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spk02: Greetings and welcome to the Definitive Healthcare first quarter 2023 earnings call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, press star then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Rudiman. Thank you, Matt. You may begin.
spk01: Good afternoon, and thank you for joining us today to review Definitive Healthcare's quarterly financial results. Joining me on the call today are Robert Musselwhite, CEO, Jason Krantz, founder and executive chairman, and Rick Booth, CFO. During this call, we will make forward-looking statements, including but not limited to statements related to our market and future performance and growth opportunities, the benefits of our healthcare commercial intelligence solutions, our competitive position, customer behaviors, our financial guidance, our planned investments, and the anticipated impacts of global macroeconomic conditions on our business, results, and clients, and on the healthcare industry generally. Any forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the risk factor sections and elsewhere in our filings with the SEC. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement included in the earnings release that we have just posted to the investor relations portion of our website. Additionally, we will discuss non-GAAP financial measures on this conference call. Please refer to the tables in our earnings release on the investor relations portion of our website for reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I'd like to turn the call over to Robert.
spk12: Thanks, Matt. I appreciate you all joining us this afternoon to discuss definitive healthcare's first quarter results. On today's call, I'll provide an overview of our first quarter results, provide some perspective on business trends and what we're seeing in the market, review some of our key wins from the first quarter, and then turn it over to Jason to highlight some of our latest product innovations. Let's begin by reviewing our first quarter financial results. Revenue exceeded the high end of our guidance range while adjusted EBITDA was in line as we continued to deliver on our goal of balanced growth and profitability. Our total revenue was $59.2 million, which represents 18% year-over-year growth, and our adjusted EBITDA was $15.7 million, which translates into 26.5% margin. Overall, we got off to a solid start to the year, given the context of the ongoing macroeconomic challenges. We continue to have strong demand generation and customer interest in our commercial intelligence platform. Our customers recognize that the definitive healthcare platform has a strategic role in their go-to-market and product development efforts, and that our solutions will be critical in accelerating their business performance as market conditions improve. The continued strength of our demand generation efforts is great validation that the fundamental value proposition of the definitive healthcare platform is resonating with customers. While I'm generally pleased with how we executed in the quarter, the business environment remains difficult. Just as we saw in recent quarters, we continue to see a number of organizations follow more comprehensive deal review processes as companies continue to closely scrutinize their budgets. The net result continues to be an elevated level of deferred purchasing decisions across all markets due to the difficult economic environment. We are working hard to do an effective job of managing through these challenges, and we have put in place several changes that should help us perform in this environment. But until we see a strengthening macro, we do not expect to see meaningful improvement from current dynamics. From a sales perspective, we signed important wins in all of our target markets with both new and existing customers. As I mentioned, our top of funnel and pipeline generation activity has been strong, and our commercial teams are doing a good job adapting to the longer sales cycles and more comprehensive approval processes required to get transactions through the finish line. As I mentioned on our last call, we've made moves to more vertically align our sales teams and institute more in-depth account plans. And as these changes mature through our teams and sales cycles, we will be in an even better position to engage with customers on the full value proposition of our platform. The increasingly strategic conversations we are having with customers reflects the important role the definitive healthcare platform can play in their day-to-day operations. As we mentioned last quarter, recent independent market research ranked the Atlas dataset as first or second in each of the top 10 use cases for healthcare reference and affiliation data. We believe the success is due to our ability to provide proprietary, actionable data in a cloud environment that enables thousands of customers to generate better returns on their sales and marketing investments and increase the probability of successful and profitable product launches. Finding the right physicians, physician groups, and hospitals, and then understanding how they all work together, is critical for the success of any life science, medical device, provider, or diversified company targeting the $4 trillion U.S. healthcare market. Our customers consistently tell us that the definitive healthcare platform delivers unique insights across numerous use cases that other vendors simply cannot match. The breadth, depth, and accuracy of our data, together with the speed at which business users can leverage that data to positively impact their business, is a compelling competitive advantage, and we continue to invest in our platform to create and deliver new insights for these customers. Jason will talk about some of our most recent innovations in a moment. Now I'd like to spend a few minutes highlighting some exciting customer wins from Q1 that demonstrate the numerous ways customers are generating business value from the definitive healthcare platform. Before I jump into specific customers, I want to note that the Staffing Industry Analysts Trade Group recently published their annual ranking of top healthcare staffing agencies, and I was pleased to see that all of the top 11 firms were definitive healthcare customers, as were 18 of the top 20 firms and 24 of the top 30 firms in their rankings. I think we're all aware of the ongoing labor shortage in the healthcare sector, and staffing agencies play a crucial role in filling those job openings. We're thrilled to provide them with access to our more than 2 million medical professionals and more than 1 million executives through our Atlas data set. We profiled one of these customers on our website recently. Thanks to our data, this interim leadership and locum tenens consulting company more than doubled its funnel of potential executives and doctors that they could recruit, and then improved email response rate by 4x by leveraging our highly accurate contact information. Turning now to deals that closed in the first quarter, we saw solid performance in both new business and upsells. In a Q4 2022 deal that pushed to Q1 2023, the world's leading mRNA therapeutic company expanded its relationship with us by adding a six-figure enterprise deal to add our monocle expert insight product so they could better identify clinical experts around the globe who could accelerate their R&D. Also, in our life science business, we had a significant deal that not only reversed customer churn from 2022, but also expanded our presence at a multinational pharmaceutical and biotechnology company. This highly competitive win included a multi-year platform commitment through 2025 to our Passport Analytics Suite. This company plans to use the Passport Analytics Suite to optimize its global marketing spend and reallocate precious investment dollars to the sales and marketing channels that are delivering the highest return. In the provider market, The Atlas data set also played a big role in our win at a leading children's hospital in the western region of the United States. As part of an enterprise deal, this hospital purchased access to our Atlas all-payer claims data set, our Atlas reference and affiliation data set, and our executive contact data, along with our Latitude analytics suite, to help it understand the pediatric market in its region, including market share, patient flow, network leakage, and competitive analysis. Moving to our diversified market, the Atlas dataset also played an important role in a Q1 upsell win. A nonprofit humanitarian organization that provides emergency assistance, disaster relief, and disaster preparedness education across the United States signed an upsell enterprise agreement that more than doubled the size of our relationship. A longtime user of our HospitalView product and internal champion at this customer reached out to us following our Atlas dataset launch. In the first quarter, this organization purchased Atlas All-Payer Claims dataset, which it will use to transform its sales strategy and identify the US hospitals and departments offering the most opportunity for growth. Finally, I want to highlight one last new customer in our software and IT market that selected us based on the strength of our new data integration capabilities. This customer is the largest virtual musculoskeletal clinic in the United States. This customer will be using our new Definitive Connect products to directly import data from our Atlas dataset into their Salesforce instance to drive their business development strategy. In addition, this company's strategy team will use our Connected CareView products to get better insurance coverage in their core markets of hospitals and long-term care facilities. As we look ahead to the remainder of the year, we are highly focused on execution and hitting our targets for the full year. We are at the early stages of penetrating our $10 billion plus market, and there are tremendous opportunities to add thousands of new logos and greatly increase our ARR per customer over time. To that end, we continue to focus on customer success, operational excellence, and ongoing investment in our platform and go-to-market initiatives to keep us moving forward. We made great progress in Q1 on our product roadmap, and investments in our verticalization and global account team strategies, and we'll continue to invest throughout the year. We're making these investments while remaining vigilant in managing our expense structure. We've built definitive healthcare from day one to be highly scalable and efficient, which has been the foundation for our consistently strong track record of profitability. We are proud of the scalable business model we have built and believe it will support both faster growth and expanded margins over time as the economy improves. I'd now like to turn it over to Jason to discuss our product innovation.
spk11: Thanks, Robert. The innovation flywheel continues to spin here at Definitive Healthcare. The pace and quality of our product innovation is a key competitive differentiator that we are constantly focused on expanding. I'd like to share the details about two significant recent product enhancements. Two weeks ago, we launched three new offerings that significantly enhance our data integration capabilities. When we deliver healthcare commercial intelligence, our goal is to make that intelligence available where and when our clients want it, in any form, in any system. In addition to our best-in-class platform and in-depth analytics, our customers have asked us to make our data available in the internal tools and systems that they use every day, including Salesforce and other CRM tools. With our new integration capabilities, customers can choose from a range of flexible options and support services to seamlessly integrate our healthcare commercial intelligence into their IT infrastructure. Our three new data integration offerings are, one, Definitive Connect. Optimized to work with Salesforce and Lightning Platform, Definitive Connect provides users with access to more than 300 data elements that are continuously updated directly in their Salesforce environment through automated data syncing. This access to our mission-critical healthcare commercial intelligence in our client CRM allows them to leverage the depth of data we provide in every interaction they have with their physician and hospital clients. Definitive Connect app is available now on the Salesforce AppExchange. Second, Snowflake. Customers of one of the industry-leading data warehouse platforms, Snowflake, can now leverage its secure data-sharing technology to access the Atlas dataset. Existing clients can opt to work with our professional services team to ingest the data they need into Snowflake, unite multiple data sets, and create data marts to perform advanced analytics. We already have three example data sets on the Snowflake marketplace to showcase our healthcare commercial intelligence to prospects with more to come. Third, APIs. We've launched a new suite of modern commercial APIs to support automated synchronization of definitive healthcare data into a broad range of applications and systems. Developers can use these APIs to request and retrieve definitive healthcare data through virtually any CRM software system or business intelligence data warehouse. With these new tools, our customers can now more efficiently access our healthcare commercial intelligence within their existing workflows while also ensuring that they're working with the most up-to-date and highest possible quality data. I also want to highlight the launch of Atlas AI, which we announced just last week. While we've always had proprietary analytics embedded throughout our solutions and services, we're deepening our investment in this area even more and making these analytics available to help drive the success of our vast customer base. Atlas AI is built on the Atlas dataset, which contains robust claims, reference, affiliation, and expert data that provides a longitudinal, comprehensive, and current picture of the healthcare market. Definitive Healthcare's data science team leverages the Atlas dataset and applies deep domain expertise, natural language processing, machine learning, graph networks, and proprietary algorithms to create new intelligence. Atlas AI enables clients to better target opportunities, allocate resources, and inform strategic planning to drive critical business decisions. Atlas AI expands a competitive mode that separates definitive healthcare from our competition. We've long talked about the virtuous flywheel, where we ingest, clean, and link data from multiple disparate data sources, and how we apply our proprietary data science to create new intelligence and new types of data that help our customers understand and win in the complex healthcare market. Atlas AI takes our commitment to the next level by delivering some of the most unique insights into the US healthcare system that I've ever seen. These insights help our clients become more productive and more effective every single day. Atlas AI is available through our view and monocle data products, as well as our Latitude Analytics Suite and Passport Analytics Suite. Additionally, clients can use Atlas AI analytics in offline reports and custom projects for even more complex analyses. We'll be adding new analytics frequently to Atlas AI to help our clients optimize their commercialization efforts. The first release of Atlas AI includes 11 proprietary analytics, each designed by our data science team to address a specific customer challenge. I'll highlight a few here. First, ACE projections. Our all claims estimations, or ACE projections, allows our clients to gain a deeper understanding into the total addressable market of the diseases or procedure areas that are most important to them. Earlier this year, we increased our Atlas prescription claims coverage by more than 60%, and our Atlas all-payer claims coverage also increased significantly, including nearly 20% increase in key areas such as rare disease, oncology, and chronic conditions. However, no claims data provider has 100% of all claims transactions that happen in the U.S., which makes our ACE projections model pretty much the only way that clients can get a view of the entire U.S. healthcare market. ACE projections apply advanced data modeling techniques and machine learning to the data in our Atlas all-payer claims data set to generate reliable estimations of clinical activity to compensate for the fact that every claims vendor has only part of the overall picture. We believe that our proprietary projection is unique in the industry because we use our reference and affiliation data as explanatory variables to train our AI models. We identify groups of features that best represent the drivers of clinical volume for a segment of facilities or providers, and then we extrapolate missing claims volumes based on the provider and facility level characteristics. Second, expert ranking. This insight utilizes natural language processing and AI to create a proprietary scoring system that allows our clients to immediately identify the top-ranked scientific and clinical experts within a specific therapeutic area. Rather than rank an expert solely by volume of activity, Definitive Healthcare's data science team leverages the Atlas Expert and Atlas All-Payer Claims datasets and applies graph networks, centrality scores, and a proprietary algorithm to rank experts and physicians according to their positions within a community of practice. This saves our clients from trying to do this work on their own by pouring through thousands of publications, clinical trial results, and claims analytics and it results in a much better and more accurate prediction, given that we do it at scale across nearly 14 million experts. Third, RxDecision Insights. RxDecision Insights is critical for our biopharma clients. These insights help our clients understand which physicians are the heaviest prescribers, which are more likely to prescribe a brand name therapy, and which prescribers are most likely to switch from a competitor's therapy. Our data science team derived RxDecision insights from a complex computational process and methodology and scaled it across the entire Atlas prescription claims data set. Our proprietary methodology processes billions of longitudinal prescription claims, curates them into individual patient journeys, and buckets them into decision-making events. These insights help our customers refine their commercial targeting, better align and research their sales force, and arrive at the most efficient and high-opportunity targets for their sales teams. We have dozens more analytics in development, each of which we believe will help our customers become smarter and more efficient and deepen our competitive advantage in the marketplace. We plan to roll out continuous enhancements of our Atlas AR offering in the coming quarters and years. I'd now like to turn it over to our CFO, Rick Booth, to walk through Definitive Healthcare's financial performance in more detail.
spk09: Thank you, Jason. I'll start with a detailed review of our Q1 results before finishing with our guidance for Q2 and reconfirming guidance for the full year. In all my remarks, I will be discussing our results on a non-GAAP basis unless otherwise noted. Our strong business model allowed us to deliver solid results in Q1 despite tough economic conditions and a challenging compare. Our financial highlights for the quarter include 18% revenue growth compared to Q1 2022, 26% adjusted EBITDA margin, and 22% unlevered free cash flow margin over the last 12 months. Revenue growth plus the trailing 12-month unlevered free cash flow margin was 40%, putting us at the rule of 40 on an unlevered free cash flow basis, or at 44% using adjusted EBITDA. Turning to our results in more detail, revenue for the first quarter was $59.2 million, up 18% from prior year and 3% above the midpoint of our guidance. This performance was driven by new business and upsell, as in the first quarter we continued to experience heightened churn, especially in life sciences and providers due to industry conditions. Pro forma organic revenue growth was 15% in the quarter. We ended the quarter with 529 enterprise customers, which we define as customers with at least 100,000 in ARR. This was an increase of 81 enterprise customers, or 18% year-over-year, but a decrease of 9 enterprise customers from the previous quarter. Our total customer count, which includes smaller customers, was 3,011 at the end of Q1, up from 2,939 in Q1 2022, but down 34 from the previous quarter. Overall, economic conditions continue to be challenging in Q1. Despite the continued headwinds, we believe new business and expansion opportunities remain strong, even if realization is slightly delayed in this environment. Gross profit was $49.8 million, up 13% from Q1 2022, and gross margin of 84.2% decreased 380 basis points from Q1 2022, as the additional data sources in the Atlas dataset came online, as we had communicated previously. We expect to see gross margin expansion as we move through the year so that the full year impact is 200 to 300 basis points for the full year. Sales and marketing expense was $20.7 million, up 18% from Q1 2022. And as a percentage of revenue, sales and marketing expense was 35% of revenue, consistent with Q1 22. Product development expense was $6.9 million, up 24% from Q1 2022. As a percentage of revenue, product development expense was 12% of revenue, up from 11% in Q1 2022. Investing in our platform and using our existing data sets to launch or enhance multiple products is a highly efficient and effective way for us to increase the value we deliver to customers. Robert and Jason touched on some examples of these earlier. and we will continue to invest in the multiple opportunities we have identified on our long-term product roadmap. G&A expense of $7.6 million was up 4% from Q1 2022, and as a percentage of revenue, G&A expenses were 12.9% of revenue, down approximately 170 basis points from 15% in Q1 2022. We expect to see continued leverage from G&A, both because these costs are relatively fixed and due to ongoing efforts to lower administrative costs. Operating income of $14.4 million was up 6% from Q1 2022. As a percentage of revenue, operating income was 24% of revenue, down 260 bps versus Q1 2022. The year-over-year margin decline was primarily a result of the gross margin impact of the Atlas dataset expansion, offset by G&A cost improvement. Adjusted EBITDA of $15.7 million was a 12% increase from Q1 2022 and at the upper end of our guidance range on a dollar basis. As a percentage of revenue, Adjusted EBITDA was 26% of revenue, approximately 160 basis points lower than in Q1 2022 due to the investments described earlier, which were in line with how we planned the year. As we move through 2023, we expect adjusted EBITDA margins to expand, allowing us to deliver the full-year adjusted EBITDA in line with guidance despite the impact of the gross margin pressure noted above. Net income in Q1 was $9.2 million, or $0.06 per diluted share, based on 154.3 million weighted average shares outstanding. Turning to cash flow, Definitive's high margins, upfront billings, and low CapEx requirements provide substantial free cash flow generation. We focus on trailing 12-month cash flows due to seasonality. Operating cash flows were $36.9 million on a trailing 12-month basis, up 46% from $25.3 million in the comparable period a year ago. Unlevered free cash flow was $50.7 million on a trailing 12-month basis, down 16% from the comparable period a year ago. Unlevered free cash flow was 22% of revenue on a TTM basis, effectively converting 77% of our TTM-adjusted EBITDA of $65.4 million into cash. Like any SaaS company, when bookings growth slows, so does deferred revenue, which is the biggest driver of unlevered free cash flow. As growth rates stabilize and recover, so should unlevered free cash flow. On the balance sheet, we ended the quarter with $344 million in cash and short-term investments, With strong profitability and only $265 million of debt, we're well positioned to fund both organic and inorganic growth initiatives. Current revenue performance obligations of $180.9 million were up 10% year over year, and total revenue performance obligations were up 2% year over year. Deferred revenue of $105.5 million was up 12% year over year. You'll note that, as expected, CRPO and deferred revenue grew more slowly than revenue. The primary driver of CRPO is, of course, new business and upsells, but we also saw continued financial distress, particularly in life sciences and providers, and those cancellations show up immediately as reductions from CRPO. These factors have been largely anticipated, and we believe that we remain on track to hit the guidance for the year. Moving now to guidance for Q2, we believe it's prudent to assume that current conditions continue and extend through the first quarter as well. Assuming this is the case, in Q2 we would expect total revenue of $60.5 to $61.5 million for a growth rate of 11 to 13 percent, adjusted operating income of $14.5 million to $15.5 million, Adjusted EBITDA of $16 to $17 million for a 26 to 28% adjusted EBITDA margin. Adjusted net income of $7 to $8 million, or $0.03 to $0.05 per deleted share on 155.2 million weighted average shares outstanding. For the full year, there is no change to our previously communicated guidance. we continue to expect revenue of $249 to $255 million for a growth rate of 12 to 15 percent, adjusted operating profit of $61.5 to $65.5 million, adjusted EBITDA of $67 to $71 million for a full-year margin of 27 to 28 percent, adjusted net income of $30 to $34 million, and earnings per diluted share of 19 to 23 cents on 155.5 million weighted average shares outstanding. Within this guidance, the key expected cost drivers are the gross margin impact of the new data sources coming online early in Q1, the annualization of expenses associated with people hired in 2022, the impact of cost of living increases on employee wages, and selective investment in the very highest growth priorities. We expect that these costs will be partially offset by continued efficiencies in costs not directly associated with revenue growth. So to summarize, Q1 was a solid quarter for definitive health care, despite current economic headwinds and uncertainty. We're well positioned for the long term because we've developed a clear leadership position in a large and attractive market that we believe will support high levels of predictable revenue growth, profitability, and capital efficiency. And with that, I'll hand it back to Robert for a few closing thoughts before we take questions.
spk12: Thanks, Rick. I want to take a moment and recognize all the time and energy that our definitive healthcare team has put into building an award-winning, employee-centric culture. Just in the first quarter alone, we had multiple events, both in the office and remote, that celebrated our diverse and inclusive culture. I had the opportunity to attend many of these events, including a virtual global celebration of the Hindu holiday of Holi, a panel discussion on the importance of self-advocacy in honor of Women's History Month, and a talk by medical expert Ben Haseen in honor of Transgender Day of Visibility. I even had a chance to serve as a judge for the first annual Definitive Healthcare Chili Cook-Off benefiting Definitive Cares. and my stomach is not fully recovered yet. All kidding aside, it's these types of events that forge important relationships across the company, and they're a huge part of the reason why I consider myself so fortunate to serve as CEO of this fabulous organization. Before opening the call for questions, I want to reiterate that we are off to a solid start in 2023 and well-positioned to deliver on our objectives for the year. Our team is doing a great job remaining focused on our customers and executing on our key product and growth initiatives. We've built an incredible business in a large dynamic and growing market that provides great opportunity to meaningfully scale our revenue and profitability in the coming years. And we remain incredibly confident in the long-term opportunity for definitive healthcare and our ability to generate substantial value for our customers and shareholders. With that, we would now like to start the Q&A.
spk14: Operator?
spk02: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then two if you would like to remove a question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we hold for questions. The first question is from Brian Daniels of William Blay. Please go ahead.
spk03: Thanks for taking the questions. This is Jared Haas for Ryan. I wanted to start just hoping you could dive a little bit further into some of the dynamics in the life sciences segment in particular. And Rick and Robert, I think you both mentioned some of the headwinds and the churn dynamics that you saw there. But I think overall, it seems like a bit of mixed commentary coming from that market from what we've seen where It seems like there's still some concern over funding dynamics, but we've also seen maybe an uptick or a nice pace of M&A, which maybe suggests some organizations are kind of pursuing growth initiatives. So maybe you could just dive into some of the dynamics in that segment in particular.
spk12: Yeah, sure. Thanks, Jared. I'd say life sciences, we felt pretty similar to the way that segment felt at the end of last year. You know, in our perspective, it's been slower. We have all those dynamics with longer sales cycles and greater deal scrutiny and just a little bit tighter, feeling like a tighter spending environment that we feel from that segment. Also, if you kind of go smaller biopharma, that's been a group that's been particularly troublesome out of our group, and we've talked about that before. feel like a combination of financial distress and just some funding difficulties there have certainly played out in their ability to purchase. The flip side of it is there's still great demand in that group. Our top of funnel is great. We're having incredible conversations. The buyers and the clients who would work with Definitive are still incredibly enthusiastic about what we're doing. There's been a ton of interest in Atlas since we launched it and have been marketing across our client base. There's no shortage of interest, and that feels really good. It's just been the same dynamic of things progressing all the way through the sales cycle. Like I mentioned in my remarks, we did have a nice win back. We had also a win of something that pushed from last year. So these things do come through. It's just at a slower pace, and we're doing everything we can to try to accelerate that. Longer term, it's still a great end market for us. The value that we deliver there is fantastic. We have a lot of million-dollar clients there. We're delivering tons of value. A couple of them expanded relationships with us this year. So it's a place where, you know, medium-long term, I feel great about just some of the short-term dynamics have been challenging.
spk03: I appreciate the puts and takes in that market specifically. Just one follow-up from us. So on the gross margin, it looked like that came in just a bit lower than our expectations coming into the quarter. I obviously appreciate the commentary around the investments and timing of those data assets coming online. I'm just curious, with EBITDA still registering towards the high end of guidance, were there any operating efficiencies specifically that you identified in the quarter? And if that was the case, is that anything that could maybe drive upside the EBITDA targets over the course of the year?
spk09: So the key areas where we've been making sure that we're pivoting investment away from is in the areas of G&A. You saw the 280 BIPs expansion year over year. We managed to do that with a nice combination of automation and other efficiencies, so we feel like it's very sustainable. It's too early in the year to talk about upside, but we were pleased that we were able to provide provide a small bead on revenue and not raise the outlook for the year.
spk03: Valerie, congrats on a solid update here.
spk15: Thanks, Jared.
spk02: The next question is from Ryan McDonald of Needham & Co. Please go ahead.
spk10: Hey, thanks for taking the question. This is Matt Shea on for Ryan. Wanted to, uh, wanted to touch on the churn in the quarter, I guess, relative to the commentary about pharma and the provider market being weaker, especially at the lower end, we weren't totally surprised to see customers tick down quarter over quarter, but maybe more surprised at the higher end with a hundred K plus customers. So just curious if you're seeing some of that weakness bubble up to some of your larger accounts. Or if you could just kind of comment on some of the churn dynamics you're seeing with some of those bigger accounts we maybe haven't seen prior.
spk14: Yeah, it's a good question. Thanks.
spk12: I'll answer in two ways. I think, number one, those numbers can change based on both pace of sales and upsells and churn. So, obviously, the number of enterprise customers is partially impacted by sales dynamics, not as many upselling or joining above that 100K level. So, that certainly was a factor. That said, we did see a little bit higher churn in the quarter as well, kind of across the base. And I think the slight uptick from what we might have seen, not unexpected, like you said. And I think the dynamics there, if I had to characterize it, is a little more incidence of just financial distress where people find themselves in a position where they're just unable to continue. And that's something that was probably that we saw a little more of this quarter than we might have seen in the past. Again, overall, you know, we still feel really good about the value we deliver to enterprise customers. And for some of the stories where we might have lost one on churn, we have a bunch of stories where we were able to expand the relationship and get you know, get more dollars in the door from someone who's already paying us a lot of money, even in this environment. So, again, I do feel like this is a great, you know, we have great value proposition. We always strive to keep all our customers, and typically enterprise customers have been some of our best, and that will continue to be the case going forward with, especially with a little more normalized macro.
spk09: Yeah, the other nuance in terms of seeing how that plays out within the enterprise customer base is, Due to the depth and power of the platform, proportionally more of our life science and provider customers are enterprise customers. You can be a very small company and still be spending $100,000 or more from us. So that's one thing to bear in mind as you think about it intuitively. And luckily, this is consistent with what we talked about in our fourth quarter call where we said that we were allowing for a little bit more conservative assumptions on churn as we entered 2023.
spk10: Got it. Appreciate the color. Sounds like it's all baked in. And then, so wanted to touch on Atlas. Sounds like a lot of great success there and driving a lot of demand. Chris Wanner, Curious. Does this change your thinking around M&A at all? Would future deals maybe be more similar to an Atlas like purchase and focus on data sets over an out of the box module and what other data sets might be interesting that that definitive could add?
spk12: Chris Wanner, I think Nothing's changed on our sort of perspective on what we want to bring into the company. I consider those a little bit different endeavors. One is to continue to fortify our data. We generally do that by finding sources or investing in collection capability to continue to bring data in to keep ourselves really best in class and unique to our clients and delivering on new use cases that clients have asked about or expressed interest in. So that's kind of the endeavor behind the investments in Atlas and, in particular, the uptake in our claims investment this year. From an M&A standpoint, we continue to have the same philosophy on M&A, which is we like to find an additional capability out there. It could be an additional data source, but more likely an additional capability, something that we can do that brings a new source in and of itself of value to clients that we can then take out across our 3,000 client base, accelerate expanding that to new clients, build it into our data set and into our platform such that it becomes an integral part of what we do. And that tends to create a lot of value through M&A. So we continue to be on the lookout and many conversations and searching for opportunities like that. And I would anticipate, you know, we've always talked about one to two per year. I'd anticipate us staying on that pace. It's been about a year. primarily driven by the fact that valuations in the private market hadn't really caught up to valuations in the public market. My sense is that's gradually starting to change, and so I'd be optimistic that over the next year we'd get back on pace.
spk10: Got it. Thanks for the call, guys. Thank you.
spk02: The next question is from Craig Ittenbach of Morgan Stanley. Please go ahead.
spk05: Yes, thanks. So it sounds like there hasn't been any meaningful changes to the backdrop, but now that you have four months of the year complete, we're hoping to get your sense kind of month to month this year, if you're seeing any nuances in that backdrop, and then in particular, what you call out in this backdrop on new logo growth versus upsell.
spk12: Yes, I'll speak to the first quarter, Craig, because that's kind of what we're looking back on that quarter is what we're reporting on. I'd say there was nothing out of line with what we expected. I'd say that, you know, as Rick mentioned, maybe a slight uptick in churn, which we had projected coming into the year, right on course of what we expected around new. So there's not a lot of dynamics that are different from what we expected coming into the year. Sorry that's not a super detailed answer, but I'd say first quarter was kind of where we expected it to be on both new upsell and churn. Yeah, no discernible trend.
spk05: Got it.
spk12: And month by month came in kind of as expected as well.
spk05: Okay. And then just to follow up on just margins, you guys have talked about some of the investments you're taking and a little bit of a drag this year. Rick, how do we think about, I know it's early to think about 2024, but just what type of operating leverage do you see in the model and particularly as you have some workforce reductions coming in this year? Yeah, I think
spk09: I think the economic model is very clean. We continue to have high gross margins even with these data investments. The data investments in G&A are largely fixed, but it's still too early to talk about 2024. We're never done in terms of continuing to improve the product, and so we're going to continue to manage for the combination of growth and profitability that we think is optimal.
spk12: I would just add to that, Craig, that you know our model, which is every incremental revenue dollar brings with it a lot of incremental profitability. And we, I think, do a good job of thinking about how much of that we reinvest in future growth and how much of that we deliver out. But the model provides a lot of room over time to do both.
spk15: Thanks. Thank you.
spk02: The next question is from Joe Brink of Vic.
spk15: Please go ahead. Sorry, I was on mute. Hi, everyone.
spk06: Hey, maybe Robert. I'll start with something you said in your prepared remarks, just implementing changes within the company, within DH to help with performance, not guiding to improvement going forward, but certainly doing some things internally meant to drive improvement. Can you maybe elaborate on, in your mind, what some of the biggest actions or maybe the actions that could bear fruit the earliest, what some of those things might be?
spk12: Sure, I'll go through those. And yeah, you're right. Like, we're, we're trying a lot and we're working hard to try to, you know, inflect things upwards, but it's hard in this environment to, you know, confidently state that those things will pay off within some specific timeframe, but I know they're good things to do over time. You know, the first, and we've talked about a couple of these before, is getting much better at account planning and really mapping out the full range of decision makers within a client and being sure that we're getting in front of them early in the sales cycle. You know, in the old days, usually the person we talked to could get the budget authority and get it done. We're finding that's rarely the case today. And there's usually... You know, Rick Booth's twin somewhere at our client who is sitting there with a spreadsheet and a budget that has a lot of questions that if you don't talk to that person early in the process tends to create issues at the back end of the process. So getting much better about that, and I think we've done a nice job of that. It doesn't make us immune from stuff slipping at the end of the quarter or new decision processes coming in that's still happening, but I think it does get us ahead of some of those issues better than we might have been last year. The second is we've really made more moves to verticalize, and that's particularly in the provider and life science segments. Obviously, they're a little bit more of our challenge segments right now, but I think we've recognized that our people on the front lines in those markets, as we've grown deeper and more complex in what we can do with our clients, we need people who can speak the language of our clients in those markets and have a little greater depth of experience in those markets. So this year we really made some positive moves to move to a little more verticalization in each of those markets, and I know that'll pay dividends just to hear about the conversations we're having and the depth to which we're discussing the use cases that we can provide. It's definitely a click above where we've been in the past. And then I think third, you know, we've had great top of funnel activity. It's basically saying let's really focus on what we know we can control, and that's getting opportunities in the door. leads, converting leads into opportunities, being as good as we can on those. Once things are opportunities, really bringing the best of the company behind those to work on converting them, whether they're new business upsell or renewal opportunities. I've gotten involved on a personal level in way more opportunities than I had in the past, and I think that's true of our executive team. Our teams are pushing hard to be sure that we're engaging at the right level of depth and urgency. Look, these are all things that they will pay off. I'm reluctant to kind of put a timeline on it, just because we've seen the macro be kind of stubbornly blocking of it really turning the corner upwards, but it's making us better.
spk06: Okay, that's all great detail. I wanted to talk on CRTO, so 10% growth this quarter. I think maybe organically, accounting for analytical wizards, maybe similar rates of growth in CRTO last quarter, so maybe stability there. How should we think about kind of the trend in a current backlog through the remainder of the year, just given where the revenue guide is? Should it be the expectation that growth rates in CRTO are inching a bit higher as the year goes on?
spk09: Let me just explain a little bit of the CRPO dynamics. In addition to our normal earn-in dynamic, remember that we have more renewals in the fourth quarter, and then those lose CRPO as we go through the quarter and the year. That consumes CRPO in Q1. We also saw an increase, particularly in financial distress, especially in life sciences and providers. That shows up as lower renewal rates and, therefore, increased churn. This was consistent with our planning, and we remain on track to deliver against our full-year guidance. We guide based on revenue and our other financial metrics. We don't guide CRPO itself.
spk06: Okay. Thank you very much.
spk02: Thanks, Jeff. The next question is on David Grossman of CISL. Please go ahead.
spk08: Thank you. Good afternoon. I'm wondering if I could just ask a quick follow-up to the question that was just asked, you know, because it sounds like, you know, the demand backdrop is stable but, you know, still challenging. And if I understand your guidance right, on the revenue side, that you do, it does imply some sequential revenue acceleration as the year progresses. So, You know, perhaps you could, you know, particularly given the CRPO dynamic you just talked about, do you want to give us a little more color on, you know, what kind of visibility you have on that? Does it relate to, you know, some of the new data products that were introduced in the first quarter? You know, just give us a little more insight into kind of how you get there and why revenue should accelerate as the year goes on.
spk09: Great question, as always, David. We started the year with revenue favorability. It's a little early in the year to raise full-year guidance. We do gain increased visibility as we proceed through the year. We are confident in our ability to meet the full-year guidance.
spk08: Right, Rick. But just, again, talking about stability, are there some dynamics that would give you that confidence that sequential revenue growth would accelerate as the year progresses here in the back half? Because I think that's what your guidance implies.
spk09: That's what we've seen on an organic basis.
spk12: I think, David, just at a high level, I know we've said this, but the assumptions behind the guidance we put out assume that the dynamics we're seeing on the macro side are what's in place across the rest of this year. And then we kind of ran all the numbers about what that means for the year and quarter over quarter, and that's how we came up with it. Nothing's changed about that from kind of how we walked into the year. I don't know if that's helpful or not, but at least gives you the context in which we set that.
spk08: Right. Okay. Well, thank you for that. And I guess the second question I had was about some of the commentary around expense management. And when we look at the first quarter and perhaps what's implied for the second quarter, Is that really the baseline right now for operating expenses, you know, leaving the gross margin out of this just on the OpEx line? Is there more opportunity than what we've seen, if necessary, or should we look at the current run rates on OpEx as being kind of where the baseline is going forward?
spk09: I think it's a reasonable first cut at the baseline. Of course, you know, we've got some additions, and you always have some, some open positions, but it's not a crazy baseline.
spk08: Great. And if I could just squeeze one last one in, just curious, you know, what is the pricing environment like? And I don't know if you've ever encountered a downturn like this in the history of the company before, but any perspective on what impact pricing, you know, has on revenue growth this year, perhaps versus prior years when you face an environment like this?
spk12: Yeah, I mean, what we've seen in the first quarter on pricing is pretty consistent with the past. So we haven't really seen any material change from what we've seen in prior years. I wouldn't say the company's been through this extended a downturn before. There was the blip after COVID hit in 2020. And if you look at that year, that year saw, you know, pretty consistent levels of pricing stability as well. So, you know, we always Our sales teams always have some discretion to discount to get things across the finish line, and they're certainly continuing to do that now. But overall, if you kind of look at our realized pricing, it's up a little over last year, which is what we would have expected.
spk08: All right, very good. Thanks very much, and good luck.
spk14: Thank you.
spk02: The next question is from Alan Lutz of Bank of America. Please go ahead.
spk13: Thanks for taking the questions. Robert, you mentioned that life sciences felt the same at the end of the year. I guess, is there anything to call out in the other segments, med tech, providers, health systems, non-health care? Was there anything that changed from 4Q to 1Q? Did any of those segments improve at all, or was it basically all kind of the same versus 4Q? Thanks. Thanks.
spk12: Yeah, and I'm sorry to be boring, but things were pretty much the same. We've seen a little more pressure comparatively in the biopharma part of our life science business, although still some in med device. We lump those together in life sciences. And providers. You know, providers had a pretty rough year last year. I don't think they've fully emerged from it yet, although, again, we're optimistic that over time things will get better because last year was a pretty all-around bad year for their financials. And then diversified relative to the others has been better throughout. Again, there are pockets within there that are tougher. We do have some software companies in there, and they've obviously had a little bit tougher ride, but we also have some other types of companies that maybe it's been a little bit less. Again, we still see the sales cycle dynamics and the difficulties getting stuff closed in those segments as well, but comparatively less so in diversified relative to the others.
spk13: And then one for Robert or Rick, I know that you talked about kind of the outlook for MNA a little bit in the current environment. I'm just sort of postulating here, but you know, I would think that some of your smaller, uh, less capitalized peers may be under some pressure at some point. Um, do you think that you could be maybe more aggressively opportunistic, um, over the next six to 12 months versus kind of the one to two deals that you've talked about historically, if that was something that sort of came to fruition?
spk12: I mean, I never want to hypothesize too much, but if we found three great companies to buy, kind of fit our criteria, and that we felt like we could successfully onboard and integrate, we would do it. So if one to two is not an absolute guideline, it's sort of a general indication. I think the realities are that it does take a, you know, we're not enormous as a company, and when we bring someone on board, we want to do it really well and capitalize on all the synergies associated with it. So that takes That takes a company-wide effort. Not to say we couldn't do three, but we would look really carefully to be sure that we could manage those to maximize the value. But no, I don't want to say there's any artificial barrier to it. And as valuations come in, I do think we'll find some really nice opportunities on the M&A front. Great. Thank you.
spk14: Sure.
spk02: Next question is from Brian Peterson of Raymond James. Please go ahead.
spk04: Hey, good afternoon. This is Jonathan to carry on for Brian. We'll just keep it to one. So I'm just kind of curious on NRR, can you stack rank the drivers of your expansion motion typically in terms of cross-sell and expanding seats into new therapy areas? And then I'm just kind of curious, you know, where do you think about a longer term NRR settling, maybe even just qualitatively once we reach the other side of the unpredictable macro? Thanks.
spk09: Yeah, the biggest driver of NRR Increase in existing client revenue comes from cross-selling into new divisions and new products. The number of seats is, at best, a tertiary driver for us. Very different from what you may be used to with some of the other companies out there.
spk12: And that's in some part because a lot of times our clients will have an enterprise license, so the big opportunity is getting them using more of our functionality versus just having more people at the client use it.
spk15: Thank you. Sure.
spk02: The next question is from Jonathan Young of Credit Suisse. Please go ahead.
spk07: Hey, thanks for taking the question. Just to go back to churn again, I guess one, the churn you saw in the quarter, was that in line with what you kind of expected for the quarter? Looking ahead, does your guidance also account for possible consolidation within the verticals where there may be additional churn outside of the financially distressed firms?
spk12: Yeah, so churn was about where we expected it to be. It was a little higher than we saw at the end of last year, which we projected would be the case just based on what's going on in the macro. We've always had a pretty steady amount of M&A throughout our client base That's something we always manage with. I don't think that was necessarily any more elevated or declined this quarter versus any other quarter. And we'll always fight hard to keep the full amount of the revenue from that as long as we can. To your point, inevitably, you know, that's sometimes a cost synergy for the acquirer, and so they want to come and find ways to renegotiate. Sometimes it's an opportunity to expand our relationship if one of the companies doesn't have us and the other one does. So it's not always a negative, but... we would tend to prefer non-consolidation versus some consolidation there. But it wasn't any different than any other quarter in terms of pacing and impact.
spk09: Right. And we did not model that as a separate variable as we were looking at 2023. Okay, great.
spk07: And then just going to the elongation of deals. So I guess I want to better understand this, but I guess my realization of it was that deals were just being pushed out a little bit, but they were still in the pipe. I guess, are you seeing basically that these deals are now completely off for now, and as the macroeconomic headwinds ease, that companies will have to reevaluate everything at that point, and so it's somewhat of a longer cycle? sales cycle overall where maybe it was nine months now, everything stopped. Then once we get to that point where things open, it's going to be another three, six months after that where we might take a little bit longer to reaccelerate revenue growth. Thanks.
spk12: Sure. That's hard to know. That's pretty specific fortune telling. So I guess what I'd say is, yes, we have a lot in our pipelines. Deals that you'd expect to close one month end up in the next month. Now, not as many are closing as they did a year plus ago either, so you are not getting all those across the finish line even in the delayed circumstance. My sense would be if you look at prior downturns here, which was after the COVID downturn, the short COVID downturn, and then my experience historically would be that once people feel like there's stability and kind of feel like they have a reasonable understanding of what's ahead for the next 12 months, that certainty tends to pretty quickly lead to buying decisions. And I kind of analogize that to us. We've been really careful with external spend. Once the economy had a pretty clear outlook and we started seeing that play through in our commercial activity, we would make spending decisions based on that very quickly. So if you think about definitive healthcare, what's great about what we do for clients is that it helps people grow and helps people sell. So the minute people feel like there's a good opportunity ahead of them to inflect sales upwards or to start growing their business at the levels they were used to again, I think we get the dollars pretty quickly.
spk07: Great, thanks.
spk12: So a long way of saying I don't think there's another two to four month pause once things I think once things stabilize, I'd expect our business to pick up certainly beyond the levels we've seen right now.
spk15: And I think that we have hit the top of the hour.
spk09: Appreciate everyone's time. We're going to be out at conferences in the upcoming weeks and look forward to seeing many of you in person. Goodbye.
spk14: Thank you.
spk04: Ladies and gentlemen, the definitive healthcare call and webcast has concluded. Thank you for your participation. You may disconnect.
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