Definitive Healthcare Corp.

Welcome to the Definitive Healthcare Q2 2023 earnings call. Our host for today's call is Robert Musselwhite. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to your host, Robert Musselwhite. You may begin.

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, the anticipated impacts of global macroeconomic conditions on our business results and clients, and on the healthcare industry generally. Product features, the anticipated benefits of our acquisition of Populi and the impact of the restatement of certain of our financial statements related to sales tax liability. 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.

Thanks, Matt, and thanks to all of you for joining us this afternoon to review Definitive Healthcare's second quarter financial results. On today's call, I'll provide an overview of our second quarter results, provide some perspective on business trends and what we are seeing in the market, and review some of our key wins from the second quarter. Then I will turn it over to Jason to highlight some of our latest product innovations, including our recently announced acquisition. I'll start by reviewing our second quarter financial results. Revenue and adjusted EBITDA for the quarter were in line with our expectations. Our ability to continue delivering on our goal of balanced growth and profitability in the midst of a difficult economy is an important reminder of the inherent value of our platform and the efficiency of our business model. Our total revenue was $61 million, which represents 12% year-over-year growth, and our adjusted EBITDA was $17 million, which translates into a 28% margin. Our adjusted EBITDA was $17 million, which translates into a 28% margin. Our performance in the quarter was driven by important customer wins in each of our target markets with both new and existing customers. We continue to see solid demand generation and are having an increasing number of strategic conversations with customers about their long-term investment priorities. This ongoing strength in demand generation gives us great confidence for our future growth prospects once economic conditions normalize. However, in the near term, the selling environment remains similar to what we have seen in recent quarters. Many customers and prospects remain stringent in their purchasing decisions and are deferring investments until they have clearer line of sight to when their business performance will begin to improve. In the meantime, we continue to focus intently on sales execution, value delivery, and investing in the products that we believe will drive sustainable long-term growth for the company. We have a lot of good work going on across all of these areas. A key driver of our current and future success is the growing demand for data and analytics to help drive strategic business decisions and daily sales and marketing effectiveness. The healthcare market is complex and continues to change rapidly with consolidation, introduction of new biopharmaceuticals, and development of new technologies to drive down costs and improve quality. All of these changes create challenges for our clients who are trying to develop and execute upon go-to-market strategies in healthcare. We help our clients understand this dynamic industry and provide the information they need to be successful competing in it. Whether it is helping sales and marketing teams more effectively target and create messaging for physicians with the highest propensity to write prescriptions, or an R&D team that needs to size its potential markets or identify the most important clinical trial researchers to accelerate drug commercialization, the cost of making business decisions with incomplete or uncontextualized data has never been higher. This challenge is especially true in a world where growth is harder to come by and operating capital costs are increasing. Our healthcare commercial intelligence platform is uniquely suited to address these challenges. This platform combines a large and expanding proprietary data set, sophisticated data science that ensures data quality, and an easy to use cloud interface to put the right information at the fingertips of business users or embed the information into their CRM or other systems. Simply put, with definitive healthcare, any company selling into the $4 trillion U.S. healthcare market will be able to make better data-driven business decisions in its go-to-market or product development initiatives. And as Jason will discuss in detail later, we are not standing still. The acquisition of Populi adds a number of purpose-built solutions for our healthcare provider clients that strengthen our competitive differentiation in that key market. Populi brings new data to our Atlas dataset. And later this month, we will release a significant update to our Atlas technology install data set. For all these reasons, we remain very bullish on the long-term growth opportunity in commercial healthcare intelligence. This is a $10 billion and growing market that is still in its early stage, and our offerings are well aligned with many of our customers' top strategic priorities. Now I'd like to spend a few minutes highlighting some exciting customer wins from the second quarter that demonstrate the numerous ways customers are generating business value from the Definitive Healthcare platform. A global immunology company chose Definitive Healthcare for a multi-year enterprise contract to profile key opinion leaders across multiple separate disease states using the Atlas AI tools that we introduced in the first quarter. This client will leverage claims-based specialty analysis, expert ranking, and key opinion leader industry collaborations to rank KOLs based on proprietary mix of clinical and scientific activity and drive greater efficiency for its medical affairs team. A Spanish multinational pharmaceutical and chemical manufacturer signed a three-year contract in excess of $1 million to gain better visibility into their market share and spot trends and opportunities in real time. Definitive Healthcare will allow them to easily identify the providers treating relevant patients and to track those providers back to the clinics, group practices, and IDNs they are affiliated with. In addition, by leveraging the new integration capabilities that we introduced in the first quarter of this year, this company will put this powerful data in the hands of their frontline employees to drive their daily efforts. An American on-demand financial and human capital management software vendor signed an enterprise agreement with us to integrate physician data from our Atlas data set into their Salesforce.com instance. This company intends to use the Atlas data set as its single source of truth as it increases its focus on the healthcare vertical. With the Atlas data set, they can size and segment their total market opportunity and build an integrated sales and marketing strategy, all while reducing the time and effort associated with deduping, updating, and maintaining key account and contact data. Turning to our passport analytics suite, which we acquired when we purchased Analytical Wizards in February 2022, we had a significant enterprise sale for passport planning and performance at a large biotech focused on developing and commercializing biopharmaceuticals for rare diseases driven by genetic causes. This company plans to use our solutions to help monitor and report upon a risk evaluation and mitigation strategy study for a drug currently in development. In addition, our solution will help this company develop a comprehensive patient journey and real-world evidence plan. Finally, turning to our provider business, we signed a multi-year enterprise deal with a nonprofit organization that provides reproductive health care and education in the United States. This organization plans to use our Atlas reference and affiliation data set in combination with our Atlas all-payer claims and latitude reporting suite to better understand where it can and should expand its services. based on the distance that patients travel for care and the services provided by existing OBGYNs in that region. In addition, the organization will utilize our solutions to identify care deserts or areas where there is limited or no access to care. And of course, there are many more examples, but I only had time to choose a few. With that, I'd like to turn it over to Jason.

Thanks, Robert. I'm really excited to share this news with everyone today. I'm thrilled to announce that we have completed the acquisition of Populi. a leading healthcare commercial intelligence company that specifically targets the provider market. PoppyLive provides healthcare organizations, including hospitals and health systems, with dynamic analytics to optimize their physician relationships, reduce network leakage, and expand their market share, both geographically and across service lines. This acquisition furthers Definitive Healthcare's commitment to leadership in the healthcare commercial intelligence market across the entire healthcare ecosystem. including life sciences, providers, and diversified industries. Founded in 2020, Populi serves some of the country's largest healthcare systems, including University of Pennsylvania Health System and Henry Ford Health. The Populi acquisition will deepen Definitive Healthcare's value to our provider clients, helping them drive growth and expansion with the addition of powerful analytics that are utilized across multiple departments and functions. Specifically, the solutions will help in the following areas. Business development and strategy leaders can determine which services and locations have the largest opportunities for expansion. Physician liaisons can identify their highest value physician and organization targets and develop successful messaging and outreach strategies. Marketing teams can optimize patient and provider marketing, as well as execute digital campaigns to acquire and retain patients and boost physician loyalty. Population health teams can create care initiatives and strategic plans with a better understanding of consumer and provider behavior, as well as social determinants of health. Finally, data and analytics departments can leverage powerful integrations to create a single source of truth across their internal systems, ensuring all departments have access to the same accurate, comprehensive, and current data. With aligned strategic visions to transform healthcare commercial intelligence and revolutionize healthcare analytics, Definitive Healthcare and Populi have strong go-to-market and product synergies that will greatly benefit our healthcare organization clients, delivering greater speed to value, deeper provider insights, and expanded ROI. As we have shared previously, our acquisition strategy is to find companies that either, one, provide a new set of proprietary data that we can use to enhance our overall offering, or two, provide a new capability to leverage our existing data to expand the use cases that we address. While Populi is still small today, it checks both boxes. With Populi, we'll expand the Atlas dataset with modeled patient information that helps our clients identify the most attractive markets and service lines for expansion. Additionally, the powerful Populi interface will leverage existing definitive healthcare data and our large provider-facing sales team to solve new problems for our current provider clients and increase our deal velocity with new logos. From a culture perspective, as Robert and I and the rest of the definitive healthcare leadership team got to know the team at Populi, we identified a strong cultural fit. Both teams are passionate about serving and improving the healthcare industry and have an innovation-oriented mindset, and value given back to their communities. I'm looking forward to watching the two teams come together to deliver game-changing value to our customers. In addition to the Populi acquisition, I'm also excited about the major enhancement that we're making to the data in the Atlas technology install dataset. We're adding significantly more information about which vendors, products, and technology types that healthcare organizations are leveraging today which will help our clients better identify the opportunities of tomorrow. Overall, we'll update data on more than 1.5 million technology installations for hospitals, health systems, ambulatory surgery centers, and physician groups. We're doing this by collecting data from multiple new sources and then applying our proprietary cleansing and linking algorithms to generate new intelligence. And in a macroeconomic environment where every organization is rationalizing every budget dollar, it is essential that companies who sell software and IT into the healthcare ecosystem maximize their precious sales and marketing resources to target the facilities where they are most likely to grow. Software and IT clients need to know who has installed their competitors' products, how old are these installations, and the number of procedures done each day using these systems and devices. Armed with this information, clients have a true competitive edge as they build more effective sales and marketing plans and increase win rates. Both the update to the Atlas technology data and popular acquisition reflect our commitment to investing in product development, even in a difficult macroeconomic environment. This year alone, we've updated multiple parts of our industry-leading Atlas dataset, including our all-payer claims and our reference and affiliations datasets, and we've added new intelligence, including our Atlas behavioral health data set. Moving forward, we will continue to add more data, and we'll also have several new Atlas AI analytics in development, all in support of our commitment to deliver the best healthcare intelligence to our customers. I'd now like to turn it over to our CFO, Rick Booth, to walk through Definitive Healthcare's second quarter financial performance in more detail.

Thanks, Jason. I'll start with the detailed review of our Q2 results before finishing with our guidance for Q3 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 Q2, despite tough economic conditions and a challenging compare. The financial highlights in the quarter include 12 percent revenue growth compared to Q2 2022, 28 percent adjusted EBITDA margin, and a 22 percent unlevered free cash flow margin over the last 12 months. Revenue growth plus the trailing 12-month adjusted EBITDA was 40 percent, or 34 percent using unlevered free cash flow margin. Turning to our results in more detail, Revenue for the second quarter was $61 million, up 12% from the prior year and at the midpoint of our guidance. Growth was primarily driven by new business and upsell as we continued to experience heightened churn due to the tough macro environment. That macro impact is toughest for customers in the areas of the economy that are struggling most, including emerging biotech, small software and IT, and healthcare providers. Although we do not formally guide net dollar retention, this could lead to year-end NDR in the mid to low 90s on an overall basis. We ended the quarter with 527 enterprise customers, which we define as customers with at least 100,000 in ARR. This was an increase of 40 enterprise customers, or 8% year-over-year, but a decrease of two enterprise customers from the previous quarter. As a reminder, these customers represent the majority of our ARR and are a key focus of our go-to-market programs. Our total customer count, which includes smaller customers, was 2,957 at the end of Q2, down from 2,999 in Q2 2022, and down 57 from the previous quarter. Overall, economic conditions continued to be challenging in Q2, Despite the continuing headwinds, we believe new business and expansion opportunities remain strong, even if realization is slightly delayed. Gross profit was $52.4 million, up 8% from Q2 2022. Gross margin of 86% decreased 260 basis points from Q2 2022 as the additional data sources in the Atlas dataset came online. as we had communicated previously. Sales and marketing expense was $21.7 million, up 17% from Q2 2022. As a percentage of revenue, sales and marketing expense was 36% of revenue, up 170 basis points from Q2 2022. This is the natural result of past investments meeting current conditions. And as I will cover later, We adjusted our sales organization shortly after quarter end in order to respond to current conditions. Product development expense was $6.9 million, up 1% from Q2 2022, as we realized efficiencies by integrating acquired operations and further globalizing our talent pool. As a percentage of revenue, product development expense was 11% of revenue, down from 13% in Q2 2022. Investing in our platform and using our existing data sets to launch or enhance multiple products is a highly effective and efficient way for us to increase the value we deliver to customers. Robert and Jason touched on some of these examples of those earlier, and we'll continue to invest in the multiple opportunities we have identified on our long-term product roadmap. G&A expense was $7.3 million, up 5% from Q2 2022. As a percentage of revenue, G&A expenses were 12% of revenue, down from 13% in Q2 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. was $16 million, up 5% from Q2 2022, and as a percentage of revenue, operating income was 26% of revenue, down 170 bps versus Q2 2022. The year-over-year margin decline was primarily a result of the gross margin impact of the Atlas dataset expansion and sales investments offset by efficiencies in product development and G&A. Adjusted EBITDA was $17.2 million, a 6% increase from Q2 2022, and above the upper end of our guidance range. As a percentage of revenue, adjusted EBITDA was 28% of revenue. And compared to Q2 2022, adjusted EBITDA as a percentage of revenue was approximately 150 basis points lower due to the investments described earlier, which were in line with how we planned the year. Net income in Q2 was $12.4 million, or $0.08 per deleted share, based on 155.6 million weighted average shares outstanding. Turning to cash flow, Definitive's high gross margins, upfront billing, 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 $33.5 million on a trailing 12-month basis, up 3% from $32.4 million in the comparable period a year ago. Unlevered free cash flow was $52.5 million on a trailing 12-month basis, down 21% from the comparable period a year ago. Unlevered free cash flow is 22% of revenue on a TTM basis, effectively converting 79% of our TTM adjusted EBITDA of $66.3 million into cash. Like any SaaS company, when booking 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 $351 million in cash and short-term investments. With strong profitability and only $263 million of debt, we're well positioned to fund both organic and inorganic growth initiatives. Current revenue performance obligations of $176.5 million were up 8% year-over-year, and total revenue performance obligations were up 3% year-over-year. Deferred revenue of $97.6 million was up 10% year over year. You'll note that as expected, CRPO and deferred revenue grew more slowly than revenue. This is because the primary driver of CRPO is new business and upsells, but we continue to see higher rates of churn, particularly in life sciences, small IT, and providers, and those cancellations show up immediately as reductions from CRPO. These factors have been largely anticipated and we believe we remain on track to hit guidance for the year. Q2 results reflect the impact of an accounting restatement related to the collection and remittance of sales tax. This has no impact on the key metrics of revenue and adjusted EBITDA. Further, the adjustment impacted current and prior periods but should have no effect going forward. In brief, we undertook a thorough review of the complex and ever-changing sales tax regulations. That review identified up to $8.8 million of potential liability to states in which definitive may have been required to collect sales tax from customers. The liability is contained within the years 2017 through 2023. We do not expect this to impact profitability on a go-forward basis because we have now updated our invoicing systems to charge sales tax in the impacted areas. Because the review encompassed all 50 states, we do not anticipate any additional remaining liability. In fact, we plan to seek resolution at a lower amount by filing voluntary disclosure agreements, gathering exemption certificates, and taking other actions. Speaking today, we cannot estimate the size or timing of any reduction in costs because VDAs require the consent of the states involved. Subsequent to quarter end, we took two key actions that did not impact quarterly results but are included in our guidance. I'll remark on each before providing guidance for Q3 and the full year. First, on July 21st, we acquired Populi. Although it is a very small company, Populi's capability to deliver provider-specific analytics strengthens our position in the large intractive provider market. Their technology and analytics have been proven with several large hospitals, and we plan to integrate them quickly with our products, as we did with Monocle and Analytical Wizards. Given the need to integrate and the mid-year timing, we expect only low single-digit million-dollar revenue contributions in 2023. And in terms of profitability, its costs are expected to exceed revenue by low to mid-single-digit millions during the same time period. The second post-quarter activity was as we exited the first half of the year without seeing any improvements in the commercial conditions, we reassessed our overall sales and marketing spend. As a result, we reduced spending in areas where the market remains troubled. Consequently, we said goodbye to 42 colleagues, but we'll end the year with a leaner and stronger sales team as a result. Moving now to guidance for Q3 2023, we believe it is prudent to assume that current conditions extend through the remainder of the year as well. Assuming that is the case, In Q3, we would expect total revenue of $63 to $64.5 million for a growth rate of 10 to 12%. Adjusted operating income of $16 to $17 million. Adjusted EBITDA of $17.5 to $18.5 million for a 27 to 28% adjusted EBITDA margin. adjusted net income of $9.5 to $10.5 million, or $0.05 to $0.07 per diluted share on 156.9 million weighted average shares outstanding. For the full year, we expect to land within our original guidance range. That range included revenue of $249 to $255 million for a growth rate of 12% to 15%, Adjusted operating profit, $61.5 to $65.5 million. Adjusted EBITDA of $67 to $71 million for a full year margin of 27 to 28%. Adjusted net income of $30 to $34 million. And earnings per diluted share of 19 to 23 cents. This guidance includes the dilutive effect of the acquisition of Populi and assumes no change in external conditions. Based on the dynamics we discussed earlier about the impacts of the macroeconomic environment, we would expect to end the year in the middle to lower half of revenue guidance, but in the middle to upper half of the profitability ranges. To summarize, Q2 is a solid quarter for definitive healthcare despite current economic headwinds and uncertainty. We're committed to efficiently and prudently managing the top and bottom line results while continuing to invest in product development to best position the company for long-term growth. We believe 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.

Thanks, Rick. Before we open the call for questions, I wanted to take a moment and acknowledge the workforce reduction that took place on August 1st. The decision to eliminate jobs is never one that I take lightly. It was sad for all of us at Definitive Healthcare to say goodbye to our talented colleagues and friends, and we wish them well in their future endeavors. As we move into the second half of the year, I want to reiterate that we are well positioned to deliver on our financial commitments 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 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. Operator?

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted, and please limit yourself to one question and one follow-up question. Once again, if you have a question, please press star 1 on your phone now. And our first question today comes from Craig Hettenbach with Morgan Stanley.

Yes, appreciate the color on Populi for what the contribution is for 2023. What would you say would be a reasonable full year run rate for that business revenue in 2024? And would it remain dilutive or how do you think about the profitability as you look out to next year for that business?

Well, we're very proud that we managed to cover the initial dilution this year while remaining within our initial guide. So thanks for pointing that out. I would expect that it will continue to be dilutive relative to where we would otherwise be in 2024. That's just the nature of these small acquisitions. And it would be in, you know, kind of mid to in strong performance, high single digits in 2024. I think the challenge is when you're dealing with a business this young and small, There's a wide dispersion of potential outcomes. That's not the big driver of our growth for next year.

And Craig, just to add on to that, you know, our plan is to really integrate that business with our provider business. And so going forward, it becomes pretty indistinguishable. I'm certainly hopeful that by 2024 we're working as a team and that there's not a clear line of demarcation between that business and our overall business.

Got it. And then, Robert, just to follow up on the job workforce reduction that's geared a little bit more towards the commercial team for this round, can you just talk about that in the context of the environment you're seeing out there where, you know, there hasn't been an improvement in the macro and just how you're balancing kind of revenue growth looking out versus profitability?

Yeah, I mean, I think hopefully you saw through the call, we continue to make key strategic investments in the business where we think it's important, particularly around new data sets and products. The acquisition of Populi, obviously that's an investment as well because it brings solutions. So we've really tried to focus on the right investments to drive future growth and expansion. And at the same time, we have a track record of delivering a good balance of growth and profitability and know that we need to balance those investments with managing costs prudently. And so that means it's important for us to do, number one, choose well with what we fund and what we don't and make the right investments there. And then secondly, be prudent on costs and where we see places where we're not getting as much yield relative to what we'd expect, we need to be prudent in pulling back on those. And so I think that's really what you're seeing. We're still carrying very important investments in our sales organization that we made across the last year. I think if you look at our sales capacity, it's still larger than it was at the end of 2021, even after the action. So I see it more as just being prudent and pulling back on places where we weren't seeing the same amount of yield in this environment. And, you know, certainly we'd love to get some macro improvement that would justify, you know, building back the vision we had before that.

But at this point, we felt like that was the right thing to do. Got it. Thank you.

And our next question will come from Cash Rangan with Goldman Sachs.

Hey, guys. This is Jacob on for Cash. Thanks so much for taking the question. I wanted to touch on the selling environment and the layoffs real quick. I think you mentioned that the selling environment remains similar to what we've seen in recent quarters. So two parts here. From a sales productivity perspective, what are some KPIs that you're watching and maybe how are those trending relative to last quarter and the year ago quarter? And then Also, I just want to confirm, were the layoffs focused on S&M, and then if so, like, where within the S&M framework were they centered on?

Sure. I want to answer your questions in reverse order. Yes, the investments were focused almost primarily within S&M this time around, and that, you know, goes back to the question I kind of answered Previously, as you know, it's been a tougher environment out there than we had planned coming into the year. Certainly hasn't improved any dimension. I think we were investing with hopes that things would improve a little more, so we felt like it was good to pull back on places where we're getting lower yield. So that was primarily where it went, mostly across markets, but probably a little more focused on the markets where we've seen a little more difficulty in the market, as we've talked about before. And then to circle back, To the first part of your call, remind me, Cash, what?

Those sales KPIs.

Those sales KPIs we tracked. So obviously, in a world where we've kept a heavier investment in sales and not seeing the sales that we want, your productivity is going down. So it's no secret that we've seen a sales productivity decline as sales performance has come in lower than we've expected. And that's been true probably across the last four quarters or so as we've seen the macro deteriorate. You know, with this move, we're hopeful and we plan to still finish the year according to where we plan to finish the year across the next several months, even with these actions. So the hope is that we found the right places where we can actually increase productivity relative to where we were trending last quarter. We manage all the metrics you'd expect, you know, all the way from top of funnel metrics, such as number of demos, number of free trials coming in, how those convert, all the way down to dollars per rep, wins per rep, activity per rep. I mean, we monitor all of that in an effort to be sure that we're staying ahead of controlling what we can control, getting things into the funnel, and then hopefully having the teams that most effectively manage that to wins and closes.

Awesome. Thank you so much, guys. I appreciate the time.

Yeah, the other key driver in addition to expansion ARR, which really sets the table, is churn, taking a look at particularly those areas of the economy that have been most challenged. Some of those that I think about are the smaller biotechs, software and IT, and providers. Keeping an eye on that, as I commented in my script, We are seeing an increased level of churn, so we now expect to end with the NDR in the mid to low 90s. So I want to make sure that people take those two things into account. And the second half of the year will really set the table for the upcoming year.

Awesome. Thanks so much, Rick. I appreciate it.

Our next question comes from DJ Hines with Canaccord.

Hey, good evening, guys. Thanks for taking the questions. Rick, I'm hoping you can talk at a high level about how you're thinking about margins over the next few years, right? I mean, the stock looks cheap, but I'm getting calls from clients that say, hey, look, Definitive has doubled its revenue base over the last three years, but EBITDA margins have gone from 45 to sub 30. And look, you've done a really nice job helping us strategically understand, you know, why that's happening. But where do we go from here, right? And help us think that through. I mean, there's some moving parts with the restructuring and popular eyeing to the mix and more organic data coming online. And any color, just kind of how we should think about things over a three-year view would be super helpful.

Thanks, DJ. As you know, we're very proactive in thinking about balancing a mix of growth and profitability. We're proud that we've taken the cost actions that we did in advance of the needs so that we can, even in the bottom half of our guidance, deliver strong adjusted EBITDA. As we look at 2024, the second half of this year is critically important. I'm confident that those affected markets are going to bounce back, and we're making the investments that we need to in terms of continuing to deliver innovation. There's no part of me that believes that biotech and providers are going to be on pause, so I remain confident that we can drive attractive combinations of revenue and profitability in the long run. I think the pace of getting there, I'm not quite ready to guide 2024.

Yeah, and DJ, just to add to that, it goes back to what I said before. We have a lot of really good investments in front of us. It's hard to choose between them. We have to choose wisely, but we want to be sure we're investing such that we're in a fantastic position. We do get a little bit of relief from the market and things turn upwards. We'll be in a great position accelerated, and I still believe that over time, growth is the best margin lever because our growth is extremely profitable. So if we can continue to move the top line a little bit faster and faster, that's going to help us a lot on the bottom line when you talk about two and three years out.

Yep, that makes sense. And then, Robert or Jason, whoever wants to answer it, maybe we could talk about one of those areas of investment that, you know, the tech install data sounds super interesting, but where does that incremental data come come from and and just so i kind of understand your strategy like how come it all comes online at once versus kind of coming in on a rolling basis as you gain access to it just help me understand why it works that way yeah yeah it's a good question again um thanks for the question appreciate it so the um

We're very excited about the tech install data. It comes from actually multiple different sources as much of our data does. We have acquired some data from a third party. We've modified the way that we're collecting data through our first party research. And then we've done some really interesting data science on top of all of that that is new and fresh and looking at data in a different way to really get more detail for our clients and more up-to-date information as well. So, you know, it's coming on all at once because we've done a tremendous amount of work and we've done a lot of testing and we're doing a major replacement all at once, but it will continue to change and modify over time. So, as with all of our data, it is a living, breathing beast, and that's really what makes it so valuable for our clients is they get to understand the changes that are happening with their clients, and that helps them identify where the best opportunities are for for them to pick up new clients as well as to grow with existing clients. So hopefully that answers what you're looking for.

It sure does. Thank you, guys. I appreciate it.

We'll hear next from Ryan McDonald with Needham & Company.

Hey, thanks for taking the question. This is Matt Shea on for Ryan. Wanted to start with the enterprise customer accounts, so quarterly declines in that metric again. Wondering whether you would attribute this to more lower upsells or higher churn, and then where that is kind of coming in relative to your expectations. And then given the NRR commentary about where it could trend towards the back half of the year, should we expect continued pressure in this enterprise customer account where we might continue to see quarterly declines as we work through the back half of the year?

I'm not going to get into guiding on a quarter-by-quarter basis, but... We do see a combination of slower expansion, and churn is still a factor, even with certain segments of those enterprise customers. So unsurprising that we ended up in that. I think if you look across the industry, many are in a similar place. But we do tend to have prudent forecasting and cost management, and so we're still able to deliver the second half of the year, even in these conditions.

Okay. Certainly there are some that are challenged, especially in some of the submarkets that we've talked about. On the other hand, we had a lot of really big wins with enterprise clients and a lot of really good expansion. So it's not as if across the board enterprise clients are turning away. We actually had some of our best stories come from that segment. It's just to Rick's point. Counterbalance with a little bit slower than usual migration of people into an enterprise level and higher levels of churn overall on that segment. But we're still bullish about that segment and about our ability to continue to migrate our customers up to there over time, and that will still be a big growth engine for us.

Remember that life sciences and providers are overrepresented in the enterprise group.

Yep, got it. That's a fair point. Okay. And then maybe switching gears to Populi, it sounds like this will help improve the provider go-to-market strategy, but curious in terms of the penetration and the provider groups that they claim as customers, how much overlap is there in their customer base relative to yours and what kind of cross-sell or upsell opportunities does this create on really either side of the house?

Very little of a lot. They're a small company with a few customers, albeit some really good customers and some strong relationships. But to your point, we're really excited about the cross-sell potential. We certainly would expect to bring a lot of our reference and affiliations data from the Outlook data set as opportunities into their clients, and we're extremely excited about bringing their product and their solutions into our provider client base. We have a great go-to-market team set up. They're raring to go, having good conversations with existing clients and a lot of good conversations with prospects, and we're excited to use the really nifty product that Populace built and the visualization that it demonstrates with those prospects and clients to bring them on board. We're hoping that will be a big growth engine for us.

As you recall, our foundation was or strong data, but with no application layer that was specifically created for providers. And they were quite the opposite. They had put all of their attention into building out that vertical, but they did not yet have customers. And so when we found each other, the recognition was immediate.

I'll run ahead of the question.

We talked about at the same time the provider market being a little bit challenged and our excitement around Populi. I don't think those are inconsistent at all. The provider market is a huge market. It continues to grow. I've worked with providers for a long time. Provider market is growing. They need this kind of support. I think the fact that we had a business that was growing despite this tough environment and can now bring in a state-of-the-art product that we think is really going to drive the business forward to these clients, gives us just an awesome opportunity to deliver more value to them and thereby grow faster. So despite the fact they've had a little bit of a rough go lately, we feel really good about the medium and long-term prospects in this market.

Great. Thanks, guys.

Thank you.

Our next question will come from Brian Peterson with Raymond James.

Hi, thanks for taking the question. So I wanted to double-click on what you guys are seeing at the top of the funnel. I appreciate all the comments on the macro and everything else, but any color you can add in terms of the pipeline generation in what you're seeing there.

You know, we're not going to comment on specific pipeline gen metrics other than to say it's a big focus for us. The mantra we've had is control what we can control. It felt like the sort of ultimate win rate and budget decision-making signing on the dotted line has been a little bit less controllable than it's been in prior years, as we've talked about. But what we can do is get out there and talk about what we're doing. We can promote our product releases. We've had several this year. We can get out in front of clients, be showing them demos and talking about the value and get things into the pipeline. So if and when budget comes back and clients are ready to make decisions, we're right there. Even on some of those deals that if we go back a couple of quarters, slips because budget went away, we stay engaged with those clients and those have become pipeline opportunities this year. I think pipeline generation feels good. Demand generation feels good. We have people who are interested in definitive healthcare. It should continue to be tough working those through the bottom of the funnel as we've seen for the past several quarters.

Understood. Maybe a follow-up on Populi and the M&A ambitions. I'm curious what you're seeing in terms of private company valuations and how we should be thinking about the targeted cadence of M&A going forward. Thanks, guys.

Yeah, we're still optimistic we can do one to two per year in this environment. We see a lot of targets. As we've commented before, we did feel like valuation still ran pretty hot through the end of last year and into the early part of this year. But, you know, I would say there are conversations to be had, and we've been having them. So we're really thrilled that we were able to land Hopuli. We think it's going to be a great combination, and we're really excited about that team joining ours. We think there'll be others, and obviously most important for us is to acquire the right kind of company that has a really strong capability or data set that we don't have or don't have to build that accelerates our ability to pull that into our platform and bring it out to clients aggressively. And that creates a lot of revenue synergy and usually cost synergy, so we end up with a lot of value creation from those types of deals. So that's the hope, and I think if I look through our pipeline of deals, obviously a lot of them are early stage, but they're out there.

Thank you. Thanks.

Our next question will come from Alan Lutz with Bank of America.

Thanks for taking the questions. I guess one for Robert. In the past couple quarters, you guys have grown about 15%, you know, through the beginning of 2023. I'm curious what you think the market growth rate is here. Obviously, it's decelerated pretty materially over the past 24 months, but I'm curious if Do you think that you're gaining share in this market, staying steady, losing share? I'm curious if you have any comments on that. And then is there any changes in the pricing environment that you're seeing? Thanks.

Sure. I think from a share gain perspective, it feels like we still are. We talk to our teams a lot about that. We look at win-loss and when we lose, why we lose. You know, it's been tougher to close deals this year, but I'd say the category that's spiked on where we haven't won has been not doing things or pulling back on spend versus going to a competitor. I still feel like the number of clients, if someone, you know, where we win is when someone wants to invest in growing in healthcare and they're investing in sales, they're not pulling back on sales. In this market, you have a lot of people that are holding back on sales investments or pulling back on sales investments because they're concerned about what's around the corner and just are a bit more tentative. But we've seen every time that's happened, when people decide, okay, we're now ready to get back to selling into healthcare, people buy definitive. And I think that hasn't changed. So I would say no, I think we're still gaining share and still getting a lot of good clients, just albeit at a slower rate than we've seen before. On pricing, we took our normal price increase this year and have seen reasonable price realization from that. So I think it's more... similar to historical pricing benefits. This year, we'll continue to look for opportunities where price can be a lever for us to drive better performance, and that can be both directions. I do think generally we're adding a lot to the product, and that can enable some higher price stress in certain areas, because there are obviously places that we'd look at where if we felt like we could offer a little bit lower price to drive more volume, we would look at opportunities to do that in certain areas. But I think in general, we hope that our overall pricing we continue to go up by several percentage points each year.

Great. That's helpful. And then one for Rick, have you guys disclosed what percent of contracts come up for renewal in a typical quarter? I know that, you know, you've been acquisitive. So some of the business models might be a little bit different, but curious, you know, what percent of contracts do come up for renewal in a quarter? And then has that changed over the past 12 or 24 months? Thanks.

Yeah, we have not gone into any particular detail on that. We haven't seen a substantive shift. I think there's been a little bit more shift now that we've got more customers renewing and the rate of expansion of new ones, a little bit more shift towards more frequent renewals, because generally we'll make a three-year deal when we're signing a new customer, and then when they renew, they'll be in annual cycles thereafter. a little bit overweighted in the first and fourth quarters, a little underweighted in terms of Q2 and Q3.

Great. Thank you both. Thanks.

And our next question will come from David Grossman with Stiebel.

Great. Thank you. Just two quick ones, one for you, Rick, and one for Robert and Jason. So, Rick, for you, I think someone was getting at this earlier. Just can you give us some high-level, you know, insight into what your expectations are for, you know, kind of the rate of churn, you know, in the back half of the year versus what you saw in the first half?

Yeah. So I think we expect to end the year with an NDR in the mid to low 90s, assuming the current conditions continue.

Right, but how would the second half look relative to the first half? Is churn going up, or is it just not getting better?

That would be relatively consistent. That's extension of the existing conditions.

Got it. Great, thanks. And Robert and Jason, I don't know which one you want to answer this, but you rarely come out of these downturns the same way you went in, and I'm just curious, based on what you've seen thus far, What do you think the biggest change is going to be both for you and your customers coming out of this when we eventually do?

Yeah, I'm happy to take a swag at that.

We have been incredibly focused during this tough macroeconomic environment and continuing to invest in product that we think is going to drive long-term growth. That's always obviously been our strategy, but we've really been intentional about making sure that we continue to do it during this period. So we're excited about a lot of things that are going on. Obviously, we continue to expand the Atlas data sets, both the reference and affiliations and claims. We think that foundation is very important. We're continuing to acquire companies that add new capabilities to use that data in new and exciting ways. And then we're also adding AI capabilities. So we're doing various bits of work throughout the company right now, both to use AI to become leaner and stronger internally, but also creating some really interesting prototypes of how we can put that on top of our product so that our clients can leverage the proprietary data that we have much faster than they've ever been able to before. So if we continue to make the right investments, focus on doing what we always have, which is measure everything and make sure that we only are investing in areas that have the highest yield, as Robert talked about before, we're going to be a lean, mean organization coming out of it. And as we continue to grow, we should see the fruits of all that work that we put in during this tough time.

All right. Well, thank you very much for that, and good luck. Thank you.

And we'll move next to Jonathan Young with Credit Suisse.

I'm just going back to the NDR. I appreciate the commentary about the assumption of elevated churn. Is there any way to break down or frame how many are kind of on the bubble of slipping into being a churn entity? And are these entities going bust in the market or just any framework around there? Thanks.

Yeah, and we've talked about this on prior calls. I think we've seen, we've certainly seen a much higher level of two things. Number one is just pure financial distress where a client is laying off people and not paying their bills and they just come and say, we can't renew.

And now we're trying to stop live. Sorry, is there a frame of like how many are kind of on that bubble if there's, you know, you obviously have an assumption for the guidance. for your comments this year, but is there any that are kind of close to slipping into churn?

I'm sorry, I'm not sure.

What I tell you, if you look at what we sort of expected from a normal churn rate to what we're seeing now, I was going to say there are really kind of three buckets, and two are certainly larger drivers. That's one, what I just told you. If you go back a year and a half, we had virtually zero of those. We have, you know, We have more than we'd like that happens right now. The second is not pure financial distress, but financial strain. Those are places that are cutting costs, and they're looking at every dollar, and they're pushing budgets out, and they're making higher approval levers. We're doing that with all our vendors. It's happening to us a lot out there. So that's the second one, and we win some of those, but that creates a lot of extra hoops to jump through. certainly jump through within the timing we'd normally expect a deal to go through. So a lot of those deals end up taking longer than we'd want even if we could get them. And then the third, you know, I don't want to dull our responsibility. There's always clients that, you know, you haven't delivered exactly what they expected and you have to work to prove that you deserve their right again. And sometimes you lose a few of those. I don't think there's been an uptick in those per se, but, you know, certainly in a world where value really matters and is getting scrutinized, we get into more of those discussions as well. So, I can't put percentages on all those and sort of forecast which of those drive forward, but those are the areas where we've definitely seen a difference from what we might have seen a year ago.

Okay, appreciate that. And then just kind of on the pipeline, you know, you're talking about continuing to develop the pipeline, but our customers basically understand that they're delaying things, but are customers saying, well, we're kind of only going to look at one solution at this time, or are they still looking at multiple solutions, just any color there. Thanks.

Yeah, I wouldn't say there's a trend to just looking at one solution. You know, we are pretty, we're distinctive with our combination of reference and affiliations data and the rest of our Atlas data sets and the way we organize it by position. So there are use cases that we are uniquely suited to deliver against. And so we don't tend to be in a situation where it's either us or someone else and they can just get exactly what they get from us from someone else. That just doesn't happen. There are times where they might prioritize spending in other areas over the use cases they would spend on with us. And again, I'd probably characterize that as places that are being more hesitant in their sales and growth activity and pulling back generally on sales into healthcare. When they do that, sometimes we get caught up in that. Sometimes we keep it, but sometimes that's a place where they put stuff on pause, and as soon as they feel better about the environment in front of them, we know they'll come back and invest again. So that's more what we see. It's really not, hey, we're not doing definitive because we're doing company X any more than it used to be in the past.

Great. Thanks.

As a reminder, if you would like to ask a question, you may signal by pressing star 1 on your telephone keypad now. And we'll move next to George Hill with Deutsche Bank.

Yeah. Good afternoon, guys. Thanks for taking the question. And I have, like everybody else, I have one for Rick and kind of one for the rest of the team. So Rick, I want to make sure I understand the mechanics of the NDR number correctly. So if you guys are tracking towards, if you guys have got to do about $250 million in revenue for this year, and you're tracking towards like a low 90s number, a mid-90s number, is the right way to think about kind of the jumping off point for next year's number, just kind of the 92, call it 92.5% or 93% times the 250? And if that's not the case, can you just explain to me mechanically why it's not?

No, I think if you think about your Q3 and Q4 forecasts, which we've helpfully provided, then I think the right jumping off point is to roughly annualize the expected revenue run rate in Q4. That's a more simple and direct – that's an approximation of ARR.

Rick, I love a simple and direct answer. Thank you very much. And then for Jason and for Robert, as the world seems to have been consumed by people focused on chat GBT and AI in the last six months, I guess, do you guys feel like you're seeing a redirection of how customers are trying to allocate capital and make investments towards where you guys, like, I guess, do you guys feel like you might be losing share of wallet or losing share of looks because some of your clients are kind of looking at, you know, the shiny new bubble that's AI-based solutions?

No, I think actually it will be exactly the opposite of that. So in order for these large language models to work well, you need proprietary and extremely high quality data. And that's what we provide and we continue to grow. So I see this as a tremendous opportunity for us to take this vast amount of information that we have and use GPT types of models and large language models just to make it more accessible for our clients. So happy to give you a quick example. This is the kind of thinking that we're doing, and this is still early stages. But if we have a client who has a device that reduces the recovery time after a joint replacement, what they might want to do with our data is say, hey, find me all the people that are doing a significant number of knee replacements across the country. Now, filter that down further to find the people that are having a quality issue and have a lot of readmissions on those knee replacements. now okay i take that list i'm going to boston tell me who are the people in boston that have that area and now tell me the executives that i need to talk to at that so who's the head of orthopedics who's the chief financial officer that's being penalized all of that you can do with our data today but it's multiple different steps and it's harder and as a result people don't you know leverage it as much as they could So we can create these natural language models that allow you to do that type of thinking. It allows our clients to use their imagination far more than they ever could to leverage our data in ways to drive their business and grow their business quicker than they ever could. And that's really exciting. So as we're talking to clients about these types of things that we're working on, there's a tremendous amount of excitement to invest more in our data and to use data in new and exciting ways throughout the organization.

Very helpful. Thanks, guys.

And there are no further questions at this time. I'd like to turn the conference back to Mr. Musselwhite for any additional or closing remarks.

Thanks, everybody, for attending the call. We appreciate your questions, and we look forward to speaking with many of you across the coming weeks. So thank you, and good night.

This does conclude today's conference call. Thank you for attending.