Pepsi Blockchain Trial a Success: Company Plans to Conduct More Soon

Pepsi blockchain trial

On Monday, May 6, media agency Mindshare said a Pepsi blockchain trial has been carried out and that it brought a 28% boost in supply chain efficiency. At the time of writing, PEP stock is down less than 1%.

Here’s what we know.

Pepsi Blockchain Trial: The Details

Today, Mindshare said the Pepsi blockchain trial was intended to see if blockchain could address “industry challenges” in programmatic advertising. The trial ran in March in the Asia Pacific region. Alongside Mindshare, the food and beverage company worked with MediaMath, a programmatic marketing technology firm, and  …

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LLY – Eli Lilly: Best-Now Near-Term Price Gains Pharmaceuticals Stock

Pgiam/iStock via Getty ImagesThe primary focus of this article is Ely Lilly and Company (NYSE:LLY).Investing Thesis Market-makers [MM] everyday are called on to balance buyers and sellers’ share volumes in transactions. For typical small, regularly appearing individual investor trades, no problem. Markets are automated to quickly adapt from electronic “offer books” with little to no help. But when systems are surprised by irregularly-appearing, huge volume transaction orders from “institutions” adjusting billion-$ portfolios, they choke, needing MM help to get in balance. Where sufficient protection from subsequent price change in a subject stock can be found at a reasonable cost, then MMs will borrow shares lent (usually by other institutions for a fee) to be delivered to the buy-side of the big trade order. The structure and prices of the derivative-securities’ contracts providing the underlier-stock price-change protection reveal the MM-community and institution expectations of the stock’s higher and lower price limits. Those limits define price risk and rewards seen in the next few months for the subject stock, making comparisons of investment prospects between similar alternatives in the next few months viable. This article compares the prospects for LLY stock with other major pharmaceutical stock alternative investments, and equity market indexes. Description of Subject Company “Eli Lilly and Company discovers, develops, and markets human pharmaceuticals worldwide. It offers Humalog, insulin lispro, and Humulin U-500 for diabetes and products for non-small cell lung cancer (NSCLC) and malignant pleural mesothelioma; for colorectal cancers, and various head and neck cancers; for metastatic NSCLC, medullary thyroid cancer, and thyroid cancer; and metastatic breast cancer, node positive, and early breast cancer. It offers medications for rheumatoid arthritis; for plaque psoriasis, psoriatic arthritis, ankylosing spondylitis, and non-radiographic axial spondylarthritis, for depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, fibromyalgia, and chronic musculoskeletal pain; for migraine prevention and episodic cluster headache; and for schizophrenia, bipolar I disorder, and bipolar maintenance. The company has collaborations with Incyte Corporation; Boehringer Ingelheim Pharmaceuticals, Inc.; AbCellera Biologics Inc.; Junshi Biosciences; Regor Therapeutics Group; Lycia Therapeutics, Inc.; Kumquat Biosciences Inc.; Entos Pharmaceuticals Inc.; and Foghorn Therapeutics Inc. Eli Lilly and Company was founded in 1876 and is headquartered in Indianapolis, Indiana.” Source: Yahoo Finance Yahoo Finance Reward~Risk Comparison with Investment Alternatives Figure 1 (used with permission)The tradeoffs here are between near-term upside price gains (green horizontal scale) seen worth protecting against by Market-makers with short positions in each of the stocks, and the prior actual price drawdowns experienced during holdings of those stocks (red vertical scale). Both scales are of percent change from zero to 25%. The intersection of those coordinates by the numbered positions is identified by the stock symbols in the blue field to the right. The dotted diagonal line marks the points of equal upside price change forecasts derived from Market-Maker [MM] hedging actions and the actual worst-case price drawdowns from positions that could have been taken following prior MM forecasts like today’s. Our principal interest is in LLY at location [3]. A “market index” norm of reward~risk tradeoffs is offered by SPDR S&P 500 index ETF at [12]. Those forecasts are implied by the self-protective behaviors of MMs who must usually put firm capital at temporary risk to balance buyer and seller interests in helping big-money portfolio managers make volume adjustments to multi-billion-dollar portfolios. The protective actions taken with real-money bets define daily the extent of likely expected price changes for thousands of stocks and ETFs. This map is a good starting point, but it can only cover some of the investment characteristics that often should influence an investor’s choice of where to put his/her capital to work. The table in Figure 2 covers the above considerations and several others. Comparing Alternative Investment Details Figure 2 (used with permission)Column headers for Figure 2 define elements for each row stock whose symbol appears at the left in column [A]. The elements are derived or calculated separately for each stock, based on the specifics of its situation and current-day MM price-range forecasts. Data in red numerals are negative, usually undesirable to “long” holding positions. Table cells with pink background “fills” signify conditions typically unacceptable to “buy” recommendations. Yellow fills are of data for the stock of principal interest and of all issues at the ranking column, [R]. Readers familiar with our analysis methods may wish to skip to the next section viewing price range forecast trends for LLY. Figure 2’s purpose is to attempt universally comparable answers, stock by stock, of a) How BIG the price gain payoff may be, b) how LIKELY the payoff will be a profitable experience, c) how SOON it may happen, and d) what price drawdown RISK may be encountered during its holding period. The price-range forecast limits of columns [B] and [C] get defined by MM hedging actions to protect firm capital required to be put at risk of price changes from volume trade orders placed by big-$ “institutional” clients. [E] measures potential upside risks for MM short positions created to fill such orders, and reward potentials for the buy-side positions so created. Prior forecasts like the present provide a history of relevant price draw-down risks for buyers. The most severe ones actually encountered are in [F], during holding periods in effort to reach [E] gains. Those are where buyers are most likely to accept losses. [H] tells what proportion of the [L] sample of prior like forecasts have earned gains by either having price reach its [B] target or be above its [D] entry cost at the end of a 3-month max-patience holding period limit. [ I ] gives the net gains-losses of those [L] experiences and [N] suggests how credible [E] may be compared to [ I ]. Further Reward~Risk tradeoffs involve using the [H] odds for gains with the 100 – H loss odds as weights for N-conditioned [E] and for [F], for a combined-return score [Q]. The typical position holding period [J] on [Q] provides a figure of merit [fom] ranking measure [R] useful in portfolio position preferencing. Figure 2 is row-ranked on [R] among candidate securities, with LLY in top rank. Along with the candidate-specific stocks these selection considerations are provided for the averages of some 3,000 stocks for which MM price-range forecasts are available today, and 20 of the best-ranked (by fom) of those forecasts, as well as the forecast for S&P500 Index ETF (NYSEARCA:SPY) as an equity market proxy. The present uncertainties in the equities market at large are seen in the [T] column of the SPY row, and in some stock rows with backgrounds shaded in pink where the Reward~Risk tradeoff of columns [E] and [F] are an unusually high level of price drawdown exposure risk. The high level of world uncertainty from Russia’s invasion of Ukraine and the recent Covid-19 pandemic may likely contribute to the uncertainties. Recent Trends in MM Price-Range Forecasts for LLY Figure 3 (used with permission)This picture is not a “technical chart” of past prices for LLY. Instead, it is the past 6 months of daily price range forecasts of market actions yet to come in the next few months. The only past information there is the closing stock price on the day of each forecast. That data splits the price range’s opposite forecasts into upside and downside prospects. Their trends over time provide additional insights into coming potentials, and helps keep perspective on what may be coming. The small picture at the bottom of Figure 3 is a frequency distribution of the Range Index’s appearance daily during the past 5 years of daily forecasts. The Range Index [RI] tells how much the downside of the forecast range occupies of that percentage of the entire range each day, and its frequency suggests what may seem “normal” for that stock, in the expectations of its evaluators’ eyes. Here the present level is near its least frequent, lowest-cost presence, encouraging the acceptance that we are looking at a realistic evaluation for HGV. With many past RIs above the present RI there is more room for an even more positive outlook. Conclusion Among these alternative investments explicitly compared Ely Lilly and Company appears to be a logical buy preference now for investors seeking near-term capital gain.

PHR – Phreesia, Inc. (PHR) Q4 2023 Earnings Call Transcript

Phreesia, Inc. (PHR) Q4 2023 Earnings Conference Call March 22, 2023 5:00 PM ETCorporate Participants Balaji Gandhi – Senior Vice President, Investor Relations Chaim Indig – Chief Executive Officer Conference Call Participants Anne Samuel – JPMorgan Jared Haase – William Blair Jessica Tassan – Piper Sandler Joe Vruwink – Baird Glen Santangelo – Jefferies Sean Dodge – RBC Capital Markets Daniel Grosslight – Citi Richard Close – Canaccord Genuity John Ransom – Raymond James Scott Schoenhaus – KeyBanc Joe Goodwin – JMP Securities Ryan MacDonald – Needham Jack Wallace – Guggenheim Robert Simmons – D.A. Davidson Operator 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. Balaji Gandhi 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 As a reminder, today’s call is being recorded, and a replay will be available on our Investor Relations website at 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 I will now turn the call over to our CEO, Chaim Indig. 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’s 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 clients was 3,140, up 36% year-over-year. We added 158 average health care services clients from the third quarter to the fourth quarter. Health care services revenue, which is the combination of subscription and related services, and payment processing revenue was up 31% year-over-year in the fourth quarter. Total revenue per average health care services client, a new key metric beginning this quarter, was $24,390, down 3% year-over-year and 1% sequentially. The decline was primarily driven by our average health care services client growth outpacing revenue growth in subscription and related services and payment processing. Subscription-related services revenue grew 35% year-over-year. Payment processing revenue grew 23% year-over-year and network solutions revenue was up 36% year-over-year. Moving on to our outlook for fiscal ’24, which ends January 31, 2024. We expect revenue for fiscal 2024 to be in a range of $353 million to $356 million, implying growth of 26% to 27% over our just reported fiscal 2023 revenue. We expect adjusted EBITDA to be in a range of negative $65 million to negative $60 million showing continued improvement on our path to profitability. We expect to see a sequential quarter increase in average health care services clients in the first quarter of fiscal 2024 that is similar with the 158 sequential increase we saw in the fourth quarter of fiscal 2023. We also expect subscription and related services revenue per average health care services client to remain roughly in line with our fiscal fourth quarter results. We continue to see solid operating leverage and we expect to return to adjusted EBITDA profitability in fiscal year 2025 while reaching $500 million in annualized revenue during fiscal 2025. We remain comfortable with our ability to finance our fiscal year 2025 targets with our cash position. We believe our capital allocation strategy sets us up to deliver on our financial targets for fiscal 2025 and beyond. Operator, we think we can now open it up to Q&A. Question-and-Answer Session Operator Thank you. [Operator Instructions]. We’ll hear first today from Anne Samuel with JPMorgan. Anne Samuel Ho. 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. Chaim Indig Hey, Annie, I’ll let Balaji say thank you first, I guess. Balaji Gandhi Thanks, Annie. Chaim Indig So I guess your question, if I heard it correctly, is why are we doing well on network solutions? Anne Samuel 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. Chaim Indig 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. Anne Samuel 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. Chaim Indig 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 doing it. Balaji Gandhi 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. Chaim Indig Everyone at Phreesia is pretty proud of the work that they’re doing. So it’s fine. Anne Samuel Great. Operator We’ll hear next today from Ryan Daniels with William Blair. Jared Haase Hey, 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? Chaim Indig 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 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. Jared Haase Yes, that’s helpful. And certainly nice to hear about the strong execution. I guess just as a follow-up — Chaim Indig It was pure execution. Just amazing for the whole team. Jared Haase 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. Balaji Gandhi 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 adds 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 adds 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. Jared Haase Okay. Great. Thanks for the color. Operator And from Piper Sandler, we’ll move next to Jessica Tassan. 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? Balaji Gandhi 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. Chaim Indig Yes. It’s pretty awesome, isn’t it? Jessica Tassan Yes, 120 million is quite a few. Chaim Indig I know. I’m proud of everyone. It’s a lot. Jessica Tassan 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. Chaim Indig 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. Jessica Tassan Awesome. Thank you, guys. Operator We’ll hear next from Joe Vruwink with Baird. Joe Vruwink 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. Balaji Gandhi 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 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. Chaim Indig 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. Joe Vruwink 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. Chaim Indig 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. Balaji Gandhi 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? Joe Vruwink Yes, it does. I’ll leave it there. Thank you. Operator And from Jefferies, we’ll move next to Glen Santangelo. 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? Chaim Indig 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? Balaji Gandhi 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. Glen Santangelo 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. Balaji Gandhi Yes. And I think I’ve heard Chaim say life isn’t linear. Chaim Indig It’s not. Balaji Gandhi 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. Glen Santangelo Okay. Thanks. Appreciate the comments. Operator And we’ll hear next from Sean Dodge with RBC Capital Markets. Sean Dodge 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. Balaji Gandhi 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? Sean Dodge That’s right, yes. Balaji Gandhi 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? Sean Dodge 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. Chaim Indig 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. Sean Dodge Okay. All right. Great. Thanks again. Operator We’ll move now to Daniel Grosslight with Citi. Daniel Grosslight 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? Balaji Gandhi So you’re looking at payment fee revenue divided by client, correct? Daniel Grosslight 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. Balaji Gandhi Yes. So again, just so we’re clear, you’re comparing about $262,000 compared to $298,000. Is that right? Daniel Grosslight Yes, that’s right. Balaji Gandhi 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? Chaim Indig 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. Balaji Gandhi 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. Daniel Grosslight 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. Balaji Gandhi Yes. Daniel Grosslight 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? Chaim Indig 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. Balaji Gandhi Yes. Daniel, are you trying to just look for like the trend on spend? Daniel Grosslight Yes. Exactly. Balaji Gandhi 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. Daniel Grosslight Yes. Make sense. Thanks guys. Operator We’ll hear now from Stephanie Davis with SVB. Stephanie Davis 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? Balaji Gandhi 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. Stephanie Davis 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? Chaim Indig 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. Balaji Gandhi 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. Chaim Indig There’s a lot of traffic there. Stephanie Davis Hope we see a lot of change there. Thanks, guys. Operator And from Canaccord Genuity, we’ll hear next from Richard Close. 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. Chaim Indig 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. Balaji Gandhi 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. Chaim Indig So the answer is more. Balaji Gandhi More. Richard Close 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. Chaim Indig 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. Richard Close All right. Thanks. Operator We’ll hear now from John Ransom with Raymond James. John Ransom 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. Chaim Indig 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? Balaji Gandhi 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. Chaim Indig 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. John Ransom 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? Chaim Indig 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. John Ransom 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 — Chaim Indig No. Balaji’s been training me. I’m not allowed to say anything. Balaji Gandhi 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. Chaim Indig 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. John Ransom 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. Chaim Indig 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. John Ransom Great. Thanks so much. Operator We’ll hear now from Scott Schoenhaus with KeyBanc. Scott Schoenhaus 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? Balaji Gandhi 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. Scott Schoenhaus 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? Balaji Gandhi 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. Scott Schoenhaus Perfect. Thank you. Operator From JMP Securities, we’ll hear next from Joe Goodwin. 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? Balaji Gandhi 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. Joe Goodwin 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? Balaji Gandhi 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. Joe Goodwin Got it. Okay. Thank you. Congrats again. Operator We’ll move now to Ryan MacDonald with Needham. Ryan MacDonald 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. Chaim Indig 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. Balaji Gandhi 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. Ryan MacDonald 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. Balaji Gandhi 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. Ryan MacDonald Thanks again. Operator And from Guggenheim, we’ll move to Jack Wallace. 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. Chaim Indig I don’t know if I understand it. What was the question? Balaji Gandhi Yes. Sorry, Jack. Chaim Indig It’s like a really good statement. Like I’m sort of lost with the question. Jack Wallace 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. Chaim Indig 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. Jack Wallace 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. Chaim Indig 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. Jack Wallace Yes, that’s really helpful, about the retention comment. I appreciate it. Thanks again. And congrats on a great quarter and a great outlook. Operator Our next question will be from Robert Simmons with D.A. Davidson. Robert Simmons 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? Balaji Gandhi 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. Robert Simmons 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? Balaji Gandhi 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. Robert Simmons Got it. Thank you very much. Operator And at this time, I’d like to turn things back to Mr. Chaim Indig for any closing remarks. Chaim Indig 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. Balaji Gandhi Bye-bye. Operator And that does conclude today’s conference. Again, thank you all for joining us. You may now disconnect.

KBH – KB Home (KBH) Q1 2023 Earnings Call Transcript

KB Home (NYSE:KBH) Q1 2023 Earnings Conference Call March 22, 2023 5:00 PM ETCompany Participants Jill Peters – Senior Vice President of Investor Relations Jeffrey Mezger – Chairman, President and Chief Executive Officer Robert McGibney – Executive Vice President and Chief Operating Officer Jeff Kaminski – Executive Vice President and Chief Financial Officer Conference Call Participants Stephen Kim – Evercore ISI Matthew Bouley – Barclays Bank PLC Michael Dahl – RBC Capital Markets John Lovallo – UBS Alan Ratner – Zelman & Associates LLC Rafe Jadrosich – Bank of America Merrill Lynch Paul Przybylski – Wolfe Research LLC Michael Rehaut – JPMorgan Chase & Co Buck Horne – Raymond James & Associates, Inc. Alex Barron – Housing Research Center Operator Good afternoon. My name is John, and I’ll be your conference operator today. I would like to welcome everyone to the KB Home 2023 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the Company’s opening remarks, we will open the lines for questions. Today’s conference call is being recorded and will be available for replay at the Company’s website, through April, 22. And now, I’d like to turn the call over to Jill Peters, Senior Vice President of Investor Relations. Thank you. Jill, you may begin. Jill Peters Thank you, John. Good afternoon, everyone, and thank you for joining us today to review our results for the first quarter of fiscal 2023. On the call, are Jeff Mezger, Chairman, President and Chief Executive Officer; Rob McGibney, Executive Vice President and Chief Operating Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer. During this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results and the Company does not undertake any obligation to update them. Due to various factors, including those detailed in today’s press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. In addition, a reconciliation of the non-GAAP measure of adjusted housing gross profit margin which excludes inventory related charges and any other non-GAAP measure referenced during today’s discussion to its most directly comparable GAAP measure can be found in today’s press release and/or on the Investor Relations page of our website at And with that, here is Jeff Mezger. Jeffrey Mezger Thank you, Jill. Good afternoon, everyone. We delivered solid financial results in the first quarter, which highlights the value of our built-to-order model. Working from a large backlog has provided stability in our deliveries at healthy margins, while we navigate turbulent selling conditions. We want to thank our entire team for their outstanding effort in serving our homebuyers and persevering through the challenges of a volatile housing market. As to the details of our results, we generated total revenues of $1.4 billion and diluted earnings per share of $1.45. We held our earnings essentially even with the prior year quarter due to a strong gross margin of 21.8%, excluding inventory-related charges and an improvement in our SG&A expense ratio, which offset a slightly lower level of deliveries. Relative to the guidance we provided in January, we came in at the high-end of our revenue range and exceeded our guidance on both operating and gross margins. Our performance together with our ongoing share repurchases, drove our book value per share higher to $44.80, up 27% year-over-year. Although KB Home is perceived to be a California builder, our business is becoming more diversified and we like the balance of our geographic footprint. Our Southeast region has grown into a larger business, approaching 20% of our revenues this year as compared to only 11% five years ago. This region has significantly improved its profitability and returns over this timeframe, and we look forward to its continued growth. During the quarter, we achieved our first deliveries in Charlotte, which is a dynamic and growing top 10 housing market. We are currently selling homes in two communities in Charlotte, with four additional communities scheduled to open this year. We expect Charlotte to further enhance the growth we are achieving in our Southeast region. We also produced our first deliveries in Boise during the quarter. Boise has been one of the fastest growing areas in the country, which created strong demand amid limited supply, and as a result, home prices appreciated rapidly. The market is now adjusting and we will remain selective with additional land investments until we see stability in pricing. Over time, we believe Boise will be a growth market for our company. The long-term outlook for the housing market remains favorable. As we have said in the past, the demographics of the millennials and Gen Zs are advantageous for our business as our primary buyer segments are first-time and first move-up buyers. While these demographics are a strong underpinning for demand, we are also still facing low levels of inventory, especially at our price points. Just yesterday, February resales were reported, representing the first sequential increase in activity in 13 months, leaving resale inventory levels at 2.6 months supply. At the same time, new home inventory continues to be limited. As to our orders, demand in the back half of our first quarter improved significantly with a sequential increase in net orders in both January and February. This was in line with the expectation we shared with you on our last earnings call. We generated net orders of 2,142 for the quarter, down 49% year-over-year as compared to our projected range of down between 50% and 60%. As I did on our last call, let me discuss gross orders and cancellation separately. We have continuously worked to balance pace and price to optimize each asset. With a sensitivity to our large backlog in many communities, we held off on adjusting pricing until more of that backlog was delivered. In the first quarter, we continued to convert our backlog to deliveries while now also reducing prices in many of our communities or offering other concessions. The timing for these actions was favorable given the seasonally stronger selling period. In addition, a more stable mortgage rate environment during January and February where rates had settled in to a low-to-mid 6% range was also beneficial in moving potential homebuyers off the sidelines. Buyers seem to be acknowledging that these higher rates are the new normal as they return to the market. Our gross orders improved significantly on a sequential basis with January’s orders increasing 64% relative to December and February increasing 58% versus January. For the quarter, our gross orders were 3,357, a year-over-year decline of 29%. On a per community basis, our gross absorption pace reached 6.6 orders per month in February above our long-term average for that month, contributing to an overall monthly pace of 4.5 gross orders per community for the quarter. We had a number of divisions that outperform this average, including Inland Empire, Sacramento, Las Vegas, Phoenix, and Orlando. For the quarter, our total cancellations moderated sequentially and generally homes and backlog are closing when they are completed. As we continue to deliver out the backlog of orders failed that were written last summer during a lower interest rate environment, our cancellation rate should decline further. In the early weeks of March, our net orders have remained strong. For the first two and a half weeks of our 2023 second quarter, our net orders were down 24% against a very strong comparable prior year period. Although we do not typically provide an intra-quarter update on this call or a projected range for net orders because we are only a few weeks into the quarter, we believe it is helpful for investors due to the volatility in market conditions. While interest rate and economic uncertainties pose a large risk to the near-term demand, we are encouraged with our recent order trends. Our strategic goal continues to be a monthly absorption pace of between four and five net orders per community, which we think we will achieve for the second quarter, resulting in a projected range of between three-thousand and thirty-seven hundred net orders. At the midpoint, this will represent a net order decline of 14% year-over-year. Our backlog at the end of the first quarter stood at over 7,000 homes valued at over $3.3 billion. This position will continue to provide consistency in deliveries and margins and supports our revenue projection for the year. During the quarter, we started 1,500 homes and ended the quarter with roughly 7,400 homes in production of which 77% are sold. We are ramping up our starts in the second quarter, as we continue to balance starts with sales, and as we look ahead to year-end deliveries. We are committed to our built-to-order model, which is defined by the choice that we offer to buyers, including the selection of the floor plan, lots, square footage and personalized finishes. An important compliment to this offering of choice is the availability of quick moving homes in each of our communities to serve the buyer who prioritizes a near-term move-in date over personalization. In this regard, we always have some inventory available in each community. During the quarter, approximately 37% of our deliveries were from inventory sales, whether a speculative start, a rewrite of a cancellation or a model sale. At the end of the quarter, we had roughly 640 finished and unsold homes available, the majority of which we expect to sell and deliver in our second quarter. We know buyers value our built-to-order approach as we achieve high customer satisfaction scores and typically one of the highest absorption rates per community in the industry. At the same time, there are some key financial benefits to this approach as we can capture incremental lot premiums and studio revenues. As a result, our gross margins are higher on our built-to-order sales. In the first quarter, we generated nearly $52,000 per delivery in lot premium and studio revenues consistent with our quarterly average in 2022, representing about 11% of our housing revenues. With that, let me pause for a moment and ask Rob to provide some color with respect to our sales approach as well as an operational update. Rob? Robert McGibney Thank you, Jeff. We are encouraged by the improvement in both demand and our sales results since early January. The initiatives we are utilizing are working and potential buyers that have moved to the sidelines are returning to the market. On our last earnings call, we shared with you two different sales strategies that we had implemented based primarily on how many homes we had in backlog in a community. For our high backlog communities with more homes already sold than remaining to sell, the emphasis was on our interest rate buy-down and lock programs to support sales as opposed to cutting price and putting our backlog at risk. For communities with either smaller backlogs or were only a small percentage of the backlog would be impacted, we adjusted prices to find the market. During the first quarter, we continue to utilize these strategies and reduce prices at about one half of our communities. At the same time, considering the results that previous pricing actions generated together with an improving demand environment, we increased prices in some of our other communities as they were selling at a faster than targeted pace. As Jeff spoke to earlier, buyers responded to our actions as we saw a sequential improvement in our orders in January and February. As to build times, we continue to make progress on the front-end of the construction cycle, although we, along with most other new homebuilders, again, experienced delays in the latter stages of construction due to the large volume of homes in construction that are nearing completion in our served markets. As to our deliveries in the quarter, build times were up seven days sequentially, but for new starts during the quarter, our build times improved by over one month between slab start and hanging drywall. We anticipate the improvement we are seeing in the front half of the construction schedule to flow through to our deliveries by the end of this year as we work to return to historical levels. Supply chain volatility continued to impact us in the later stages of construction. For example, appliance availability improved, but has not yet fully resolved. At the peak of the supply chain disruption, we had about 400 loaner appliances in place across our system due to back orders or delivery delays, and by the end of the first quarter, we had less than 20. In addition, ongoing municipal delays and the availability of transformers and electrical equipment contributed to delays in finalizing homes. We have many completed homes with loan approved buyers waiting on transformers and estimate that over a 100 additional homes would likely have closed in our first quarter and transformers been installed, a situation that was exacerbated by the hurricanes in Florida. While supply chain disruptions will likely continue at some level for the foreseeable future with ongoing shortages and flooring, heating and cooling materials and insulation, we are encouraged by the improvements we are seeing in many areas, which we believe will provide greater predictability for our business and for our customers. Another critical area of focus of our operations is driving direct cost reductions. As we analyze the data, we continue to recognize savings on new starts, which are down relative to their peak last August by about $19,000 per unit, helping to offset the price decreases we took. Although we are working to reduce trade labor costs, they are proving to be sticky, and the market improvement in early 2023 is resulting in increasing starts across the industry that may slow our progress, but we remain committed to driving additional savings as we progress through the year. While we negotiate lower costs on our existing product array, we continue to focus on offering smaller floor plans with simplified and value engineered elevations and interiors that live bigger for less, providing a more affordable product that meets the needs of our customers and leveraging our scale and consistency in starts. And with that, I will turn the call back over to Jeff. Jeff? Jeffrey Mezger Thanks, Rob. Buyers were about 80% of the loans funded during the first quarter financed their homes through our mortgage joint venture, KBHS Home Loans and their credit profile continues to be strong. About 66% of these customers qualified for a conventional mortgage and the vast majority of KBHS customers are using fixed rate products. The average cash down payment was 15%, which equates to over $74,000. At the income levels, the average household income of these buyers was over 130,000 and their FICO score was 733. While we target the median household income in our submarket, we continue to attract buyers above that income level with healthy credit who can qualify at higher mortgage rates and make a significant down payment. As to our land investment activity during the quarter, we maintain our conservative approach with investments in new land purchases of only $50 million, down 86% year-over-year. We expect to stay highly selective with respect to additional land investments until markets settle and there’s clarity in pricing to gain confidence in achieving our required returns. We continue to develop land that we already own, investing $317 million in development and related fees. As part of a regular review of our land portfolio, we have been active in renegotiating land contracts to reduce purchase prices and extend closing timelines. We are also canceling contracts that no longer meet our financial criteria, including contracts of purchase approximately 3,800 lots during the first quarter. Our lot position stands at 62,400 owned or controlled, down about 30% year-over-year, but still providing the lots we need to achieve our growth targets in 2024 and 2025. Approximately 46,000 of our lots are owned with roughly 18,000 finished. Of these finished lots, roughly 8,100 have a home under construction including models. We continue to balance our development phasing with our start pace to limit building up a large inventory of finish lots. In addition, we are generally developing lots on just-in-time basis, creating smaller phases and reducing our cash outlay. We like our current land and lot position and believe we can afford to be patient waiting until the time is right to be opportunistic with our capital. With a healthy level of cash generated from our operations, we increased the amount of cash that we returned to shareholders during the quarter with repurchases of $75 million or 2% of our shares outstanding. Over the past 24 months, we have now repurchased about 12% of our shares at an average price of $35.74, returning a total of over $515 million to shareholders, including our quarterly dividends. The repurchases are accretive to our earnings and book value per share and will support a higher return on equity in the future without compromising our growth. We also announced today that our Board of Directors authorized the repurchase of up to $500 million of our common stock. This new authorization provides us with the flexibility to continue to repurchase our shares on an opportunistic basis. With our stock currently trading at a significant discount to our book value, the buybacks provide an extremely attractive return on the investment. In closing, we are off to a solid start for the year, and although there are some key unknowns with respect to interest rates and the economy, we are confident in our ability to navigate market conditions. As a result, we’ve resumed providing guidance for the full-year highlighted by expected revenues of about $5.5 billion and a healthy gross margin of roughly 21%. We look forward to continuing to update you on the progress of our business as we move throughout the year. With that, I’ll turn the call over to Jeff for the financial review. Jeff? Jeff Kaminski Thank you, Jeff, and good afternoon, everyone. I will now cover highlights of our 2023 first quarter financial performance as well as provide our second quarter and full-year outlooks. Given the challenging housing market environment, we are pleased with our execution during the first quarter. With our revenues essentially even with the prior year period, our healthy gross profit margin and expense containment efforts produced over $125 million of net income, down only $9 million as compared to our strong result in the year earlier quarter. In addition, we are providing an expanded full-year outlook rather than the limited guidance we provided in January. In the first quarter, our housing revenues of $1.38 billion were basically the same as a year-ago, as a 3% decrease in the number of homes delivered was mostly offset by a 2% increase in the overall average selling price of those homes. From a regional perspective, an 18% decline in our West Coast region’s housing revenues was largely offset by double-digit growth in our other three regions with the Southeast region generating the largest increase of 23%. Looking ahead to the 2023 second quarter, we expect to continue to successfully navigate the improving albeit still challenging supply chain conditions and generate housing revenues in the range of $1.35 billion to $1.5 billion. For the full-year, we are narrowing a range of expected housing revenues to $5.2 billion to $5.9 billion. We believe we are well positioned to achieve this topline performance supported by our first quarter ending backlog value of approximately $3.3 billion, our higher community count, and our assumption of current housing market conditions continuing for the remainder of the year along with expected improvement in supply chain performance and build times. In the first quarter, our overall average selling price of homes delivered increased 2% year-over-year to approximately $495,000 as increases of 10% to 12% across three of our regions were mostly offset by a 5% decrease in our West Coast region due to a community mix shift in our Southern California business where several communities with $1 million plus selling prices delivered out in 2022. For the 2023 second quarter, we are projecting an average selling price of approximately $480,000 as we expect a mix shift composed of a lower proportion of deliveries in our higher priced West Coast region. We believe our overall average selling price for the full-year will be in a range of $480,000 to $490,000. Homebuilding operating income for the first quarter was $156.5 million compared to $169.6 million for the year earlier quarter. The current quarter included abandonment charges of $5.3 million versus $0.2 million a year-ago. Our homebuilding operating income margin decreased to 11.4% compared to 12.2% for the 2022 first quarter, reflecting a lower gross margin, partly offset by a slight improvement in the SG&A expense ratio. Excluding inventory-related charges, our operating margin for the current quarter of 11.7% decreased 50 basis points year-over-year. For the 2023 second quarter, we anticipate our homebuilding operating income margin, excluding the impact of any inventory-related charges, will be in the range of 9.5% to 10.5%. For the full-year, we expect this metric to be in a range of 10% to 11%. Our 2023 first quarter housing gross profit margin was 21.5% as compared to 22.4% in the year earlier quarter. Excluding inventory-related charges in both periods, our gross margin decreased by 60 basis points to 21.8%. The decline was mainly driven by slightly higher construction costs and an increase in homebuyer concessions. Assuming no inventory-related charges, we are forecasting a 2023 second quarter housing gross profit margin in a range of 20% to 21%. We anticipate quarterly gross margins will be relatively consistent sequentially for the last two quarters of the year, resulting in an expected full-year margin, excluding inventory-related charges in a range of 20.5% to 21.5%. Our selling, general and administrative expense ratio of 10.1% for the first quarter improved 10 basis points from a year-ago, reflecting slightly lower expenses on approximately the same topline revenue. We are forecasting our 2023 second quarter SG&A ratio to be in the range of 10.3% to 10.8% and expect our full-year ratio will be approximately 10% to 11%. Our income tax expense of $36.7 million for the first quarter represented an effective tax rate of approximately 23%, an improvement from roughly 25% in the year earlier quarter. We continue to expect our effective tax rate for both the 2023 second quarter and full-year to be approximately 24%. Overall, we generated net income of $125.5 million or $1.45 per diluted share for the first quarter compared to $134.3 million or $1.47 per diluted share for the prior year period. The stock repurchases over the past two years favorably impacted the first quarter earnings per share by approximately $0.15 or 10%. Turning now to community count. Our first quarter average of 251 was up 18% from the corresponding 2022 quarter. In the current quarter, we opened 24 communities and had fewer sellouts as compared to the prior year. We ended the quarter with 256 communities, up 23% from a year-ago with increases in all four regions. We believe our second quarter average community count will be up in the range of 15% to 20% year-over-year, and the full-year average will be up in the low double-digit percentage range. This larger portfolio of active selling communities will help offset the impact of weaker housing market conditions as compared to last year. Due to the soft market conditions in our healthy existing land pipeline, we continued to moderate our investments in land acquisitions and development during the first quarter with our total expenditures down 48% to $367 million. As Jeff mentioned, land acquisitions represented only $50 million of the total first quarter investment, an 86% decrease. At quarter-end, our total liquidity was approximately $1.24 billion, including over $983 million of available capacity under our unsecured revolving credit facility and $260 million of cash. During the quarter, we repurchased nearly 2 million shares of our common stock at an average price of $38.16, which is 15% below our quarter-end book value per share. With our Board’s recent $500 million repurchase authorization, we intend to continue to repurchase shares with the pace, volume and timing based on considerations of our cash flow, liquidity outlook, land investment opportunities and needs, the market price of our shares in the housing market and general economic environment. Our quarter-end stakeholders’ equity was $3.7 billion, and our book value per share was up 27% year-over-year to $44.80. In conclusion, we plan to continue to execute on our operational priorities throughout the remainder of the year, focusing on improving build times, reducing cost, driving net orders across our footprint and generating and deploying cash in line with our capital allocation strategy. As I mentioned earlier, we plan to continue our measured approach to share repurchases supported by our strong balance sheet and expected operating cash flow. We expect this repurchase strategy to continue to generate a tailwind to our financial results incrementally improving our EPS book value per share and returns. Driven by our anticipated operating performance in 2023, we expect further accretion in our book value per share as well as a low double-digit return on equity for the year as we continue to focus on stockholder value creation. We will now take your questions. John, please open the lines. Question-and-Answer Session Operator Thank you, sir. We will now be conducting a question-and-answer session. [Operator Instructions] And the first question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question. Stephen Kim Yes. Thanks a lot guys. Yes, really impressive job. Appreciate all of the guidance as well. So thanks for that. You gave a lot of really interesting stats. I’m sure my peers will clean up a lot of them. But the one that I wanted to focus in on was your commentary about built-to-order margins being better than the – I guess the QMIs or the spec margins or whatever. So – and then you also said that I think 37% of your deliveries were kind of previously started. So just with respect to those stats, could you give us a sense for how much higher your margins are on built-to-order? Has that relatively changed? And then the share that 37% of deliveries that are – were sort of not BTOs, what does that look like historically and what is assumed in your guide? Jeffrey Mezger Yes. A lot Stephen, we’ll try. As I shared in the comments, we did deliver more inventory in the quarter, and in part it was due to the cancellation spike we experienced in Q3, Q4, and early Q1. So we had to cover those. We always have strategic specs we put in the ground, whether a multi-family product or the odd lot on a cul-de-sac we want to build out or if it’s a strong performing community, we’ll throw more starts in the ground. So we always have some strategic specs. And then we have models which really don’t talk about too much, but we view them as an inventory sale as well. Historically that’s higher than our average. We like to maintain on the starts basis, 80% sold, 20% unsold. That’s what we have been targeting over time. But as you think about that, you start 80% and then about 10% of a [can] over the life of the construction cycle, you’re really 70-30 is our typical ratio over time. So if you break down that way not too far off from historical, but up a little bit and we’re glad that we were able to move them and move on to Q2. Our built-to-order margins right now are typically 2 to 3 percentage points higher, depends on the city and there’s always a story on the community, but typically 2 to 3 percentage points higher. I touched on lot premiums and studio revenue. We have an inventory home, it’s a lot harder to get a lot premium because that’s the first thing that gets discounted on the selling floor if someone is making an offer on a spec. So we do better on lot premiums on our built-to-order. But also we don’t have to incentivize the sale as much. And what we like to say is we’re – the buyers creating their own value versus us forcing a value through discounts and incentives. So typically there’s a little bit more incentives that convince our customer to go purchase a home that’s already built. I know there’s a lot of noise on this metric in the industry and everybody probably measures it a little different, but if you’re predominantly a spec builder, I can see where your margins would be higher on a spec that’s completed because why would somebody buy a spec at frame stage if their choice is a completed home. But in our case, our buyer is still tilt to the preference of personalization. So in the quarter, it’s a blended margin that we reported 21.8, our built-to-order was a little higher, inventory little lower, and it came out to the average. And with the selling mix that we’re looking at going forward over the balance of the year, it all ends up summarized in the guidance that Jeff gave for the year. So I think I covered all questions. I don’t know if there’s anything I missed. Stephen Kim No, that was really great and comprehensive, so I appreciate that. Next question I had related to your outlook. Jeff, you gave this as a lot of detail and what it looks like is you’re certainly expecting to see some strong closing, some strong orders that you’ve already experienced thus far in March. And so your volumes are going to be pretty solid here in 2Q, which leaves for the back half of the year. It does seem that you’re being pretty conservative here with your closings outlook if I assume that your orders per community remain in anywhere close to that four to five range, let’s say in 3Q, it would look to me like I should be able to exceed your closings guide. So I’m curious, is there something that I should be thinking about with respect to maybe your backlog turnover ratio or something in the third or fourth quarter? Is that going to sort of stay stubbornly kind of low? Because I would assume that that would move back kind of to the ranges that you had maybe pre-COVID or approaching that by the fourth quarter just because of some of the things that Rob McGibney was talking about with cycle times improving and things of that nature. So can you help me understand why the closing guidance seems kind of low there for the back half of the year? Jeffrey Mezger Yes. For starter, Steve, we still have an extended build time. So we have divisions that are pretty much started out for this year by the end of this month. So if we continue to see strong sales and we convert to strong starts in Q3, it’ll be more of an early 2024 benefit than it will 2023. And I think what I was trying to message, if you think about it, our business model went through a whipsaw where interest rates spike. We had buyers that hadn’t locked their loan, [can rates] goes way up. We’re still protecting our backlog, so we’re not doing things to get gross sales, we’re getting hammered with cans and now we’re coming out of that. Our can rate, we expect will continue to moderate back to historical levels. At the same time, we’ve taken steps to get our gross orders up. So the guide is reasonable for the year. We are projecting a little higher backlog conversion over the balance of the year, but if this – the current market conditions hold, it sets up a very good start to 2024. Operator And the next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question. Matthew Bouley Hey. Good afternoon, everyone. Thanks for taking the questions. So just a question on the margin outlook and the sort of guidance you gave around kind of relatively consistent margins trending into the back half of the year. Just looking at the order ASP during the quarter, recognizing there was some mix in that. I think it was down. It could be wrong, maybe $50,000 to $60,000 sequentially. I think you also mentioned your starting homes was about $19,000 of cost reduction in there. So maybe part of the answer is going to be around mix, but just curious around, what else are you seeing and what kind of gives you confidence to say that that margin in the back half will be relatively flat given these price reductions that are occurring? Thank you. Jeff Kaminski Sure. Matt, I can respond to that. So as always, we have the advantage of looking at our backlog as we forecast margins and we’re anticipating that backlog right now delivers out over the next three quarters we know specifically in that backlog, the pricing, the cost, et cetera. So I have a pretty good hand on the margin included in there. I would caution a little bit on the net order average selling price. There is a bit of noise in there, not only from the point of your community mix and different plans obviously that are in the back or in those numbers, but there’s backlog adjustments and noise associated with those backlog adjustments that get flushed through the average selling price on net orders every quarter. So those are the couple of items why that may not [quite box] with some of your numbers. But essentially at the end of the day as we look at it, we have obviously some pricing pressure in the market that we’re forecasting. Some is already embedded in our backlog and then some of the cost savings that Rob pointed out, but many of those have hit fourth quarter early next year, and we have pretty good beat on the margins excluding any unforeseen events over the next few months. Matthew Bouley Got it. Okay. Super helpful. Thanks for that, Jeff. The second one, just kind of higher level, recognizing the stress in the banking environments and regional banks is evolving quickly here. I’m just curious of what you’re seeing kind of on the margin in these past few weeks. Any kind of thoughts or what you’re hearing around lending standards as well as just kind of impacts within your own mortgage business. How are you thinking about how this kind of rapidly evolving in environment on regional banking may impact your business? Thank you. Jeffrey Mezger Well, Matt, we’re watchful like everyone on this call to see how this plays out. We’re not hearing anything right now on tighter lending standards. We’re not hearing buyers say this banking crisis is really influencing my confidence. It’s pretty quiet, but it’s a headline that you’re – you have to be watchful of and that if the regional banks got really stressed, it has to impact the economies where those banks are located. So we’re watchful of it, but to date, there’s no change in underwriting, liquidity is out there. Certainly the big banks we do business with are all open and doing their things. So far it’s been good. If anything it helps drop mortgage rates down and it helps the consumer, but we have to wait and see how it plays out. Operator And the next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question. Michael Dahl Hi. Thanks for taking my questions. I guess Jeff, just to follow-up on that last comment, what are the things that you’re most watchful for? What are the things that you view as the most leading indicators, whether it’s feedback from your customers or things that you’re seeing in the market from various lenders in terms of kind of identifying if or when or where you would start to see some of these stresses play out and start to impact your business? Jeff Kaminski Yes. I think if you’re asking from the point of view of the consumer, obviously the headline is the mortgage rate and as Jeff said, some of the recent actions [indiscernible] to moderate that a little bit. I think that’s the number one concern on the consumer’s mind. Lending standards as Jeff also mentioned, really haven’t changed it as far as we could see up to this point. So those would be the two watchouts. Spring so far for us is has been pretty healthy and we’ve liked what we’ve seen on the sales side and consumer behavior and we hope that continues and this whole banking situation sells and we kind of move on. We are watchable of it and obviously concerned as everyone is on where this could lead, but so far so good as far as our business goes. Michael Dahl Got it. Okay. And my second question just – and it’s – was somewhat related, but just thinking about 2Q and the expectation on orders. I think last quarter was understandable you had kind of five weeks under your belt for the quarter. And so you had a good taste of where things were and looking at the comps and what you were trying to do on the sales side where you thought you could drive pace, you’re pretty early in the quarter and there is a lot of uncertainty out there that’s pretty quickly emerged. So in terms of the level of confidence getting to the four to five pace for the full quarter, just wanted to probe a little bit more on what’s driving it. Is it – you think you’ve kind of found your stride on kind of price incentive strategy where if the market dips, you can plug that or is it just a function of what you’ve seen in these past couple of weeks? Just maybe elaborate a little bit more on what’s giving you the level of conviction to give that – to give that range for the second quarter? Jeffrey Mezger Sure. When I – I say we don’t like giving a guide in March because it’s only right now two and a half weeks and it’s more the comparables can be odd when you’re comparing two and a half weeks to two and a half weeks and may not represent what’s really going on in your business. But the [sound environment], there’s not like a switch that puts on March 1 and you’re now in a new sound environment. As we shared in our prepared comments, February was very good for us. In fact, even with this elevated can rate that’s moderating, we were at four and a half a month or a community in the month of February and March has continued at similar levels. But Rob, you want to give him some insight into our thinking on the sales projection? Robert McGibney Yes. I mean, I just echo what you had said. I mean, we’re confident in it because we’re seeing it today. Like Jeff said, we were hitting the four and a half a month in February to increase sequentially each month of Q1. And while it’s early in March, we’re seeing even more positive results on the sales side than what we saw in February. So barring any kind of unforeseen surprise on that, we don’t really see a reason that we won’t continue on the path that we’ve been on which – that’s what gave us the confidence to guide the way we did. Operator And our next question comes from the line of John Lovallo with UBS. Please proceed with your question. John Lovallo Hey guys. Thank you for taking my questions as well here. And maybe the first one just on the delivery ASP outlook of 480 to 490. It’s pretty far above what’s in the backlog ASP right now. And so I’m just curious, what’s driving this? I mean, is it just mix of what’s going to close? Or is there an expectation that the second quarter order ASP is going to be elevated and that’s going to flow through the back half? Just any help there would be appreciated. Jeff Kaminski Yes. John, as you know, we have a pretty wide range of ASPs between our West Coast business and the rest of the business. So at times those numbers get a little skewed just due to that mix between regions. We do schedule out our deliveries one-by-one, believe it or not, by community, by division as we forecast out second to fourth quarter. So a lot of it is just very specific to what homes are actually scheduled to close and in what quarters do we expect it. The differential between our go forward guidance and really the backlog, in my opinion isn’t really that significant. And we often deal with that, the backlog is up to eight or nine months now backlog, and we’re trying to forecast the first three months of those deliveries. So you often get a little bit of a disconnect, sometimes the next quarter’s a little bit higher than the backlog, sometimes it’s a little bit lower. The backlog also doesn’t include all of the potential revenue in that, any of the units in backlog that haven’t completely gone through the studio process are still under clubbed a little bit. So those are things that kind of bring it back more into line, but I think you’d find that we’re normally pretty accurate on the ASP go forward forecast and we’re pretty confident with this one, so don’t see a lot of variability there. John Lovallo Okay. That’s helpful. And then maybe just going back to the gross margins and sort of the sequential – flat sequential gross margins in the back half relative to the second quarter. What are you guys forecasting in terms of direct costs maybe in lumber? And then how does the sort of the ASP flow into this as well? Jeff Kaminski Right. So on the cost side, most of the costs are more or less baked. We have a – the vast majority of our starts for the whole year, as Jeff mentioned, it’ll be started by the end of this month so that we don’t see a lot of variability on the cost side. Anything that happens with lumber upward down would be more an issue a bit in the fourth quarter, but even more so of an issue in the first quarter or an opportunity, I should say, in the first quarter of next year. So there’s not a lot of variability on the cost side. The prices are more or less locked because they’re a large backlog. And our expectations around what we do on quick moving units, kind of reflect what’s already in the backlog and kind of going off pricing and costs off some of those units. So again, we have a lot more visibility this quarter than certainly than we had during our conference call earlier this year, which is one of the reasons why we wanted to go out for the full-year and provide some more details. And that’s kind of how it’s sorting out right now, fairly consistent margins and all the other guidance points that we’ve provided, we’re pretty confident. Operator And the next question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question. Alan Ratner Hey guys. Good afternoon. Thanks for all the color and guidance. Appreciated. First question, I’d love to drill down a little bit in terms of what you’re seeing in the land market. I know you walked away from some additional option deals this quarter, and if I look at your lot count, it’s down about 35% year-on-year. Obviously a lot of that’s coming through option walkaways. But what we’re hearing is the land market is remaining pretty sticky and with home prices having declined, pick your number 5%, 10%, 15% in some markets, we haven’t necessarily seen that come out of the land market yet is what builders are talking about. So on one hand, you can wait and wait for that capitulation or on the other hand, if you’re kind of optimistic that the market is found a solid footing here, it would seem like you kind of have to make a decision to go out and start buying land again. So I’m curious, a) what are you seeing in terms of that capitulation; and b) you pulled back quite a bit this quarter. How close are you to re-engaging in the land market again? Jeffrey Mezger Well, Alan, I wouldn’t say that we disengaged it all. We’re just being more selective and cautious and you’re right in what you hear, the land prices have been sticky out there and most of the landowners in the markets were in are pretty well healed, and they’re also waiting to see how the market plays out before they do anything. So we have not seen a lot of downward movement in land prices. And as I shared on my comments, we’re owned and controlled through 2024 and into 2025. So we don’t feel the pressure today that we have to do something, but we are encouraging the teams to go tie things up and tie it up with some money and work on entitlements and we’ll make a call on the closing when it comes time to commit to the deal or not. But we’re encouraging all our teams to go on a land search and go out there and fill in the queue. We’re just not writing big checks unless we’re confident that that asset is going to give us the returns. So I think you’ll see this healthy tension. There’s land available out there, we’re not worried that we won’t be able to support a growth trajectory beyond 2025, but we’re going to stay watchful for a while. Alan Ratner That’s helpful. I appreciate that. Second question, it seems like the incentive across the industry that’s been having the most traction are mortgage rate buy downs and it’s definitely something that the new home market has an advantage on over the resale market with kind of the in-house mortgage subs. Are you guys using rate buy downs a lot I mean, obviously with the build-to-order model? I would imagine it’s more costly for you to do a buy down out of three, four, five, six months into the future compared to spec builder that could have certainty of delivery date in the near-term. But how often are you using those rate buy downs? And if so kind of what are you buying the rate down to and what does the cost look like? Jeffrey Mezger Okay. Rob, you want to take that? Robert McGibney Yes, sure. So, I would say on the – we are using the mortgage programs, we’ve got both lock longer term loans or shorter term loans and in some cases buy the rates down. But I would say we’re seeing that become less as the market’s improving and we’ve adjusted pricing to get right in the communities where we don’t have a lot of backlog that gets impacted. So we are using it, it’s selective, it’s not every community, it’s not every customer, we use it where we need to drive the sales. And another benefit that we’re seeing is the cost of those programs is becoming less as well with rates coming down are typical and we offer a couple of different programs, but are typical is buying the rate down to five and seven, eight, and with rates coming down, the cost to do that has fallen along with the cost of the long-term lock. We can go out 270 days on a BTO sale to lock that. So the cost of both of those is coming down as well as the frequency of needing to use them with the market improvement and overall demand getting better here in the spring selling season. Operator And the next question comes from the line of Rafe Jadrosich with Bank of America. Please proceed with your question. Rafe Jadrosich Hi. Good afternoon. Thanks for taking my question. I just wanted to follow-up on the second half kind of gross margin commentary. Understand your point that the ASP is locked as a built-to-order builder and the houses are customized. But when you think about some of those incentives flowing through, like what’s the outlook for incentives in the second half of this year versus the first half? And then what are some of like the offsets that you would expect that to get to the flattish sequential gross margins? Jeff Kaminski Yes. I can take that. So on the incentive side, the assumptions on incentives are really baked into what’s already been offered and in some cases what the division needs, or fields they need on a community-by-community basis maybe to incent some of the buyers to actually close on the home. So there is some conservatism baked into the cost side on the incentives whereby, we’ve included a bit more than actually is contracted at this point in those out quarters. So I feel like there’s enough cushion in there to cover what we’ll need to do to get the closings. On the cost side of things, like we’ve mentioned a couple times, once the home starts, the cost of the home are pretty well baked in. So there’s not a lot of offset there coming from any surprises. Most of it’s just basically the cushion that we have involved there. The other side of this is the percentage that we have locked on current mortgages. It’s a pretty high percent right now with our mortgage company. So we have a higher confidence in closings that’ll occur, so with that less variability on gross margin out in the back half of the year. The final point I guess I’d make is, as we progressed through last year, we did see some costs coming down and as we started those homes, those homes on the lower cost basis, will be hitting in the second, third quarters, fourth quarters a little bit up in here because of some of the starts, we haven’t quite finalized for the fourth quarter, but for the most part we’re seeing some of the cost savings already flowing through, but the bulk of what Rob talked about earlier will actually flow through in the early part of next year. Rafe Jadrosich That’s really helpful. And just to clarify, going forward, are you assuming incentives are higher in your deliveries, like the second, third and fourth quarter than what was in the first quarter? Just trying to understand the timing of like when you offered those and when they’ll actually start to flow through? Jeff Kaminski I don’t think they’re necessarily higher. One of the more difficult things we’ve had to contend with was the variability in the mortgage market and just buyer behavior. As rates were peaking and we were seeing a high level of cancellations coming through, we were having to get a little more aggressive on incentives to hold some of those buyers. I think the more stable we see rates and again with the high percentage of buyers that are currently locked on mortgage rate, we don’t think we’ll have to do quite as much. But despite that, we still have included a little bit of talk on the cost side just to compensate for whatever we do have to do in the back half. So that’s kind of our outlook right now. I mean we had a nice beat on the first quarter. We forecasted basically the same way for the rest of the year as we just did for the first quarter. And we’re hoping to be right within that range that we provided earlier for both the second quarter and the full-year. Operator And the next question comes from the line of Truman Patterson with Wolfe Research. Please proceed with your question. Paul Przybylski Thanks. It’s actually Paul Przybylski. I was wondering, as your construction times normalize, what level of incremental capital do you think you pull out of – or cash you can pull out of working capital and the timing of that flowing through the financials? Jeff Kaminski Yes. We think there’s a tremendous opportunity on that side, Paul. Thanks for pointing that out. It could be – not could be, it is in the hundreds of millions of dollar range. As far as timing goes, that’s a difficult thing right now because it’s really going to rely on supply chain conditions and actually achieving the build times that we’re targeting. It has proven to be sticky and a large issue for not only us, but for the whole industry for quite a few quarters now. But eventually, we’re going to get back to the type of performance that our company is used to in terms of both backlog conversion level with inventory out there and the dollars we have tied up in it, and we think it’s a tremendous cash flow opportunity for us on a go forward basis. Paul Przybylski Okay. And I think you mentioned you were developing smaller phases in your newer communities, I would assume you’re also doing that for phase extensions and legacy projects. How does that impact the cost structure and would that present any kind of margin headwind as we move into the 2024, since you’re not “getting that volume discount?” Jeffrey Mezger Incremental, it’s not significant. A lot of it you get right back in less carry, you’ll have to pay for another move-in for the heavy equipment, 30, 40, 50 grand, whatever. But the development subs are getting hungry too. So they’ve been accommodating us as we go to smaller phases because they want to keep moving. Operator And the next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question. Michael Rehaut Hey. Great. Thanks for fitting me in. Appreciate it. First question, I just wanted to circle back to the gross margin outlook and kind of understand, and I apologize if I’ve missed this. But what drove the upside relative to guidance if it was mixed or if it was better pricing and the backlog, et cetera, obviously different factors can influence that. And in the – expectation for 2Q to be reverting back to the 20 to 21, which I think was your original guidance for the first quarter. Just trying to understand also what are some of the drivers there from in terms of the current pricing environment and the cost backdrop? Jeff Kaminski Sure. Yes. Just starting with the quarter and the beat on the quarter, we talked about actually last quarter that we had a number of things that we thought was going to drive a sequential decrease. We included things such as the concessions and the mortgage rate buy downs, the construction costs that ticked up a little bit when those homes were started, mix shifts and a little bit lower operating leverage. On the operating leverage side, we actually held pretty steady there. Our sales on a year-over-year basis, or sorry, our revenues on a year-over-year basis were pretty close, so we didn’t lose anything there. So we picked up a bit there. Didn’t see as much on incentives as we had baked in. We have to basically estimate what the incentives would be on quick moving homes and we just didn’t see the need to do as much as what we had baked in there. Maybe the estimate was a little too conservative, I don’t know, but it was helpful. So most of the variability was really on mix, lower incentives and then doing a little bit better on the spec home deliveries than we had anticipated. Michael Rehaut Okay. Thanks for that. I guess second question, I think Steve Kim talked about, maybe looking at some of your guidance metrics as conservative, I think around closings. The question I had was, I think it was part of his comments, it talked about this four to five pace maybe continuing through the rest of the year. It does seem from your comments and others that seasonality and some more positive trends have come back throughout so far this year. But alongside that perhaps you’d also expect seasonality to kick in both ways. And historically you look at 3Q orders, they’re down anywhere from 20% to 30% sequentially on a sales pace basis versus 2Q and then 4Q historically they fall off another roughly 20%. So if seasonality is coming back to the business in a kind of a more normal quarter-to-quarter cadence, it does seem like you are obviously guiding to some return to normalcy. Is it fair to assume, and I’m not asking for quarterly guidance in 3Q, 4Q, but from a seasonality perspective, is that kind of the right way to think about it if we’re kind of returning to plus or minus, a normal type of cadence throughout the year? Jeffrey Mezger Certainly, my expectation, Mike, that we’re normalizing on the cadence. Our move from Q2 to 3Q and Q3 to 4Q is not as great as you just articulated. Our Q3 is typically down about 10% from Q2 and then Q4 is down 5% to 10% could be in parts because of the markets we’re in are a little warmer climate and you get a lot of snow birds that come down in the winter and things like that. But in a normal year, we’ll run 4, 5.5 in the second quarter and then it’ll come down a little in the third quarter and come down a little in the fourth quarter and then over the year, you’ll average between 4 and 5. So based on what we’re seeing right now in a consumer behavior and we qualified it because there’s a lot of unknowns out there, but based on what we’re seeing, we think the markets are starting to normalize. Operator And the next question comes from the line of Buck Horne with Raymond James. Please proceed with your question. Buck Horne Hey. Thanks for the time. I appreciate it. Just stepping back from a higher level question for you. Have you guys started to see any shift in consumer preferences? Just thinking through like work from home trends and as more companies are trying to mandate some sort of return to office, as the year has progressed, I’m just wondering if you’ve seen any changes in terms of like community locations or the floor plans that your customers are choosing. Has there been any shift noticeable in your business in terms of shifting work from home preferences or I guess conversely, is there still a strong driver in terms of the need for home office space in the business? Jeffrey Mezger I don’t know that we’ve seen any shift yet. But I do know that buyers are putting offices in there – they’ll take the fourth or fifth bedroom and convert it to a home office of some kind. So as we looked at it back when that was a big topic, the work from home, most people were still buying houses that were within 30 to 45 minutes of their employer. So their view was, we can own a home here, drive a little further to work, but we’re only having to go in the office a couple days. It’s not like they would move to Kansas City while working in San Jose, they’d move to Stockton while working in San Jose. So I don’t know, we’ve seen a big geographic shift and we’re certainly not seeing a shift right now in the size of the home or what they’re spending in our studios. It’s been pretty static for the last 18 months. Buck Horne All right. That’s real helpful. I appreciate that. And then my last one, just in terms of the cancellations and maybe the [mechanics] that you guys have absorbed so many cancellations over the past couple quarters. Are you guys keeping most of the customer’s deposits on those cancellations? Or are you refunding some of that? Or what’s the amount of – kind of the average amount of non-refundable/hard money that the customer has when they sign a new contract with you guys? Jeffrey Mezger Yes. On average around the system buckets about 2% and if they cancel and their – they had a loan approved and [final to start], we’ll retain on the deposit. Operator And the next question comes from the line of Alex Barron with Housing Research Center. Please proceed with your question. Alex Barron Yes. Thanks guys. Yes, I wanted to ask a little bit about the two markets, I guess where the orders still haven’t come back fully. I guess that was the Central and the Florida market or Southeast markets. Was that still somewhat intentional on your part, and not fully – still focusing on delivering the higher margin backlog before incentivizing sales? Or are those things largely behind us and then you expect orders to get back to normal next quarter? Jeffrey Mezger Rob, do you want to take that? Robert McGibney Yes. So I would say that it’s – part of what you mentioned is, is a driver, we talked on our last quarter about our strategy with the backlog and the higher backlog communities. In the Central region, they have really high backlogs. So there have been communities where we didn’t make the early price adjustments there, which were just starting to now or did during the quarter, and we’re seeing those sales paces pick up. As far as the Southeast, they performed really well on the gross sales side, especially as we got towards the end of the quarter. So as some of the older sales that we have in backlog may have purchased when rates were lower, as those work through the system here over the next couple of months, I expect that the Southeast is going to bounce back pretty quickly. Alex Barron Got it. My second question had to do more with the balance sheet. So I believe you guys have some debt coming due next quarter about $350 million due in May. Just curious if the plan there is to pay those off with cash or to potentially raise debt and take advantage and maybe do more of the share buyback given the big discount or just thoughts around those two topics? Jeff Kaminski Right. Alex, we refi that debt actually last year. So our next maturity is actually our term loan, and it’s not until 2026. So we have no near-term debt maturities at this point. Operator Thank you. At this time, we have reached the end of the question-and-answer session. And ladies and gentlemen, that does conclude today’s teleconference. Thank you for your participation. You may now disconnect your lines.

AWH – Aspira Women’s Health Inc. (AWH) Q4 2022 Earnings Call Transcript

Aspira Women’s Health Inc. (NASDAQ:AWH) Q4 2022 Earnings Conference Call March 22, 2023 4:30 PM ETCompany Participants Nicole Sandford – President & Chief Executive Officer Ryan Phan – Chief Scientific Officer & Chief Operating Officer Marlene McLennan – Chief Financial Officer Conference Call Participants Ross Osborn – Cantor Fitzgerald Griffin Soriano – William Blair Operator Good morning ladies and gentlemen and welcome to Aspira Women’s Health, Inc. Fourth Quarter and Year-End 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Leading the call today are Nicole Sandford, President and Chief Executive Officer; Marlene McLennan, Interim Chief Financial Officer; and Dr. Ryan Phan, Chief Scientific and Operating Officer. Before we begin, I would like to remind everyone that forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995, will be made during this call, including statements relating to Aspira’s expected future performance, future business prospects and future events or plans. Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, actual outcomes and results are subjected to risks and uncertainties and could differ materially from those anticipated due to the impact of many factors beyond the company’s control. The company assumes no obligation to update or supplement any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Participants are directed to the cautionary notes set forth in today’s press release, as well as the risk factors set forth in Aspira’s most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC for a description of factors that could actual — that could cause actual results to differ materially from those anticipated in the forward-looking statements. At this time, I’d like to turn the call over to Nicole Sandford, President and Chief Executive Officer. Please go ahead, ma’am. Nicole Sandford Thank you, operator and good afternoon, everyone. It is my pleasure to welcome you to our 2022 year-end conference call. Today, we plan to share with you highlights from a year of company-wide necessary change for Aspira Women’s Health. Since stepping into the CEO role last year, I have said that achievement of our mission rested on focused execution in 3 areas: growth, innovation and operational excellence. I made a commitment to be transparent with our stakeholders and to earn your trust by clearly stating our intentions and then following through. I’ve also given my word that I would utilize our resources, your capital and our time, as effectively and efficiently as possible in pursuit of the long-term success of the company. While it has not been an easy year, I am proud of our progress and believe we have emerged stronger than ever before. I hope you will feel the same before this call is over. Let me pause and introduce Dr. Ryan Phan, our Chief Scientific and Operating Officer; and Marlene McLennan, our Interim Chief Financial Officer. You will hear from each of them shortly with an update on our product portfolio and financial performance, respectively, before we open the call for questions. Let me start with an overview of our commercial progress in 2022. We grew product revenue last year to $8.2 million, a 20% increase over 2021. At the same time, we increased gross profit 8 percentage points and reduced sales and marketing expense by 13% on a full year basis. Test volumes increased to 21,423, a 23% increase, continuing the sequential and year-over-year growth trends that we have sustained for every quarter since I became CEO. OvaSuite test volumes have continued their upward momentum in the first quarter of 2023. Despite major weather events that caused weeks of delivery disruptions around the country, we saw a dramatic daily volume growth in both January and February. In 2022, we rebranded our ovarian cancer portfolio under the name OvaSuite. Our Ova1Plus test which has now been ordered more than 60,000 times, continues to displace inferior but deeply entrenched single biomarker test. With the successful launch of OvaWatch in December 2022, we now offer a noninvasive risk assessment test for all of the more than 1 million women a year that develop adnexal mass. Our OvaSuite tests have the potential to replace fear with data when women and their healthcare providers make decisions about how, when or even if they remove a women’s reproductive organs. With one of the most extensive ovarian cancer biobanks and decades of bioinformatics expertise, we believe there is no one better positioned to become the market leader in the development of the most advanced diagnostic tools for this devastating and deadly disease. Before moving on, I want to remind you that we face no competition in the market for OvaWatch. It is a completely new risk assessment blood test with a clinically validated 99% negative predictive value that can significantly reduce the number of indeterminate masses and provides a previously unattainable level of confidence in a physician’s decision about the care of their patients. We learned a great deal about our OvaSuite sales and marketing strategies in the last year. In addition to completely rebooting our marketing program, we reallocated funds to high-impact provider conferences, streamlined our KOL program and reworked our incentive plans to drive behaviors that results in provider adoption. In 2023, we will engage in more market focused, high-impact media, starting with an interview on lifetime channels morning show, The Balancing Act in April. Last year, we announced an Ova1Plus co-marketing and distribution agreement with BioReference. Following an October launch, momentum among the joint sales teams has been lower than anticipated. However, we believe our partnership continues to be an important part of the women’s healthcare program. We are working together to implement more effective sales incentives as part of a relaunch between the commercial team. We intend to make the most of this experience and the lessons learned, as we look towards the development of commercial partnerships for our other products, including OvaWatch. On the reimbursement front, we are actively pursuing payer adoption and fair pricing for the OvaSuite test portfolio, hitting a number of important milestones in 2022. Starting with OvaWatch, the American Medical Association moved quickly to assign OvaWatch a unique PLA code which will facilitate efficient coverage and reimbursement when it goes into effect in April of 2023. We also secured OvaWatch coverage from an industry-leading global payer just 2 months after our official launch and only weeks after the publication of our clinical validation study. Meanwhile, we continue to press hold out commercial payers on Ova1Plus coverage, adding Sentinel [ph] of Oklahoma and Molina of Ohio coverage in the first quarter of 2023. The OVA1 clinical utility study which experienced significant COVID delays, has been completed and a manuscript has been submitted for publication. On the Medicare front, we joined with ovarian cancer advocacy groups to educate Congress on the failures of single biomarker tests and the need for better diagnostic tools to save women’s lives. Our combined efforts resulted in the call for national Medicare coverage for multi-marker ovarian cancer test the Omnibus spending bill passed late last year. While we continue to pursue the crosswalk of OvaWatch coverage via our Novitas OVA1 LCD, the implementation of this provision by CMS in 2023 would potentially provide a national coverage determination for all of our ovarian cancer testing portfolio. On the Medicaid front, we became credentialed in a number of additional states in 2022 and are actively engaged with Medicaid decision-makers since launching OvaWatch in December. Turning to our operational excellence initiatives, we have aggressively reduced back office and discretionary spending and reallocated funds to activities that drive our strategic goals. We are a smaller, more nimble organization today compared to a year ago. We eliminated nearly 30% of the workforce, creating significant payroll and payroll-related savings that we will see in 2023. While this has meant that the team that remains must do even more to support our success, I know each individual shares a passion for our mission to improve outcomes for women with gynecologic diseases. Last quarter, we used $7.1 million in cash, a meaningful step down from the trajectory we were on at the beginning of 2022. We will continue to streamline spending while growing top line revenue. In 2023, our cash usage for operations is expected to be between $16 million and $19 million. A significant reduction when compared to the $32.3 million of cash used in operations in 2022, while this is meaningful progress, we recognize that our cash needs exceed our year-end cash balance of $13.6 million. We are actively identifying additional sources of liquidity and in February, put a $12.5 million EPM in place with Cantor Fitzgerald. I’m confident in our ability to secure additional funding to meet our needs and in our ability to navigate these difficult market conditions without sacrificing revenue growth. That being said, our cash needs will drive how quickly we can move some of our programs, products and activities forward. Now, I will turn the call over to Ryan for a closer look at our product development and innovation progress. Ryan Phan Thank you, Nicole. I am proud to say that in spite of challenges, we have found opportunities and have made significant progress in our growth and innovation goals. I will spend the next few minutes updating you on our overall product development and pipeline progress. Let me start with OvaWatch which we will launch in December. OvaWatch is the first and only of its kind noninvasive ovarian cancer reassessment test. It provides health care providers with a personalized result based on 7 biomarkers, age and menopausal status for women presenting with benign and indeterminate adnexal masses. Historically, patient might have chosen preventative surgery, potentially causing lifelong implication for women, who have their ovaries necessarily removed. With the launch of the OvaWatch, clinicians are able to make better informed care decisions for women than they were previously possible. I am also pleased to say that the OvaWatch clinical validation management will publish in the peer review journal of Frontiers in Medicine just a few weeks ago. This publication highlights real-world evidence to support the clinical usefulness of OvaWatch in the management of adnexal masses. It demonstrated OvaWatch’s high negative predictive value across diverse data sets. And so its utility as an effective assessment tool for clinician to safely decrease premature or unnecessary surgery. Enrollment in the prospective OVA1 study has been committed. However, we continue to follow with end goal patients via additional periodic blood draws. As a result, we are collecting real-world evidence to support the second phase of the OvaWatch launch, a serial monitoring assay for women with adnexal masses who are not identified for surgical intervention. Let’s move on to EndoCheck, our in development test for the identification of endometriosis. You may recall that we expanded our development activity in 2022. The result of our internal development of a protein-based test was expanded to consider a multiomic noninvasive diagnostic tests via a sponsor agreement with a consortium of academic institutions led by Harvard Dana-Farber Cancer Institute. I will provide an update on each starting with the internal efforts. While I’m pleased that we have made much progress on the development of an effective assay, the speed of development and commercialization of any endometriosis test will depend on the availability and cost of usable high-quality samples that align with our test’s intended use. While we have recently succeeded in identifying and cataloging a lost number of patient samples from our own biobank. Additional samples from other sources will be needed to develop a commercially viable test. The surplus sufficient symbol continues and we remain focused on the launch of the first-generation assay in the second half of the year. With respect to the small cell research agreement with Dana Farber, we are pleased to report that the development efforts with this group of scientists and collaborators are on track. Sufficient and highly qualified endometriosis patients and controlled cohorts were obtained for this study and the development efforts are well underway, utilizing a next-generation sequencing-based approach and proteomic analysis for the identification of microRNAs and proteins. We believe that the project of this collaborative effort will meet our expected development goals for 2023. To support the development of endometriosis diagnosis assay, our multicenter clinical study for endometriosis were designed and is currently enrolling patients to confirm the clinical performance of EndoCheck as a noninvasive tool to aid the diagnosis of endometriosis. This is a prospective observational study. We are pleased with our enrollment upside and patients so far. We are closely monitoring progress and potentially competitive efforts, both in the U.S. and globally but are optimistic about the competitive positioning of our EndoCheck test. We believe asking what gynecology diseases is and our ability to develop and validate the clinical assay in our clear laboratory setting offers an advantage over others. The strategy and approach on EndoCheck launch will be discussed at an R&D Day that we plan to host on May 21. We will also highlight the potential for the 0 margin application of our OvaWatch test and our plans for growing the OvaSuite portfolio. It has indeed been a very dynamic and exciting time for Aspira. I’ve been with the company for less than a year and are focused on building momentum through the first phase along on OvaWatch and a steady progress in the development of EndoCheck. I am confident in the progress we made in the development of powerful products will help improve women’s gynecology health. I will now turn to Marlene for a discussion of our financial performance. Marlene? Marlene McLennan Thank you, Ryan. Total product revenue was $8.2 million for the year and $2.1 million for the quarter ended December 31, 2022, compared to $6.6 million and $1.9 million for the same period in 2021. The 20% full year and 16% fourth quarter revenue increases were due to an increase in Ova1Plus test volume compared to the prior year, partially offset by a lower average unit price of $372 for the year and $369 for the fourth quarter of 2022 compared to $378 and $381 for the same period in 2021, respectively. The overall number of tests performed increased 23% for the year to 21,423, with the fourth quarter volume increasing 18% to 5,642 test. Gross profit margin for the year was 53% compared to 45% in 2021. For the fourth quarter, gross profit margin was 57% compared to 55% in the same period last year. Margin improvement is primarily attributed to targeted cost control measures in the laboratory and information technology spending. Research and development expenses for the year increased 12% to $6 million, primarily due to costs related to our sponsored research collaboration agreements and increases in employment-related expenses, partially offset by decrease in costs attributed to clinical trials. R&D for the quarter decreased 29% over the same period last year, primarily due to personnel expenses. Sales and marketing expenses decreased 13% for the year to $14.9 million and 40% for the quarter to $2.9 million, primarily due to decreases in employment-related expenses, consulting expenses and other marketing expenses, offset by an increase in travel costs. General and administrative expenses for the year increased 22% to $16.2 million, primarily due to legal costs, severance for role eliminations and incremental cost of the Executive Chairperson and costs related to our capital raise. For the quarter, G&A expenses decreased 21% to $2.9 million, primarily due to a decrease in outside legal expenses. As of December 31, 2022, Aspira had $13.6 million in cash and short-term investments. Cash used in operations for the year was $32.2 million compared to $27.4 million in 2021. We utilized $7.1 million in operating activities during the fourth quarter of 2022 compared to $7.6 million in the fourth quarter of 2021 and $8 million in the third quarter of 2022. Cash to be used in operations in 2023 is anticipated to be between $16 million and $19 million. I will turn it back over to Nicole. Nicole Sandford Thank you, Marlene. In closing, we’ve come a long way since the beginning of 2022 and we have been through tremendous change as an organization. But the one thing that remains clear is the critical need for better ovarian cancer diagnostic tools for women and the resulting potential for our business. We’re taking all the steps we believe are necessary to position ourselves for success and continue to be steadfastly focused on growth, innovation and operational excellence. With that, I would like to now open up the call for questions. Operator? Question-and-Answer Session Operator [Operator Instructions] Our first question comes from the line of Ross Osborn with Cantor Fitzgerald. Ross Osborn Congrats on the progress. I thought we’d start off on ASP this year. There’s a lot of moving dynamics. So maybe focused on OvaWatch initially. How should we think about ASP following your ability to sign a national payer? And then as a follow-up, when looking at the corporate ASP, can we just walk through the change in payer mix there and how that should evolve over this year? Nicole Sandford Sure. Well, on the OvaWatch side, as you know, it does take some time to get those payer relationships lined up. We were very pleased with the progress that we’ve made so far. But of course, the business is — or the test market is really divided in a number of parts, including Medicare which is really important for an ovarian cancer test, as women are at higher risk as they age. So we continue to be optimistic about the crosswalk of the Novitas LCD and as I mentioned in my earlier remarks, we are looking at a potential NCD for multi-market ovarian cancer blood test based on the provision in omnibus bill. So still work to do there, of course but ultimately, we expect in reasonably short order, sometime towards the end of the year to start to see the OvaWatch, ASP start to line up with the Ova1Plus price. And to your point around the changes — I’m sorry, Rob, I think you were asking around OVA1Plus average selling price, what to make of that in the mix. It is true. It had additional Medicaid sales this year and that mix has sort of resulted in a little bit of erosion on the sales price. But on the upside, that gives us a great platform to go back to those states which we have been doing aggressively in the last several weeks to go back to states and say, your patients — your Medicaid patients are benefiting from this test. They’ve been ordered frequently. We’ve been able to provide statistics and have had very positive conversations with a number of state Medicaid administrators, to make them see that the test is useful and is being used for the population and to encourage them to accelerate, adding over plus to the fee schedule. Ross Osborn Okay, great. And juggling a couple of calls, I may have missed this but how are conversations going with potential partners for co-marketing distribution agreement for OvaWatch? Any idea on the time line there? Nicole Sandford So as you probably know, the important issue that people are looking to is very similar to the question you already asked which is what does the reimbursement look like for this test, because that is an important risk factor for any potential partner on a commercial partnership for OvaWatch. So every time we have an announcement which we’ve had many in the last couple of months which is great, we get a more captive audience with people to talk about, the market potential for the test. No time line here to — no time line here to announce. Believe me, we’ll be happy to tell you when there’s something there. Ross Osborn Okay, got it. And then maybe on your cash burn, does a signing of a potential partner for OvaWatch, does that include in your cash burn guidance positive or negatively? Nicole Sandford No. We have not included anything relative to cash for OvaWatch partnership. Ross Osborn Okay, great. And then lastly on — nice reiteration for your plan to launch on that test. So I guess between now and launch, what needs to happen from both a development and regulatory perspective? Nicole Sandford So we’ve mentioned in the past that we are pursuing a number of different potential paths for the launch of an endometriosis test which could include an FDA path or an LDT. So we’re not ruling either out at this point or remove them all in, I guess, I would say. So from a regulatory standpoint, that’s still sort of developing as we continue to think about what makes the most sense from a launch perspective. What needs to happen, as Ryan mentioned, the biggest barrier to a completed test is in remains, the availability of acceptable samples for the validation of the test. That has been a challenge and it continues to be a challenge. It doesn’t do us with any good whatsoever to try to validate or continue development with samples that are not high quality and that don’t line up exactly with the test that we’re developing. So that is a challenge. So we continue to seek out additional sources and as we said in the remarks earlier, we were very pleased to see that we were able to identify a number of additional samples in our own biobank as we continue to refine the test and the requirements. Question-and-Answer Session Operator Our next question comes from the line of Andrew Brackmann with William Blair. Griffin Soriano This is Griffin, on for Andrew. Thank you taking our questions. Maybe just to start on OvaWatch, can you talk a little bit about the stock feedback that you’re getting on OvaWatch? Are you seeing an expanded ordering population that you have that expanded label? And then I think there was some expectation for some cannibalization of OVA1Plus, has that played out as sort of expected so far? Nicole Sandford Thanks for the question. I’ll say on the cannibalization side, we have not seen that. We’ve continued to see growth in OVA1Plus. We were really thoughtful about how we presented the test to the physicians and the intended each very, very clear. We’ve found that they’ve been able to understand very easily which test is appropriate given the intended use. So happy to say that has not materialized as of yet. Of course, it’s early days. And in terms of physician response, so far, it’s been overwhelmingly positive. As you know, it takes a while to get the word out on a new test. So we continue to go out in the field and also as a company, we’re investing in a lot of additional physician conferences and higher impact at the conferences were attending to get the word out. But people seem to be really open to the intended use and they understand the value of taking what turns out is a pretty significant number of masses that sort of fall into the indeterminant category which frankly means they really don’t have a good sense of what to do with that patient; and it’s a large percentage. Having a tool that helps them to reduce that number or to just have better insight into that number of patients is incredibly valuable. We’ve heard that time and again. So as they’ve learned how the test works and the value of being able to isolate the patients that really do need additional scrutiny or additional clinical intervention and rule out to some extent, the women that are in that indeterminate category has been very, very valuable. Griffin Soriano Okay. And that corporate deck, I think, has a potential of watches $300 million to $420 million. Obviously, serial monitoring is really a big part of that. Can you just go in a little bit more detail on the time line for the serial launch indication? I know you talked about a prospective study that’s enrolling but any sense of time lines for launch there? Nicole Sandford Yes. Yes. So I’ll start and then Ryan can add any color to the study. The study is actually — the study that we’re using for the serial monitoring test is actually an extension of the OvaWatch, clinical validation study which is frauds, we continue to take draws and monitor those patients through additional drugs. Our commitment has been to launch that serial monitoring test in the second half of 2023. Ryan, anything else you’d like to add? Ryan Phan No, I think that Nicole mentioned everything needed, [indiscernible] ask that question. You answered right. I think the OvaWatch serial monitoring assay is going to be key for the patient and the physician as well, particularly for this particular population, many of them was either by selection or by clinically makes sense but not selected for surgical intervention. So they need a tool to follow up and OvaWatch is serving that purpose. The great news is our clinical study has come late but we continue to follow those enrolled patients. So we know exactly what the [indiscernible]. So those data are going to help us to set the stage for what the time line and also at the dosage, if you will. If you think therapeutically, how did this frequently how the woman should see the OvaWatch we may have those information when near to the time that we can launch the test which we intended — we remain intended for the second half of the year. Griffin Soriano Okay. And then — sorry. Nicole Sandford Sorry, let me just say one thing. We understand that in the market that we are in right now but the market conditions being what they are, investors, both current and potential investors, are hyper focused on companies with revenue. We continue to believe that the OvaWatch serial monitoring test is going to drive material revenue for the company and has been really put to the top of the list in terms of things we think about every day. And we do believe that our revenue estimates that we’ve talked about in the past are very, very realistic for a serial monitoring test. Griffin Soriano Okay. And then last one, maybe for you, Marlene, on just burn $16 million and $19 million for the year. Anything on how do you think about pacing, first half, second half split? And then I know you had previously sized the reduction forces being maybe something a little over $6 million year-over-year savings in 2023. Is that sort of still how you’re thinking about that? Marlene McLennan We are definitely on target for that and monitoring it very closely. It’s pretty evenly spread over the quarters. Most of our savings will be realized towards second quarter going forward, because they were just initiated in first quarter. But overall, we are on target for $16 million to $19 million. Operator Ladies and gentlemen, there are no further questions at this time. I’d like to turn the call back to Nicole Sandford for any closing remarks. Nicole Sandford Thank you so much and thanks for the questions. We appreciate the attendance today and the continued support and interest in the company. We’ve been through an awful lot of change this year, as I said but I’m more optimistic than I’ve ever been. I’ve said before and I’ll say it again that as companies that are further away from commercialization of their product, are really going to struggle. And as we see the fallout of that happening all around us, I believe that we’re going to be comparatively a very, very attractive investment, especially as we kind of move through the year and we continue to deliver on all of the things that we’ve promised. So, I appreciate your time today and look forward to continuing to bring you additional news and insight as the year goes on. Thank you so much. Marlene McLennan Thanks, everyone. Operator This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a great evening.