Good evening, ladies and gentlemen, and welcome to the Phreesia Fiscal Fourth Quarter 2023 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, Senior Vice President, Investor Relations for Phreesia. Mr. Gandhi, you may begin.

Thank you, operator. Good evening, and welcome to Phreesia's earnings conference call for the fiscal fourth quarter of 2023, which ended on January 31, 2023. Joining me on today's call is Chaim Indig, our Chief Executive Officer. A 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 our Investor Relations 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 annual report on Form 10-K 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 both furnished with our Form 8-K filed after the markets 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.

Thank you, Balaji, and good evening, everyone. Thank you for participating in our fourth quarter earnings call. Before we jump into some highlights of the quarter and Q&A, I'd like to talk about our CFO transition, which we also announced in an 8-K filed after the markets closed. Balaji Gandhi will take over as our CFO this Friday, March 24. Many of you on the call know Balaji. He's been a part of our executive team over our entire existence as a public company. He has become a trusted peer to our executive team and Board of Directors in terms of planning and communicating Phreesia's strategy, brings over two decades of knowledge and background in the health care space as an investment analyst and industry executive, including the past four years with Phreesia. He has been invaluable to us in his previous role, and we are excited about the contributions he will make as CFO. Let me also thank our outgoing CFO, Randy Rasmussen. When Randy joined us in 2019, we had a small finance organization for our company with about 500 employees and $150 million of revenue. Randy helped build a great finance organization and implemented processes, systems and controls that we believe are important for a public company to be able to deliver durable and profitable growth over time. Now moving on to our results. Our stakeholder letter and earnings release came out about an hour ago but let me start the call by sharing a few key highlights of the material we released. Revenue in the third quarter was $77 million, up 32% year-over-year. That's our eighth consecutive quarter of over 30% year-over-year revenue growth. Thank you and congratulations to the entire Phreesia team, a fantastic job. In the quarter, our average number of health care services…

Thank you. [Operator Instructions]. We'll hear first today from Anne Samuel with JPMorgan.

Hi. Congrats on a great quarter and congratulations, Balaji, on the very exciting news. Maybe my first question is on network solutions. You saw really, really strong growth in this segment once again. And I was wondering if, perhaps, you could discuss a little bit about how we should be thinking about underlying market growth in that segment and how you expect to grow relative to that. And then, you've seen some relative insulation versus some of your peers in this space that have seen some pressure from pharma advertising budget. So just wondering if you could speak to why maybe you're more insulated versus others.

Hey, Annie, I'll let Balaji say thank you first, I guess.

Thanks, Annie.

So I guess your question, if I heard it correctly, is why are we doing well on network solutions?

Why relative versus others, and then also just kind of thinking long-term, how do we think about maybe what the underlying market growth rate is for that segment.

Look, I think the tone has shifted in the market. And so first and foremost, I think, from what we see, our clients are really focused on ROI, tried-and-tested tactics and platforms that could deliver like clear, like scaled ROI that meaningfully help patients understand their therapies and understand different treatment pathways and understand different things that are important to their care. And so first and foremost, that's probably what we've seen in sort of the market and we do those things, right? The other reason is, frankly, we got a great team, and they're doing really well. And I think the reason we're doing really well is because of the team and how they've been out in front working with clients and making sure they understand the value. Frankly, on behalf of everyone, I just want to give them my thank you. Everyone on life sciences and our payer teams have just done a great job. And so thank you to all of them. I know they're listening.

That's helpful color. And then, in your letter, you spoke about completing your first enrollment period in the payer space. And since you're kind of new to the payer space, and we haven't seen as much there, I was hoping you could maybe talk a little bit about how MemberConnect helped with that and what it looked like for you.

It looked okay. And it's still early days. I don't think we're prepared to talk much about it. I think we're still learning. But it did a little bit better than we thought it would. And I was proud of the team. It was hard. We had to do things a little bit. I don't think we've automated a lot of our solutions yet, but I think we're working pretty hard on building a lot of products around it. And I think everyone was pretty excited about our first year of doing it.

And Annie, I'd just add two things. One, it is still early, and we're still learning. And two, you'll remember we raised the guidance into the fourth quarter knowing what we knew about the enrollment period back then in December. So some of that opportunity is already in the results.

Everyone at Phreesia is pretty proud of the work that they're doing. So it's fine.

Great.

We'll hear next today from Ryan Daniels with William Blair.

Yes, good evening. Thanks for taking the question. This is Jared on for Ryan. I'll first echo the congrats to Balaji on the transition here. And then I did actually want to ask a follow-up on the point around ROI related to the life sciences offering. So in the letter, it looks like one of the drivers of upside that you mentioned was taking programs live earlier than expected. I'm sort of curious, was that just a one-off trend this cycle, or do you think that that's kind of due to clients realizing that's ROI from the platform and kind of getting their budgets in order for the year so that they can kind of be on channel, so to speak, for more time each year?

No, I would actually say, look, we were able to -- so the way our fiscal year runs, so it runs to the end of January. And there was a lot of people that worked into the holiday season to make sure that programs transition seamlessly this year. And thank you all for making sure that those programs ran seamlessly, and our new programs went live as soon as possible. So it was about a strong January and the seamless transition the team just did. On behalf of everyone in Phreesia, they really crushed it into that year and allowed us to just -- we ran pretty well in January, which helped us significantly. I don't know if that answers your question, Jared.

Yes, that's helpful. And certainly nice to hear about the strong execution. I guess just as a follow-up --

It was pure execution. Just amazing for the whole team.

Got it. Yes. So just one quick follow-up from us then. I guess thinking about the fiscal '24 guidance here. Given the strong client count growth that you saw last fiscal year, is it fair to assume the 2024 outlook is being driven by a greater mix of land-and-expand growth versus new in-year sales? Really just trying to triangulate any thoughts on if there's anything we should be thinking about relative to the visibility that you have into this guidance at this point in the year maybe relative to prior years.

Yes, Jared. We obviously gave a little bit of color into the first quarter, which if you take that for what it is, it's about the same amount of ads that we had in the fourth quarter. You would probably conclude that the growth would look about the same for the mix on growth from client ads versus revenue per client. In terms of the latter three quarters, we're not really talking about it. We have some visibility, but we'll just try to update you as we go. But I don't think we would agree with where you were going as far as some kind of inversion between the contribution, for now, it's probably still going to be more skewed to the client growth versus revenue growth.

Okay, great. Thanks for the color.

And from Piper Sandler, we'll move next to Jessica Tassan.

Hi. Thank you, guys, so much for taking the question, and congratulations, Balaji. That's awesome. So we wanted to focus a little bit on, we saw you facilitated 120 million plus visits in FY '23, up about 20% year-over-year. You grew health care services clients a little faster than that. So is there anything for us to conclude on the kind of divergence of those two growth rates?

Yes. It's actually probably worth an explanation. The actual math you need to do is, it's not like actually a clean year-over-year, and we had talked about eclipsing 100 million visits as of the end of September of 2021. So I mean, you can't actually get to the growth to line it up perfectly. But I would say that I don't think there's anything you should read into the difference between visit growth or client growth, they're probably about the same in terms of the mix of client size.

Yes. It's pretty awesome, isn't it?

Yes, 120 million is quite a few.

I know. I'm proud of everyone. It's a lot.

Yes. Just maybe a quick follow-up. I was hoping you guys could kind of talk to us a little bit about the social determinants of health screening tool and whether or not you're getting paid for that currently. And if you are getting paid, are the payers sponsoring that outreach and does the revenue show up in network solutions? Thank you.

So we provide those social determinants of health modules and everything we do around the set of questions right now, that's just part of what people get as part of the package. We don't charge extra for it. I just philosophically tend to not believe that that's something that we have thought about monetizing. We think it's just the right thing to do. And so we try to do the right thing as an organization to help clients help their patients. And no, we, today, don't make any money from payer clients on social determinants of health. It's really just about making sure that we identify the issues that caregivers and providers can help them.

Awesome. Thank you, guys.

We'll hear next from Joe Vruwink with Baird.

Hi, great. Thanks and congrats, Balaji. Just reflecting on EBITDA performance over the last 12 months, actual results, I think ended up being almost $60 million better than the preliminary guidance. And I definitely appreciate it's probably not the pragmatic thing out of the gates to embed the type of productivity per employee that ended up being seen over the last year. But I'm just wondering kind of in that context, how you might handicap or kind of scenario plan around the forecast that was provided today, any puts and takes or thoughts on kind of the upward trajectory and productivity continuing on a quarterly basis.

Yes. And thanks, Joe. So, I think the biggest difference between a year ago at this time when we laid out the EBITDA outlook versus today, and I think we talked about this maybe on the last call. I mean there were a lot of other unknowns out there. One was we were coming off of that big step-up in inflation and we talked about that, and wages went up. And that was that big step-up in terms of expenses, and you saw the drop in EBITDA. So to be frank, I think I'm maybe speaking for Chaim, too, and our exec team, I don't think we knew whether we were in the seventh inning of that or the ninth inning of that. And so that was baked into our expectations. I think we've also talked about the situation in Ukraine at that time, so it would have been late March of '22. So those are two factors that were very different. Beyond that, I think we've been pretty open about talking about productivity and revenue per employee and metrics like that. So I think everything else is sort of headed in the right direction, but those are two differences between last year and this year.

Look, and I also think that we have a culture of ownership at the company and all of our people, our shareholders. And I think what we try really hard to articulate to them what we have to do, which is be thoughtful about the money we spend and all of them took it seriously. So a lot of the material improvements are thanks to them and everyone on the team for being just really good stewards of capital. It can't just be on the leadership; it went all the way through the organization. And I think that's why we did a lot better, too.

Okay. That's great. And then any time a new metric is debuted, you kind of asked why. And so I think the interpretation here is like contribution from the network business certainly seems like it's going to be a tailwind for a while. I guess maybe related to this, do you think you're coming up on a point in time where Phreesia will be less of a client add story, I'm not saying that goes away. Like, maybe it's more of a net retention story and it's going to be maybe more of a growth contributor to SaaS side of the growth algorithm.

I don't think we're ready to say that yet. I think we still have a lot of growth left in growing the network in the near term.

But I do think, Joe, that the takeaway from this, I think one of the things we concluded, and I don't know, you probably weren't following us back then. But when we went public, we had this key metric which was the health care services revenue, which, in fact, that was called provider revenue per client. And if you really think about it, it's sort of like more of a jigsaw puzzle and that was putting together the subscription-related services and the payment processing and you could calculate. Then what happened, we noticed that the investment community started to break that down and looked at subscription per client, looked at payment per client. And so we just sort of like added this third component to it. Now you can look at total and you can look at network solutions. So the intention isn't to introduce something new, it's to just sort of like step back and look at the entire picture and break it up any way you want. But in any given quarter, one of those can contribute more than the other. Does that make sense?

Yes, it does. I'll leave it there. Thank you.

And from Jefferies, we'll move next to Glen Santangelo.

Yes. Thanks for taking my question. I just have two quick ones. Chaim, I first wanted to just talk to you about the top-line here. I mean, essentially, if we use your guidance for revenue this year, it almost seems like you need to grow faster in fiscal '25 to get to your fiscal '25 goals of $500 million run rate, so by default, you're effectively giving 2 years of guidance here. And I want to get a sense for you on where we are with respect to the penetration of automated check-in within the business more broadly. And I guess, what sort of gives you that comfort that the growth rate that you're currently enjoying is sustainable for another eight quarters?

All right. Look, I think we've got a lot of work to do to get where we need to be, and I don't think it's going to be easy. And I think we're still in the very, very early innings of building in our business and I'm pretty excited about it. I'll ask Balaji to answer this. But I think if you look back, we've been public for a bunch of quarters now. And during that time, we've had acceleration, like, it's gone down a bit and we reaccelerated up. Like, how many times have we done that, Balaji?

If you look back, it's been like three or four times, Glen, where we've had sequential quarter growth vary on a total revenue basis. And I think the reason even if you take out some of the distortion from COVID with payments, the biggest reason is it sort of relates to the earlier question that Joe asked about the three revenue streams. So again, there's a little bit of seasonality around network solutions or seasonality around payments. So I think when you're sort of thinking about growth rates on an annual basis or CAGRs, you can kind of lose sight of how our business operates. So again, there's quarters where we've grown 36%, there's quarters where we were growing 27%. And this is where we're setting things up for annual guidance for this year.

Okay. Well, Balaji, maybe if I could just sort of follow up then on the profitability side, right, because the annual guidance this year, I mean, on the EBITDA side, it almost assumes like no leverage from the EBITDA number you reported in this fiscal fourth quarter. I mean, a little bit, which, again, back to that theme of providing two-year guidance, right, if you're assuming you're going to be profitable by the end of fiscal '25, that assumes a very healthy ramp in fiscal '25. And so I just wanted to get a sense, I understand the differences that played out in fiscal '23 maybe to the original expectation, the uncertainty in the environment, but is there anything as we think about sort of this 2-year stack here that would load more expenses in the first year versus the second year or because it seems like the way you have it positioned, it's not anywhere close to being straight lined. Thanks.

Yes. And I think I've heard Chaim say life isn't linear.

It's not.

But I think this also relates to an earlier question, which is around like maybe last year's EBITDA and our entered EBITDA guidance and how we entered the year and this year. So I think we talked earlier about what's different from last year. What's the same is, it's early in the year. We're, what, 5, 6 weeks into our fiscal year. And we look at a lot of different investments that we're going to make. Some of them are short-term, some of them are long-term. And we calibrate as we go. So we've got sort of a view of how we think things will play out. And so where we talk about that in March is going to be different than July, October, December, Glen. So some of that, we'll just share with you as we go through the year. But that said, I don't think you should expect it to be linear because we'll calibrate on the expense side and then there's the earlier point about revenue mix, having sort of a different profitability. So it's a seasonally strong payments quarter, for example. We're going to have lower EBITDA.

Okay. Thanks. Appreciate the comments.

And we'll hear next from Sean Dodge with RBC Capital Markets.

Yes. Thanks. Good afternoon. Maybe just going back to the new metric for a moment, the total revenue per AHSC. You're at 24,400 as of Q4. Can you give us some sense of what the fully penetrated opportunity would be right now on a per provider basis? I think before, you said something like 31,500 per provider for subscriptions, how we kind of frame that in our mind if we add in payments and now with the network services opportunity on a per provider basis could be over time, of course.

Yes. Sean, I don't want to do the math off the top of my head, but it's pretty simple. I mean all these numbers are like, again, just think about it like a jigsaw puzzle. So the total TAM is $10 billion. And so the 31,500, I think, that you mentioned, that's what you said, right, on a quarterly basis?

That's right, yes.

So that's subscription-related services. So I think, on one hand, you could say there's a universe of 50,000 clients, and there's about $10 billion of total addressable market. Again, I don't want to screw up my zeros, but it's $10 billion divided by 50,000. And then 126,000 is what we talked about from subscription, and then you can do the math. It's $2 billion on network solutions divided by 50,000 clients. Does that make sense?

Yes. That makes sense. And then, I guess kind of related to this, in Q4, I know you said you added a bigger mix of larger clients. What's the attachment rate been like with payment processing in those larger clients? I guess, how does that compare to what it has been historically for you all? I know from the last call; it sounded like you've been having some increased success there.

Yes. It's still lower than our average, but the team's plugging away. They're doing a good job of winning some deals in it. And I think we've been fairly happy. We're still tracking, but it's a long slog. But no, we're winning payment volume. Obviously, nowhere close to what we do in the average, but we're winning payment volume in the enterprise accounts. And I think it's evident in the numbers.

Okay. All right. Great. Thanks again.

We'll move now to Daniel Grosslight with Citi.

Hi, guys. Thanks for taking the question. I'll add my congrats to Balaji here. You mentioned in the shareholder letter that patient processing volume tends to grow in line with network growth. But if we look at payment fees per provider this quarter, it fell about 10% year-over-year. Can you help square those two comments? And as we look at '24, should we expect payment fees per provider client to return to a more normalized growth or do you think there's still going to be some degradation in that metric?

So you're looking at payment fee revenue divided by client, correct?

I'm looking at the volume per client. But I mean it's directly correlated with processing fees. But yes, my numbers were on a volume per client basis.

Yes. So again, just so we're clear, you're comparing about $262,000 compared to $298,000. Is that right?

Yes, that's right.

Yes. That might be something we have to follow up with you on. I do see your point. I mean it's obviously the same quarter in terms of seasonality. I mean, I don't know, Chaim, what you're thinking off the top of your head?

No. I just think what you might see is a mix of client types. I don't think we see any massive variability in it.

But as I look at the last couple of quarters, and this actually would make sense, it was down 16 year-over-year last quarter and 17 year-over-year the one before that. And I think one thing we have talked about, and in our letters, Daniel is we had that unusual -- so volumes were down from COVID and then spiked up. And so we were working off some of those tougher comps on a per client basis. But anyway, maybe we can follow up with you on that because nothing comes to mind.

Yes. That sounds good. And for '24, I assume it's more normalized across the board. So that's really a '23 and '22 dynamic. Okay.

Yes.

Okay. And R&D this quarter, a bit of a pickup. Can you just talk a little bit about product development and how we should think about R&D and capitalized software for '24?

Look, I'll talk about the first part, and then Balaji can talk about capitalized software because I don't really know that much about it. So look, we invest in product. Products make huge gains for our clients. They drive significant value for all of our shareholders. And we see a lot of efficiency gains when we invest in product. And also, its new products to build and new markets to go after, and we're pretty excited about some of the things that the team is doing. And we've always led as a product-first, product-driven organization, and I expect that to continue. Obviously, the growth in R&D will start to mitigate over time and we see that mitigating in the near term and as we start getting a lot of operating leverage off some of the newer investments and the people that we brought onboard who are just so impressive on our R&D team.

Yes. Daniel, are you trying to just look for like the trend on spend?

Yes. Exactly.

Yes. I mean you can see it's sort of been growing proportionately with R&D expense on the P&L. So I think we've sort of found this more of this range that we've been at on a quarterly basis. I don't think it will increase, to Chaim's point, but it will increase probably at a similar rate to R&D expense. And that's all in the context of still getting operating leverage on EBITDA, et cetera. But you could probably ratchet it up a little bit based on what your R&D expense is.

Yes. Make sense. Thanks guys.

We'll hear now from Stephanie Davis with SVB.

Yes, guys. Thanks for taking my questions. Balaji, congratulations on the new seat. First one is for you. Phreesia is a very different organization from when you first joined. So when you look at your new title and this kind of next leg of growth, how would you think of your top priorities for this new role?

Well, I think I've had almost 4 years here, and I think part of it is, we've done a lot of things, obviously, in the last 4 years. We've raised a lot of capital and we're trying to be opportunistic about that. Had to make a lot of decisions about how we put that money to work, what kind of returns we'd get. And I think that's been a lot of different people at Phreesia have been involved in these things. So I think continuing to just make sure we're focused on cost of capital, returns on capital. And I think we've talked about this on some of these calls, what we did was pretty controversial, but the reason we felt comfortable doing it is because we had a lot of rigor behind it. So I think, again, we've got a really good finance team that helps us make some of these decisions and still continuing. So it's actually, in some ways, more of the same. Don't mess with a good thing on that front.

Understood. This is probably a little bit ironic given it comes from SVB Securities analyst, but with the world blowing up, you are seeing private market valuations rationalizing pretty quickly. With that in mind, how committed are you to organically developing some of these new platform solutions like rev cycle versus maybe looking at a buy in order to accelerate the expansion?

Look, obviously, we've acquired some things where we thought the capabilities made more sense for us to acquire than to build. We've done that in the past. We believe that we want to be both good stewards of capital but also, we want to buy really great things, not just good deals, right? And I know some people believe valuations have sort of come in line on the private side. I think that there's still a lot of expectation resetting that needs to happen there, probably more than has happened to date, Stephanie. But look, we looked at things. We will continue to look at things. Frankly, as an organization, we also feel pretty good that we're good at building things and we're good at getting clients, get our software and to use our network. And we deliver phenomenal value. So the things that we care about are things that drive phenomenal value to our clients, and we'll just keep doing that. And if there's things that add value to the clients and add great returns to our shareholders, then we'll look at them. But I don't know, we'll be thoughtful.

And it gets back to my earlier point around just capital allocation returns because I think we've done some acquisitions and it's just sort of lined up the right way for us. But we'll have to see. I mean you'll have to let us know how quickly things change.

There's a lot of traffic there.

Hope we see a lot of change there. Thanks, guys.

And from Canaccord Genuity, we'll hear next from Richard Close.

Great. Thanks for the question. Congratulations to both of you. So maybe diving in on life sciences, a little bit more into Annie's question. Just maybe if you could provide some details on the growth there in terms of maybe getting greater wallet share from existing customers versus new pharma clients coming onboard to the platform.

Look, it's been a couple of things. It's been greater wallet share in the brands we work with. It's been more brands at the pharmaceutical customers and clients and life sciences companies that we previously worked with, so expanding our footprint. And then it's winning new clients that we haven't worked with before or we've worked with, and they've been at a previous company or the agency that we work with has had great success with us with some clients and now they recommend us for other clients. So I think a lot of our growth has been driven by just delivery. And it's a pretty small world. So doing what you say you're going to do and doing it really well over and over again has been a big part of our success and treating clients really well. And we try really hard. The team has been great at it. It's been all of the above. Balaji is going to pull up a stat, he's got a good stat here.

Yes. Richard, from time-to-time, we do update some of this stuff in our deck. So I would look at it. I'm looking at Slide 9 of our investor deck. And we work with more than 80 brands. And if you look back, that number was about in the 40s when we went public 2019. And the last time we updated this deck, it was over 70 brands.

So the answer is more.

More.

Okay. Chaim, maybe just as you're out talking to potential clients, even existing clients and getting feedback from your sales team, I guess any perspectives you can share with us in terms of like what's the mindset of health care providers right now? Has anything meaningfully changed maybe over the last year? What are the pain points, is it the same? Any update there would be helpful.

Look, I think they're tired. They're working hard. It's hard to pay people what they need to. They're still having staff turnover. I think they feel like their organizations are fairly understaffed often. And they don't have a ton of money. So look, our view is they're looking for solutions that drive a phenomenal amount of value pretty quickly and they just don't want to take a lot of risk. And so I think that's where we've been having a lot of success is they could look to their right and they could look to their left and they can find other people that use for Phreesia. They get a phenomenal amount of value for it. And frankly, a lot of them have used it at their doctors. And we give them the ability to get great value with no risk, and that's really, really important in this market. But I feel for our health care providers right now. The last four years has been a rough go. It's been a really rough go. And I'm just really honored that we get to work with so many great ones. They're in it to treat patients. That's why you go to medical school. You want to make a difference.

All right. Thanks.

We'll hear now from John Ransom with Raymond James.

Hey, there. I guess I have to congratulate Balaji or you guys will be mad. Congratulations, Balaji. Hope dinner was good. Just thinking about your upcoming hiring cycle for your SCRs. Last year, obviously, was the big experiment of stepping on the gas. What are we thinking about this year in terms of additions? Thanks.

I feel like becoming an SCR at Phreesia is like a job that they probably wouldn't hire me if I was graduating college. That team is amazing with more experience than they've ever had, and they're doing really well. We're really investing in them. And I think they're staying in their seats longer. And that's by design because we actually want to get them deeper into Phreesia. And it's been very successful. And we've created new roles around it. We now talk about not just the SCR team but also where they graduate to an ISR team. And the ISRs are just rocking it out right now. And they're the future of the organization, so we're pretty excited about it. Won't you agree Balaji?

Yes. And I'm surprised we got this long in the call without somebody asking the number, but it's 177 for the quarter. So John, it's been tracking sort of in that range for 3 quarters now. And I think you know what we're talking about doing in terms of expense trends and operating leverage.

And I would also point out and I have a lot of meetings, just as a side note. We use SCRs in all parts of our go-to-market organization, not just our provider market. So we have SCRs in our life sciences organization, in our payer organization. All of them have been doing just phenomenal work.

My other question is, I mean, if we go back to the roots of the company, starting with smaller doctor offices, let's say somebody has been with you for 4, 5, 6 years. I mean do you hit a plateau with that client, I would assume. I mean they can only see so many patients. You can only do so many things for them. So how do you think about the long-term growth with some of your more mature kind of legacy clients or is that just kind of the foundation that you build new customers off of?

Well, look, some of our oldest clients are using our newest products, too. I was in a meeting where I was like, why have I heard about that client, John? And it turns out it was one of the first clients we ever had and they're still using us, and they just changed their name. And now they're using some of our new beta products, which are pretty exciting, and which hopefully we'll talk about in the coming years. But our best clients are the ones that often have been with us the longest. And they've seen what happens when Phreesia comes out with new products and the wins they get with it. So I don't know, I wouldn't say our old clients are out there. Our CSM organization, they've just been phenomenal getting those clients to try and use our newer products which is the whole thesis.

That was my sneaky way, I was hoping you'd slip up and tell us what some of those were, but you didn't take the bait. So --

No. Balaji's been training me. I'm not allowed to say anything.

I think there's another angle there. Some of those older clients have actually become consolidators in the market. And that's just private equity roll-up of specialists that started with smaller Phreesia.

They have. And like we also have some of those smaller clients that have been bought by health systems and it turns out that those health systems use Phreesia now because of those smaller clients. But I think that was a long time ago that, that was our core focus.

I understand. Now my last question is, it's been a couple of years, I'm probably losing track of time since you announced you were going into the hospital market. And I know your thesis at the time was we can save on data entry. But what have been the learnings as you've expanded your reach into the hospital market? And how do you think about that opportunity now versus when you started? Thanks.

We just think about it the same. I think the hospital market is pretty big. We've been rolling out a lot of hospitals over the years. Obviously, there's different segmentation. We've had a lot of success in children's hospitals, in community hospitals, regional hospitals, tertiary hospitals, acute hospital. It's sort of funny, John. You see one hospital, you see one hospital and you go to another one, they all have different systems. And we've been able to add just a ton of value to them. And we're building out new very specific workflows that, if you asked me 3 years ago that we'd be building, I didn't even know some of those workflows existed. But they're laborious and hard for these hospitals to do. It's coming from the teams, both our implementation organization, our CSM organization but also our product organizations, just working in tandem. I think we still have years of work to just continuously automate and move work to the patient and just create a better health care experience with better outcomes. But we're starting to talk a lot more about outcomes than we ever have.

Great. Thanks so much.

We'll hear now from Scott Schoenhaus with KeyBanc.

Hey, Chaim and Balaji. Congrats, Balaji, on the new role, well deserved. So I wanted to touch upon the strong, another 150 adds of new clients in this upcoming quarter. I think it speaks volumes of the quick ROI offered to your provider clients. But I was wondering if you could give us the average conversion timeframe from a promotional client to a paying client for your subscription services. And just as a reminder, you're including client count for providers that are using payment processing but are still on the pretrial promotional software service, correct?

Correct. That is correct. You have to pay us to be counted in that health care services client count. Yes, Scott, we're not sharing the conversion rate there. But we've shared retention rates on client retention on an aggregate basis for 4 years from 2019 through '22. And we can tell you, it hasn't really changed much from the 90%-ish client retention rate, a big chunk of our go-to-market over that last few years has been the promo.

Yes. And I just wanted to follow up on that last call with the sales and SCR investments commentary. I think last quarter, you mentioned you're going to keep sales and marketing expenses relatively flattish, which we actually saw this quarter. Should we continue to expect that this will continue to drive most of the operating leverage in fiscal '24?

Well, I don't think this has changed. If we sort of stack rank, G&A is still at the top of the list but sales and marketing being second, getting some gross margin improvement, third, and R&D going up as an investment area and maybe holding about flat on a percentage of revenue. That's sort of how you think.

Perfect. Thank you.

From JMP Securities, we'll hear next from Joe Goodwin.

Great. Thank you so much for taking my questions and congrats, Balaji, on the CFO role. I guess you have a number of new vectors of growth coming into the model, like payer and the referral management, which has continued to mature. I guess can you talk about how these newer items are influencing your guidance methodology, or maybe, Balaji, how guidance methodology may change now that you're in the CFO seat?

I don't think anything will change. I think what we're trying to be intentional about is, you see the total opportunity in terms of subscription dollars where you can see the sort of areas we focus on, patient access being some of the new stuff, I think, that you mentioned. But also some newer things in registration and revenue cycle and different quarters are going to have different monetization of that. We have a lot of the promos that we've talked about. So I don't think you're going to see anything different. And our intent isn't to really like mask anything. It's a business that has different ways of driving growth over time and trying to keep it simple for everyone.

Got it. Okay. Thank you. And I know you don't disclose the net retention rate. But I guess maybe qualitatively, if we think about what that was in FY '23, is it improving from when we still had visibility into those metrics? Any commentary there?

Well, again, this is one of those things where point in time matters. And we look at those metrics and they move around quarter-to-quarter. And I think two examples I can give you of that are, if we've got a quarter where we have got year-over-year we've got expansion in a client, then it's going to speak favorably to that. If we had a quarter where we added a lot of net new and smaller clients, it's not going to look as good. So I think that's probably just not a place we want to go in terms of your question specifically. But again, client retention and gross revenue retention are something we've disclosed.

Got it. Okay. Thank you. Congrats again.

We'll move now to Ryan MacDonald with Needham.

Hi. Thanks for taking my questions and congrats, Balaji. Maybe first starting on MemberConnect. I understand it's early in the process and sort of the monetization and maturation of the offering. But as you got through the first enrollment period, can you talk about how you're measuring, whether it's ROI or conversion rates, on the leads and referrals that you're generating and how you might be able to use that for the upcoming enrollment period as we get into 2023 here to sort of expand and grow that offering? Thanks.

I think it's probably still too early for us to give color on that, but I'm sure the team will start putting out promotional material. And when they do, we'll let them lead with it as opposed to anything else.

And you could probably, there's a payer website and there's information there. So just if you look at that, you'll get a sense of how we're going to market there.

Okay. And then maybe as a follow-up for you, Balaji. I just wanted to make sure I got this down, sort of a clarification on the state of the cash balance. In the press release, I think you said on the recent events that, at the end of it, you believe the cash generated will be sufficient for at least the next 12 months. And then in the fiscal '25 target, you say it will be enough to support you along your path to hitting your targets. Do you still feel confident in your ability to sort of reach your breakeven target in 2025 with the cash on the balance sheet? Just want to make sure I have that clarification right and some of the wording on the press release. Thanks.

Yes, I'm glad you asked. And yes, we feel comfortable with our cash balance to take us to our targets in '25. And I think that was worded, I'll just say sort of from an SEC regulatory and accounting and audit perspective. It was worded that way, but we still feel very comfortable with the comments we've made.

Thanks again.

And from Guggenheim, we'll move to Jack Wallace.

Hey, thanks for taking my questions. Balaji, congratulations on the new role. And to you both, thanks for the kind words in the last public call. First off, I just want to ask about the commercial team. Looking back over the last year plus, you added a lot of bodies. Obviously, you've added quite a bit of clients. I'm thinking about just how the team is settling in and their comfort levels and cross-training now to be able to sell more of the full stack versus, say, where we were a year or even a few quarters ago. Thank you.

I don't know if I understand it. What was the question?

Yes. Sorry, Jack.

It's like a really good statement. Like I'm sort of lost with the question.

Just asking about the state of the commercial team now in terms of their comfort level in cross-selling and upselling versus you being more focused on the land expansion just given the average tenure of the team today versus, say a couple of quarters ago or even a year ago.

Yes. First off, obviously, there's been more people in the seats for longer and that's frankly just good for us. We've obviously ramped up a ton of people over the last couple of years. And now a lot of those folks are in their seats a lot longer, and obviously, they're doing a lot better. But to clarify, the people that upsell and expand are a very different team. And frankly, my heart goes out to that team because they're amazing, and they keep getting -- just crushing it on the provider side. And then, our net new team is different and they're also, obviously, based on the number, doing phenomenal. So those are 2 separate teams and they're frankly doing really well. And I think all of us have high expectations with that team to just keep doing well.

Got it. That's helpful. And then moving to the expense side, I was wondering if there are any investments or projects to call out that could be either lumpy in nature or hitting in certain parts of the year. And then on a related note, if there's any opportunistic hiring going on given the state of the technology market. I'm thinking specifically within R&D. Thank you.

Look, I think we're always thoughtful about how we hire, but I think we have communicated that we expect headcount to remain up or down around these levels, about 10%. So I don't think we're surely not crazy on this, on hiring. We're being thoughtful about it. But look, I think there's always been a lot of talent. But it doesn't matter the economic cycle, having done this for 18 years. Like, good people are just hard to find in good times or bad. Like, you hold on to your great talent with like every bit you can even when times are tough, right? So I don't know that it's any easier hiring people now than it used to be. I think what we see is, we're not getting poached as much as we used to with promises of grandeur. How's that? I think people feel pretty good about the place they are at Phreesia.

Yes, that's really helpful, about the retention comment. I appreciate it. Thanks again. And congrats on a great quarter and a great outlook.

Our next question will be from Robert Simmons with D.A. Davidson.

Hey. Thanks for taking our questions. And let me add my congratulations to Balaji. Good to see [FFO] [ph] doing well. So on the payments business, the gross margin there has been pressured for about a year, year plus. What are your expectations there? Do you expect it to stabilize around current levels, or do you think it's going to start getting back to the previous gross margin level you used to see?

Yes. I mean it's headed back there. I think we've been talking about this sort of on this journey. I think I just want to be a little bit careful because there's different ways of calculating that number. But I think if you just step back, no matter how you calculate it in terms of looking at interchange, looking at subscription and network solutions versus payments, et cetera, it was sort of a 500-plus basis point headwind through that period we're investing. And we've been steadily working our way back. So I think the gross margins will be a few hundred basis points higher when we are at breakeven on an adjusted EBITDA basis. I think as we talked about earlier, mix sort of matters in terms of how it improves between now and then. But just to remember one thing is that when the company -- before the company went through this investment cycle, so think like fiscal '20, I don't think you should expect the gross margin levels there because we just really weren't scaled for 3,000-plus clients that we have today but within a few hundred basis points of that.

Got it. That's very helpful. And then in the letter, you talked about PAM and also about rewarding providers. Can you just give us kind of an example to kind of bring that to light? What would be the example of rewarding a provider in that context?

Sure. Yes, sure. I mean I think the most straightforward one is the one in the letter, the KCC program, the Kidney Care Choices program. And so it is a performance measure. If you want to participate in that value-based care program with CMS, you have to measure PAM twice and you are measured on that, and your payments are based on how you perform against a bunch of quality measures of which PAM is one. If you care to, you can read some of the rule making around how the payments work from between CMS and the KCC program.

Got it. Thank you very much.

And at this time, I'd like to turn things back to Mr. Chaim Indig for any closing remarks.

I just want to thank everyone for joining the call and really excited about the new year. And I just want to thank our team for another great year, and we look forward to one ahead, talk to you all in a couple of months, right? All right.

Bye-bye.

And that does conclude today's conference. Again, thank you all for joining us. You may now disconnect.