Health Catalyst, Inc

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Health Catalyst Incorporated second quarter of the conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you can use the star 1-1 on your telephone keypad. At this time, I would like to turn the conference over to Mr. Aaron Brown. Sir, please begin.

Good afternoon, and welcome to Health Catalyst's earnings conference call for the second quarter of 2022, which ended on June 30th, 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, and the high inflationary environment 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-Q for Q1 2022 filed with the SEC on May 10, 2022, and our Form 10-Q for Q2 2022 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 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. I am happy to share that our Q2 2022 revenue came in at the high end of our guidance range, and that our Q2 2022 adjusted EBITDA outperformed the top end of our guidance range. While we are pleased with these Q2 results, we are disappointed that, as we referenced in our earnings release this afternoon, we are revising down our revenue and adjusted EBITDA outlook for the full year. Although I will spend the majority of my prepared remarks commenting on how our end market dynamics are impacting our bookings performance, I first want to take a moment to set the broader context. As we have entered our fourth year as a public company, I continue to have confidence in our ongoing position as the market leader in data and analytics technology and services that drive measurable improvement. Our engaged and committed team members, our deep customer relationships, our ROI-centric value proposition, and our strong balance sheet leave us well positioned to be the long-term market leader in an industry that is still early in its adoption of commercial-grade data and analytics technology and services. Likewise, as we navigate a challenging macroeconomic environment, we are committed to operating with financial discipline. As such, while our near-term growth is impacted by the macroeconomic pressure on our end market, we are confident in our ability to drive meaningful, positive adjusted EBITDA in 2023 and beyond. With that, let me walk through the three main drivers that caused us to reassess our full-year growth outlook. First, our health system end market is currently experiencing meaningful financial strain, in which they have realized significant increases in labor and supply costs without a commensurate increase in revenue, leading to substantial margin pressure. As a result, our sales cycles have elongated and our first half bookings achievement was materially lower than anticipated, impacting both our new customer additions and our dollar-based retention metrics. Importantly, through the first half of 2022, we have maintained a robust pipeline and have not seen a material negative impact on our win rates. What we have observed is that many healthcare organizations are delaying near-term purchasing decisions as they reevaluate budgets given their financial situation. Additionally, in a few instances, we are experiencing customers trimming back their near-term spend with Health Catalyst in an effort to meet shorter-term budget cut requirements. Within our professional services segment, this has translated to a subset of customers modestly reducing the number of FTEs engaged in their initiatives. While in the technology segment, this has mostly translated to a small subset of modular customers lowering their application and analytics spend. In many ways, we would characterize the selling environment in the first half of 2022 as similar to what we experienced in the first half of 2020, when significant economic challenges related to COVID-19 resulted in many of our customers and prospects pausing their purchasing decisions and some customers reducing their spend with health catalysts as they work through near-term rebudgeting exercises. Just as we saw our customers stay with Health Catalyst through the worst financial aspects of the COVID-19 pandemic and then choose to expand their relationships in 2021, we believe our long-term partnership orientation with our customers will, over time, provide opportunities for meaningful future expansion in those relationships. The second driver of our revised 2022 outlook is the loss of a large enterprise DOS customer. While this event is certainly unfortunate, as a reminder, our historical gross customer retention has been extremely high, especially amongst our enterprise DOS customer base. And based on our engagement with existing customers, we believe this was an isolated, customer-specific event. As context, this customer was added shortly after the onset of the COVID-19 pandemic. This customer's recent decision to bring their analytics function in-house was primarily driven by near-term cost savings needs in light of their significant financial pressure. We also acknowledge that we could have performed better in our implementation and time to value, and we have taken active steps to learn from this experience and improve. Importantly, we have not experienced this feedback as an overall trend from our customers. The 3rd driver of our revised 2022 outlook relates to our decision to pause our investments in the life sciences adjacent market outside of continuing to provide our twistle patient engagement solution. While we continue to believe there is a long term opportunity to leverage our robust data asset within the life sciences and market. Our investment over the last few years has not played out as meaningfully as we had forecasted. The life sciences adjacency previously accounted for a few million dollars in our 2022 revenue forecast that we no longer expect to achieve. Additionally, it will result in the loss of a few DOS subscription customers, each with relatively low ARR values. We believe this strategic decision will bolster our efforts to concentrate on our core value proposition, prioritize continued progress toward profitability, and drive operational focus, including allowing us to reallocate a subset of this investment toward our core product roadmap. As we continue to invest in core data and analytics technology infrastructure, We are building this infrastructure with life sciences use cases in mind, keeping open the possibility of future reinvestment in the life sciences market. Moving on to commentary on the second half of 2022, we are proactively responding to the challenging macroeconomic environment and near-term top-line pressure with a focused, prioritized operating plan. First, I would emphasize that we are strategically focusing our operations to enable continued meaningful operating leverage. This operational focus includes, as mentioned previously, pausing our investment in the life sciences adjacent market, as well as reducing our investment levels in other areas. This also includes further expanding our offshore delivery capabilities, enabling greater savings in certain operating expense and delivery functions. Next, I would highlight that we are continuing to make several strategic investments to continue to position ourselves as a market-leading data platform and focus on providing our customers with a strong ROI through our technology and services offerings. Related to our data platform, we have made meaningful recent investments in high-value data and analytics to enable faster time to value and greater scalability. On time to value, our investment has and will continue to focus on plug and play data acquisition enablement, enhanced data quality, embedded AI, and machine learning capabilities, and an extensible unified data model. And as it relates to scalability, our investment will continue to focus on modern architecture capabilities, including snowflake enablement, elastic compute, and event-driven processing. All of these data platform capabilities enable our clients to more quickly and effectively use data and analytics to make more data-informed decisions and measurably improve. Given the financial pressure that health systems are currently facing, we are also prioritizing investments in applications and services that we believe have a clear financial ROI, such as our financial empowerment suite, a population health suite, and our tech-enabled outsourced services. We are prioritizing these solutions in our conversations with prospective clients, and we are encouraged to see meaningful and positive responses to these offerings in our current pipeline. In the second half of 2022, we anticipate we will see an improvement in our pipeline conversion rates and timelines relative to the first half of the year. Though there will likely continue to be some amount of strain on our near-term conversion rates given the ongoing end-market financial pressure. Next, let me share a few comments on the implications of these updates for the second half of 2022 and beyond. We are lowering our full-year 2022 revenue outlook, which Brian will cover in more detail. Importantly, however, our adjusted EBITDA guidance is only minimally impacted relative to the revenue guidance revision. as we have quickly adjusted our operating plan to balance the lower growth forecast and enable continued operating leverage. In terms of our 2022 bookings outlook, we now anticipate our dollar-based retention will be in the mid to high 90s and that our net new DOS subscription additions will be in the mid to high single digits. And though we are not sharing specific guidance related to our 2023 outlook today, We do anticipate that our 2023 revenue growth rate will be materially impacted by the lower bookings performance in 2022 as compared to previous expectations. Even with a lower growth profile in 2022 and 2023, we are committed to realizing positive adjusted EBITDA in 2023 and anticipate similar adjusted EBITDA annual margin improvement in 2023 as we are expecting in 2022, namely approximately 300 basis points of improvement. We aim to realize this continued profitability improvement through a combination of operational focus and cost optimization. As we look beyond 2023, and acknowledge that the macro environment is evolving and that our end market remains challenging, we remain confident in our ability to achieve our long-term adjusted EBITDA target of 20% plus. Additionally, as we enter our fourth year as a public company and having demonstrated our ability to achieve our adjusted EBITDA break-even timeline set out at the time of our IPO, today we are providing a mid-term target of 10% adjusted EBITDA margin and positive free cash flow in 2025. We believe this margin target still allows us to make the level of investment required to maintain our long-term strategic differentiation and market leadership while also beginning the realization of meaningful free cash flow generation. On a related topic, let me now share that our board of directors has authorized a share repurchase program. which allows us to repurchase up to $40 million of our outstanding shares. As we evaluated our corporate finance options, informed by our strong cash position and our high level of conviction in our path to meaningful free cash flow generation for full year 2025, we determined that a share repurchase program would create value for our shareholders by allowing us to opportunistically repurchase a subset of our shares with the recognition that current share prices do not match our view of the long-term value of shares of the company's stock. Given the size of the repurchase program relative to our overall cash balance, we also maintain the ability to utilize our balance sheet to conduct opportunistic future M&A. We will continue to be disciplined in our M&A evaluation process, requiring acquisitions to be both strategically and financially compelling for Health Catalyst. While in the near term we anticipate M&A is less likely, given the market dynamics and ongoing disconnect between public and private market valuations, and our intention to drive additional focus and execution against our current offerings, we continue to believe M&A will contribute to our long-term strategy. Before I turn the call over to Brian, let me also take a couple of moments to share a few positive company updates from the second quarter. First, I'd like to highlight our team member engagement. Approximately every six months, we utilize the Gallup organization to measure our team members' engagement levels. In our most recent results, we achieved an overall team member engagement score in the 97th percentile. This latest engagement level continues a pattern that has been in place for many years of industry-leading team member engagement, consistently ranking between the 95th and 99th percentile in overall team member engagement scores. We as a leadership team continue to maintain a primary, prioritized focus on team member engagement, the center of our strategic flywheel. Because we recognize the central and foundational contributions that our team members make in building the software and providing the services expertise that enable our customers to achieve massive measurable improvement. Second, we have been encouraged to see another of our solutions, power costing, recently record meaningful improvement in customer satisfaction towards industry leading levels as measured by the CLAS organization. These Gallup and CLAS results are encouraging confirmation of our prioritization and focus. Additionally, in June, we as a company celebrated publishing our 300th Customer Improvement Case Study. These 300 customer-approved case studies have documented a total of $1.5 billion in validated measurable improvements and 5.4 million lives positively impacted. And these 300 published case studies represent a small fraction of the measurable improvements that our customers have realized as a result of their partnership with Health Catalyst. Lastly, we are excited to have publicly announced two of our recent customer additions. First, I am happy to share that our new relationship with LifePoint Health will allow them to leverage our robust technology offering, along with our professional services expertise, to support their efforts to reduce their variation in clinical outcomes, improve their overall quality of care, and drive toward their population health goals. Next, we're pleased to share that Akron Children's Hospital will leverage our data platform and population health software, along with our professional services expertise, to improve their patient experiences and outcomes, personalize value-based care, create operational efficiency, and compete more effectively in their marketplace. We are honored to have the opportunity to serve these two leading healthcare organizations, And we believe these new relationships highlight our industry-leading solution, the importance of our value proposition, and that the breadth of our offering enables us to effectively serve clients across the healthcare ecosystem. With that, let me turn the call over to Brian. Brian?