Phreesia, Inc. — Form 10-Q summary
Business and period: Phreesia provides healthcare software for patient access, registration, payments and clinical support, plus targeted patient communications for life sciences clients. This unaudited report covers the quarter and six months ended July 31, 2022 (fiscal 2023 Q2), compared with the corresponding 2021 periods. Unless noted, amounts below are in millions.
Financial performance
| Metric | Three months ended July 31, 2022 | Prior year | Six months ended July 31, 2022 | Prior year |
|---|---|---|---|---|
| Revenue | $67.9 | $51.0 | $131.2 | $99.3 |
| Operating loss | $(46.3) | $(23.8) | $(96.9) | $(34.5) |
| Net loss | $(46.7) | $(24.4) | $(98.0) | $(35.4) |
| Adjusted EBITDA (non-GAAP) | $(26.0) | $(11.0) | $(56.5) | $(11.0) |
| Cash used in operating activities | $(19.8) | $(6.7) | $(53.5) | $(12.2) |
| Free cash flow (non-GAAP) | $(25.7) | $(9.9) | $(66.4) | $(22.3) |
Quarterly revenue grew 33%; six-month revenue grew 32%. Q2 revenue comprised subscription and related services of $31.1 million (+36%), payment processing fees of $19.6 million (+20%), and life sciences of $17.2 million (+46%). Estimated gross margin, using revenue less cost of revenue and payment processing expense, was approximately 59.6% in Q2 versus 61.4% a year earlier. Operating loss margin widened to approximately 68% from 47%.
Average healthcare services clients increased to 2,776 in the quarter from 1,987. Average revenue per healthcare services client fell 7% to $18,248, which management attributed mainly to client growth outpacing payment volume and to the solution mix among new clients. Patient payment volume rose to $811 million from $696 million; 80% was processed under Phreesia’s payment-facilitator model, versus 78%.
Financial position and liquidity
- Cash and cash equivalents were $240.7 million at July 31, 2022, down $73.1 million from January 31, 2022. Total assets were $426.0 million and stockholders’ equity was $348.5 million.
- Finance lease liabilities and other debt totaled $10.7 million, including $5.7 million current. The $100 million Silicon Valley Bank revolving facility was undrawn, with $100 million available; the stated rate was 5.0% at quarter-end, and borrowings mature May 5, 2025.
- Management said cash, normal-course cash generation and available facility capacity were expected to fund operations for at least 12 months. It also expects net losses and negative cash flows to continue for at least the next year.
- Six-month investing cash outflow was $12.9 million, including $10.2 million for capitalized internal-use software and $2.6 million for property and equipment. Cash used for financing was $6.7 million.
Material changes and management commentary
- Losses and cash burn increased substantially year over year. Management linked expense growth primarily to higher compensation and headcount, along with outside services and marketing costs. Sales and marketing expense rose 111% and R&D rose 121% for the six months.
- Management said growth in team size and compensation is expected to moderate in fiscal 2023 and thereafter; the filing provides no specific revenue, earnings or cash-flow guidance.
- Stock-based compensation was $14.9 million for the quarter and $29.4 million for the six months (including amounts capitalized or recorded in accrued expenses). Dilution and compensation expense are relevant given the widening losses.
- The company ceased using its Ottawa office during the quarter and planned to cease use of its Raleigh office in September 2022 and Portland office in April 2023; management reported no significant financial impact from shortening the related asset lives. Phreesia said it is fully remote.
- The company reported no material legal proceedings and no significant change in material cash requirements. Management stated disclosure controls were effective as of July 31, 2022; a previously identified material weakness in internal control was described as remediated.
Outlook, risks and contingencies
Phreesia cautions that growth investments, upfront client acquisition and implementation costs, variable sales and implementation cycles, and seasonal payment and life-sciences activity can make results volatile. Key risks include continued losses and cash consumption; competition, including from EHR and practice-management vendors; client retention and monetization; privacy, cybersecurity and regulatory compliance; reliance on third-party payment processors, vendors and hardware suppliers; and the effects of inflation, economic disruption, COVID-19 and geopolitical instability. The SVB facility is secured by substantially all assets other than intellectual property and contains financial covenants; the company reported compliance at quarter-end. No material contingent litigation liability was reported.
Important facts for investors to verify
- Whether revenue growth can translate into improving operating leverage, given sharply higher operating expenses, losses and cash burn.
- Whether healthcare services client growth can reverse the decline in average revenue per client and support durable subscription and payment revenue.
- Cash runway and capital needs under continued negative operating and free cash flow, including the availability and covenant conditions of the undrawn credit facility.
- The sustainability and cash-flow impact of elevated stock-based compensation, capitalized software investment and client acquisition costs.
- Developments in payment processing economics, client concentration and receivables, privacy/security exposure, and third-party service dependencies.