Participants

Balaji Gandhi; Chief Financial Officer; Phreesia Inc

Chaim Indig; Chief Executive Officer, Board Member; Phreesia Inc

Jailendra Singh; Analyst; Truist Securities

Sean Dodge; Analyst; RBC Capital Markets

Scott Schoenhaus; Analyst; KeyBanc Capital Markets

Jessica Tassan; Analyst; Piper Sandler

Matt Shea; Analyst; Needham

Jeff Garro; Analyst; Stephens

Daniel Grosslight; Analyst; Citi

Jared Haase; Analyst; William Blair

Will Jellison; Analyst; D.A. Davidson

Richard Close; Analyst; Canaccord Genuity

Presentation

Operator

Good evening, ladies and gentlemen, and welcome to the Phreesia Third Quarter Fiscal 2025 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 third quarter of fiscal 2025, which ended on October 31, 2024. 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 by tomorrow morning. 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, such as adjusted EBITDA and free cash flows 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 joining our fiscal third quarter earnings call. Our team continues to perform well as evidenced by our operating and financial results. We are on track to finish the year strong, and we believe that our solid foundation also sets us up for continued growth and profitability in fiscal 2026. Balaji will walk you through our third quarter results, our updated outlook for fiscal 2025 and our initial fiscal 2026 outlook.
Before handing it over to Balaji, I want to make 2 comments: First, I'd like to acknowledge the destructive hurricanes that impacted millions of people in the Southeastern United States, include many Phreesia employees, clients, colleagues and their respective friends and families. I'm proud of our team's preparation and response to the hurricanes and grateful to our team for rallying behind our clients over the past few months. Second, we are excited about the future here at Phreesia. Our network continues to grow, adoption of our current offering is increasing, and we are beginning to see promise of new solutions we are investing in.
Our product team continues to scale out our existing investments by expanding product functionalities into new integrations, increasing value of our existing clients and creating a more compelling offering for prospects. I will now hand it over to Balaji to provide some financial highlights.

Balaji Gandhi

Thank you, Chaim. Let me start with a couple of highlights from our stakeholder letter regarding the third quarter, and then I will dive into our updated outlook for fiscal year 2025, along with our initial outlook for fiscal year 2026. First, the third quarter. Revenue was $106.8 million, up 17% year-over-year. Adjusted EBITDA was $9.8 million, up $16.4 million year over year with an adjusted EBITDA margin of 9%.
The average health care services clients, or AHSCs, increased by 68 from the prior quarter. Total revenue per AHSC was $25,207 up 1% year over year, and up 3% over the previous quarter. Year-over-year comparisons in our third quarter are affected by the wind down of a clearinghouse client relationship in the first quarter of this year that we have previously discussed. That client wind-down reduced third quarter total revenue growth by 1% and total revenue per AHSC growth by 2%. All the revenue associated with this clearinghouse client was in the payment processing revenue line.
Moving on to cash flow and balance sheet highlights. In the fiscal third quarter, we completed our second consecutive positive operating cash flow and free cash flow quarter.
Operating cash flow was positive at $5.8 million, up $12.1 million year-over-year. Free cash flow was positive at $1.6 million, up $13.2 million year over year. We expect that the year-over-year improvement in free cash flow will fluctuate on a quarter-to-quarter basis based on specific timing of invoicing and payments, which you can see reflected in working capital along CapEx.
Our cash was $82 million on October 31. We have no borrowings on our $50 million credit facility.
Now moving on to our financial outlook.
Let's start with an update on our fiscal 2025 outlook. We're narrowing our revenue outlook for fiscal 2025 to a range of $418 million to $420 million from a previous range of $416 million to $426 million. We are raising and narrowing our adjusted EBITDA outlook for fiscal year 2025 to a range of $34 million to $36 million, from a previous range of $26 million to $31 million.
We continue to expect AHSCs to reach approximately 4,200 for the full fiscal year 2025 compared to the 3,601 we reported in fiscal year 2024. We also continue to expect total revenue per AHSC to increase in fiscal 2025 compared to the $98,944 we achieved in fiscal 2024.
Moving on to our initial financial outlook for fiscal 2026. We expect revenue to be in the range of $472 million to $482 million, which implies a 13% to 15% increase from our updated revenue outlook for fiscal 2025. We expect adjusted EBITDA to be in the range of $78 million to $88 million, which implies a 129% to 144% increase from our updated adjusted EBITDA outlook or fiscal 2025. The revenue range provided for fiscal 2026 assumes no additional revenue from potential future acquisitions completed between now and January 31, 2026.
We are also reiterating our previously shared outlook on AHSCs to reach approximately 4,500 in fiscal 2026 and total revenue per AHSC to increase in fiscal 2026 compared to fiscal 2025.
I would like to thank all of my colleagues at Phreesia for their contributions to another successful quarter and their commitment to our mission and values. Operator, I think we can now open up the lines for the Q&A session.

Question and Answer Session

Operator

(Operator Instructions) Jailendra Singh, Truist Securities.

Jailendra Singh

Congratulations on a strong quarter color and a very impressive margin guide for fiscal '26. Obviously, profitability and free cash flow are extremely important, we love that. But I'm just curious, how did you go about balancing between the goal of more than doubling our EBITDA margin in fiscal '26 and reinvesting some of the profitability back into the business to push top line growth higher?

Balaji Gandhi

Jailendra, thanks for the question. The last part of your question, could you just repeat, how did you arrive at that.

Jailendra Singh

So basically, I mean, your EBITDA margin outlook reflects like almost double the margin you're doing this year, which is pretty impressive. But just trying to understand how did you go about balancing between the goal of doubling your EBITDA margin and reinvesting some of the profitability back into the business to push top line higher? Just trying to understand that your thought process of revenue and profitability balancing for next year?

Balaji Gandhi

Sure. So I don't think anything around that topic is new. I think it's something we've been exercising for 2.5 years now. And I think the one thing I'd point out is expense discipline. I think we have an amazing culture at Phreesia, especially companies I've followed in my career and company have worked that. I think across the company, there is a pretty special culture about exercising expense discipline and thinking like owners and really being good stewards of capital.
So I think if you went back a couple of years, Jailendra, and looked at the expense lines back then, it's really more of that. And then when you have expense discipline and you find opportunities for efficiency, a bunch of it drops to the bottom line, but some of it can be reinvested in other areas that fuel future growth. So we are absolutely doing both, as you pointed out.

Operator

Sean Dodge, RBC Capital Markets.

Sean Dodge

Maybe Balaji, just going back to the comments around continuing to drive higher revenue per AHSC. If we think about sales and marketing expense, is there any update you can give us on are you continuing to change the mix in how those dollars are being spent? Are you continuing to allocate more toward cross-selling and network solutions and away from new clients? And then any quantification you can give around how much reallocating or shifting you've done there over the last year so how much of each of those buckets changed?

Balaji Gandhi

Yes, Sean, I think it sort of relates to Jailendra's question, it's continuous. And so we're always looking at the returns and the paybacks we're getting on how we're going to market in both the health care services part of the market and on the Life Sciences side. And I think -- I don't think it would be appropriate to use a percentage because frankly, it also changes from time to time, but it is continuous.
And I think if you look at the dollar amount, it's actually this quarter, it happened to be literally the same amount of money spent on sales and marketing in the fourth -- in the third quarter compared to the second quarter, and it's been running in that sort of range for a couple of years now. So I think that's how we should take away as the go-to-market is always reflecting trying to get the types of returns that I think our outlook communicates.

Operator

Scott Schoenhaus, KeyBanc Capital Markets.

Scott Schoenhaus

Balaji, I guess this question is for you. The recent -- I guess, not recently, the acquisitions you did this past year access these forums, ConnectOnCall. Are you fully monetizing them now? Can you give us an update there? And then maybe your strategy on how you think of subscription revenue per provider client in the coming quarters?

Balaji Gandhi

Yes. I mean, none of those acquisitions have had enough time where we could ever say we're fully monetizing them. And obviously, we did 3 last year. So there's a lot of activity going on in different parts of the organization in product management and the go-to-market. So still a lot of work to do, but I think we'd all say that we're pleased with the progress so far that we've had on those acquisitions.
On subscription, that's not something where we're going to talk specifically, Scott. I think what we've really tried to anchor everyone around is total revenue per client.
We have these different revenue streams and that number, I think you see in our letter, the commentary around -- we expect that number to be up this year versus last and next year versus this year. I think you can now even with our revenue outlook and our AHSC outlook, you can even back into how much we think at this point, the total revenue per client might go up. And I think that's probably the most constructive way to think about the business.

Operator

Jessica Tassan, Piper Sandler.

Jessica Tassan

Congrats on the quarter and the strong guide. I was hoping you could talk a little bit just about the network solutions selling season in fiscal '25. Maybe what drove some of the strength in fiscal 3Q? Any specific tailwinds related to Part D?
And then I'm hoping you can describe some of the feedback you've heard from your pharma customers regarding the appointment of RFK to lead HHS, how are you and your customers kind of thinking about and delineating between marketing and education because in our view, it's kind of an important distinction.

Balaji Gandhi

You got a lot in there, Jess. I think probably three or four questions. Why don't we do this? Why don't we start with just the selling season. And I think as we've talked about, there is a lot of activity this time of year.
At this point in the year, I think what we can tell you is we're probably slightly ahead of where we are versus last year in terms of how much visibility we have into the outlook we just shared for fiscal '26. So on that front, slightly better. And so I think our -- in terms of our outlook for the rest of this year, I think it's sort of pretty much as we expected. And then maybe repeat your second question?

Jessica Tassan

Yes. Just how are you thinking about the appointment of RFK to lead HHS? And are you and your pharma customers kind of thinking about delineating between pharma marketing and pharma education. Thanks, appreciate you addressing.

Balaji Gandhi

Sure. So first of all, I think we should probably be clear that it's a presumptive nominee that for HHS secretary and what we're aware of is a perspective that the presumptive nominee has, that reasonable television viewers may question whether certain television channels have a dependence on advertising and how they might influence their coverage of health issues.
And for Phreesia, just as a reminder, everybody Phreesia's platform of personalized health content is built on the principles of privacy and consent we need patients with relevant, personalized and accurate health information in key moments when they're in a health care state of mind, which we think improves outcomes and have -- certainly have some data to substantiate that. So that's really, I think, just how we would look at that topic at this point.

Operator

Ryan MacDonald, Needham.

Matt Shea

This is Matt Shea on for Ryan. Congrats on the nice quarter here. Wanted to double-click on MediFind. Good to hear about the traction with the number of manufacturing clients going live with campaign. Curious just about some of the mechanics around the campaigns.
How long are these campaigns typically? And any color on the ROI of these campaigns or how that's trended so far versus expectations? And then how is that kind of building a pipeline for incremental partners from here?

Balaji Gandhi

Yes. Matt, on the -- specifically on the MediFind campaigns, it's not something I think we have readily available now. I'm happy to follow up with you on that topic, but that's [ not ] something we have now.

Operator

Jeff Garro, Stephens.

Jeff Garro

I wanted to ask a little bit more on the FY26 outlook and on the profitability there. It seems to imply a very strong incremental EBITDA margins equivalent, if not better, to your gross margin percentage. So I wanted to ask if strong incremental gross margins on roughly flat operating expenses as the right framework think about the FY26 EBITDA outlook? Or if you've identized some incremental operating expense efficiencies.

Balaji Gandhi

Yeah. So I think, Jeff, what you're asking is how much of the EBITDA improvement is from gross margin versus below the gross margin line, maybe that.

Jeff Garro

Yes.

Balaji Gandhi

Okay. Okay. Yes. And I think we talked about the gross margin that we've been running at for several quarters now. We front-loaded and made significant investments in cost of revenue several years ago.
We continue to get very nice operating leverage out of that line, but we've also been running at the gross margin we've had for several quarters. So I think the takeaway should be certainly may be opportunity for a little bit there, but it's really the expense lines getting more operating leverage out of these benches below that. And really, growth is probably the biggest driver of revenue growth is the biggest driver of that EBITDA.

Operator

Daniel Grosslight, Citi.

Daniel Grosslight

Congrats on the strong quarter here. I wanted to just ask about the pipeline again. I guess more broadly speaking, in terms of total LTVF customers. I think last quarter, you mentioned that in the first half, total transaction value was about 20% larger than the first half of last fiscal year. I was hoping you can provide an update now that we're a little bit later in the selling season on how things are trending for the second half of the year.

Balaji Gandhi

Yes. Good question, Daniel. And we can say that it's been consistent. The total value, and just so we're clear from what we said last time and are repeating now, is it's the total dollar value associated with an average health care services client contract, and that means all 3 revenue lines. Those are trending around that same clip of about 20% bigger than at this time last year.

Operator

And your next question comes from the line of Jared Haase with William Blair.

Jared Haase

This is Jared on for Ryan Daniels. Balaji, maybe I just wanted to follow up from an earlier question on the Network Solutions side. And I think you mentioned having a little -- a little bit better visibility at this point with pharma customers on that network solutions business. Just wanted to clarify, I'm curious, is there anything in particular that's driving that? I assume that, that would mean sort of budgets are you're getting finalized a little bit earlier in the cycle.
I'm wondering, do you think that's, I guess, a macro trend across the board for pharma? Or do you think there's something unique to Phreesia where maybe the platform is, I guess, moving up in priority relative to other tactics.

Balaji Gandhi

Yes. And let me clarify one thing. What we meant was that we -- the visibility we have at this year -- at this time this year into the outlook -- revenue outlook we provided for next year. So we're comparing that to where we were a year ago. So it's a very Phreesia specific comment.
And Jared, I think I'd call out our team. I mean I think it's our product team, and it's just our Life Sciences team generally has driven that outcome. And so it's obviously grown quite a bit in that area. And I think we've got more product out, and we talked about some of that in the letter.

Operator

William Jellison, D.A. Davidson.

Will Jellison

I wanted to ask specifically about the subscription business and just get an update from you on what we're seeing with respect to important drivers of that line, like gross retention, price cross-sell and volume on a per AHSC basis?

Balaji Gandhi

Yes. And so first, let me clarify, it's just a revenue stream. So it's not a business for us. And I think a lot of the commentary we make about it is when we think about go-to-market and we think about clients and the right type of clients, it really does relate to all three revenue lines, William, and so everything we do is that sort of framework to it. So obviously, there are subscription metrics around this, but that's not really how we're trying to optimize the business, and that's not really how our products are designed.
So I don't think that would be helpful. But it's one of the revenue lines we have that contributes to that.

Operator

(Operator Instructions) Richard Close, Canaccord Genuity.

Richard Close

Yes. Congratulations. Maybe a follow-up on the fiscal '25 guidance. It looks the midpoint came down a little bit. And I think last quarter, you had mentioned the wider range was based on just work to be done to close the year out on network solutions.
So just maybe a little bit color on why the midpoint is moving down a little bit. I guess it's a little surprising since the EBITDA moved up so much and networks higher margins. So any help there would be great.

Balaji Gandhi

Yes. And Richard, I think in general, one thing we've tried to do is have a guidance philosophy that throughout the fiscal year, when we have more visibility we share it with you. I think we had lots of conversations with folks coming out of the second quarter in September.
And I think the expectations that people have are pretty aligned with this revised guidance. And I think we talked a little bit about the selling environment feeling slightly better in terms of the visibility we have on what we shared for next year. But I don't really think there's anything else to read into that. And I think the expectations are fairly light. Richard.

Operator

And that concludes our question-and-answer session. I will now turn the conference back over to Chaim Indig for closing remarks.

Chaim Indig

Just want to thank everyone for joining us for our 22nd earnings call. And I wish everyone a happy holidays, Merry Christmas, Happy New Year, and happy (inaudible). Bye.

Operator

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.