Health Catalyst, Inc

Ladies and gentlemen, thank you for standing by and welcome to the Health Catalyst, Inc. first quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. It is now my pleasure to introduce Senior Vice President of Investor Relations, Adam Brown.

Good afternoon, and welcome to Health Catalyst's earnings conference call for the first quarter of 2020, which ended on March 31st, 2020. My name is Adam Brown. I am the Senior Vice President of Investor Relations for Health Catalyst. and with me on the call is Dan Burton, our Chief Executive Officer, and Patrick Nelley, our Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today, as well as in our related Form 8K furnished to the SEC, both of which are available on the investor relations section of our website at ir.healthcatalyst.com. As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call. During the call, we will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding trends, strategies, the impact of the COVID-19 pandemic on our business and results of operations, and our general anticipated performance of the business. These forward-looking statements are based on management's current views and expectations as of today. It should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may materially differ. Please refer to the risk factors in our Form 10-K for 2019, filed with the SEC on February 28, 2020, and our Form 10-Q for the first quarter 2020, which will be filed with the SEC. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of these non-GAAP measures to their most comparable GAAP measures is provided in our press release. During the call, we may offer incremental metrics to provide greater insights into the dynamics of our business. These details may be one time in nature, and we may or may not provide updates in the future. Lastly, I note that we ask for everyone's patience should we run into any technical difficulties, given the unique circumstances of hosting this call. With that, let me turn the call over to Dan for his prepared remarks, and then Patrick will subsequently provide his prepared remarks. Dan and Patrick will then take your questions. Dan?

Thank you, Adam, and thank you to everyone who has joined us this afternoon. Let me first take this opportunity to share that our thoughts and prayers are with all those impacted by the COVID-19 pandemic, especially those who have lost loved ones. We recognize that there are certainly a series of unprecedented challenges associated with the global spread of COVID-19. Yet we also see reason for optimism and hope for the future in general and specifically as it relates to the mission of Health Catalysts. Our mission to be the catalyst for massive, measurable, data-informed healthcare improvement is needed now more than ever. And COVID-19 has shined a light on the benefits of a robust, scalable, flexible, and open data and analytics infrastructure that, when combined with the right expertise, can lead to extraordinary outcomes, even in the face of a rapidly evolving global pandemic. As a reminder, Health Catalyst places our team members at the center of our flywheel with the belief that when team members feel connected to our mission at an extraordinary level, they will produce outstanding work for our customers. And holding true to that thesis, I want to thank our team members who remain committed during this COVID-19 pandemic to working tirelessly to support our customers Many of which are risking their lives to provide care with the goal of ensuring that their courageous efforts are as effective and as data-informed as possible. And to date, we are both grateful and honored that our heroic health system customers have trusted us so meaningfully to support them in this time of great need. I'll begin today's call by sharing our first quarter 2020 financial results As a reminder, in connection with our recent convertible senior notes offering on April 8, 2020, we preannounced our preliminary estimated financial results for Q1 2020. I am happy to now share our finalized Q1 2020 financial results and to reiterate that I am pleased with our performance across the board. Our total revenue for Q1 2020 was $45.1 million. This represents an outperformance relative to the midpoint of our guidance and results in 28% growth relative to the first quarter of 2019. Total adjusted gross margin in the first quarter was 49%. And our Q1 2020 adjusted EBITDA was a loss of $6.0 million. which represents an outperformance relative to the midpoint of our guidance and shows an improvement from a loss of 6.7 million for the same period in the prior year. I'll now focus much of my commentary on our response to the COVID-19 pandemic, both in our support of our customers and the corresponding impact COVID-19 is having on our business. First, I'd share that as the COVID-19 crisis has progressed, We've been heartened to see our customers leveraging our existing technology now more than ever in meaningful and significant ways as they respond to COVID-19. The benefit of a cloud-based open and flexible data platform means that customers can rapidly build their own ad hoc analytics with minimal development time. This architectural design coupled with our data platform's self-service tool has proven instrumental in enabling our customers to quickly make data-informed decisions as this crisis has rapidly unfolded. In addition to customers utilizing our existing technology, we have worked to quickly develop and deploy a series of COVID-19 specific technology and services solutions. We began developing our first three COVID-19 solutions in the early days of the pandemic based on a meaningful increase in direct customer dialogue and feedback which has persisted throughout this pandemic. And we brought these foundational solutions to market over the course of just a few weeks in line with the timeline needed to enable our customers preparedness during the rapid onset of the pandemic. Our next round of insights was gathered through frequent additional discussions with health system customers directly informing our next wave of COVID-19 development, culminating in the release of 10 total technology and services solutions in less than two months. Importantly, in our effort to support all our existing customers in an expedited timeframe, the technology associated with these COVID-19 solutions is offered to help Catalyst customers at no incremental cost. Additionally, in response to requests from health systems who are not currently Health Catalyst customers, we have made available a modular bundle consisting of a light version of our data platform bundled with our patient safety application suite, inclusive of the COVID-19 specific public health surveillance module. This offering can be installed in as little as a few weeks. and the technology is also being made available to any US healthcare system with the only fees charged in 2020, including our direct costs to recuperate cloud hosting and other implementation fees. The adoption of these COVID-19 specific solutions has occurred at a much faster pace than we initially anticipated. Likewise, the customer successes we've witnessed utilizing these solutions have reinforced the significant value of advanced capabilities in data, analytics and expertise, especially in the face of such complexity and uncertainty. And with that, I will now share some of the highlights we have witnessed over the last several weeks as customers have meaningfully leveraged our solutions in their response to COVID-19. First, I'd comment that usage of our data and analytics solutions has never been higher Our population builder, leading wisely, and patient safety analytics applications, crucial components of our COVID-19 technology response, have seen a significant increase in usage, averaging greater than 20% increases in just the past several weeks since the onset of the pandemic. I'd also share that we have greater than 115 active implementations of COVID-related analytics at our customers, each leveraging one or more of our COVID-19 solutions. Next, I'd call out that our COVID-19 patient and staff tracker solution, which is proving mission critical for customers because of its capability to track where COVID-19 positive patients have been within their health system setting and the staff with which they've interacted, is already one of the most utilized analytics accelerators in our company's 12-year history. I'd also highlight that our COVID-19 capacity planning tool and epidemiologic approach to capacity management based on modeling an outbreak in local communities and the subsequent impact of infection rates on the healthcare system's ability to respond in terms of beds, ventilators, staff, and personal protective equipment has resulted in hundreds of users attending our training webinars and thousands of visits and views of our web-based tool. Lastly, I'd share that we are fortunate to have one of the largest national repositories of health data in the world with our touchstone application, accessing data from our data operating system, which contains greater than 80 million de-identified patient records. and tens of thousands of facts per patient. This application leverages its vast repository of clinically rich de-identified patient data to produce real-world COVID-19 insights related to surveillance, testing, capacity planning and treatment response. And we are sharing those findings with customers, health systems, public health authorities and biopharma organizations. I'll conclude my comments on this topic by sharing with you a real-world example of our support of one of our longstanding customers during the COVID-19 crisis, leveraging a subset of the solutions that I just described. As the COVID-19 pandemic increasingly impacted aspects of organizational functioning, leaders at one of our large regional health system customers realized that their data requirements and the critical metrics they needed to track were beyond what their electronic medical record could provide. This organization quickly pivoted to our DOS platform to integrate data from numerous diverse source systems, producing an integrated view of data across more than five hospitals and hundreds of clinics spread across more than 45 different locations. In less than a week, it then deployed our COVID-19 dashboard technology powered by our Leading Wisely analytics application to transform data into timely information to guide management. This tool has allowed hundreds of employees, including this health system's most senior leaders and incident command teams to track greater than 60 trending metrics associated with COVID testing, employee health, outpatient and virtual volumes, inpatient volumes, negative pressure rooms, PPE inventory, ventilator availability, length of stay, and more, while also delivering the ability to quickly add new data based on emerging needs. Moving on from our technology and services response to COVID-19, let me now spend some time discussing the current and prospective business impact of this health crisis. First, from an internal operations perspective, We are fortunate to have extensive work-from-home operations experience as greater than half of our staff were already remote team members before the pandemic. Additionally, as a result of our solution being cloud-based, all of our professional services can be delivered remotely and thus we have not experienced any professional services disruptions due to the shift to a remote-only model. Lastly, from an internal operations perspective, I'd share that in response to the COVID-19 crisis, we quickly developed an internal task force utilizing this team to enable a rapid, consistent, and centralized response across our customer base. With respect to the forward-looking financial impact of COVID-19, let me first share that we view the process of issuing guidance as a significant commitment to the public markets to provide our anticipated forward-looking performance with a very high level of confidence and accuracy. And as we've demonstrated by our financial performance relative to our guidance since becoming a public company, we take this commitment seriously. Later in our prepared remarks, Patrick will share our Q2 2020 guidance The fluidity and uncertain timeline of the COVID-19 pandemic, however, precludes our ability to provide the precise magnitude of its impact on our full year 2020 financial results. As such, consistent with our 8K issued on April 8, 2020, in conjunction with our convertible debt offering, we have determined that at this time it is necessary to continue to wait to provide full-year 2020 financial guidance. With that being said, I will now aim to provide as much color on our forward-looking financials as possible. First, we are fortunate to have a highly recurring revenue model in which greater than 90% of our revenue is recurring in nature, and as such, we entered 2020 with greater than 90% revenue visibility relative to our initial full-year total revenue guidance. This revenue model helps curtail the potential negative impact of the COVID-19 pandemic on our 2020 total revenue. As it relates to our existing customer relationships, I'd first share that our dialogue with the vast majority of customers Thank you for joining us today. highlighting the significant value of data and analytics in responding to this crisis. As discussed earlier, we have developed a number of technology solutions designed specifically to support healthcare providers during the COVID-19 pandemic. We believe these solutions coupled with our open data platform should help us continue to drive high levels of customer retention and technology expansion As it relates to our professional services relationship with our existing customers, we have seen the vast majority of our customers choose to divert their contracted FTEs away from other improvement-oriented projects and focus these resources on supporting their response to COVID-19. And in certain cases, we have even seen customers expand their professional services relationships with us as we augment their staff in support of Thank you for joining us today. of Professional Services Revenue Growth in 2020. Importantly, we intend to support our customers through the near-term financial strain they may experience. As such, there have been situations and there may be additional situations where we proactively and temporarily provide our professional services to customers at a discounted rate, resulting in lower revenue and gross margin. We believe this long-term, customer partnership-oriented approach is deeply consistent with our mission, reinforces our commitment to customers, and will enable us to maintain and expand these customer relationships over time. As it relates to beginning new DOS subscription customer relationships, I am pleased to share that a number of late-stage deals have continued to move through our pipeline. including adding multiple new DAS subscription customers even during the COVID-19 crisis. In particular, I would highlight our recently announced long-term partnership with the Carle Foundation, a meaningful customer relationship that began last month. This new DAS subscription relationship includes health catalysts serving both the Carle Health System and Carle's Health Alliance health plan. More broadly related to new DAS subscription customer relationships, we have observed that the COVID-19 crisis has forced the majority of U.S. healthcare providers to prioritize their response to this healthcare pandemic as their number one priority. In many instances, we anticipate this will lead to these organizations realizing a high level of distraction from beginning new vendor relationships. As we've shared previously, the majority of our new customer sales typically occur in the second and fourth quarters aligned with health system budgets. This fact pattern coupled with the uncertain timeline of the COVID-19 crisis has contributed to our need for additional time and data before we can speak to our 2020 net new DAS subscription customer metric with a high level of precision. I would share, however, that we do anticipate seeing some near-term negative impact on new DAS subscription customer additions, the extent of which is likely proportionate to the length of time that COVID-19 is the main focal point of prospective customers. On the other hand, we believe our rapid development of extensive technology and services solutions designed specifically to support healthcare providers during the COVID-19 pandemic may provide a partial offset, enabling us to acquire some level of new customers during the COVID-19 pandemic. While it is challenging at this point in time to forecast new customer sales following the COVID-19 pandemic, we would anticipate some sales processes may accelerate from their normal timeline as a result of pent-up demand while others are likely to simply elongate proportionate to the length of the COVID-19 crisis. Importantly, the impact on our 2020 and 2021 revenue growth rate will largely depend on the rate at which we are able to acquire new customers during and shortly following the COVID-19 crisis. Patrick will spend some time in his prepared remarks articulating how new customers flow through our finances this year and next to help provide a modeling framework for potential 2020 and 2021 income statement impact. Lastly on this topic, I would share that we cannot think of any event in recent history that has galvanized the awareness and importance of data and analytics more than COVID-19. Not only at the healthcare provider level, but also at the state and national healthcare infrastructure level. As such, we believe that we have reached an inflection point in our healthcare delivery model, which is likely to serve as a medium to long-term tailwind in the industry's adoption of data and analytics. In terms of adjusted EBITDA, we plan to partially offset any negative revenue impact through selective cost containment efforts, thereby curtailing the adjusted EBITDA impact. Importantly, in our response to the COVID-19 crisis, we remain centrally committed to our team members, ensuring they stay at the center of the health catalyst flywheel. As such, any cost containment efforts implemented will have a bias towards non-headcount related items. Now let me comment on our senior convertible debt offering completed in April 2020. I am pleased to share that we successfully executed against an upsized convertible debt offering of $200 million plus another $30 million green shoe with pricing at the favorable end of our marketing range. This offering strengthened our cash position by over $140 million after retiring our OrbaMed debt facility, resulting in a total of over $340 million in cash, cash equivalents, and short-term investments on our balance sheet at the end of April. As we've shared previously, prior to this convertible debt raise, we anticipated we had plenty of coverage to reach cash flow breakeven. As such, we viewed this capital raise as enhancing our ability to opportunistically pursue M&A activities, especially at the analytics applications layer of our technology stack. Given the challenging environment imposed by COVID-19, we believe that many of these applications companies will struggle to fundraise. This will likely present us with a number of favorable situations. where acquisition targets will be eager for their team members to join a best place to work and we will be in a position to benefit from accretive technology solutions offering an enhanced value proposition to our existing and prospective customers. Before I turn the call over to Patrick, I'd like to share that we have taken steps to appoint a new member to our board of directors. Effective June 15, 2020, Mark Templeton will join our board. By way of background, Mark most recently served as the CEO of DigitalOcean, a cloud infrastructure provider. Prior to DigitalOcean, Mark spent 20 years of his career at Citrix Systems, Inc., serving for 14 years as its president and CEO. During his tenure, Mark led the vision for a software-defined virtual workplace to enable new ways for business and people to work together from anywhere. Under Mark's leadership, Citrix grew into a global enterprise with annual revenues of more than $3 billion with 100 million users worldwide. Mark's tremendous depth of experience Growing an organization through both the innovation of an extensive product portfolio and dramatic global expansion will be a valuable addition to our board. And I am certain his world-class expertise in leading scalable growth will contribute meaningfully to the maturation of our company. Mark's board appointment fills an upcoming vacancy after Promote Hawks, Thank you for joining us today. Now, I'll turn the call over to Patrick, who will review our first quarter 2020 financial results and our outlook for Q2 2020. Patrick?