Phreesia, Inc.

Good morning, ladies and gentlemen, and welcome to the Freesia Fiscal Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. I would now like to introduce Balaji Gandhi, Vice President, Investor Relations for Freesia. Mr. Gandhi, you may begin.

Thank you, Operator. Good morning and welcome to Frisia's earnings conference call for our second quarter of fiscal 2020, which ended on July 31st, 2019. As a reminder, Frisia's fiscal year end is January 31st. Participating on today's call from Frisia are Chief Executive Officer and Co-Founder Chaim Indig and Chief Financial Officer Tom Altier. Following prepared remarks from Chaim and Tom, we will conduct a Q&A session. A complete disclosure of our results can be found in our earnings press release issued yesterday evening as well as in our related Form 8K submission to the SEC, both of which are available on the investor relations section of our website at ir.freesia.com. As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call. During today's call, will make forward-looking statements pursuant to the State Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act, including statements relating to the expected performance of our business, future financial results, including guidance for the full fiscal year 2020, our strategy, our partnerships, and expected launches of products and services Long-term growth and overall future prospects. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call. In particular, those described in our risk factors included in our final prospectus for our initial public offering filed with the SEC on July 19, 2019 and the risk factors included in our Form 10-Q that will be filed before September 16, 2019. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them except as required by applicable law. We will also refer to certain financial measures not in accordance with generally accepted accounting principles in order to provide additional information to investors. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. A reconciliation of GAAP to non-GAAP results may be found in our earnings release and supplemental materials, which were furnished with our Form 8K filed after the markets closed on September 9th Thank you, Balaji.

Good morning, everyone. This is our first public forum since becoming a public company in July, and I would like to take a moment to thank all of those who made significant contributions to Freesia's success over the past 14 years since Evan Roberts and I formed the company. We appreciate the contributions of our early investors and board members, our clients, our partners, and of course our employees, who are also shareholders. In addition to all these important people, we're also appreciative of the trust that has been placed in us by our new shareholders through our IPO. We're excited about the future and the opportunity we have as a public company to fulfill our mission. We are very pleased with the results we released last night. Before we jump into the results, there are two topics that we will cover. First, I'd like to provide some background on Freesia's mission and culture, particularly for those of you who are new to our story. We believe our mission and our culture are an important part of our past, present, and future. Second, I will lay the foundation for how you can expect us to communicate our progress to you each quarter. First, mission and culture. Freesia's mission is to create a better, more engaging healthcare experience. We believe we are materially improving the healthcare experience, but we recognize that we have a long way to go since most of the market has yet to implement Freesia. We look forward to having most of its clients in the years to come. Our team is deeply invested in our mission to improve the healthcare experience. We believe that a Freesia shareholder is also invested in our mission, so we want to update you on one of these initiatives that we are very excited about. First, some background on the opportunity that aligns with our mission. Medical care delivery drives about 10 to 20% of our health status. Factors outside the clinical setting, including socioeconomic factors and a patient's physical environment, determine the remaining 80 to 90%. These indicators are commonly referred to as social determinants of health and include income, access to nutrition, access to transportation, home life and loneliness, as well as environmental factors. On August 26, There was an excellent piece in the New York Times about the transformative healthcare projects underway in the state of North Carolina. Among the projects is a plan to cover non-clinical services because of the increasing acceptance that social determinants like access to healthy food, clean and safe housing, transportation, and social support are non-trivial contributors to health. Frisia is incredibly excited to be a partner in this initiative. Healthcare organizations throughout the state can now use Freesia to deliver North Carolina's standardized social determinants of health screening questions to identify patients who have unmet social needs that impact their overall health. Freesia can alert providers and care coordinators in real time about patients' individual needs so they can more fully understand a person's holistic health. We believe this program will be a beacon to guide other states. While this initiative is not currently a significant contributor to revenue, we do believe it is worth sharing with all of you given that it provides continued validation of the region's value proposition in close alignment with our mission. Let's talk about culture. It's important for our shareholders to understand our company culture because we believe it gives us a competitive advantage. Another important aspect of our culture is our early career program. We started our early career program about five years ago. We made a strategic decision to target new and recent college graduates with less than two years' experience to position us for long-term success. We didn't invent this concept. We studied out the best companies recruited, developed, and retained great people, and then modeled our programs after those companies. Our program gives us a competitive advantage on speed and agility. We're able to pave career paths across Eurasia for our early career hires. Five years into our early career program, We are more bullish than ever about its value. We're very proud of the program. We know that everyone listening to today's call is a very talented, well-networked person, so if you have any referrals for our early career program, please send them to Balaji. Let me now lay the foundation for how we'll communicate our progress to you both today and going forward. In addition to revenue and adjusted EBITDA on our financial statements, we view three additional metrics as useful indicators of our performance on a quarter-to-quarter basis. First, the average number of provider clients. Second, the average revenue per provider client. Third, patient payment volume. Let me cover the highlights of our fiscal 2020 second quarter, which ended July 31st. Total revenue for the quarter was $30.8 million, up 24% year-over-year. The average number of provider clients was 1,558, up 6% year-over-year. Average revenue per provider client in the quarter was $16,472, up 23% year-over-year. Patient payment volume was $464 million in the quarter, up 30% year-over-year. The cost of EBITDA was $0.7 million, down $1 million year-over-year. Tom will spend significant time on these metrics in a few minutes. Let's talk about our approach to guidance. We expect to provide an outlook for total revenue and adjusted EBITDA on an annual basis near the beginning of each fiscal year and updates to those annual figures on a quarterly basis. Our outlook for fiscal year 2020, ending January 31, 2020, is as follows. We expect total revenue to be in the range of $118.5 million to $119 million. We expect fiscal 2020 adjusted EBITDA to remain positive. Going forward, we expect our adjusted EBITDA margin to increase annually. We have seen an increase in public company expenses and have incorporated them into our adjusted EBITDA outlook. Our longer-term adjusted EBITDA margin is 20%. With that, I will now turn the call over to our CFO, Tom, for a detailed financial review.

Thank you, Chaim, and good morning, everyone. Let me take a few minutes to run through the highlights of our income statement, balance sheet, and cash flows for the fiscal second quarter. I will also provide a bit more color on our fiscal 2020 outlook. First, revenue. As Chaim mentioned, total revenue was $30.8 million, up 24% year over year. We report our revenue in three line items. Subscription and related services, which was $14 million in the quarter, up 34% year-over-year, payment processing fees, which were $11.7 million in the quarter, up 27% year-over-year, and life sciences, which was $5.1 million in the quarter and flat year-over-year. It's also useful to track our combined revenue from providers, which adds subscription and related services to payment processing fees. said differently, provider revenue covers our entire business less our life sciences revenue. Provider revenue in the quarter was $25.7 million, up 31% year over year. Now let's dig a little deeper into provider revenue. The two drivers of the 31% provider revenue growth are average provider client growth and average revenue per provider client. Average provider clients grew 6% year-over-year. This is consistent with the mid-to-high single-digit growth we've experienced over the past six quarters. Average revenue per provider client grew 23%, also consistent with trends over the past six quarters. We believe these trends provide a solid indicator of our growth formula. We land new client logos, and over time, we expand with more providers to each client and upsell more patient intake modules to each client. Now let's talk about life sciences. Life sciences revenue was flat year over year, but up a strong 26% sequentially. In order to understand the driver of the strong sequential performance, let me review our life sciences revenue model. Our clients are life science companies. Our revenue is based largely on the delivery of messages at contracted price per message to targeted patients. Messaging campaigns are sold for a specified number of messages delivered to qualified patients over an expected time frame. Revenue is recognized as the messages are delivered. Now let's go back to the $5.1 million in life sciences revenue in the fiscal second quarter, which was up 26% sequentially. Our team delivered the specified number of messages over a shorter time frame. This outperformance brought forward additional revenue into the quarter. Before we get into some highlights on expenses, I also want to take a few minutes to talk about payment processing. Our payment processing revenue is based on the number of transactions and the dollar amount of patient payment volume that we process on credit and debit cards on the Freesia platform. Our payment processing fees are generally calculated by one of two methods and sometimes both. Those methods are a percentage of the total transaction dollar value processed and the fee per transaction. In the fiscal second quarter, Our patient payment volume, or the total dollar volume of transactions on our platform, was $464 million, up 30% year over year. Credit and debit patient payment volume represented roughly 82% of the total patient payment volume in the three months ended July 31, 2019. The remainder of our patient payment volume in the quarter was composed of credit and debit transactions, for which Freesia acts as a gateway to another payment processor, as well as cash and check transactions. As I mentioned earlier, fiscal second quarter payment processing fee revenue was $11.7 million, up 27% year over year. Payment processing expenses in the quarter were $7.1 million, up 33% year over year. The margin on our payment processing revenue in the second quarter was 39% versus 42% in the prior year quarter. So our payment processing profitability decreased by 280 basis points year-over-year. You should expect quarter-to-quarter fluctuation in profitability. We would expect to see moderate pressure on an annual basis over time due to lower take rates and higher interchange costs. Now let me provide a few noteworthy expense items in the fiscal second quarter. I will review several expense line items on an adjusted, non-GAAP basis, which excludes stock-based compensation expense from each line item. Please note that a full reconciliation of GAAP to non-GAAP measures, including adjusted EBITDA, is included in our earnings press release and our 10-Q filed with the SEC. On an adjusted basis, cost of revenue was $4.2 million, or 13% of total revenue, Down 100 basis points year-over-year. On an adjusted basis, sales and marketing expense was $7.9 million or 25.5% of total revenue, down 60 basis points year-over-year. On an adjusted basis, research and development expense was $4.5 million or 14.7% of total revenue, up 210 basis points year-over-year. The 210 basis point increase on an adjusted basis reflects our ongoing focus on partner integrations and product development. On an adjusted basis, general and administrative expense was $6.4 million, or 20.9% of total revenue, up 260 basis points year over year. The biggest driver of this increase as a percentage of total revenue were the costs that we are now incurring as a public company. Adjusted EBITDA, which excludes stock-based compensation from EBITDA, was positive $0.7 million, down $1 million year over year. The decline reflects the combined impact of the expense items I discussed earlier, particularly the costs associated with preparing to become a public company. Fully diluted shares outstanding as of July 31 was $35.8 million, and cash on the balance sheet of July 31 was $100.1 million, up $94.1 million from April 30, 2019. The increase of $94.1 million represents the net impact of $127.2 million in net proceeds from our IPO and the repayment of $17.7 million, outstanding balance on our revolving line of credit, plus the dividend of $15 million to our former preferred stockholders. Cash flow from operations from the quarter was $0.6 million versus $1.9 million in the prior quarter, reflecting the higher expense trends I previously cited. Capital expenditures for the quarter were $2.9 million, Inclusive of $1.5 million of capitalized software development, relatively unchanged from the year-over-year comparables of $2.9 million and $1.3 million, respectively. Before opening the call to Q&A, I wanted to provide some more color on our fiscal 2020 outlook. When considering our $118.5 million to $119 million revenue outlook for fiscal 2020, please note the following. When you model provider revenue, note that patient payments tend to be higher at the beginning of the year with the resetting of patient deductibles. This is an annual cycle that we all personally see happen each year. We expect life sciences revenue to be relatively flat year over year. And finally, G&A expenses will be higher on a quarterly basis, largely due to much higher than anticipated directors and officers, liability insurance, and accelerated compliance with Sarbanes-Oxley. Due to the strong performance of our share price, we may need to be Sarbanes-Oxley compliant as early as next year. We estimate these two factors will increase G&A expense by around three to four million on an annualized basis. That said, we continue to see solid operating leverage across our business as we grow and we continue to target adjusted EBITDA margin in the 20% range long term. All in all, we're very pleased with our fiscal second quarter results. Operator, we can now open up the call for questions.

Thank you. At this time, we will be conducting our question and answer session. In order to ask a question, please press star, then the number one on your telephone keypad. To allow for as many questions as possible, we ask that you limit your questions to one question with one related follow-up. Your first question comes from the line of Ann Samuel with JPMorgan. Ann, your line is open.

Hi, guys. Congrats on a great quarter, and thanks for taking the questions. I was hoping you could maybe provide a little bit more detail on the social determinants of health announcement, what kind of implications that might have on the cross-health opportunity going forward.

I'd say it's really early to describe how it's going to affect revenue, and we're really not providing any guidance change for revenue, but we think it's strategically important and aligns unbelievably well to our mission. I'm pretty excited, and I know everyone here at Fareeja is excited, to be partnered with the state on this groundbreaking program, and we think, frankly, social determinants are going to become a huge part long term on how people help manage the cost of their own health care and, frankly, improve their outcomes. So the fact that we're partnered with probably the largest SDOH program in the country right now is just exciting to us.

Great. And then just on the revenue line, you know, your revenue was slightly better than our expectations this quarter. I was just hoping maybe you could speak to what drove some of that upside and then just how to think about how that will flow through to the back half of the year.

Thanks. I'll answer the first part and then I'll let Tom answer the second part of the question. So, look, I'd say the team did just a phenomenal job of just taking practices live faster and driving more add-ons forward. A little bit faster than we had expected. I wouldn't suggest that that's going to happen again. As we went through this IPO process, everyone just really kicked into gear, and I'm really proud of the team and how they executed in this past quarter.

Andy, with respect to revenue going forward for the rest of the year, keep in mind that payment, as I mentioned on the call, payment processing revenue was highest in the first quarter and tends to moderate as we go through the year. And also life sciences revenue can be a bit lumpy and may not stay at the levels that we're seeing in Q2.

That's very helpful, Collin. Thanks, guys.

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

Yeah, good morning, guys. Thanks for taking the question. Congrats on a strong quarter out of the box. One to follow up, Tom, you had mentioned partner integration costs. I'm curious if you can provide any color on the work that you're doing with Epic and Cerner integration activities and maybe how that's assisting in either the new sales or the pipeline or even customer retention. And if it's maybe too early to see those benefits manifest, maybe what your expectations would be is those integrations developed.

Ryan, that's correct. We are doing those integrations, but we think it's too early at this time to really give you much color on what those will result in the rest of this year and 2021.

Okay, and maybe something you didn't mention, but an update on the work you're doing on the inpatient facilities. I know you've got a partnership with R1 Based on their public comments, it seems like they're rolling that out at some fairly large acute care hospitals. And I know it hasn't been a core focus in the past, but it seems like an interesting novel TAM for you to target. So, Chaim, maybe you can talk a little bit about that market opportunity and kind of what you're seeing there. Thanks.

So, we really appreciated our partnership with Joe and his team at R1. I think that together, along with the clients that we serve, we've seen Really good early success. I think as we start having real metrics, Ryan, to be able to discuss, we'll be coming out to the street to talk a lot about that. But I still think it's pretty early to discuss, just to really put a long-term view on the value of the acute opportunity. The one thing I will say about acute is it's complex and hard, and we want to be able to really make sure that we serve Those populations appropriately. I'm really excited about the opportunity. And I frankly also want to echo one of the things Tom was saying about ethics. Our partnership with them has been wonderful. They've been a great organization to work with.

All right. Thanks for all the color guys. Congrats again on the strong start.

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

Good morning. So I guess maybe just following up on Ryan's question about Cerner and Epic, if we kind of take a step back and look at the broader environment, You know, NextGen talked about maybe some trends towards subscription deals that is impacting them a little bit. You got, I'm sure, some noise around Athena and GE and putting those businesses together. Can you just give us a sense of what the environment feels like right now? If there's anything that's changed, just anything on that front would be great.

I don't think we've seen anything materially changing in the environment that we haven't seen continuously, which is physicians and healthcare systems continuously looking to drive instant value or as quick as they can value into their organizations and their propensity to continuously invest in solutions that have strong ROIs. And I think a lot of those partners that we have, I think, have been doing phenomenal work. And I can't speak for them, but I can speak for our organization. And I think we really just kept our head down and really just tried to provide a good ROI to our clients with great products. And, you know, month in and month out, just do the things we say we're going to do.

Okay, that's great. And then maybe just on the life sciences business, I hear that you guys had really solid execution during the quarter and got some campaigns maybe done a little sooner than you might have otherwise expected. Can you talk about what your approach is to that business, let's say, over the next two or three years, whether or not you're Thank you for having me.

We feel good about that business today. I think most of our core resourcing has gone and will continue to go around the products in our provider business. If anything changes, I'm sure we'll come to the market and sell everyone because we're really excited about it. We're really pleased with what that team has been doing and we appreciate that it was a little bit bigger than Thank you. Good morning.

Revenue per client metric that you're giving us, can you break that down into how much of that is being driven by natural organic growth of the client and their business growing? How much of that is increased penetration of the existing products that they bought? And how much of that is uptake on the new products? And what new products are they taking out? Yeah.

That's a great question. So I think the answer is we're selling more clients, we're expanding those clients, and they're buying more applications that we build. And we're seeing a spread across. I don't think we're going to be breaking down which aspect it is, but I'd say in all three of those we're seeing continuous uptick. I'm very happy with the expands. I'm very happy with the new wins we're seeing. I think all of us are very happy with the uptick we're seeing in upsell and cross-selling our additional applications and products.

Can you call out one or two of the... What about calling out some specific apps that they're taking up?

So I'd say the one thing that I will call out that we're seeing broad adoption of across the board is mobile. And I'd say that in almost every account we're seeing mobile adoption and the uptake being just unbelievably high, which makes us happy because, frankly, it flows all the way through. And we think it's just a phenomenal experience and one we've been building for years.

All right, thank you. And then on the life sciences business, so I hear you on the early delivery. Is there a delta in the cost structure when you deliver these campaigns earlier? In these agreements, who controls the cadence of these messages? Is it you or is it the client?

Sean, there's no uptick in costs if we deliver earlier. And can you repeat the second part of that question?

Yeah, just wanted to know who is really controlling the cadence of how these messages goes out? Is it you? Is it the life sciences client? Is it the provider?

So we set a general budgeted range with our life sciences clients. And as it's accelerating, the teams will usually communicate back to them, indicating and making sure that they're comfortable with the acceleration. So it's something where we don't... Thank you very much.

We are showing no further questions. I will turn the call back over to Frisia's CEO, Chaim Indig, for closing remarks.

Thank you very much, everyone, for joining us. We really appreciate your time. We're very happy about the quarter that we just came out of, and we look forward to the next couple quarters, and I look forward to meeting a lot of you over the next couple months. Cheers. Thank you very much.

Thank you. This concludes today's conference call. Thank you for your participation. You may now.