our operators across the board, and we put our product organization as operators. They think like operators and owners of the company everywhere, and we want to empower them to make really smart investment decisions for existing products, existing growth initiatives, and new products. We're actually investing heavily in new areas of growth.
Whenever we're ready, I promise Balaji will make us tell everyone. Right now we want to give as much air cover to those folks as possible to be able to build out their ideas and see how they're successful and really frankly drive value for all of our stakeholders, including our customers and employees. We feel pretty good about a lot of the investments we're making. They're reporting on them all the way up on a regular basis.
Thanks.
Your next question comes from Donald Hooker from KeyBanc. Your line's open.
Great. Good morning. Thank you for taking my questions. Was curious if, I guess Veeva reported last night, kind of talked about wage pressures and kind of being aggressive, kind of raising comp. I've seen, I guess, software developers are in demand, software people are in demand. We've seen other sort of software companies. I'm looking at your numbers here for the quarter, and I'm wondering if you're seeing kind of wage pressures on some of the software talent and how you're thinking about that going forward.
I don't. I think what Veeva did, I wasn't listening to their call, but I read some of the notes. I think we're seeing it not just in software engineering, but across the board. I think there is a general view that exceptional talent should be paid well. We have a plethora of really amazing people at Phreesia. We want to continuously make sure that we're paying them appropriately. It's always been part of our philosophy, that compensation, if you work hard, you should get paid very well. I wouldn't just say it's software engineering. I'd say it's across the board. Randy, would you agree?
Yeah, that is part of our spending increases, increasing pay for top performers.
Great. Thank you. One other real quick one. I was curious, as I look at your payment processing fee revenue, and it moves around a lot, obviously, but are there more or less, I guess probably less, patients of your clients that are on payment plans? Does that somehow, I guess, does sort of that changing use of payment plans a factor in changing your payment processing fees?
It doesn't actually for us, because we don't charge. It's usually just card not present when you're on a payment plan. Generally, I don't think it has massive fluctuation in our payment volume. We have seen an uptick over the years as deductibles have gotten bigger, that more patients aren't able to pay their whole bill. We think it's important that our, and so do our clients, that they're given the ability to pay reasonably over time. The vast majority of the payment plans are interest only, or, I mean, no interest.
Okay. Super. Thank you for your comments. Have a good day.
Cheers. Be safe.
Your next question comes from Sean Wieland from Piper Sandler. Your line's open.
Thank you very much. Good morning. I'm still a little bit stuck on the growth in OpEx. Maybe if you could take it line by line through the three lines in OpEx. How much was wage increases? How many FTEs were added? I guess I get the investments in R&D you were talking to Ryan about. G&A was up a lot. Still just not quite clear on the sudden acceleration in OpEx.
Chaim, do you want me to take this, or you want to?
Yeah, go for it.
Go first, then? Yes. I think, across the board, where we're investing is in sales and marketing and R&D. I think it's important for us. We've always been a product-led company, and our product sells itself. I think as we make investments across the board, in our investor deck, I think it's slide eight where we talk about the different modules that we have. From a headcount perspective, the headcount is slightly north of 1,200 this quarter. We did add quite a bit in sales and marketing primarily and in the R&D areas. From a G&A perspective, I guess one of the things that we also mentioned is that we did go live with a new ERP system this quarter, which was a project that we launched last year. We did it entirely remotely, so we're really proud of the organization.
We felt, as a public company, it's really important to have a robust ERP system, and an important investment for us to scale the company and really have strong controls over our spending and our financial reporting.
Could you quantify the number of FTE adds in the quarter?
I think our ending headcount was slightly north of 1,200 employees.
Yeah.
Growing.
I was just looking here. It was 1,238 for the end of July. Sean, in our 10-K, you'll see we had 827 as of 01/31/2021.
Right
sort of the growth you can see.
Okay. That's super helpful. Thanks. I want to ask about the Health Campaigns. Is there any interest among your clients or any efforts on your part to aim Health Campaigns of addressing vaccine hesitancy across the patient base of your clients?
Sean, we have been using it aggressively with our clients to use Health Campaigns that is a pointy edge of the spear for vaccine hesitancy and getting them into groups that are providing vaccines. It's been very effective at both getting folks in for their vaccine, and we are very strong believers based on the data that healthcare providers are a great place to deliver vaccine and make folks more comfortable. People trust their healthcare providers more than almost anyone else. Having their healthcare providers drive vaccine adoption, awareness, and deliver the vaccine is really important, and Health Campaigns has been very successful in the practices and health systems that have turned it on.
That's great to hear. Yeah.
What's really nice about it too is it's a good way for them to get using that product. Once they do, they start realizing they could use it for a lot of other campaigns to drive real outcomes and patient visits.
Thanks for that, Chaim.
Thanks, Rick.
Your next question comes from Scott Schoenhaus from Stephens. Your line is open.
Hi, Chaim and team. Not to belabor the point, but just to drill into the investments you're making on the R&D side. Chaim, is it fair to assume that this growth is coming mostly from additional software engineers that are needed to customize service offerings for specific customers, and any impacts from going upmarket to larger hospital systems on these investments?
From the R&D spend, our R&D team does very little customization per client basis. It's really on building product. It's about adding software engineers and product managers and QA all across the board so that we can continuously build amazing product for our customers. It's for big customers and little customers. What we really try to do is, and we believe this strongly, a lot of the products that we build for big or small tend to be used interchangeably. Right? Whether you're a massive health system, you still have a lot of the same problems. What we've seen is a lot of the things that we've built in the acute space and in hospitals are now being used for workflows in very small practices, and it's been wonderful to see.
We empower our product organization to build scaled product, and we really focus on driving usage. Right? If you build a great product and people use it, you're able to monetize it continuously for years, and it becomes really sticky, and it becomes a phenomenal flywheel of growth. If I look at our product investments, it's on adding more architects and engineers and product managers and QA, and really making sure we continue to invest over the long term in building something of significant value for all of our stakeholders.
No, that's great. That makes perfect sense. Chaim, you mentioned earlier on the call an anecdote about helping customers who are seeing hiring issues or labor shortages. Are you seeing this as a catalyst for demand across your customer base, or is it particular to specific sizes of customers or location? Thanks for your time.
Look, I think this is an acute problem across the board for all of our customers, big and small. I was with a long-time client the other day, and it's a good-sized regional group, and I saw him and he said there are 130 people below where they are budgeted to be. I said, How can we help? He goes, Are you kidding me. I don't think we'd be able to open our locations right now if it wasn't for Phreesia. We feel like not only are we making a difference for our clients today, giving them the ability to see patients, but it's a very large catalyst for why people are implementing technology. No one feels good about cutting bodies. It's not why anyone enters healthcare.
What they do feel good about is treating patients, and we're helping them do it in a much more efficient manner than what they've done. Yeah, we are seeing it as a significant catalyst. The wage pressure is everywhere across the country.
Your next question comes from Iris Long from Berenberg. Your line's open.
Hi, good morning, team. Thanks for taking the question. My first one is on hiring. Given that you have hired a bunch of people recently, should we expect more hiring in the second half? Usually how long does it take to fully train them? Considering the sales cycle that typically lasts for a couple of months, is it fair to say that we should wait for at least a couple of quarters before we see some impact on the revenue line?
We are not expecting to slow down our hiring. In certain areas, I think we'll see more, in other areas we'll see less, and it will vary depending on what the needs of the operators are moving forward. They're empowered to make a lot of those decisions. This year's results are a result of hiring and investments we made over the previous years. The way we think about it is the investments we're making now should pay out for years in the future. We tend to think out in years, less in terms of quarters.
Okay. Got it. Then just a follow-up to that, in terms of your investment philosophy. At this current investment level, are you still aiming at a 20% long-term growth, or could it be higher? Then maybe at what point should we expect the investment to level off a bit?
I think we'll talk about our future growth levels at the end of this year, beginning of next year, and I think that's what we've done historically in the past, and I think that's what we'll do in the future. Randy, do you agree with that? Is that right?
Yeah, I think when you look at 20% and you look in the far future, I think that's still an appropriate metric. In the near term, growth rates may fluctuate as we make these investments.
Okay. Thank you. Appreciate the color.
Yeah, I think if you look at our guidance range, we're guiding to $195 million to $198 million, so 31%-33% growth for this year.
Okay. Thank you.
Your next question comes from Ryan MacDonald from Needham & Company. Your line's open.
Hello, this is Alex on for Ryan. I'll just talk for me. In the quarter, we saw continued strength in the Life Science division. Was the strength primarily due to strong execution or more favorable market dynamics?
I think that team has continued to do a wonderful job, and as an organization, and that we got together as a leadership team, we're all really just proud of how they've executed. Even if the market dynamics, and we do believe the market dynamics have been favorable, but you have to be able to execute upon favorable conditions to be able to perform the way we did. I think we were able to take advantage of good market dynamics and execute unbelievably well, and that team's just doing a great job, and we're proud of them.
Okay. We've seen a growing amount of VC funding in the space. Is that changing the competitive landscape, or is it impacting the RFP process at all?
We've been doing this for 16 years. We've seen VC funding come in and out. I think what we have generally seen with our client base is they like to see working product as opposed to slides and ideas. I think that the quarter we just had speaks for itself, but we feel pretty good about our ability to help our clients quickly deal with the problems that they're facing today. We haven't really seen that affect us materially.
Okay. Great. Thanks.
Your next question comes from Joe Goodwin from JMP Securities. Your line's open.
Oh, great. Thank you so much. Thank you guys on the call, guys. I know it's early days. Can you talk about the ProviderConnect program that you guys have been working on for a little bit, just how that's going and the traction you're seeing there? Thank you.
It's a really cool offering. It's been live in a couple markets. I think it's provided a phenomenal amount of value to the organizations that have gone live with it. I think it's still really early days for us to comment on any of the performance, but we feel really good about how that team's doing, and we continue to aggressively invest in the product and that team. We think it's going to make a material difference to just so many patients being able to get care. Nice work finding that out. You really got to do research to figure out the markets we're in on that and what's happening, so it's pretty good. I think this is the first question we've had on it, and the product's been in market for over a year.
Thanks, a lot. Take care.
Cheers.
Your next question comes from Richard Close from Canaccord Genuity. Your line's open.
Thank you. Good morning. Congratulations. In the letter last night, you talked about the revenue performance and being able to pull forward from the pipeline. I was just wondering if you could characterize that a little bit, the current state of the pipeline. When you talk about pulling forward, what's the ability in terms of being able to refresh or refill the pipeline based on the accelerated success you're seeing?
Well, if we didn't feel good about continuously refreshing, we wouldn't be hiring across the board. A lot of that pull forward has been just really strong teamwork between our SDR organization, our sales organization, our implementation organization, our CSM organization, and really coordinating and pulling through and making when a client becomes a client. First, when they become an opportunity, making them a client as fast as possible. When they become a client, getting them live as fast as possible so that they convert as fast as possible, and then getting them into the network. We've seen the team just work just so well together.
I think we're all just very surprised given and happy with the outcomes, considering so many new members of the team have joined and they've really been able to make a big impact pretty quickly in helping these clients get live and making a difference to their practices, which is what we're all here for. Frankly, we have to keep filling that back top of the funnel, and we feel pretty good that the organization's going to keep doing it.
Okay. That's helpful. A follow-up on the competitive question a couple minutes ago. Can you just go over what you think is the main differentiation for Phreesia as you go out and compete? It is a pretty crowded field, but what's the feedback you're getting as people are signing on, and just curious your thoughts.
I think it really depends on the client, right? What their problem is. On a high level, the number one thing we hear is we have a great offering for all of people's patients that then they get unbelievably high self-service rates and phenomenal ROIs, and we work really quickly. We make an impact to their organization and their satisfaction rates, and their staff like it, and we know how to get it working. In the world of technology, having an idea is one thing. Making that idea work at scale is actually really hard, and it requires both a ton of investment and phenomenal people. We do what we say we're going to do, and we make a huge impact. When we talk to our clients, that is ultimately the biggest differentiator, and they tell other prospects, right?
No one really wants to buy a product that doesn't work, right? It doesn't do what it says it does, and we do that. We sell product that makes a big difference, and we could articulate it and make it happen pretty quickly.
Great. Thanks.
Your next question comes from Sean Dodge from RBC. Your line's open.
Hey, good morning. This is Tom Kelliher in for Sean. Thanks for taking the questions. Maybe going back to product adoption, you all talked about some of the newer clients opting for more products upfront than maybe a couple of years ago. Broadly speaking, if you think about penetration from a product or even a total revenue standpoint, where is the existing client base relative to full penetration? Based on existing products, is there a lot of upsell opportunity remaining?
I think we have a fair bit of runway to be able to continuously add a lot of value to our clients, our existing clients, by having them adopt more of our offerings. We've seen that over time, they continue to gain adoption. We make it easy, and sometimes it's a timing issue. Sometimes it's a feature function issue for a specific offering. Generally, we think we have a fair bit of runway, still 2 to 3 times growth, depending on the types of clients.
Okay, perfect. Thank you. On the life sciences, can you give a sense of the cost structure and margins on that side, and maybe how we should think about that segment evolving as a mix of the total revenue over time?
Randy, do you want to take that?
Yeah. I think we get this question a lot. Life science is really part of our platform. It's the same patients that are using Intake that are on the same platform that's delivering the digital messages from life science. It's not really broken out internally because it's shared costs on the technology side. We do have a dedicated team for sales and content creation. It fluctuates over time and it can be lumpy, but it's a good business.
Okay, great. All for me. Thanks, guys.
We have one more question from Stephanie Davis from SVB Leerink. Your line's open.
Hi, this is Joy Zhang on for Stephanie. Thank you for taking my question. Veeva and a couple other health tech companies have called out a trend where pharma companies are meaningfully reducing their sales rep headcounts as the industry moves towards digital advertising. Can you give us a sense of how this trend could impact your Life Sciences business?
Well, I think the trend has been our friend. I think that's the term. We've seen a fair bit of growth in our life sciences revenue stream, and I think we invested over the last couple of years, and we've been very pleased with the returns. I think a lot of it's put us in a position to be able to capture continuously more growth. I'm proud of the team, but I do think that we're seeing dynamic changes, but a lot of it, to me, seems sort of common sense. I don't think a lot of practices are letting, because of COVID, I don't think a lot of practices are letting sales reps in to visit them. They probably should and are reducing them as a result.
That's helpful. Just a quick one on the sales and marketing side. You mentioned that most of the new hires tend to be new grads, but was wondering if the mix has tilted more towards the senior side within your acute business, just given the strong relationships required in the end market, or is there a difference?
Sorry, I missed the first part of the question. Can you repeat that?
Yeah. Just within the new hires, you mentioned they tend to be the new grads, but are they more senior within the acute businesses, just given the relationships required?
We have this amazing early career program across the board, and what we hope to do and we do hire people outside of early career throughout the organization also. A lot of our hiring is in early career, and what we hope is that, and what we've seen is that over time, those early career folks become more senior at the company and are able to work with more complex organizations. Historically, we have seen that occur where we, and seniority is in the eye of the beholder. We're looking for our people to be able to do it as opposed to just age. Yeah, we have seen people matriculate continuously to be able to handle and work with large, complex organizations. With that, I look forward to speaking with all of you in the fall, and thank you for your continued interest.
Be safe and have a nice Labor Day.
Thank you. I would now like to turn the call over to Mr. Chaim Indig for closing remarks.
I think I said them, so I'll look forward to speaking to everyone in the fall, and thanks for your continued interest.
Thank you. This concludes today's conference call. Thank you all for joining. You may now disconnect.