Phreesia, Inc. (NYSE:PHR) Q2 2024 Earnings Call Transcript

Phreesia, Inc. (NYSE:PHR) Q2 2024 Earnings Call Transcript September 6, 2023

Phreesia, Inc. beats earnings expectations. Reported EPS is $0.34, expectations were $-0.75.

Operator: Good evening ladies and gentlemen and welcome to the Phreesia Fiscal Second Quarter 2024 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, Phreesia’s Chief Financial Officer. Mr. Gandhi, you may begin.

Balaji Gandhi: Thank you, operator. Good evening, and welcome to Phreesia’s earnings conference call for the fiscal second quarter of 2024, which ended on July 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-K submission to the SEC, including our quarterly stakeholder letter, both issued after the markets closed today. These documents are available on the Investor Relations section of our website at ir.phreesia.com. As a reminder, today’s call is being recorded, and a replay will be available on our Investor Relations website at ir.phreesia.com following the conclusion of the call.

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During today’s call, we may make forward-looking statements, including statements regarding trends, our anticipated growth, our strategies, predictions about our industry, and the anticipated performance of our business, including our outlook regarding future financial results. Forward-looking statements are subject to various risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ materially from those described in our forward-looking statements. Such risks are described more fully in our earnings press release, 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.

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. The non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP results may be found in our earnings release and stakeholder letter, which were furnished with our Form 8-K filed after the market closed today with the SEC and may also be found on our Investor Relations website at ir.phreesia.com.

I will now turn the call over to our CEO, Chaim Indig.

Chaim Indig: Thank you, Balaji, and good evening, everyone. Thank you for participating in our second quarter earnings call. Our stakeholder letter and earnings release came out about an hour ago, so let me start the call by sharing a few key highlights of the material we released. Total revenue in the second quarter was $86 million, up 26% year-over-year. Subscription and related services revenue grew 26% year-over-year and the processing revenue grew 21% year-over-year and Network Solutions revenue was up 33% year-over-year. Adjusted EBITDA was negative $12 million, $14 million improvement year-over-year. Our average number of healthcare services clients in the quarter was 3445, up 24% year-over-year. We increased our total revenue for clients to $24,914, up 2% year-over-year.

I want to thank the team for delivering solid revenue growth while also driving another quarter of nice operating leverage. I speak for all of our employee owners when I say we look forward to returning to profitability. Let me hand it over to Balaji to talk about our fiscal 2024 outlook.

Balaji Gandhi: Thanks Chaim and good evening everyone. Moving on to our outlook for fiscal 2024, which ends on January 31, 2024 we are maintaining our revenue outlook for fiscal '24, which is in the range of $353 million to $356 million implying growth of 26% to 27% over our fiscal 2023 revenue. We are raising our fiscal '24 adjusted EBITDA outlook by $6 million on the top and bottom end of the range. Our new Adjusted EBITDA range is negative $54 million to negative $49 million from a previous range of negative $60 million to negative $55 million. The increase reflects continued operating leverage across the organization and continued progress on our path to adjusted EBITDA profitability. We are also maintaining our revenue and profitability targets for fiscal 2025.

Those targets are $125 million of revenue in a quarter during fiscal '25 which implies $500 million of annualized revenue and returning to adjusted EBITDA profitability during the fiscal year 2025. We remain comfortable with our ability to finance our fiscal year 2025 targets with our current cash position. We believe our capital allocation strategy sets us up to deliver on our financial targets for fiscal 2025 and beyond. We continue to focus on driving shareholder value. Operator, I think we can now open it up for Q&A. Thank you.

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Q&A Session

Operator: Thank you. [Operator Instructions] We'll take our first question from Ryan Daniels with William Blair.

Ryan Daniels: Yes. Good evening, guys. Thanks for taking the question. Balaji, one for you first on the quarter specifically. It looks like the cost of revenues were down year-over-year despite the strong revenue growth and I know in the shareholder letter you talked about some things you're doing to optimize the platform spend. So can you go into a little bit more detail on that as it looks like pretty impressive cost controls there?

Balaji Gandhi: Yes. And first of all Ryan, just to point out specifically on this quarter, there was a little bit of benefit in terms of timing of certain payments. So I think as we said in the last couple of quarters, we feel pretty good about the improvement we've made on this line. And while there's still opportunity, I think a lot of the improvement, the big improvement has been seen over the past four to six quarters. And to your other question, I mean a lot of this was, look we made a lot of big investments across the platform and we just -- we I think we've talked about this at length about just growing into it. So I think what you just saw when gross margins were 500 to 1000 basis points lower was just us making that investment knowing we were going to go from 1500 clients to well over 3000 clients and wanted to make sure we support all those clients well.

Ryan Daniels: Okay. That's super helpful. And then one bigger picture question, it kind of leads off of that. You've done a great job progressing at or ahead of your schedule to get to the run rate and breakeven in 2025 fiscal year. And I'm curious if you're willing as we approach that time point to go beyond that and give us a little bit better view about what the financial model might look like in however manner you want to characterize it kind of beyond the 2025 goals you've established? Thank you.

Balaji Gandhi: Thanks, Ryan. Well, look let me try to be helpful on that topic. Maybe first just taking a step back and it actually Ryan relates to your previous question around gross margin. So we did make some pretty big investments and growing into those investments is a very important theme when you just think about our financial profile. But I think specifically let's talk about G&A expense and so and Ryan you specifically you may remember this from our IPO process four plus years ago. We were spending annually about $30 million in G&A and about to go public with trailing revenue of just over $100 million. And we quickly recognized and we did a lot of research around this that to be a high performing public company with proper controls, processes, systems etcetera, it was going to be significantly higher.

And the research we did concluded it was somewhere in the neighborhood of $20 million a quarter or 80 million annually. So that's a pretty big step up from the 30 we were at. And yes some of that is people, some of it is just systems and processes et cetera. And in our research we realized that a lot of companies delay that investment and we chose to not delay that and do it upfront. And so you saw in our income statement a big step up in G&A that started to build in fiscal '21 and sort of peaked about seven quarters ago. And I think if you look at seven quarters ago or over the past seven quarters, G&A has been flat. And I think kudos to our entire team, both the people in in the G&A category itself, but also just all of the folks in other parts of the company, we have done a great job of growing into that and so generating operating leverage while we've held that flat.

So just maybe some numbers, it's I'm just looking, it's 48% growth from seven quarters ago in revenue with effectively 0% growth in G&A and I think that's very important context for your question. So now maybe turning to your question around beyond '25, we think that now that we've sort of gotten towards a path of growing into that G&A base where G&A is in the teens as a percentage of revenue which from all of our research we think that's where we should be and we feel pretty good about that. So and again just to be clear, when we're at about $500 million of revenue our G&A is around where it is now, it's in the teens. And so beyond '25, we can sort of see ourselves getting back to the profile we had when we went public, which is a 20% grower on the top line and growing profit.

And I think how this sort of step up in profitability manifest, we will continue to communicate that as we get closer. We're still a bit away from that, but I think that was sort of the story we went out with. We're just going to be a much bigger company with a lot more products, a lot of great people and I think we've had a track record of putting out some longer range targets to try to be helpful, but hopefully that answers your question Ryan.

Operator: We'll take our next question from Jessica Tassan with Piper Sandler.

Jessica Tassan: Hi, guys. Thank you so much for the questions. So Congrats on the nice Network Solutions performance in the quarter. We've obviously seen this as an area of strength for -- consistent strength for Phreesia despite kind of noise across the competitive landscape. So just hoping you guys can offer some perspective on the life sciences digital media market and on the role of programmatic marketplaces as a place to sell inventory?

Chaim Indig: Yes. So First off, look, I think the reason why we had a strong quarter is the strong team. Like all across the board, our team just executed really well on the network solutions side and that was our product organization, our sales organization, our content team, our analytics team and even our network team. There was a lot of coordination here. And look, I think it's super competitive. It's a hard market. I think we've been fairly consistent saying it's not that easy going, but I think when you -- we'll keep attempting to do what we do, which is winning share and delivering really, really valuable messages to patients to try phenomenal ROIs continuously and those ROI's frankly improve outcomes. And I think that's what's been really inspiring is, as a company, one of the things we've really focused on is not just thinking about it in terms of dollars and cents, but terms -- we really think about it in terms of impact to patient and patient lives and the outcomes that they have and then we're all pretty proud of here.

So the numbers were very much a team effort, but it's something we're really proud of. And then you asked about programmatic?

Jessica Tassan: Yes, just, just…

Chaim Indig: Go ahead.

Jessica Tassan: I'm just curious to know if you guys have a perspective on programmatic marketplaces and whether or not free to participate or if that's even relevant to the success of your Network Solutions sales organization?

Chaim Indig: Today we don't participate in programmatic. We've invested heavily in our machine learning and data science team and the products and being able to take content live thoughtfully for the right patients at the right time. So we -- when we think about being able to deliver the right message, the right patient at right time, that's something that frankly we think we have deep skill set in and I think programmatic is some -- it's not something that is actually new in the ad business. I think it's maybe a little -- it's very much talked about, but it's something that's existed for as long as we've been in the business.

Jessica Tassan:

eForms:

Balaji Gandhi: Yes, thanks, thanks, Jess. Yes, I mean, I think you've seen over the past four or six quarters it can sort of be jump around a little bit. I think there was a quarter where it was -- went down from 206 to 158, 158 to 169. I think we're trying from listening to a lot of folks to try to like make sure we're giving some visibility into the next quarter because we have it and that's what we're doing with the 175. I think -- I don't think there's a ton to read into 136 versus 175 versus in the last quarter being 169, we continue to add a lot of new clients and feel really good about our ability to continue to grow the business. The teams are doing a great job. We're very happy with the performance, and it's where we thought it would be.

Operator: We'll take our next question from Joe Vruwink with Baird.

Joe Vruwink:

eForms:

Chaim Indig: Yes, I'll let Balaji answer the last part of the question because I didn't really understand what you were asking. Maybe he can interpret it. So we were -- well frankly we're really excited about, I'm personally I am excited, but I know everyone that's interacted with the Access team has been just blown away. We're really talked about its capabilities. It got introduced to us and we've been booking, we've spending a lot of time with a lot of our clients and what we realized is that there were certain capabilities we just didn't have and a lot of -- and to have those capabilities you needed some really deep content. And when this got introduced to us and we realized that we shared a lot of common clients, we realized that this founder led organization was right for us.

And so we moved fairly quickly. It was a very small business. It came out, it foundationally came out of the printing business which I find to be very interesting because that's not how we evolved, which has been great. They came out, something was very physical, but what it came from was this idea that forms me to look a certain way. And as long as I've been in healthcare, and during Phreesia for 18 years, Evan and I keep waiting for forms to disappear and every year there's more mandatory forms that people have to fill out a certain way, in a certain format, in a certain look. And our clients are telling us that and when we looked at one client they had over 5000 this one health system that we had had over 5000 forms all different formats and sizes and different types of signatures that needed to be done.

And like that was just so much content that was deeply proprietary and this organization had it and so we it made a lot of sense for us to make it part of Phreesia. We've been -- we're really excited with what we've seen so far, but it's really early days, but it was pretty small.

Balaji Gandhi:

MediFind:

Chaim Indig: And helping our clients.

Joe Vruwink: Yes, yes, okay that that was all great. And then maybe a just second question, you're sitting here as of the July quarter at $86 million in revenue, talking about $125 million in revenue at some point next year. So you kind of can do the simple math on what needs to be added over the next six quarters. I guess any directional way to think about the contribution in getting to the 125 between the different revenue segments that you break out? Would you maybe expect one to be more influential than the others, just any way of framing that?

Balaji Gandhi: Yes, I think the short answer there is no because and I think we've been very consistent about this, there are just multiple paths to getting to different places, not just 125, getting to 86, for example, from 68, and so Joe, that's actually a very, very powerful aspect of our business. That said, I think like today, the composition and the mix of revenue subscription has held in, in that mid 40s as a percentage of revenue for a long time and you've seen network solutions, at I think multiple times it surpassed as a percentage of revenue payments. I think this quarter is an example, and that's sort of a change that's growing faster historically has grown faster, but I don't think we're going to be too prescriptive about that. And then in terms of just the path from here to that 125, we'll also point this out, I mean, there's seasonality, there's different quarters where we've added a lot more revenue than others.

Operator: And we'll take our next question from Richard Close with Canaccord Genuity.

Richard Close: Yes. Thanks for the questions, congratulations. Balaji, maybe you could talk a little bit about the Phreesia platform update section. You talk about looking at the text messaging part of it, maybe go into a little bit more details on what you're thinking about the platform?

Balaji Gandhi: Richard, do you want me to ask the product? Do you want me to answer the product question? I mean, I'll give it, I'm giving it to Chaim.

Chaim Indig: You always give me a hard time.

Balaji Gandhi: I mean, I think our goal in that, just in that section is that we are continuing to make investments in the platform. Not just, it's not just about new products; it's also just our ability to communicate with patients faster or better, easier. And so I think the comments we made around texting are just, that we're continuing to invest in that platform, it's never just like sort of won and done and the accuracy, security, privacy, all of those sort of aspects matter. But I don't think there was anything beyond that that we were trying to communicate.

Chaim Indig: Right. And we're very proud of the team that spent a lot of time, on that product.

Balaji Gandhi: Yes, that's fair. It is a stakeholder letter, Richard. It's not just for investors, but it's for clients, it's for all of our employees, et cetera.

Richard Close: Good. All right. And then moving on to a referral management, if we could talk about that a little bit. Maybe a three-part question, if I could sneak it in. You talk about MedMine being integrated into referral management, I'm curious on that? And then what is the revenue model for both MedMine and referral management? You really don't talk about referral management on Slide 13 of the presentation. So if you could just remind us how you're thinking about that part of the business going forward?

Chaim Indig: So first, Richard, I promise I'm not trying to make fun of you. It's called MediFind, not MedMine. And we do, and so then you were asking about refer. Look, I think we've been investing, we, in our view, we really, if you look at Slide 10 and you think about, we really think about it all around the -- around Access. So MediFind, it really, it's a space that our providers and our -- and the patients that use Phreesia have been telling us for years. They love help finding the right doctor at the right time and so it's a space we've been looking at for a long time. We've been investing a lot in with our Connect platform, been growing very, very well. We've done, I want to say over a million appointments just through referrals alone.

It's been growing at a really nice clip and frankly just helping people find the right doctor with an online platform is an area we've just been looking at for here. We've looked at building and buying and we got introduced to MediFind years ago through a client. And, an opportunity came for us to move really quickly to be able to buy it and make it part of the Phreesia family. And we moved, I was blown away how fast team was able to move. We moved unbelievably quickly to be able to make it part of Phreesia, because it -- as an, as a property, it's the number one or two in most of the searches that you do when you're looking for a specialist in the markets, in a lot of markets, and over the next couple years we'll be integrating it with Phreesia really with the view of driving better access for patients to find the right specialist.

This is a platform that has the massive wealth of data and expertise being built up for I want to say over two decades. And so we we're -- we just think of ourselves as lucky that they chose us as the partner to move forward with. And we will continuously invest in it very, it was very small, but it is freaking awesome, so we're really excited about it and we thank our client for introducing us to it years ago.

Operator: All right, and we'll take our next question from Glen Santangelo with Jefferies.

Glen Santangelo: Hi. Yes, good evening. Thanks for taking the question. Hey guys, I just want to try to follow up on some of the previous revenue questions because I think this is a big issue for folks. If you look at your subscription revenue line, clearly it's been decelerating pretty consistently for the past year, and I think a lot of people are focused on provider ads maybe also decelerating. And then when you take that into context of your fiscal 2025 guidance to get to that $125 million, it almost looks like unless you have a big push from network solutions, you're going to need to see subscription accelerate in fiscal 2025 versus fiscal 2024 and with low large numbers becoming a bigger issue it seems unlikely that that will happen. And so, just wanted to get your take on this pathway to $125 million as it relates to subscription revenues and if we're even thinking about that correctly as we think about the two-year stack?

Balaji Gandhi: Yes, well, thanks Glen and I think this is, I think this relates to Joe Vruwink's question earlier, and I think this is really important if, us being prescriptive about each revenue line item and how that contributes to $125 million is really harmful we think to the way we run the business, the way we think about building the business up over time. And every 90 days, you get another data point in terms of progress we're making and you can sort of run numbers and see how it builds up. But I think, Glen, this is just one example maybe to think about how we think about building a big business that has long-term durable growth is payments. And so if you look back over time when we, again 12, or I guess 17 quarters ago when we went public, we had 1,558 clients.

And at that time we were doing about 290,000 in payment volume for clients. And now you fast forward, we've more than doubled the number of clients, right? With the 3445 we have today. And, you round a little bit, it was, I think it was 287 was this quarter, $287,000 in payment volume per client. And so what that suggests is we sort of have a similar size and profile client across the entire base as we did that. And does that make sense, Glen?

Glen Santangelo: Yes.

Balaji Gandhi: Okay, okay. And the reason and how this relates to sort of your question is, if you look at our take rate over that same period of time, our take rate was 3.04 back then, it's 2.91 this quarter, 23 basis points, right? And I think we've talked about this over the past several quarters, but our philosophy has been like, we just want to do right by our clients add more value, we have other products to sell them in subscription. We're obviously, thrilled to be able to also generate revenue in network solutions across a lot of those same clients. And so that 23 basis points, across a billion dollars in payment volume in a quarter is a few million bucks, right? And you start to think about, well, are we giving up revenue in the near-term knowing that it's the right thing for our clients, but also it's there in the long-term.

And so again, there's going to be periods where we can take revenue, there's going to be rev periods where, revenue might not show up in a quarter. That's sort of how, we think about it over time. The numbers of the numbers, I think in our comment is we feel good about the fiscal 2025 targets.

Glen Santangelo: Okay. That's fair. If I could just ask my follow up on the EBITDA side, I think this is a sixth quarter in a row you've comfortably beat EBITDA. And when we look at the full year guidance, right, it assumes no leverage from the 20 something percent revenue growth in the back half of the year. And, I understand, the wantingness there to be conservative with respect to the guidance. But I guess what my question really is, is as you think about this path to be in a $500 million company, Chaim do you feel like the existing infrastructure of the company can, is sufficient to be able to handle $500 million plus in revenues and continuing with these physician ads? Or do you think there's going to have to be some investment made at some point to better handle the growth?

Chaim Indig: Well, I think we are making a lot of investments continuously. And I think that, we will continue to make investments not just in getting to 500, but I plan on being here after that, right? And so, a lot of the investments we're making now are for beyond that, but and we think that continuously we're not playing just the game for next quarter or next year, it's let's make sure that we build a sustainably large competitive moat and at the same time just provide phenomenal value to our clients and while also keeping an eye on the bottom line for our shareholders.

Balaji Gandhi: And, Glen, I'll just add to that comment. I think we're actually trying to run the business and grow the business in a way that we don't lead to the concern you have, which is, are we under investing in the business and we're trying to do both, at the same time. And I think again, credit to the entire Phreesia team for doing that. It's not easy.

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

Scott Schoenhaus: Hi, Chaim and Balaji. I just wanted to dig further into your Access eForms acquisition. I guess this kind of ties into the long-term revenue cadence bridge but you mentioned in your stock holder letter that the Access eForms has a vast catalog of content in the acute-care space. Does this enhance your current number of modules that you're able to cross-sell? And then should this also translate into higher revenue per AHSC as you're able to sell more and more modules into the acute setting?

Chaim Indig: So I think early on it will, I think it will probably have very minimal impact to our revenue per client. I think that there's a bunch of work we have to do to make in, to make it tied into Phreesia, which we are have already started the investment in, but over a long period of time, I think it's going to add significant value to our clients. And when you add significant value, we have a pretty good track record of cap, sharing that value upside, look it's not a sexy thing, but like if anyone's ever been through a hospital, it's just lots of paperwork that needs to be documented and signed continuously. And that, and to that point, like that content is just hard to replicate. And people often view content and sort of the watching a video or you're having the, like a book or, but the reality is, content in healthcare is like the vast, these vast, whether it's when we bought Insignia and it was patient activation measure, we do that as really as content or if it's, this which is just this massive library of forms.

And that's that example of 5,000 that was just one client that had, they built out 5,000 forms for us. So what we really have to do is do that list of making those types of forms available for the vast majority of our network over the next couple years.

Balaji Gandhi: And Scott, I don't think that you need to get, like too deep into the, your question around revenue. I mean, think about the scope, right of things that we can do. And we have a big TAM number and subscription, and I think our philosophy has always been build, rent or buy, and this falls into that arena. And this just happened to be something that we, would buy, but it's not going to be for every client. So when you spread the opportunity across a base of 3,500 clients and however many we're at, two years, three years, five years from now, I would, I don't think that's going to be, material, but it's part…

Scott Schoenhaus: Great. Thanks for all that color.

Chaim Indig: Great.

Scott Schoenhaus: I appreciate that. I just, my follow up is around the nascent payer referral. Obviously open enrollment season is occurring quickly coming up here quickly, can you just remind us these the profitability metrics on this business? I think you've mentioned before that, you know, it doesn't require a huge sales uplift, and these are pretty high incremental margins, so I just wanted to get some more additional color on that. Thanks.

Balaji Gandhi: Yes, I mean, I don't think, I think what we've said is it's early and we're every season, that we learn a little bit more about this. I don't think there's anything Scott, that we could sort of take away around like any kind of unit economics, but I will say that, we learn more from it every year and it's still early and open enrollments around the corner.

Operator: We'll take our next question from Daniel Grosslight with Citi.

Daniel Grosslight: Hi guys, thanks for taking the question. Chaim, you previously mentioned that the sales cycle has become a bit more challenged broadly, as everyone has taken a pretty hard look at tech spend and deciding what to cut. Can you just comment on how the selling season has changed this year or is changing if you've had to provide more discounts, et cetera and how we should really think about that average revenue per user for on the subscription side for the remainder of the year?

Chaim Indig: Look, I think, I wish there was a selling season. I feel like, selling season for us is Monday to Friday and it starts at 9:00 A.M. and goes till 5:00 P.M. east coast, west coast, and everything in between, right? Like I, every week we're out there calling our practices and health systems and big groups and small groups and single hospitals and multi-hospital groups, and the teams doing really just good work getting in front of the right clients. And then as we win the clients, we have a pretty good track record of keeping them and selling them more stuff. And the way we sell them more stuff is we want, is we introduce product that adds a lot of value to them, and sometimes we give it to them, sometimes we sell it to them, and sometimes, it's part of the transaction so it really, we get it from transactions.

So I've been really happy. I still think it's hard, but I think the team's doing a great job in a tough environment. And I think a lot of that is not just the sales marketing organization, but it's also the product organization. We have good product and it really starts with good product and we do a good job of selling to our clients and we do the things we say we're going to do, implement them really well, and we try our best to treat them as awesome as we can.

Balaji Gandhi: And, I'd also add that if, when you think about just the client, we do have these three different revenue lines and obviously it's, I'm sure it's helpful for people to look at subscription, look at payments, look at network solutions independently and that's fine. But at the end of the day, when we think about our go-to market, we think about, how a cost of acquiring customer and all that type of stuff. It's really the totality of it. And that, as Chaim said, I think earlier in the remarks, that inched up a couple of points year-over-year to just around 25,000.

Daniel Grosslight: Yep, okay. And then Balaji on the funding need. I know you mentioned that you can get to your fiscal 2025 targets, profitability within fiscal 2025 without raising additional capital. But I'm wondering if you could put perhaps maybe a finer point on that, you do spend, call it $20 million or so on capitalized software, et cetera. So I'm just curious if you think you can get to free cash flow profitability with your current cash position or, beyond that 2025, do you think you have to perhaps raise additional capital to get you there?

Balaji Gandhi: Well, I think the, I think the earlier comment, to Ryan's question, we talked about growing profitably beyond that. So I think let's start Daniel with, like it's, get to adjusted EBITDA profitability. I think there's milestones along the way. You look at the operating cash flow this quarter, I think we're all very proud that that's a single digit number and that's that sort of return to a single digit loss number for the first time really since this big investment cycle happened. So that's a data point. And then, adjusted EBITDA operating cash flow and then free cash flow. So I think we should, let's be clear, that comment earlier around growing profitably beyond fiscal 2025 was intended to say, we can grow the business at that rate and we can, invest in it as we continue to grow. But it's not like, that's, that we need, we envision ourselves needing to come to the market to raise money to grow the business at that. We just want to be clear about that.

Operator: We'll take our next question from Ryan MacDonald with Needham.

Matthew Shea: Hey, this is Matt Shea on for Ryan. Thanks for taking the question and congrats on the strong quarter. Wanted to start with network solutions. There was a comment in the stakeholder letter that discussed you guys delivering more messages in the first half of 2024 than anticipated with some of those messages originally being expected for the second half. So curious, if we should interpret this as an as a pull forward of spending. Or could the strong first half performance lead to incremental programs or upsells for additional messages in the second half would just like to kind of unpack that and help understand what your expectations are for the back half of the year?

Balaji Gandhi: Sure. Thanks Matt. Look it's the former of your two scenarios. It is pulling it forward. And I think, the team has done an outstanding job of performing in the first half of the year, and we're able to deliver those messages for our clients, which is great. But at the same time, look the lack of us rolling that into the guidance for the remainder of the year is because there is some in year activity that we want to wait and see. And, Matt, that's not really any different than every other year for Phreesia. And so that's just sort of where we are at this point in the year, and so I would absolutely think of it as portfolio.

Matthew Shea: Okay, got it. That's helpful. And then maybe sticking with Network Solutions turning to MemberConnect, obviously annual enrollment periods different every year, but curious kind of how the Medicare Advantage lead generation business has gone this year to date, kind of relative to your expectations, and then again, not knowing what AEP is going to look like yet, just curious if there's anything that gets you guys excited about this year's AEP in particular, whether it be, any conversations you guys have had with payers or any plans to maybe weaponize some of those communication preferences, insights you generated from your recent survey of Medicare Advantage beneficiaries?

Balaji Gandhi: Well, I think the first part of your, question and you sort of answered it probably yourself, which is, the most of this year is not really, relevant. The show really starts, with the open enrollment the annual open enrollment period. And, we'll just say it again like, it's still very early. I think we like having, exposure in the payer space. We gain that through the acquisition of Insignia and then launching into this, product with MemberConnect. But no real, nothing really new to update there from the last time we talked. And we're – but we're still excited about it.

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

Sean Dodge: Yep, thanks. Good afternoon. Just on the healthcare services revenue for AHSC metric, it's continuing in, that $18,300 range, I'm just curious the underlying dynamics there. You're cross-selling and expanding into more locations and that should help grow that metric, but that's being offset by newer clients that are starting with fewer solutions. And there's also, is there a client size mix impact at play two? And what I'm trying to get at is just understanding how much progress you're making with the cross-sell and land and expand absent, these other offsetting factors. Is there any way you can kind of quantify, the kind of the list you're getting from cross-selling and land and expanding?

Chaim Indig: Yes, we are growing within our base, but I think Sean, the comment earlier around just using that payments as an interesting way to think about it, because upwards of 80% of our clients, are a payment facilitator you know, we're the payment facilitator for, and so if we were running about 290,000 in payment volume in a quarter when we were 1,558 clients, and it's about the same number now, there's a number of doctors and or providers, associated with a client. There's a number of patients they see. There's a certain amount of payment volume that crosses. I think that's as probably as powerful a way to think about has the sizing or the shape of our footprint changed over four years and it just really hasn't. And I think our go-to-market of letting people try the product and then they convert over and they, then they try a new product and it is sort of, that is, that does distort that number over time.

But I think we brought this up, we've added so many clients over time that, can sort of take longer and we're okay with that. We feel really good about that.

Sean Dodge: Okay. And then you mentioned during one of the earlier questions, there were some benefits from payment timing you realized during the quarter. Can you quantify for us how much that that was

Chaim Indig: When you say payment timing, I missed that.

Sean Dodge: I don't, it was something you said. I think in response to like Ryan's question, you said there was a benefit in the quarter from payment timing.

Chaim Indig: No, no, that wasn't payment time. Yes. That was, yes, in cost of sales. Yes, there was just like a vendor where we had like, an expense that will reverse so that reversed. So my point is our gross margin, in this quarter is probably running 50 to a 100 points basis points higher, just like onetime benefit, think about it that way, but we're still in the same sort of range.

Sean Dodge: Okay, all right, great. Thanks again.

Chaim Indig: Yes.

Operator: Our next question comes from Jeff Garro with Stephens.

Jeff Garro: Yes, good afternoon. I have a question on the sales and marketing spend. And it looks like sales and marketing spend down both year-over-year and quarter-over-quarter, while you all keep adding healthcare services clients at a healthy clip and have a multitude of growth drivers on the network solutions side. So wanted to ask if there's color that you could add on mix and trends in sales and marketing spend on new healthcare services, client focused resources where, you have that, that good balance of growth versus resources versus network solutions, which I think clearly in an earlier growth stage.

Chaim Indig: Well, it's, network solutions is actually, is an 18 years old in terms of being part of our business. I think that sales and marketing expense line is for all areas of the company. I think, we're constantly sort of, calibrating that, and I don't think there's anything that's changed a whole lot over the past few quarters. But just know that, and I think this comes up a lot too, that is absolutely supports clients added in healthcare services, but also brands that we add. And even things we do, in the revenue cycle area. So and, so I think, I don't think anything particularly to call out there, you can see that we've, again, continue to get nice operating leverage on that sales and market.

Jeff Garro: Great. That helps. And one more question on the spend side. Maybe I'll follow up to Glen's earlier question that the, the guidance does seem to imply some ramp in OpEx spending in the second half versus the first half. So we want to see if there's any areas investments you would call out or maybe part of the ramp is, some type of expense from the integration of MediFind and access built in. Thanks.

Chaim Indig: There you go. That's the answer. You answered it yourself.

Jeff Garro: Done. Thanks again guys.

Chaim Indig: Thanks.

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

Jack Wallace: Hey, yes, thanks for taking my questions. Just wanted to go back and see if there's a connection between the Access eForms acquisition, which sounds like it's [indiscernible] in the hospital space as well as the payments commentary you've had Balaji, and if we should expect that there'd be a higher level of, inpatient mix that will help you boost the payment volumes and potentially even a higher take rate. And then I got a follow up.

Balaji Gandhi: I don't think I draw any connection to that time, would you?

Chaim Indig: No, I will say we've been, we're very happy with the progress we've been making in the hospital space and it's an area we continue to invest in and it's an area of great need and I think we still are very excited about it.

Jack Wallace: Got it. Thanks. And then you just thinking about the mix of growth into the 125 number, and maybe to ask those, the questions slightly differently is should we expect any you composition mix within the client base into larger customers that have, more wallet share, more you TAM per client opportunity as being a driver to get to that figure? Thank you.

Balaji Gandhi: I mean, I think one thing, Jack, that over time we do, we are, moving to more of an enterprise model. And so if you think about some independent groups that have become affiliated with some of these large position aggregators out there we're able to sort of do more enterprise deals at that level. But again, that's just an aggregation of what would've been, an individual smaller Phreesia client that's now just a large enterprise and part of that. But, healthcare's still pretty big. I think the data from the American Medical Association is 51% of groups are still, 10 providers are smaller. Obviously there's some very large ones too, but so not really.

Operator: We'll take our next question from Robert Simmons with D.A. Davidson.

Robert Simmons: Hey, thanks for taking the question. I was wondering if you could talk about patient volumes over the course of the quarter. What did you see month to month and also what did you see so far this quarter?

Balaji Gandhi: When you say this quarter, you mean the second quarter?

Robert Simmons: No, sorry. So when I say what did you see in second quarter, month to month and what have you seen so far in 3Q?

Balaji Gandhi: Yes, I mean, I think, and I think we brought this up maybe last on the last call and in a lot of the meetings we've had with investors over the past few months, I mean, a lot of the things that sort of swing payments for us, we have seasonality, let's start with that, right? Deductibles reset at the beginning of the calendar year that we have the natural seasonality, which you see that bump in our fiscal first quarter. And then there's how many Mondays, are in a given month and more people tend to go to the doctor on Monday than on Friday, sort of the opposite of what you see in retail. So Robert, just one good example is this year, July 3rd fell on a Monday, and so a lot of people took that day off, went right into the holiday and so that you had, some of the, the smoke fire stuff in the month of June.

You know, you had some flooding stuff in July. I guess we hear about some hurricane category five rolling up the northeast now. These are sort of the things that swing back and forth we're pretty distributed across different specialties, across different geographies. So I mean, again, if the points I brought up are probably what drives a billion being 990 sequentially.

Robert Simmons: Got it. Okay. And then your head count has been coming on pretty steadily since it peaked about a, what was it, about a year and a half ago maybe? The base has declined a bit. I mean, do you expect that to settle out here pretty soon? When does it start to grow again? What are your expectations there?

Balaji Gandhi: Well, I think this goes to the earlier comment around just sort of like investments we made, I think, and sort of our path to profitability. I think we've been pretty consistent. That number will sort of be in this sort of range plus or minus, plus or minus 10%. You should expect it to sort of be in that range. And we feel pretty good about that. But to be clear, I mean, and I think this was maybe Glen's question, we are still investing in the business for long-term growth.

Robert Simmons: Got it. Thank you very much.

Balaji Gandhi: Yep.

Operator: And that concludes the question-and-answer session. I'd like to turn the call back over to Chaim Indig for any additional or closing remarks.

Chaim Indig: Thanks everyone for joining us for this call. I look forward to talking to all of you in 90 days and hope and maybe in between if we're lucky. Cheers.

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