Phreesia (NYSE:PHR) is a software company that specializes in “patient activation, giving providers, health plans, life sciences companies and other organizations tools to help patients take a more active role in their care.” PHR jumped 21.2% after the company reported its earnings for Q3 FY 2024. Given the stock’s post-earnings collapse in September, I reviewed the latest results for signs that the company is finally turning the corner.

Case for A Bottom

Apparently, PHR collapsed after Q2 FY2024 earnings because the company failed to raise guidance for the year. A filing for a mixed securities shelf offering of up to 1,088,936 shares the day after the 22.1% post-earnings collapse likely greased the skids for the stock. By the time the selling exhausted itself at the end of October, PHR had plunged to an all-time low. From there, the stock likely benefited from the V-recovery in stock market sentiment. Thus, the reaction to the latest earnings results seems to confirm a bottom for the stock.

From a fundamental perspective, a path to profitability supports the case for a bottom. Management made a tough decision to trade in revenue growth for profitability. They risked reneging on guidance for $500M revenue for some time in FY 2025 and pushed the promise to the following year. This decision seemed to pay-off in a high-rate environment where profitless companies are a lot less attractive than they were 2-3 years ago. In the shareholder letter, management explained that “we have made decisions to hold back on certain planned investments in our go to market and in the payer space because we do not believe the revenue from those investments will be realized soon enough to justify the returns in the current cost of capital environment.” During the Q&A session of the conference call, management further explained that “payers don’t move very fast”, so they decided not to “throw dollars at it” in order to return to profitability faster. Management further emphasized that the cost of capital drove its decision to cut back.

The cost-cutting allowed Phreesia to guide to adjusted EBITDA of $10M-$20M in FY 2025 which is a slight improvement from previous guidance of profitability “at some point during fiscal year 2025.”

The valuation also supports the case for a bottom and cautious buying. Even after earnings, PHR trades at a price/sales ratio that is still at levels last seen in 2019. PHR’s EV/sales ratio is just now picking itself off the floor and all-time lows.

From a technical perspective, PHR has carved out a convincing bottom after hitting an all-time low at the end of October. PHR broke out above both a pre-earnings consolidation range and above a downtrend defined by its 50-day moving average (DMA) (the red line below).

The combination of a likely bottom in price and valuation with a caveat of slower revenue growth earns PHR a “cautious” buy from me despite the hold quant rating. (The quant rating was quite “prescient” when it flipped from buy to hold in June!). “Cautious” means I am willing to buy down to 50DMA support (approximately), but not willing to pay a lot higher than current levels.

Growth Compromise

The upside in PHR is somewhat limited by a lack of revenue growth per AHSC (Average Healthcare Services Clients or the average number of clients that generate subscription and related services or payment processing revenue each month during the applicable period). The chart below shows some shifting in revenue mix, but the overall revenue rate peaked in 2022.

A recent acquisition of Connect OnCall, an after-hours call service focused on medical practices, “brought 100s of clients with very little revenue” and will even slightly reduce average revenue per client. Phreesia does not see Connect OnCall making a significant contribution to financial results in the near-term. Yet, management described Connect OnCall as “a beautiful product” that has generated excitement from customers. When asked during the conference call about cross-sell opportunities from the acquisition, management only referred to its 20-year history of successfully generating value from acquisitions.

Accordingly, Phreesia’s revenue growth has to come from adding more paying customers. Management acknowledged during the earnings conference call that “growth comes from growing the network.” Phreesia grew AHSCs 21% year-over-year (excluding Connect OnCall). Guidance for Q4 suggests a 22% year-over-year growth rate. However, guidance for lower revenue growth suggests that AHSC growth will also slow.

The company expects 26-27% revenue growth for 2024 but the lowered spending will drag revenue growth to around 20% in 2025. That growth further slows to around 17% for 2026. Thus, a bet on PHR is a bet that the worst news is behind the company, but the ultimate upside will be capped by this slower revenue growth despite the good news on profitability.

The company dangled out the prospect for beating its revenue guidance sometime in the future, another factor that may have helped the stock turn the corner: “…our available borrowing capacity under our credit facility with Capital One provides us with an additional source of capital to pursue future growth opportunities not incorporated into our fiscal 2025 revenue and Adjusted EBITDA outlook.” When asked by an analyst to explain the slower growth below the company’s 20% target range, management would only say that it is too early to dig into 2026. They again vaguely referenced investments in future: we “can only say we’ve put in investments to hit the 20% growth.”

Conclusion

Phreesia provides a valuable service to its clients by supporting the patient experience from scheduling appointments to paying for services to health education. The company also establishes goodwill in its market by supporting population health and public service announcements. Phreesia referenced the American Lung Association, the American Heart Association, the National Kidney Foundation, the Prevent Cancer Foundation, the Ad Council, and the Prevent Cancer Foundation®, the only U.S.-based nonprofit organization solely dedicated to cancer prevention and early detection. Thus, I feel okay about PHR as a long-term investment with a healthy dash of patience. Future earnings reports will need to show more promising growth levers to generate the significant upside that can come from igniting the momentum of a price recovery. PHR traded approximately four times higher than current levels at its post-IPO peak in 2021.

Be careful out there!