Health Catalyst, Inc

Good afternoon and welcome to the Health Catalyst earnings conference call for the third quarter of 2020. My name is Jonathan and I will be your operator for this call. At the conclusion of today's call, the Health Catalyst management team will be available to take questions. With that, let me turn the call over to Adam Brown, Health Catalyst Senior Vice President of Investor Relations to begin today's call.

Good afternoon and welcome to Health Catalyst's earnings conference call for the third quarter of 2020, which ended on September 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. 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, Thank you for joining us today. Please refer to the risk factors in our Form 10-Q for the second quarter of 2020 filed with the SEC on August 12, 2020, and our Form 10-Q for the third quarter of 2020 that 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. 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. We are excited to share our third quarter financial performance along with the other highlights from the quarter. I will begin today's call by by communicating our third 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 Q3 2020 was $47.2 million. Excluding the one-month contribution from our recent Vitalware acquisition, Our total revenue for Q3 2020 was $46.3 million. This represents an outperformance relative to the midpoint of our guidance. Our total technology revenue for Q3 2020 was $28 million. Excluding the one-month contribution from our recent Vitalware acquisition, our total technology revenue for Q3 2020 was $27.2 million. representing 28% growth relative to the same period last year. Total adjusted gross margin in the third quarter 2020 was 51%, an increase of approximately 170 basis points compared to the second quarter of 2020. And our Q3 2020 adjusted EBITDA was a loss of $6.4 million, which also represents an outperformance relative to the midpoint of our guidance and shows an improvement from a loss of $8.4 million for the same period in the prior year. Now let me transition to some of the highlights from the quarter. You will 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 will first share two examples of recently documented customer improvements from newly published case studies. The first improvement vignette highlights our work with one of our customers supporting their journey to financial and operational recovery from COVID-19, while the latter demonstrates that a number of customers have widened their focus and are back to leveraging our technology and services to do meaningful improvement work outside of their COVID-19 responses. First, Banner Health leveraged our solution, including our data platform, and our COVID-19 elective surgery impact analysis application to visualize the impact of canceled surgeries on revenue and develop a data-informed recovery plan through integrated clinical, financial, and operational data and analytics. This allowed Banner to safely resume more than 3,000 cases, resolving 32% of the perioperative services backlog. and recapturing millions in revenue. Next, let me highlight a recent improvement at MultiCare Health System from their work outside of the realm of COVID-19. MultiCare leveraged our solution, including our data platform and Leading Wisely analytics application to develop a system-wide data-informed approach and standard improvement methodology to address their hospital length of stay challenges. These improvement efforts resulted in $24 million in documented customer savings, the outcome of a 0.6-day reduction in length of stay system-wide across MultiCare. 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 how the healthcare delivery ecosystem has adjusted to the temporary new normal operating environment. First, I would share that our perspectives on the current operating environment are largely consistent with the detail we shared on our Q2 2020 earnings call. To start, I would underscore that the current COVID-19 surge We continue to do everything in our power to support our customers to ensure they successfully manage through this unprecedented time. That said, we continue to be encouraged as we witness meaningful evidence that the health care provider ecosystem is Thank you very much. related to containing the COVID-19 pandemic. Now let me provide some commentary on what the current operating environment means for our business in the near term. First, we are 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 near-term impact of COVID-19 on our top line is relatively muted as evidenced by our strong year-to-date 2020 revenue performance. As it relates to our existing customer relationships, let me first share some additional detail on our technology. Since the onset of the COVID-19 pandemic, our customers' overall usage of our data platform continues to increase and has never been higher. Of particular note are foundational analytics applications. which are crucial components of our COVID-19 technology response, have seen a significant increase in usage, resulting in a roughly 40% increase since the onset of the pandemic. I also 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. Additionally, I would share that we have seen usage of our COVID-19 specific products in a number of cases 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 strong full-year technology dollar-based retention performance Similar to historical levels. Moving on to professional services, we continue to see high levels of engagement of our team member base, which remain engaged on both COVID-19 recovery work, as well as focusing on more general clinical, financial, and operational improvement work. That said, consistent with what we discussed on our last earnings call, the financial strain imposed by COVID-19 on a number of our customers has led to a lower year-to-date professional services dollar-based retention, and we would expect to have a meaningfully lower full-year 2020 professional services dollar-based retention than we have achieved historically. Now let me transition to providing some commentary on new DOS subscription customer additions in 2020. First, I would share that the additional context we will provide is consistent with the details we provided on our Q2 2020 earnings call. As a reminder, we were pleased to sign multiple new customers in the first half of 2020 but as a result of COVID-19, the number of new customer additions was lower than we originally anticipated entering the year. As we've entered the second half of 2020, We have been pleased to see healthcare organizations adjusting well to the new normal operating environment, with COVID-19 significantly highlighting the need for a more robust commercial-grade data and analytics solution. On the other hand, COVID-19 continues to create some near-term financial uncertainty, making some health systems more cautious in their near-term purchasing decisions. Given these competing factors, We have continued to see our second half pipeline and conversion rates progress similar to the second half of 2019. Thus, we feel confident about the expectations we shared on our previous earnings call of high single digit net new DOS subscription customers for full year 2020. Moving on to the longer term impact of COVID-19, 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. And at the health system level, we are seeing meaningful evidence that COVID-19 is highlighting the need for a commercial grade data and analytics solution to replace patchwork homegrown systems. Also in the context of our growth efforts, let me mention that we hosted our seventh annual Healthcare Analytics Summit in September. While the format was virtual, this year's conference was a meaningful opportunity for Health Catalyst to continue to provide thought leadership within the healthcare data and analytics ecosystem and also carefully listen to our customers and prospects as we further cultivate and deepen those relationships. We viewed this year's summit as a significant success with record registration of more than 3,500 attendees and some of our highest attendee satisfaction scores. Next, let me share some brief commentary on our recent acquisitions. While we are still early in the integration process with both the Help Finch and VitalWare transactions closing in the last couple of months, We are pleased to share that our integration efforts, including team member, technology, and sales, are progressing well and are in line with our expectations. Likewise, our acquisition of Able Health from February is largely integrated from a technical perspective, and we are pleased with the early market receptivity we are seeing for the consolidated product offering. More broadly, As we heard countless times at our Healthcare Analytics Summit, existing and prospective customers are enthusiastic about the increased breadth of our offering following these acquisitions. I'm also happy to share some new leadership promotions connected with our annual planning process and in response to the company's continued growth and expansion. We are pleased to announce the introduction of the role of President at Health Catalyst, with responsibility for all the major growth functions of the company, including with existing clients, new clients, international expansion, sales operations, marketing, and communications. This role will report directly to the CEO and will have responsibility for overseeing our anticipated growth and expansion in the years ahead. The introduction of the role of president has been under consideration for over a year as we have continued to grow in scale and as we anticipate sustained high growth for many years to come. During this year's planning process, after multiple discussions with our board and with other senior leaders, we determined that this year would be the right time to introduce this role. As a result of an interview process that involved numerous health catalyst leadership team, and board members, we are pleased to announce the promotion of Patrick Nellie, Health Catalyst's current chief financial officer, to the role of president, effective January 1, 2021. Patrick joined Health Catalyst in 2013 after having filled roles in healthcare investment banking at McCall Partners and in private equity at GTCR. At Health Catalyst, Patrick first built the company's internal analytics group and then built the company's benchmarking product line, named Touchstone. In 2017, Patrick was promoted to Chief Financial Officer of Health Catalyst, responsible for the finance, accounting, investor relations, human resources, IT, and real estate functions. During Patrick's tenure as Chief Financial Officer, Thank you for joining us today. with a concentration in biophysics and biochemistry from Wake Forest University. During the past seven years, I have worked with Patrick on a wide variety of strategic and operational issues. Through these interactions, I have come to appreciate Patrick's character and leadership capability. I have tremendous respect for Patrick's intellectual capacity, his strategic prowess, and his boundless energy and he has earned my trust as he continues to demonstrate his deep commitment to our company's mission, operating principles and cultural attributes. Patrick has my full support and confidence and the unanimous support and confidence of our board of directors. I look forward to continuing to work closely with Patrick during the years to come. Patrick's promotion to the president role also necessitated the company's selection of its next chief financial officer. We followed a very similar process in the selection of our next chief financial officer as the process we followed in the selection of the president, including forming an interview team, interviewing multiple candidates, coming to a unanimous recommendation, reviewing with our board, and receiving full support to extend an offer which has been accepted. I am pleased to announce Brian Hunt, Health Catalyst's current Senior Vice President of Financial Planning and Analysis to the role of Chief Financial Officer, effective January 1, 2021. Brian has been with Health Catalyst for over six years, having worked closely with me, with Patrick, and with many other leaders across the company. During Brian's tenure at Health Catalyst, he has served in leadership roles in the finance organizations, including Vice President and Director of Financial Planning and Analysis, along with serving in our internal analytics function. Prior to joining Health Catalyst in 2014, Brian gained experience as an investment banker with Deloitte Corporate Finance and with Mollis and Company. Brian holds a bachelor's degree in accounting from Brigham Young University. I have also had the benefit of hundreds of interactions with Brian During the course of many years. And from these interactions, I have developed significant respect for Brian and confidence in his ability as a leader and as a financial steward who understands our business at a deep and multifaceted level. Brian has my full confidence and support, along with that of our board of directors, to receive this additional responsibility. And I look forward to working closely with Brian in the years ahead. Brian has joined today's earnings call and will be leading the financial sections of future earnings calls beginning with our Q4 earnings call early in 2021. I'm also pleased to announce two additional promotions related to these announced changes. Jason Alger, our Senior Vice President of Finance, has been promoted to Chief Accounting Officer and Adam Brown, our Senior Vice President of Investor Relations, has been promoted to Senior Vice President of Investor Relations and Financial Planning and Analysis. Jason and Adam have each been with the company for more than five years and have each demonstrated their extraordinary capabilities during their Health Catalyst tenure. We are fortunate to continue to benefit from their expertise, dedication, and leadership as respected teammates and colleagues. Each of these promotions will be effective January 1, 2021. and will contribute to our continued ability to grow and scale as an organization. Lastly, before I turn the call over to Patrick, I would like to share that Mike Dixon will be completing his service on our board of directors effective December 31st. I want to take this opportunity to share my heartfelt gratitude for Mike and his more than nine years of impactful service on our board. Mike and I are two of the original board members from the fall of 2011 when the company first organized a board of directors, and it has been an honor to serve alongside Mike over the past decade. Without Mike's countless contributions to our company over many years, starting in its very early stages, I am certain that we would not be where we are today. Patrick?