Health Catalyst, Inc

Good day, and thank you for standing by. Welcome to the Health Catalyst first quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star, then 1 on your telephone keypad. Please be advised, today's conference may be recorded. If you require operator assistance during the call, please press star, then 0. I'd now like to hand the conference over to Adam Brown, Senior Vice President of Investor Relations and Financial Planning and Analysis.

Good afternoon, and welcome to Health Catalyst's earnings conference call for the first quarter of 2022, which ended on March 31, 2022. My name is Adam Brown. I'm the Senior Vice President of Investor Relations and Financial Planning and Analysis for Health Catalyst. And with me on the call is Dan Burton, our Chief Executive Officer, and Brian Hunt, 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 today's 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, 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-K for the year ended December 31st, 2021, filed with the SEC on March 1st, 2022, and our Form 10-Q for the quarter ended March 31st, 2022, which will be filed with the SEC today. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of these non-GAAP financial 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 Brian will subsequently provide his prepared remarks. Dan and Brian will then take your questions. Dan?

Thank you, Adam, and thank you to everyone who has joined us this afternoon. We're excited to share our first quarter 2022 financial performance along with additional highlights from the quarter. I will begin today's call with some commentary on our first quarter 2022 financial results by sharing that we were pleased with the company's overall financial performance. Our Q1 2022 total revenue was $68.1 million, representing 22% growth year over year, and we achieved positive adjusted EBITDA of approximately $700,000, with these results beating the midpoint of our quarterly guidance on each metric. Stepping back, I wanted to take a moment to reflect on how proud I am of our company. for our Q1 2022 adjusted EBITDA performance. At the time of our IPO, almost three years ago, we made a commitment to our investors to reach adjusted EBITDA breakeven entering the year 2022. Despite a global pandemic and realizing meaningful wage pressure within a tightening labor market, we delivered on this milestone due to our team members' hard work and unrelenting commitment to our mission. Additional financial highlights from the first quarter that I would note include our technology revenue of $42.2 million, representing 25% growth year-over-year, and our adjusted technology growth margin of 70.1%, representing an increase of approximately 95 basis points year-over-year. Now let me highlight some additional items from the quarter. You will recall from our previous earnings calls that we measure our company's performance in the three 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 our customers to realize massive, measurable improvements while also maintaining industry-leading customer and team member satisfaction and engagement. Let me begin by sharing a few examples of customer improvements from recently published case studies. All the customer improvement vignettes I will highlight today represent customers leveraging technology from the acquisitions that we have made over the last couple of years, a testament to the strategic nature of our M&A and the importance of the more comprehensive integrated value proposition now offered to our customer base. First, let me share that financial success in healthcare often hinges on a health system's ability to capture its charges effectively. One of our integrated health system customers with annual net operating revenues of more than $4 billion used a patient accounting system and charge capture tool to help ensure revenue integrity. Over time, however, they had seen improvement come to a halt. The aging technology could not provide the analytical insights that the system's leaders needed to identify opportunities to improve. In response, the organization replaced its previous charge capture tool with Vital Integrity, a new help catalyst analytic application that resides within our financial empowerment suite and was in the early stages of development when we acquired Vitalware. Vital Integrity quickly delivered actionable insight and workflow support, enabling our customer to identify and address gaps in its charge capture processes and compliance issues, leading to a $7.8 million increase in annual revenue. Vital Integrity identified more than 23,000 unique accounts for review and improvement, and in its first 45 days of installation, the analytics application identified 1.5 times more missed charges than the previous charge capture tool. Next, Community Health Network, an Indianapolis-based health system customer, was committed to ensuring its patients received appropriate primary and preventative care. But burdensome, time-consuming documentation processes in the EMR made it difficult to improve performance and close care gaps. Leveraging our DOS data platform and our embedded care gaps application, which was acquired through our Health Finch acquisition, our software enabled community health networks providers to have visibility into care gaps within their workflow. decreasing the administrative burden on their care teams, and optimizing processes to use data and analytics to easily track and measure performance year round. Providers using our embedded care gaps application closed greater than 370,000 more care gaps and generated more revenue than providers that weren't using the application, yielding a four times benefit to cost ratio. Lastly, With the onset of the COVID-19 pandemic in 2020, leaders at one of our health system customers immediately recognized the need for robust telehealth-based efforts to meet their increased demand. Leveraging our Twistle by Health Catalyst application suite as their patient engagement technology platform, this health system rapidly expanded their care capacity, supporting more than 38,000 patients through COVID-19 screening, testing, treatment, and monitoring. 95.7% of patients adopted the Twistle technology and read or responded to 76.5% of all messages. Additionally, more than 64% of patients stated that the Twistle application reduced the need to contact a provider by phone. Also in the improvement category, we have been fortunate to receive multiple recent external recognitions. First, on the product side, I would highlight that our healthcare.ai product after its official release in 2021, has achieved meaningful industry recognition and praise, recently scoring a 93.2 on a 100-point scale in CLAS's 2022 Best-in-Class Report. CLAS notes that Healthcare.ai received a 100% score in four categories, including would buy again, part of long-term plans, keeps all promises, and avoids nickeling and diming. Additionally, Class's report noted that customer satisfaction with Health Catalyst has jumped sharply over the last year as we have improved at digging into customers' data and providing prescriptive guidance as to where they should focus their AI efforts. Customers report that this guidance enables them to focus on the right populations and problems. Additionally, the report noted that customers spoke very highly of Health Catalyst's expertise and willingness to help them achieve their goals. We view this external validation as important recognition of our product vision within the mission-critical AI product space. Next, as it relates to our team member engagement, I am proud to share that the Women Tech Council has named Health Catalyst to its 2022 Shatter List. This is the fifth year in a row that we have earned a spot on the Women Tech Council's list of technology companies, with active programs that are leading and accelerating progress towards breaking the glass ceiling for women in the industry. Lastly, we are excited to also share that Help Catalyst has been named to Inc. Magazine's 2022 Annual Best Places to Work list, the sixth year in a row we have achieved this designation. Our next strategic objective category is growth, which includes beginning new customer relationships while also expanding existing customer relationships. First, in terms of the current selling environment, I would share that our outlook is in line with what we shared on our last earnings call a few months ago. As we shared then, we anticipate the COVID-19 pandemic will continue to result in both tailwinds and headwinds as it relates to our growth in 2022. First, as it relates to tailwinds, following the Omicron wave, we are encouraged to see the recent trajectory of the pandemic, including meaningfully lower hospitalization rates. Likewise, we continue to see meaningful evidence that the healthcare provider ecosystem, is well-equipped and prepared to respond to the ongoing pandemic in areas including treatment efficacy, supply chain logistics, capacity planning, and broader operational optimization. And as we have mentioned before, we continue to believe that the COVID pandemic will serve as an overall tailwind in the industry's adoption of data and analytics, significantly highlighting the need for a commercial-grade data and analytics solution to replace patchwork homegrown systems. As it relates to headwinds, while I mentioned the positives related to the trajectory of the pandemic, we do anticipate our provider end market will likely continue to be under some amount of financial strain while also experiencing ongoing operational distraction, especially with the BA.2 subvariant alongside vaccine logistics. Likewise, our provider end market continues to experience some financial strain resulting from the tight labor market. With this backdrop, our Q1 2022 pipeline and conversion rates perform largely in line with expectations. And similar to what we shared a couple of months ago, our current pipeline continues to support the bookings expectations for 2022 shared at the beginning of the year, including net new DOS subscription customer additions in the high teens and a dollar-based retention rate between 108% and 111%. Likewise, we continue to expect our bookings cadence to be aligned with historical years, meaning that the second quarter and the fourth quarter of this year are forecasted to be our most significant bookings quarters, aligned with health care organization budget cycles. As such, as is the case every year, our forecast assumes a material amount of bookings achievement in the second quarter. Next, as it relates to growth, we are excited to have publicly announced one of our recent customer additions. Tallahassee Memorial Healthcare, a private, not-for-profit community healthcare system serving a 17-county region in North Florida and South Georgia, selected Health Catalyst as their data platform provider to power their clinical transformation journey, including enabling their ambitious quality and safety goals. We expect our comprehensive software solution, including our DOS data platform, self-service analytics, touchstone data and clinical and quality analytics offering will enable a thorough, accessible, and accurate view of Tallahassee Memorial's patient data and provide them the necessary tools to scale and improve their analytic efficiency across their enterprise. We view this partnership as important recognition of the strength of our data platform and clinical and quality technology offering, strongly aligned with our focus on driving measurable improvement at each of our customers. Lastly, as it relates to growth, let me share a couple of comments related to our M&A efforts. First, we are excited to have closed the acquisition of Armis Corporation at the end of April. This tuck-in acquisition provides us with a clinical registry development and data management technology solution to complement Health Catalyst's existing data abstraction services business. We anticipate this integrated technology and services solution will be a compelling value proposition to drive tangible financial savings for our customers in the critical functional area of registry reporting. The purchase price for this Tuckin transaction is 15 million of mostly cash consideration. And the impact of this acquisition on our 2022 financials will be immaterial. We're thrilled to welcome Armis's talented team members and we look forward to working together with them in support of our shared mission. Commenting more broadly on our M&A strategy, we continue to carefully assess potential acquisitions within our pipeline. Of course, we are mindful of current market dynamics, including in some cases a near-term disconnect in valuation expectations between the public and private markets. We will continue to be disciplined in our M&A evaluation process. requiring acquisitions to be both strategically and financially compelling for Health Catalyst. I'd also note that we consider M&A not in a vacuum, but rather as one tool in a broader capital allocation toolbox. We are fortunate to have a strong balance sheet, and we regularly assess all capital allocation alternatives, always with an eye to maximizing long-term shareholder value. With that, let me turn the call over to Brian.

Brian. Thank you, Dan. Before diving into our quarterly financial results, I want to echo what Dan shared and say that I am pleased with our first quarter financial and operational performance. I will now comment on our strategic objective category of scale. For the first quarter of 2022, we generated $68.1 million in total revenue. This total represents an outperformance relative to the midpoint of our guidance, and it represents an increase of 22% year-over-year. Technology revenue for the first quarter of 2022 was 42.2 million, representing 25% growth year-over-year. This year-over-year growth was driven primarily by recurring revenue from new customer additions, from existing customers paying higher technology access fees as a result of contractual built-in escalators, as well as from our Twistle acquisition that closed on July 1, 2021. This quarterly revenue performance was slightly higher than anticipated due to technology environment go-lives occurring, on average, faster than forecasted. Professional services revenue for Q1 2022 was $25.9 million, representing 17% growth relative to the same period last year. This amount outperformed the guidance expectations we shared last quarter, mostly the result of successfully achieving completion of a large milestone-based contract in March. An occurrence we had mentioned was a possibility on our last earnings call. For the first quarter of 2022, total adjusted gross margin was 54.6%, representing an increase of approximately 30 basis points year over year. In the technology segment, our Q1 2022 adjusted technology gross margin was 70.1%, an increase of approximately 95 basis points relative to the same period last year. This year-over-year performance was mainly driven by existing customers paying higher technology access fees from contractual built-in escalators without a commensurate increase in hosting costs, partially offset by headwinds due to the continued costs associated with transitioning a portion of our customer base to third-party cloud-hosted data centers in Microsoft Azure, which increases our hosting costs. In the professional services segment, our Q1 2022 adjusted professional services gross margin was 29.3%, representing a decrease of approximately 220 basis points year over year and an increase of approximately 600 basis points relative to the fourth quarter of 2021. This quarterly performance was higher than the expectations we shared on our last earnings call, mostly the result of the large milestone-based contract we achieved in Q1. In Q1 2022, adjusted total operating expenses were $36.5 million. As a percentage of revenue, adjusted total operating expenses were 53.6%. which compares favorably to 55.8% in Q1 2021. Adjusted EBITDA in Q1 2022 was positive 0.7 million, with this performance beating the midpoint of our guidance and comparing favorably to an adjusted EBITDA loss of 0.8 million in the first quarter of 2021. This Q1 2022 adjusted EBITDA result was mainly driven by the strong quarterly revenue performance mentioned previously, along with the timing of some non-headcount expenses that we anticipate will be pushed out to later in the year. Our adjusted net loss per share in Q1 2022 was approximately six cents. The weighted average number of shares used in calculating adjusted net loss per share in Q1 was approximately 53 million shares. Turning to the balance sheet, we ended the first quarter of 2022 with $425 million of cash, cash equivalents, and short-term investments compared to $445 million at year-end 2021. As a reminder, in April 2020, we issued a private placement of convertible notes with a principal amount of $230 million. the net carrying amount of the liability component is currently $225.4 million. As it relates to our financial guidance for the second quarter of 2022, we expect total revenue between $68 million and $71 million, an adjusted EBITDA between a loss of $1.5 million and positive $0.5 million. And for the full year 2022, we continue to expect total revenue between $287.8 million and $292.8 million, and adjusted losses between $4 million and $2 million. Now, let me provide a few additional details related to our 2022 guidance. First, in terms of our full year 2022 year-over-year revenue growth by segment, Consistent with what we shared on our last earnings call, we continue to expect the technology segment to grow a little above 20% and the professional services segment to grow a little below 20%. In terms of Q2, we anticipate that our technology revenue will grow a few percentage points sequentially and that our professional services revenue will be flat to slightly down quarter over quarter. This quarterly professional services revenue dynamic is mainly driven by the material outperformance in Q1 professional services revenue, resulting from the large milestone-based contract achieved in March. Normalizing for a more ratable revenue recognition across quarters, our Q2 professional services revenue growth would be more aligned with our typical quarterly revenue growth cadence. Next, in terms of our adjusted gross margin, we continue to anticipate that our adjusted technology gross margin will be in the high 60s for the next few quarters and that our adjusted professional services gross margin will be in the mid-20s. Specifically for Q2, we anticipate our professional services adjusted gross margin will be a few percentage points lower than our Q1 2022 performance, given that the Q1 2022 margin was boosted by the one-time large milestone-based contract achieved in Q1. Lastly, and consistent with what we shared on our last earnings call, we continue to expect some seasonality in our operating expenses, especially in the third quarter related to our healthcare analytics summit, as well as the timing of certain other non-headcount operating expenses, including the one-time TWSL integration expenses throughout the year. With that, I will conclude my prepared remarks. Dan?

Thanks, Brian. In conclusion, I would like to recognize and thank our highly engaged team members. Without their consistent contributions to our mission and growth, none of this would be possible. And with that, I will turn the call back to the operator for questions.

If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, Press the pound key. In the interest of time, we ask that you limit yourself to one question. Our first question comes from Anne Samuel with JP Morgan. Hi, thanks.

Your first quarter EBITDA was really nicely positive, and your second quarter guide implies that you could potentially be positive again, you know, if you hit the high end. I'm just curious, one, what levers contributed to that improved profitability in the quarter, And two, what's incremental for expenses in the back half of the year that are causing you to maybe not hit EBITDA positive for the full year? Is that maybe some of those pushed out expenses that you talked about in the prepared remarks? Thanks.

Yeah, thank you, Annie. This is Dan. I'll share a few thoughts, and then Brian, please feel free to add as well. So as it relates to the Q1 EBITDA, we were excited about that being positive. One of the items that Brian highlighted in his prepared remarks was that milestone-based payment that had a material impact given that it came in in Q1 and contributed certainly to that positive EBITDA. And then as it relates to the back half of the year, one element that I know you have direct experience with as a former attendee is our annual Health Analytics Summit that happens in Q3. There is a series of expenses that are one time in nature associated with that summit that we host for many to attend, hundreds to attend. And so that's one of a couple of examples of back half-weighted expenses that do contribute to a little bit more burn in the second half than in the first half. Anything you'd add, Brian?

Yeah, I think that was well said, Dan. Yeah, the milestone in Q1 was a little bit higher margin, professional services milestone, and we saw that margin tick up in Q1. Do expect that to tick down slightly, you know, through the remainder of the year. And then, as Dan said, we've seen, you know, historically some seasonality in our operating expense and had a little bit of delay in some of the non-handicap expense that we thought we'd have.

That's helpful. Thanks. I was maybe hoping you could provide a little bit of color on, you know, how big that milestone contract was and how much that helped in the first quarter.

Yeah. Yeah, it was approximately 1.5 million of revenue that we incurred in Q1, and most of that was on the services side. And typically we would have seen, you know, that revenue be recognized over a few-quarter time period, but we are, as you know, trying to be flexible with current clients and prospects in terms of enabling different services contracting models with the real goal of being flexible on their adoption of new technologies and ensuring that we're driving outcomes and improvement for them.

Great. Thanks so much.

Thanks, Amy.

Our next question comes from Ryan Daniels with William Blair.

Yeah, thanks for taking the questions. Congrats on the strong start to the year. Dan, one for you. You mentioned some of the pressures on your client base, and one that stood out is the labor and workforce issues, which I know we've been seeing a lot of lately, both from a staffing capacity and a cost side. I'm curious if you could kind of look internally on that issue and talk to us a little bit more about how you're managing hiring, retention of your workforce, especially on the services side, probably a lot of demand there, and ensuring that the culture remains intact, as I know that's very important to you. Thank you. Sure.

Yeah, thank you for the question, Ryan. It is really important, and we have made that a priority focus for a long time now, and that included in the 2022 planning cycle. We prioritized ensuring that we made really meaningful progress as it relates to team member compensation, for example, and that has been something that we believe has helped us. We've been encouraged to see, even in this really tight labor market, that actually our turnover rates, starting at the first of the year, which were already well below the industry averages, have ticked downward each subsequent month through the end of April. And that's encouraging for us when coupled with the fact that, as we shared in our last earnings call, the most recent Gallup engagement survey data came in with team member engagement in the 96th percentile. As that is such a central component of our differentiation as a company, we're really pleased to see some meaningful measures suggesting that things are going well We don't take anything for granted. This is a very difficult environment, a hiring environment, a retention environment. We're going to continue to prioritize team member engagement, prioritize taking care of our team members so that that key point of differentiation remains in place in the months and years ahead.

Okay, great. I'll stick to the one and hop back in the queue. Thanks.

Thanks, Ryan.

Our next question comes from Jessica Tassin with Piper Sandler.

Hi, thank you so much for the question, and congrats on the execution against the profitability target. So I just wanted to ask a little bit more about the quarter-over-quarter decrease in G&A. I think it was down pretty substantially versus Q4, so just what drove some of the operating expense efficiency, and what does that decrease, the $10.6 million decrease mean? in the fair value of contingent consideration referred to specifically. Thank you.

Yeah, thanks, Jess. So, yeah, when you're looking at G&A trends from Q4 to Q1 on the face of our financial statements, the vast majority of that decrease from a GAAP perspective is related to essentially a gain from an expense standpoint on the contingent consideration liability, which is which is the potential earn-out consideration that we would potentially issue for the TWSL acquisition that we did last year. So the measurement period on that earn-out is midway through 2022. And so as we kind of estimate that potential earn-out during the year, that value of that liability does fluctuate on a quarterly basis. The primary driver of the gap change in G&A If you look at kind of non-GAAP G&A metrics, that also ticked down a little bit, but on a much smaller basis. And most of that was just, you know, timing, some of the seasonality in our G&A.

Can I just ask one quick follow-up on that? So just does the sequential decrease, what should we be inferring with respect to the performance of the Twizzle acquisition then? And thank you.

Yeah, good question. Yeah, so as I mentioned, we are required to estimate that potential liability and value each quarter from an accounting standpoint. So that's the primary driver of that change. There can be fluctuations in our estimated achievement there. The good news for us is that we structured that earn out in that deal as essentially upside to the color that we provided that Twistle would contribute from an ARR and revenue standpoint at the time of the deal. So even though there can be, you know, fluctuations in that, you know, it is a win-win if we're able to pay out some earn-out consideration, and that would be merited by, you know, higher growth than what we expected.

Got it. That's really helpful.

Thank you.

Thank you.

Our next question comes from Cindy Motz with Goldman Sachs.

Oh, hi. Thanks for taking my question, and also congratulations. The quarter looks pretty good, especially, you know, The EBITDA, congratulations on that. So following on that, though, directionally, I know you don't give longer-term guidance, but it looks like you're teed up pretty well, though, for 2023 and beyond. You know, you may make other acquisitions, but it looks like, you know, 2023 is looking pretty good with EBITDA, maybe just from, you know, the cross-lines. Do you want to comment, you know, on that? And then I just also was curious if you had your net revenue retention rate for the quarter. Thanks. Okay.

Yes, so on the second question first, we will share net dollar-based retention numbers once a year for the full year. We did share that we are reaffirming that guidance that we provided at the first of the year for dollar-based retention being in that 108 to 111, and then once the year is over, we'll share what the actuals were. And then on the directionality of our EBITDA, we would agree we're pleased with the trajectory that we've been on since we went public, that we talked about being able to be on a trajectory where we would cross over to EBITDA-positive territory within this timeframe, and pleased that that milestone was achieved. We're also excited to continue to see that trajectory go towards our long-term targets that we've shared of EBITDA margins between the 20% and 25% range long-term. That will take a number of years for us to achieve, but we anticipate that we will continue to make progress in that direction in 2023 and beyond.

Great. Can I sneak in one more about the acquisition, Armisys? Could you just elaborate a little bit more on that? Does that have anything, like will that position you well with your data and, you know, possibly life sciences, clinical trials, any information there would be great. Thanks.

Yeah, absolutely. So we are excited about Armis. As I mentioned in my prepared remarks, it's a small tuck-in acquisition. It's the smallest acquisition in terms of consideration that the company has done since going public. So it is a small tuck-in acquisition, but we're excited about the strategic benefits that can accrue to one of our business lines, which is that outsource chart abstraction business. where we provide outsourced chart abstraction services to a number of health system clients where we can do it better, faster, and cheaper. And Armis' technology automates even more of that process, specifically the submission of registries. And so we can offer even a stronger value proposition in terms of being better, faster, and cheaper. And so it's a very natural combination for us to pursue and We anticipate that many of our clients will appreciate that additional efficiency advantage to that solution. That's one of our more popular higher growth segments of our business and so excited to see that growth continue.

Great, thanks.

Thanks, Cindy.

Our next question comes from Elizabeth Anderson with Evercore.

Hi, guys. Thanks so much for the questions. One of the questions we've been getting a lot from investors on our side is, you know, with the general sort of capital markets environment, you know, being what it is, do you guys have any anticipated plans in the next 12 months to raise capital in any form?

Yeah, thanks for the question, Elizabeth. So we, as we mentioned in the prepared remarks, have a strong balance sheet. We're grateful for that. That enables us to be in a position to make important strategic moves, which could include and have included in the past strategic M&A. To your point, the current M&A landscape and current market environment presents some unique challenges in terms of disconnects between public market valuations that have been adjusting significantly and And there's often, as you know, a lag between public and private market valuations. And so we're mindful of that. As we mentioned in the prepared remarks, we intend to stay very disciplined in our approach to M&A but appreciate having a strong balance sheet that can enable us if and when we find opportunities in the M&A landscape that make strategic and financial sense to be able to move forward there. And like we mentioned in the prepared remarks, we're also mindful that M&A is one of a number of items in the toolbox, as it were, from a capital perspective. We remain open to and are consistently evaluating different options as it relates to the most effective use of capital in creating long-term shareholder value, and that will continue. I think given where we are today, we feel very good about a strong balance sheet, and There may be many scenarios where we have sufficient capital to execute well against our strategy in the next several quarters ahead.

Just to add to that, Dan, I do think it's worth kind of mentioning that in terms of recent M&A, we have been fortunate to deploy some of that capital while still having a strong balance sheet over the last little less than a year on three acquisitions. And having done a few as a public company, it does give us a lot of internal runway and opportunity to focus on those integrations and to execute against what we're seeing as some of the cross-sell opportunities, both apps to DOS customers as well as DOS cross-sell opportunities. So we're excited to continue to be heads down executing on those opportunities internally as well.

Super helpful. Thanks, guys.

Thanks, Elizabeth.

Our next question comes from Stephanie Davis with SBB Securities.

Hey, guys. Thank you for taking my question. I was hoping you could tell us more about the demand environment given some of the costs had when you're seeing the hospital on market. Is there still an appetite for large IT projects? Are you seeing a greater relative preference for DOS Lite? How should we think about the backdrop?

Yeah, thanks for the question, Stephanie. So the backdrop is behaving very similar to what we shared in previous quarters. So there are always some headwinds and some tailwinds that we experience on a regular basis, but we wouldn't characterize it as either better or worse than what we've been experiencing the last several quarters. And that's one of the reasons why we felt comfortable affirming the full-year guidance from a bookings perspective, both as it relates to the Net New DOS subscription clients and as it relates to the dollar-based retention.

Just to add to that, Stephanie, in terms of what we expect in terms of contribution toward our net new DAS subscription goals this year, we do continue to believe that the majority of those ads will be more of our enterprise DAS sales motion, while we will have some contribution from DAS Lite. We did sign a few DOS-like customers last year, and that pipeline continues to grow, but still is a minority of the ads that we'd expect, and that's reflective of our current pipeline as well.

Good to hear that enterprise remains strong. Are you seeing any of your offerings shift in rankings of prioritization, just as we are seeing this backdrop? And would you ever maybe go farther outside of your adjacencies into something like credentialing, which could still use your data, but could also help manage hospital staffing issues?

Yeah, great question. I think right now, as Brian mentioned a minute ago, we've got plenty of wood to chop with the acquisitions that we've done. There's a lot for us to work on, and we have many markets open to us that we're really excited about. And so we're actually quite energized just focusing on the markets that we've already invested in and entered into. I would share in terms of any shift in demand or popularity, certainly with some of the trends around staffing shortages, labor shortages, labor utilization being a challenge, we're cognizant of the fact that that's an important area for our clients. And solutions like power labor, for example, and power cost really help you manage and and optimize based on those labor constraints that a lot of our health system clients are facing. Pop Health can also directly contribute to, you know, efficiencies that are important to maintain in this kind of environment, and Pop Health continues to be very active from a pipeline perspective. And then the last area, you know, chart abstraction, we mentioned earlier with the Armis acquisition being a popular and a growing area for us. that is something that we can offer that helps to alleviate some of the staffing shortage issues and also provides a better, faster, and cheaper alternative to many health systems that they can bake in hard dollar savings. So those solutions where there's hard dollar savings on the cost side and solutions where there's hard dollar revenue implications like what we shared in our prepared remarks around VitalWare with charge master management, those are all great examples of of very near-term helpful items that in today's environment have been quite popular.

Sounds like a good market for CFO-facing solutions. Thank you, guys.

Thanks, Stephanie.

Our next question comes from Richard Close with Canaccord Genuity.

Yeah, thanks for the question. Congratulations as well. Maybe to just dive in deeper on the labor side, I'm curious... Dan, if you think the labor situation at your clients is more of a headwind or tailwind, and I'm curious, you know, how you think about the labor situation in terms of driving specifically the professional services business, if you can, you know, increasingly become an... you know, and, you know, help on the professional services side for them, you know, supplying that tailwind?

Yeah, good question, Richard, and it certainly is both, a headwind and a tailwind. Maybe I'd probably keep it pretty equal on the headwind side, you know, the fact that these health system clients are often spending a little bit more on staffing, definitely put some pressure on their margins. And so whenever there's pressure on margins, you have to be very cognizant of that. At the same time, the fact that we have so many solutions that both help them optimize the staff that they have and help them be more efficient is a very natural discussion for us to have, and we can really be part of the solution. And so that's where certain aspects of what we offer, and that even plays into your question about services, certainly that the mix of services can be impacted by what expertise our clients are having a hard time recruiting for, for example, where it's often really hard for them to recruit for data scientists or deep domain experts, and that tends to be an area of real popularity for us, and that's a little bit higher margin. And then on the flip side, our outsourced chart abstraction, for example, is another area where we've seen meaningful interest and growth because it's low cost and it's lower cost. And we also do a really nice job of keeping engagement levels really, really high when clients outsource that to us and we can give them hard dollar savings. That's a lower margin offering within our services portfolio and also something that we've seen be more popular. So they kind of mix together. And that's where I'd say it's probably about equal parts headwind and tailwind. But we're grateful to have so many solutions that can really help, even in the near term, to help these health systems navigate this difficult labor environment.

Okay. And as a follow-up, Brian made some comments earlier, a couple questions ago, on the three acquisitions and focusing in on integrations and Can you just update us on how integrated are all the acquisitions at this point in terms of the functionality?

Yeah, happy to, Richard. So we tend to think about the first six to 12 months post-acquisition as really important, heavy lifting from a technology integration perspective. And so if you think about the last 12 months, Within the last 12 months, we've acquired TWSL, and we're probably furthest along of the three acquisitions we've done this last year in terms of the TWSL technology integration. And we're seeing some really encouraging signs. I mentioned one example in our prepared remarks where there's some really natural connection points between TWSL's patient engagement technology and other population health efforts and clinical improvement efforts. where it's a really natural extension of what we're already doing with our clients and utilizing DOS and utilizing some of our clinical assets at the applications layer. So that Twistle technology and people integration is on track with where we hoped it would be, and we're coming up in a month and a half on the one-year anniversary. So I would say it's tracking well with our expectations. The other two acquisitions, KPI Ninja and Armis, were both, quite a bit smaller acquisitions and more tuck-in in nature. But we're pleased with where we are with regards to the KPI Ninja integration and very excited about the technology that they're bringing to Health Catalyst in terms of real-time streaming capabilities and other capabilities that are very relevant at a platform and a data layer for all of our clients. And then Armus just closed a few weeks ago. And so we're excited to be seeing positive signals, but we're very early on there. But it's a small token acquisition and will be embedded within our outsourced services business unit. And so we anticipate that that integration will go smoothly and quite well.

Okay, thank you. Richard?

Our next question comes from...

You cut out there for just a minute. Hello? Did you repeat that?

Hi. Oh, is it? Was that me that was the mystery guest? This is John Ransom at Raymond James. How are you?

Hey, John. Welcome. Thank you. Sorry about that.

I guess with me, weird things happen like this. So I guess I'm trying to think like second level a little bit about, you mentioned the rapid, of course, we're all aware of the rapid reset in public valuations. In your experience, how long is the standoff between the public mark and the private mark? And again, I'm trying to think about this glass half empty or glass half full. I mean, if you don't have to raise capital, do you think there might be the opportunity to find some neat assets? at much better prices than you might have a year ago, two years ago? And if so, how long typically in your experience does it take for the market to adjust to the reality?

Yeah, that's a good question. Hard to know. But in studying some of the past fluctuations and cycles, it isn't uncommon for it to take 6 to 12 months or even longer in some cases for a full kind of – harmony to exist in terms of public and private valuations. And so as Brian shared earlier, we've been active as a public company with six acquisitions since we went public, three in the last year. We've got plenty of meaningful work to do in terms of ensuring great integration, great cross-sell results, and we're really early on in that process. So we're excited to focus on really, really good execution against those acquisitions while the public and private markets kind of work things through on their own. And to your point, in the meantime, we'll continue to have a very strong balance sheet. We'll continue to be disciplined, both strategically and financially. And then we anticipate that there will be more of a harmony in terms of the approach to valuations that will exist here over the next 6, 9, 12 months, in which case we want to be well-positioned to take advantage of the opportunities that exist.

And just as a follow-on to the low stock price environment we find ourselves, I know your attention levels are up, but what kind of complexity is great for you in terms of stock comp and or substituting cash for stock comp or any other things that we're not thinking about that, you know, a lower than desired stock price might that you have to adjust your tactics around?

Yeah, I appreciate the question, John. So I think for us as a company, one of the – more significant challenges for us. As you know and as we've discussed, we practiced being a public company for a couple of years before our IPO nearly three years ago. We take the commitments that we make really seriously and that's one of the reasons why the company for 12 out of 12 quarters has beaten the midpoint of its guidance on every metric and and also reached each of the longer-term milestones that we shared when we went public. We talked a lot about that with our team members to say, this is what we need to do to keep our commitments to public shareholders so that we can be a successful publicly traded company. And I think one of the dynamics that we're having to manage now is, is we've delivered really well against those, but the stock price doesn't reflect that. And there are a lot of macroeconomic factors that factor into that, obviously. And so, part of what we have to do is some education with our team members to, you know, better understand some of those factors that are outside of our control. And then also, we've made a deliberate decision, including this last annual planning cycle, to prioritize, to your point, John, cash compensation for our team members so that we make sure that we're very competitive on cash compensation. And that was embedded in our 2022 operating plan and our 2022 guidance was meaningful progress on base salaries and on cash compensation in general, which makes it easier for team members. It's still challenging, but it makes it easier for them to think about the equity component as a longer-term component of their compensation and The other piece that really helps us is we focus a ton on engagement and on mission. And so many of our team members come to Health Catalyst for a multitude of reasons, including often at the center is this desire to make the world a better place. The fact that what we do saves lives and prevents injuries helps team members take a longer-term view. But we also have to realize that compensation matters a lot to them. So we're going to keep prioritizing cash compensation. to team members. And as we prioritize that, as we've discussed in the past, we do expect over time that you'll see stock-based compensation come down over time. But that'll take some time. But that's certainly the direction that we're headed.

Thanks so much.

Thanks, John. Thanks, John.

Our next question comes from Daniel Grosslight with Citi.

Hi, guys. Thanks for taking the question. Dan, you know, all the improvements that you covered in the case studies that you highlighted in your prepared remarks were all from acquired assets, which I thought was interesting. Can you quantify the cross-sells that you've seen this year from those recently acquired assets, both from upselling acquired analytics to existing DOS clients, and then the other way around, selling DOS into some of the clients that you acquired when you purchased these assets?

Yeah, absolutely. Thanks for the question, Daniel. So we are excited about that cross-sell, and that was certainly an important factor in our 2021 dollar-based retention performance of 112%, which was meaningfully higher than what we'd ever experienced before that. Certainly, as we tried to highlight, the cross-sell of these newly acquired technologies contributed directly to that higher than historic dollar-based retention. And we were excited that we were able to add, you know, meaningfully more NetNewDash subscription clients in 2021 than we were in 2020, for example. And that also informed our comfort level last earnings call in raising net the annual guide in terms of the net new dot subscription clients to the high teens, and in raising beyond historic levels, multi-year historic levels, the dollar-based retention that we expect to be more in that 108 to 111 range, whereas in prior years before 2021, we've been in more of that 107 to 109 range. So as we mentioned in our prepared remarks, based on our Q1 performance and our view of the pipeline today, we felt comfortable reaffirming the four-year guide for both of those bookings metrics around net new dollar subscription clients and the dollar-based retention. And that's definitely informed by some encouraging data around the cross-sell. Now, I will share, I feel like we're in early innings as it relates to the cross-sell opportunity that exists. We're just beginning to really understand how to do that at a systematic level. And that takes time to figure out with each acquisition. It takes some time to develop the integrated messaging and to integrate the go-to-market strategy. But over time, we believe that will be a major growth engine for us that we're excited about.

Just to add to that, Dan, to your question, Daniel, the other kind of data point shared is that our Q1 is typically – a smaller kind of bookings quarter for us relative to other quarters. So not a ton of new data in terms of what Dan shared relative to last year, the cross-sell success and achievement. But our first half is a big selling season for us. Our Q2 is a big season of selling for us as well as Q4. So we're encouraged by the pipeline that we have and working hard to execute against that in Q2.

Yep, makes sense. Thanks for the call there. Thanks, Daniel.

Thanks, Daniel.

Our next question comes from David Larson with BTIG.

Hi. Congratulations on a good quarter. What are your expectations for gap G&A costs over the remainder of the year, like for 2Q, 3Q, and 4Q? I know that there was sort of that gain in SG&A and 1Q, but It seems like it was pretty material, like from $23 million a quarter down to $8.8 million a quarter. It was like a $15 million gain. So just any color there would be helpful. Thank you.

Yeah. Yeah, thanks, David. Yeah, so the gain is laid out if you look through kind of our non-GAAP reconciliation. Most of the acquisition-related non-GAAP, expense that we break out was related to that change in fair value of the contingent consideration for the earn out. So that's the main dynamic in Q1. Moving forward, I don't expect huge changes on a quarterly basis through the remainder of the year. In particular, on a non-GAAP basis, that should stay fairly consistent on the G&A line item. There's some seasonality, like we talked about, toward the back half of the year with G&A, but we can see, to your point, there can be fluctuations on a GAAP basis mainly related to that earn out. Good news is that that will get trued up this next quarter just given the earn out timing as of June 30th.

Okay. So it looks like there was like a $4.8 million item in 1Q and then in 2Q will there be another adjustment like that and then that's sort of complete so no impact in 3Q and 4Q?

Right, yeah, the Q2 adjustment will depend on the actual achievement. So there could be a net expense, there could be net reversal of expense or net gain, just depending on how that shakes out in Q2. And then, yeah, to your point, no other changes beyond Q2.

Okay, thanks very much. I'm all set. Appreciate it.

Thanks, David.

Our next question comes from Dev Wirasuria with Berenberg.

Hey, good evening. And great quarter. Thanks for taking my question. I want to just touch on, you know, the inflationary environment here. A lot of commentary on many other calls just addressing that. How are you thinking about the price escalators built into kind of your older contracts? And maybe, you know, are you looking to kind of renegotiate those as you, you know, through this inflationary environment? Or are they already pecked to some sort of CPI index? you know, how are you thinking about the pricing and adjusting for this, both in the tech side and on the professional services side? And then second, you know, is any of that baked into guidance? Any color on that would be helpful. Thank you.

Okay, great. Thanks, Deb, for the question. Yes, inflation is on everyone's mind these days, understanding which elements of inflation are long-term, which elements are or more transitory, are important factors. Interestingly, within the healthcare space, outside of certain aspects, like the labor shortage, for example, with nurses, healthcare pricing increases have been below many other sectors. And so we try to be cognizant of that as well. We do have built-in technology escalators that are contractual in nature with the passing of each year. Those are often in the low double-digit percentage range, so they're already very robust. And while there is an opportunity every few years to look at that, typically we have three- to seven-year contracts put in place from a technology pricing perspective, but they're often very robust in terms of those built-in escalators. And so we wouldn't anticipate dramatic changes to the way that those are structured. On the professional services side, those are a little bit more fluid and there's an opportunity for us to stay a little bit more fluid and flexible in terms of understanding the market conditions. And as I mentioned earlier, there will likely be some cases where, like with domain expertise services, it may be appropriate for us to think about higher prices. and for our clients to accept those. In other circumstances and cases, the fact that we can offer a lower cost alternative and an efficient alternative will be the primary driver of the value proposition to those clients, and they are very sensitive to that value proposition, that pricing. But the compare might be a little bit more favorable because they're experiencing a little bit more price increases in terms of their own labor in especially those areas like clinically oriented areas like chart abstraction. So we're seeing some puts and takes and we're keeping our ear to the ground. Tech is a little bit longer term from a pricing perspective, already built in contractual escalators that are pretty robust. Services, there's a little bit more flexibility, but we are sensitive to ensuring that our value proposition is really strong. to clients. And so except in a few circumstances where, like with domain expertise services, there might be a reasonable and merited meaningful price increase, I think we'll try to stay at a more reasonable level with our clients and stay in line with what they're experiencing as well.

Just your second question, Deb, in terms of what's built into guidance. So to Dan's commentary, what we've reflected is more representative of kind of the historical pricing that is built in to our existing customer contracts. And so as Dan mentioned, that's going to take some time to play out and adjust against that. So that's what we expect in terms of guidance impact from that this year. There is, on the cost side of the equation for us, the technology line-in for us is less headcount intensive, so it's less impacted by inflationary pressure or wage pressure, which benefits our gross margin. relative to the services segment, which is mainly headcount. That's where we are seeing more of that wage pressure hit. That's a bit of a headwind for us while it takes us time for us to adjust.

Great.

Thank you.

Thanks, Deb.

I'm showing no further questions in queue. I'd like to turn the call back to Dan Burton for closing remarks.

All right, thank you all for your continued interest in Health Catalyst. We appreciate your time and look forward to future conversations. Have a great evening.

This concludes today's conference call. Thank you for participating. You may now disconnect.