Health Catalyst, Inc

Ladies and gentlemen, thank you for standing by. And welcome to the Health Catalyst, Inc. Q2 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 one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference to your first speaker today, and Adam Brown, Senior Vice President of Investor Relations. Please go ahead, sir.

Good afternoon and welcome to Health Catalyst's earnings conference call for the second quarter of 2020, which ended on June 30th, 2020. My name is Adam Brown. I'm 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 Nellie, our Chief Financial Officer. Thank you. Thank you. Thank you. 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, our pipeline conversion rates, customer discounts on professional services, and our general anticipated performance of the business. These forward-looking statements are based on management's current views and expectations as of today and 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-Q for the first quarter of 2020 filed with the SEC on May 13, 2020, and our Form 10-Q for the second quarter of 2020 that will be filed with the SEC. We will also refer to certain non-GAAP financial measures to provide additional information. A reconciliation of these non-GAAP measures to their most comparable GAAP measures is provided in our press release. 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 start by expressing our ongoing gratitude to our heroic national health systems and their frontline workers. We are both grateful and honored that our health system customers have continued to trust us to meaningfully support them in this time of great need. Next, let me share that the current COVID-19 surge likely indicates that our country and national healthcare system will be under some amount of strain over the coming months. With that said, we are highly encouraged as we continue to witness meaningful evidence that the healthcare provider ecosystem is significantly more well equipped and well prepared in responding and operating effectively in the midst of our new normal. Lastly, by way of introductory comments, I would share that racial inequities remain at the forefront of our national conversation. Health Catalyst is committed to not only joining the many voices calling for justice and change, but also to using our data and analytics to create equitability in healthcare. Specifically, we are committed to continuing to play a meaningful role in using data and analytics to support our customers in their efforts to better understand and resolve these disparities in healthcare. I'll begin today's call by communicating our second quarter 2020 financial results. First, let me share that I am pleased with our performance across the board, especially in light of the macroeconomic backdrop. To start, I am happy to report that our total revenue for Q2 2020 was $43.3 million. This represents an outperformance relative to the midpoint of our guidance. Total adjusted gross margin in the second quarter was 49%, an increase of approximately 20 basis points compared to the first quarter of 2020. This quarter-over-quarter gross margin growth was achieved despite providing the COVID-19 related professional services discounts we discussed on our last earnings call. And our Q2 2020 adjusted EBITDA was a loss of $4.2 million, which also represents an outperformance relative to the midpoint of our guidance and shows an improvement from a loss of $5.7 million for the same period in the prior year. Now let me transition to some of the highlights from the quarter. You'll recall from our previous earnings calls that we measure our company's performance in three primary strategic objective categories of improvement, growth, and scale. And we'll discuss our quarterly results with you in each of these categories. The first category, improvement, is focused on evaluating our ability to enable massive, measurable improvements for our customers while sustaining industry-leading satisfaction and engagement. I'll first share two examples. Thank you for joining us today. desired to understand the overall impact of COVID-19 related declines in elective surgeries. The data that Community Health Network needed to understand that impact and prioritize the organization's elective surgery restart plan resided in disparate systems and would have required hundreds of hours of manual data review. As a Health Catalyst customer, however, Community Health Network leveraged DOS, our data platform, along with our COVID-19 specific Financial Impact Recovery Elective Surgery Application to gain insight and visibility into procedure trends. Specifically, our solution allowed Community Health Network to visualize surgical case backlogs by the facility, specialty, and procedure. This enabled the identification of the number and type of procedures that are recoverable, the ability to model the estimated revenue impact of cancellations, and the use of analytics to understand the implications of different restart elective surgery strategies, enabling Community Health Network to optimally meet its patients' needs and also effectively help it recover from COVID-19 revenue losses. Next, let me highlight a recent improvement at Banner Health from their work outside of the realm of COVID-19. Banner Health identified considerable variation in surgical supply use across its facilities The health system desired a data-informed strategy that would allow it to maintain high-quality outcomes while simultaneously decreasing costs across its procedures system-wide. To standardize supply use, Banner utilized DOS along with a robust suite of analytics to help identify variation in high-volume, high-cost surgical procedures. Banner then leveraged those analytics to build standardized surgical preference cards for specific high volume procedures, allowing them to quickly realize 3.2 million in surgical supply cost savings. Lastly, within the improvement category, I'd like to highlight our team member engagement. Every six months, we utilize the Gallup organization to measure our team members' engagement levels. In our most recent results, we once again achieved a team member overall satisfaction score in the 99th percentile. While we have consistently ranked between the 95th and 99th percentile in overall team member satisfaction scores, this past period's score, the second highest in the company's history, was particularly encouraging as we adapted to a remote-only culture. As a leadership team, we continued to make a deliberate decision to double down on our team member engagement efforts after the onset of the pandemic. Our hypothesis was that if our team members can feel listened to and cared for at an extraordinary level in this time of unique challenge, they will continue to produce outstanding work on behalf of our customers. These Gallup results, coupled with our customers' high satisfaction levels throughout the pandemic, are heartening confirmation of our hypothesis coming to fruition. Our next performance measurement category is growth, which we define as adding new customers while also deepening existing customer relationships. In the growth category, with COVID-19 as a backdrop, I'll share a detailed update on the state of our company along with some broader perspectives about the healthcare delivery ecosystem as we witness an adjustment to the temporary new normal operating environment. First, I would underscore that the current COVID-19 surge likely indicates that our country and national healthcare ecosystem will be under some amount of continued strain over the coming months. That said, a lot has changed since we spoke with you three months ago. Indeed, we are encouraged as we continue to witness meaningful evidence that the healthcare provider ecosystem is significantly better equipped and better prepared to respond to the ongoing pandemic, including its treatment efficacy, supply chain logistics, capacity planning, and broader operational optimization. Likewise, we have observed that the majority of our customers and prospects have started to also focus meaningful mindshare beyond their COVID-19 response as they've effectively adjusted financially and operationally and have started to refocus on broader clinical, financial, and operational improvement work once again. Now let me provide some commentary on what this new normal operating environment means for our business in the near term. First, we're fortunate to have a highly recurring revenue model in which greater than 90% of our revenue is recurring in nature. This model means that the impact of COVID-19 on our top line will be relatively muted in 2020. To that effect, you will hear more from Patrick later in the call when he shares our updated full year 2020 guidance. As it relates to our existing customer relationships, let me first share some color as it relates to our technology. To start, I would highlight that we benefit from a high level of technology revenue predictability, especially our all-access DOS subscription customers that have built-in contractual technology revenue escalators. I'm pleased to report that since the onset of COVID-19, our customers' overall usage of our data platform has never been higher. A particular note, our foundational analytics applications, which are crucial components of our COVID-19 technology response, have seen a significant increase in usage, averaging a roughly 30% increase since the onset of the pandemic. Additionally, I would share that we have seen usage of our COVID-19 specific products meaningfully shift from those focused on COVID-19 preparedness to those focused on financial recovery, and planning analytics in areas such as elective procedures, ambulatory care, and revenue cycle. Given all these factors, we would anticipate minimal impact on our technology dollar-based retention as a result of COVID-19. Moving on to professional services, we continue to see extremely high levels of engagement of our team member base, many of which are engaged on COVID-19 recovery-focused work, but also many of which are back to focusing on more general clinical, financial, and operational improvement work. As mentioned on our last earnings call, we anticipated providing some proactive and temporary professional services discounts to our existing customers, helping to support them through their short-term COVID-19 related financial strain in the spirit of a long-term partnership. I'm happy to share that we have worked through those discussions. and that they were very well received. As you'll hear more from Patrick, as anticipated, we experienced a decline in our professional services gross margin in Q2 as a result of those temporary discounts. And we'd expect a smaller spillover impact on our Q3 professional services gross margin. Given this, we'd anticipate our near-term professional services dollar-based retention to be lower than our expectations at the beginning of the year. Now let me transition to providing some commentary on new DAS subscription customer additions in 2020. First, I would share that we were pleased to sign multiple new customers year to date, including after the onset of COVID-19. In particular, I would highlight that we recently added one of the 20 largest health systems in the country as a new DAS subscription customer. We are honored that this health system has chosen HealthCatalyst as their enterprise analytics solution. While we were excited to add multiple new customers during the first half of 2020, I would share that more generally, we saw a purchasing pause starting in late Q1. Given this, consistent with the color that we shared on our last earnings call, our first half 2020 number of net new DOS subscription customer additions was meaningfully lower than we originally anticipated entering the year. As we enter the second half of 2020, we are encouraged by our pipeline. We would characterize our pipeline as being as robust as the same period last year with the overall tone of the conversations and momentum of our sales processes being positive. Given this data, we would anticipate strong bookings conversion in the second half of 2020, similar to last year's levels, while also acknowledging that the COVID-19 situation means that we are in unprecedented times and thus our historical conversion rates may be less predictive than in the past. Moving on to the longer term impact of COVID-19, I would reiterate our sentiment from our last earnings call. First, 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. and thus we believe it will serve as a meaningful tailwind in the industry's adoption of data and analytics. At the health system level, we are seeing COVID-19 highlighting the need for a commercial grade data and analytics solution to replace patchwork homegrown systems. I would also share that we are seeing the potential for meaningful government investment in healthcare data and analytics infrastructure modernization over time. Lastly, I'd share that we anticipate a meaningful long-term impact on our life sciences business as we leverage one of the largest clinically rich repositories of health data in the world for real-world insights. Also in the context of our growth efforts, let me next mention that we are looking forward to hosting our seventh annual Healthcare Analytics Summit in September. While the format will be virtual this year, We continue to believe that this conference represents a meaningful opportunity for Health Catalyst to continue to provide thought leadership within the healthcare data and analytics ecosystem while carefully listening to our customers and prospects as we further cultivate and deepen those relationships. The theme of this year's conference will be Healthcare Analytics in the New Normal, and we are fortunate to feature many of the leading voices in the country as our keynote speakers. Next, I'd like to make a few comments on a recent acquisition of Help Finch, which we are happy to announce is officially closed. First, I would share that this deal is consistent with the rationale that we provided for our convertible debt raise in April. Help Finch is a SAS technology provider of an integration engine delivering insights and analytics into EMR workflows in real time. This acquisition highlights Health Catalyst's ability to integrate and scale software applications on top of our DOS platform. The Health Finch technology will serve up actionable insights derived from DOS and other Health Catalyst analytics applications into the EMR at the point of care. Of particular importance and excitement is the strong mission and cultural alignment with the Health Finch team. We are thrilled to welcome the talented and diverse Health Finch team to Health Catalyst further enabling our mission to be the catalyst for massive, measurable, data-informed healthcare improvement. Next, let me make some comments on our announcement today of our definitive agreement to acquire VitalWare. VitalWare offers a revenue workflow optimization and analytics SaaS technology solution to healthcare providers. The acquisition contemplates a $120 million purchase price consisting of $70 million in cash from the balance sheet and $50 million in Health Catalyst common stock, plus the potential for an earn-out. We are extremely excited to announce this transaction. First, VitalWare provides us with another analytics application, offering us a strategic anchor technology in the revenue space, expanding our CFO value propositions. VitalWare's flagship offering is a best-in-class, chargemaster solution that solves a complex regulatory and billing function needed by all health systems. Additionally, VitalWare brings to bear a meaningful upsell opportunity with new product suites in revenue integrity and price transparency. Ultimately, DOS will further enhance these revenue insights by seamlessly integrating billing, claims, pharmacy, and supply data We also would highlight the value of VitalWare's compelling financial profile, which includes greater than 90% recurring technology revenue with approximately $19 million in 2020 estimated standalone full-year recurring revenue and a 20-plus percent annual historical growth rate. Additionally, VitalWare has approximately 75% gross margins and is adjusted EBITDA break-even. Lastly, I would highlight that our integration of VitalWare will reinforce our continued commitment to our shared mission, operating principles, and cultural attributes, which is a requirement for every acquisition. Please refer to our press release furnished to the SEC on Form 8K for additional information related to the VitalWare acquisition announcement. Additionally, please note that our guidance figures that will be shared by Patrick at the end of our prepared remarks do not include any anticipated contribution from Vitalware as the transaction has not yet closed. Lastly, let me note that the 2020 and 2021 GAAP revenue and adjusted EBITDA contribution from Vitalware will be impacted by the timing of the close of the transaction and the purchase accounting impact of a deferred revenue write-down. I would also share that following the close of the Vitalware transaction, We anticipate having greater than $250 million of cash on our balance sheet, and we continue to be active in considering other strategic acquisition opportunities, both at the analytics applications layer of our stack and in our adjacent markets of life sciences and international. Lastly, before I turn the call over to Patrick, I'd like to share that Todd Cousins will be completing his service on our Board of Directors effective September 1. I want to take this opportunity to share my heartfelt gratitude for Todd and his eight years of impactful service on our board. Without Todd's countless contributions to our company over many years, starting in its early stages, I am certain that we would not be where we are today. Patrick?