Q2 2024 Phreesia Inc Earnings Call
Participants
Balaji Gandhi; CFO; Phreesia, Inc.
Chaim Indig; Co-Founder, CEO & Director; Phreesia, Inc.
Daniel R. Grosslight; Research Analyst; Citigroup Inc., Research Division
Glen Joseph Santangelo; Equity Analyst; Jefferies LLC, Research Division
Jack Dawson Wallace; Research Analyst; Guggenheim Securities, LLC, Research Division
Jeffrey Robert Garro; MD & Analyst; Stephens Inc., Research Division
Jessica Elizabeth Tassan; VP & Senior Research Analyst; Piper Sandler & Co., Research Division
Joseph D. Vruwink; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division
Matthew Dineen Shea; Research Analyst; Needham & Company, LLC, Research Division
Richard Collamer Close; MD & Senior Analyst; Canaccord Genuity Corp., Research Division
Robert Edward Simmons; Senior VP & Research Analyst; D.A. Davidson & Co., Research Division
Ryan Scott Daniels; Partner & Co-Group Head of Healthcare Technology and Services; William Blair & Company L.L.C., Research Division
Scott Anthony Schoenhaus; Research Analyst; KeyBanc Capital Markets Inc., Research Division
Sean Wilfred Dodge; Analyst; RBC Capital Markets, Research Division
Presentation
Operator
Good evening, ladies and gentlemen, and welcome to the Phreesia Fiscal Second Quarter 2024 Earnings Conference Call. (Operator Instructions)
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.
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. 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-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 showing 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 health care services clients in the quarter was 3,445, up 24% year-over-year. We inched up total revenue per client 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 (inaudible) 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.
Question and Answer Session
Operator
(Operator Instructions) We'll take our first question from Ryan Daniels with William Blair.
Ryan Scott Daniels
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 4 to 6 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 -- 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 1,000 basis points lower, it was just us making that investment knowing we were going to go from 1,500 clients to well over 3,000 clients and wanted to make sure we support all those clients well.
Ryan Scott Daniels
Okay. That's super helpful. And then one bigger picture question that 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?
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 4-plus years ago, we were spending annually about $30 million in G&A as of -- 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, et cetera, 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 end. So that's a pretty big step up from the $30 million we were at. And 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 7 quarters ago. And I think if you look at 7 quarters ago, or over the past 7 quarters, G&A has been flat. And I think kudos to our entire team both the people 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 at 48% growth from 7 quarters ago in revenue with effectively 0% growth in G&A. And I think that's a 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 topline 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 Elizabeth Tassan
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 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 that drive phenomenal ROIs continuously and those ROIs, 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 patients and patient lives and the outcomes that they have. And then we're all pretty proud up here. So the numbers were very much a team effort, but it's something we're really proud of.
And then your question around programmatic. I think -- go ahead.
Jessica Elizabeth Tassan
Yeah. Just curious to know if you guys have a perspective on programmatic marketplaces and whether or not Phreesia 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 to the right patient at right time, that's something that, frankly, we think we have skill set in and I think programmatic is not something that is actually new in the add 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 Elizabeth Tassan
That's really helpful. And my quick follow-up is just that your letter indicated that Healthcare Services client add should reaccelerate to about 175 in 3Q, including the clients gained from Access eForms. So just hoping you can give us a little bit of color around the 2Q deceleration and your expectation for kind of the core health care services clients growth going forward.
Balaji Gandhi
Yes. Thanks Jess. Yes. I mean I think you've seen over the past 4 or 6 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 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.
Chaim Indig
Team is 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.
Joseph D. Vruwink
Hoping to get a bit more detail on Access eForms, maybe a 2-parter. One, just from a strategic standpoint, what this opens up for Phreesia relative to what has been the existing kind of road map and strategy in the acute market. And then part B of the question is maybe just a little bit more financial detail. Last question asked about just does seem to be factored into client adds, maybe kind of an annual run rate for that business in terms of revenue contribution and how to think of it going forward?
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 frankly, we're really excited about it. I personally I'm excited, but I know everyone that's interacted with the Access team has been just blown away. We're really pumped about its capabilities. It got introduced to us, and we've been looking -- or we're spending a lot of time with a lot of our clients. And we -- and what we realized is that there were certain capabilities we just didn't have. And to have those capabilities, you needed some really deep content. And when this got introduced to us and we realized we shared a lot of common clients, we realized that this (inaudible) organization was right for us. And so we moved fairly quickly.
It was a very small business. It came out -- it's foundationally came out of the printing business, which I find to be very interesting because that's not how we evolved, which has been good. They came out of something that was very physical. But what it came from was this idea that forms need to look a certain way. And as long as I've been in health care, being in Phreesia for over 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 and a certain look and our clients are telling us that. And when we looked at one client, they had over 5,000 -- this one health system that we had over 5,000 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 it made a lot of sense for us to make a 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
And Joe, on your second question, I mean, I think if it wasn't clear from Chaim's answer, I mean, this is very much a product acquisition. And if you think about, we've done 6 acquisitions in our history, they all have that product-centric sort of flavor. And so they bring -- some of them have brought some clients over. I think Access like some of the other ones have a lot of overlapping clients, so -- which is great because it's just nice to be able to add more value and deepen some of those relationships we have with existing clients. So it's sort of around the edges in terms of the contribution to those numbers. And similar with the financial profile. I mean, whether it's QueueDr, whether it's in Insignia whether it's MediFind, I mean the financial contribution here is pretty immaterial. It's really about adding great product design set. And then being that contributor to the 20% grower company that we think we can be beyond '25 and really being accretive to that growth.
Chaim Indig
And helping our clients.
Joseph D. Vruwink
Yes. Yes. Okay. That was all great. And then maybe just a 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 6 quarters. I guess any directional way to think about the contribution in getting to the $125 million 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 million, getting to $86 million. For example, from $68 million. And so Joe, that's actually a very, very powerful aspect of our business. That said, I think you know, 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, I think, multiple times it's 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 million, we will 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 Collamer Close
Congratulations. Balaji, maybe you could talk a little bit about the Phreesia platform update section. You talked about looking at the text messaging part of it. Maybe go into 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'm giving you a hard time.
Richard Collamer Close
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 one and done. And the accuracy, security, privacy, all those sort of aspects matter. But I don't think there was anything beyond that that we were trying to communicate.
Chaim Indig
And we're very proud of the team, they 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 Collamer Close
Good. All right. And then moving on to referral management. If we could talk about that a little bit. Maybe a 3-part question, if I could sneak it in. You talked about MedMine being integrated into referral management. 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 referral -- look, I think we've been we -- in our view, we really view -- if you look at Slide 10, if you think about -- we really think about it all around the growing access. So MediFind, it really -- it's a space that our providers and our -- and the patients at 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. It's been growing very, very well. We've done, I don't want to say over 1 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 been looking at for years.
We were into 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's family, and we moved -- I blow away how fast team was able to move. We moved unbelievably quickly to be able to make it part of Phreesia because it -- as a property, it's the #1 or 2 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 of years, we'll be integrating with Phreesia with the -- really with the view of driving better access for patients to find the right specialist. This is a platform that has some massive wealth of data and expertise being built up for, I want to say, over 2 decades. And so we were -- we just think of ourselves as lucky that they chose us as the partner to move forward with. And we'll continuously invest in it very -- it was very small. But it is fricking awesome. So we're really excited about it. And we thank our client for introducing us (inaudible).
Operator
And we'll take our next question from Glen Santangelo with Jefferies.
Glen Joseph Santangelo
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 have focused on provider adds may be also decelerating. And then when you take that into context of your fiscal '25 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 '25 versus fiscal '24 and with 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 2-year stack?
Balaji Gandhi
Yes. Thanks, Glen. And I think this relates to Joe Vruwink's question earlier, and I think this is really important. 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 per client. And now you fast forward, we've more than doubled the number of clients, right, with the 3,445 we have today. And you round a little bit, as I think it was $287,000, 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 then. And does that make sense, Glen?
Glen Joseph Santangelo
Yes. 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 it for 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 the same clients. And so that 23 basis points across $1 billion 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 to do 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 periods where revenue might not show up in a quarter. That's sort of how we think about it over time. The numbers are the numbers, I think our comment is we feel good about the fiscal '25 targets.
Glen Joseph Santangelo
Okay. That's fair. If I could just ask my follow-up on the EBITDA side. I think this is the 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 wanting to be conservative with respect to the guidance. But I guess what my question really is, is as you think about this path to being a $500 million company, Chaim, do you feel like the existing infrastructure of the company is sufficient to be able to handle $500 million plus in revenues and continuing with these physician adds? 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 million, but kind of 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 moats -- and at the same time, just provides phenomenal value to our clients. And while also keeping an eye on the bottom line for our shareholders.
Balaji Gandhi
And Glenn, I'd 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 underinvesting in the business. And we're trying to do both at the same time. And I think, again, a 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 Anthony Schoenhaus
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 guidance bridge. But you mentioned in your stockholder letter that the Access eForms is 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, well, 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 it tied into Phreesia, which we 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 sharing that value upside.
Look, it's not a sexy thing. We're like, if anyone's ever been through a hospital, there's just lots of paperwork that needs to be documented and signed continuously. And to that point, like that content is just hard to replicate and peep often view content in sort of the watching a video or having like a book or -- but the reality is content and health care is like -- whether it's when we bought Insignia and it was patient activation measure, we view that as really as content or if it's this, which is just this massive library of forms. And that example of 5,000. That was just 1 client that had -- they've built out 5,000 forms for us. So what we really have to do is do that lift of making those types of forms available for the vast majority of our network over the next couple of 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 in 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 2 years, 3 years, 5 years from now, I don't think that's going to be material.
Scott Anthony Schoenhaus
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 the profitability metrics on this business? I think you've mentioned before that 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.
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 enrollment around the corner.
Operator
We'll take our next question from Daniel Grosslight with Citi.
Daniel R. Grosslight
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 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 a.m. and goes to 5 p.m. East Coast, West Coast and everything in between, right? Every week, we're out there calling all practices and health systems and big groups and small groups and single hospitals and multi-hospital groups and the team's 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 as we introduce a product that adds a lot of value to them. And sometimes, we give it to them. Sometimes we sell it to them. And sometimes we -- it's part of the transaction. So really, we get it from transactions.
So I've been really happy. I still think it's hard, but I think the team is doing a great job in a tough environment. And think a lot of that is not just the sales and marketing organization, but it's also a product organization. We have good products. 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 a client, we do have these 3 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 cost of acquiring customers 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 R. Grosslight
Yes. Okay. And then largely on the funding need, I know you mentioned that you can get to your fiscal '25 targets profitability within fiscal '25 without raising additional capital. But I wonder 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 '25, do you think you have to perhaps raise additional capital to get you there?
Balaji Gandhi
Well, 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 sort of returned 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 '25 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 we envision ourselves to come to the market to raise money to grow the business at that. So I just want to be clear about that.
Operator
We'll take our next question from Ryan MacDonald with Needham.
Matthew Dineen Shea
This is Matt Shea on for Ryan. 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 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 2 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 pull forward.
Matthew Dineen Shea
Okay. Got it. That's helpful. And then maybe sticking with Network Solutions. Turning to MemberConnect. Obviously, annual enrollment period is 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 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, yes, most of this year is not really relevant to 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 gained 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 -- but we're still excited.
Operator
We'll take our next question from Sean Dodge with RBC Capital Markets.
Sean Wilfred Dodge
Yes. Just on the health care services revenue for AHSC metrics, 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 too? 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 lift you're getting from cross-selling and land and expanding?
Balaji Gandhi
Yes. We are growing within our base. But I think, Sean, the comment earlier around just using that payment is an interesting way to think about it because upwards of 80% of our clients are a payment facilitator -- 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 or providers associated with the client. There's a number of patients they see. There's a certain amount of payment volume that crosses. I think that is probably as powerful a way to think about as the sizing or the shape of our footprint changed over 4 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 then they try a new product. It's 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 that can sort of take longer and we're okay with that. We feel really good about that.
Sean Wilfred 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 was?
Balaji Gandhi
Did you say payment timing? I missed that.
Sean Wilfred 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.
Balaji Gandhi
That wasn't payment timing. That was -- yes, in cost of sales. Yes, there was just like a vendor where we had like an expense that will reverse -- that reversed. So my point is our gross margin in this quarter is probably running 50 to 100 points -- basis points higher. Just like a onetime benefit, think about it that way. But we're still in the same sort of range.
Operator
Our next question comes from Jeff Garro with Stephens.
Jeffrey Robert Garro
I have a question on the sales and marketing spend. It looks like sales and marketing spend down both year-over-year and quarter-over-quarter while you all keep adding health care services clients at a healthy clip and have a multitude of growth drivers on the Network Solutions side. So I want to ask if there's color that you could add on mix and trends in sales and marketing spend on new health care services client focused resources where you have that good balance of growth versus resources versus Network Solutions, which, I think, clearly in an earlier growth stage.
Balaji Gandhi
Well, it's -- Network Solutions is actually -- is 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 that is absolutely supports clients added in health care 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 particular to call out there. You can see that we're, again, continue to get nice operating leverage on that sales and market.
Jeffrey Robert Garro
Great. That helps. And one more question on the spend side, maybe a follow-up to Glen's earlier question, that the guidance does seem to imply some ramp in OpEx spending in the second half versus the first half. So I want to see if there's any areas of 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?
Balaji Gandhi
There you go. That's the answer. You answered it yourself.
Operator
We'll take our next question from Jack Wallace with Guggenheim.
Jack Dawson Wallace
Just wanted to go back and see if there's a connection between the Access eForms acquisition, which sounds like it's primarily in the hospital space as well as the payments commentary you've had, Balaji, and if we should expect there would be a higher level of inpatient mix that will help boost the payment volumes and potentially even a higher take rate? And then I've got a follow-up.
Balaji Gandhi
I don't think I'd draw any connection to that, Chaim, would you...
Chaim Indig
No, right? 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 Dawson Wallace
Got it. And then just thinking about the mix of growth into the $125 million number. And maybe to ask the question slightly differently is, should we expect any composition mix within the client base into larger customers that have more wallet share and more TAM per client opportunity as being a driver to get to that figure?
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 physician 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 have been an individual, smaller Phreesia client that's now just a large enterprise and part of that. But health care is 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 no, not really.
Operator
We'll take our next question from Robert Simmons with D.A. Davidson.
Robert Edward Simmons
I was wondering if you could talk about patient volumes over the course of the quarter? Or what did you see month-to-month? And also, what do you see so far this quarter?
Balaji Gandhi
When you say this quarter, you mean the second quarter?
Robert Edward Simmons
No, sorry. I just want to say, what do you see in the second quarter or month-to-month and what have you seen so far in 3Q?
Balaji Gandhi
Yes. I mean, I think we brought this up maybe last -- on last call and 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. So 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 then on Friday, sort of the opposite of what you see in retail.
So, Robert, just one good example is this year, July 3 fell on a Monday. And so lot of people took that day off, went right into the holiday. And so that -- you had some of the smoke buyer stuff in the month of June. You had some flooding stuff in July. I guess we hear about some hurricane Category 5 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 $1 billion being $990 million sequentially.
Robert Edward Simmons
Got it. Okay. And then your head count has been coming down pretty steadily since it peaked about a -- was it about 1.5 years ago, maybe? The pace 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.
Operator
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 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.
