Health Catalyst, Inc

Welcome to the Health Catalyst third quarter 2022 earnings conference call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star zero. And I would now like to turn the call over to Adam Brown, Senior Vice President of FP&A and Investor Relations. Sir, please begin.

Good afternoon and welcome to Health Catalyst Earnings Conference Call for the third quarter of 2022. which ended on September 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 inflationary macroeconomic environment on our business and the 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 Q2 2022, filed with the SEC on August 5, 2022, and our Form 10-Q for Q3 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. We are excited to share our third quarter 2022 financial performance along with additional highlights from the quarter. I will begin today's call with some commentary on our third quarter 2022 financial results by sharing that we are pleased with the company's overall financial performance. Our Q3 2022 total revenue was $68.4 million, representing 11% growth year over year, and our adjusted EBITDA was a loss of $4.6 million, with these results beating the midpoint of our quarterly guidance on each metric. Additional financial highlights from the third quarter include our technology revenue of $44 million, representing 15% growth year over year, and our adjusted overall gross margin of 51.2%, representing an increase of approximately 25 basis points year over year. Now let me highlight some additional items from the quarter. You will recall from our previous earnings calls that 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 clients to realize massive, measurable improvements while also maintaining industry-leading client and team member satisfaction and engagement. Let me begin by sharing a few examples of client improvements from recently published case studies. First, as part of its population health strategy, WakeMed Health and Hospitals utilized our software, including our DOS data platform and healthcare.ai, to meaningfully improve its patient access performance. Prior to implementing our solution, WakeMed knew that its patients often had trouble accessing its system, but it lacked the actionable data that would enable the identification, prioritization, and management of improvement opportunities. Leveraging our technology, WakeMed can now visualize patients across key performance indicators, including referral conversion rates, schedule utilization, new patient visits, cancellations, no-shows, visit types, and patient portal activation rates. After learning from its data, WakeMed prioritized upgrading and improving its patient scheduling process, optimizing its patient referral process, and increasing the number of new patients while simultaneously growing the number of WakeMed physician practices. In just one year, the combination of our health catalyst solution and the WakeMed team's efforts ultimately led to WakeMed increasing its revenue by over $25 million. and achieving more than a 15% relative increase in its outpatient visits. Next, as part of a broader client relationship, Banner Health engaged in a tech-enabled outsourcing relationship with Health Catalyst related to their clinical chart abstraction needs, which included Health Catalyst hiring a portion of Banner's chart abstraction team as rebadged Health Catalyst team members who continue to perform chart abstraction for Banner Health. Leveraging our DOS data platform to automate several components of the abstraction process, we effectively allowed Banner to lower its costs and improve its clinical chart abstraction efficiency while simultaneously improving the abstraction team member experience. This tech-enabled outsourcing relationship has resulted in Banner realizing hard dollar annual savings of over $750,000 in abstraction labor costs and registry costs saved. Additionally, this automation has allowed the clinical chart abstraction resources to support Banner's quality improvement initiative, including a 46% improvement in case submission accuracy for electronic clinical quality measures reporting and the identification of over 71,000 cases out of 225,000 that would have been submitted in error. Lastly, the team member engagement scores of the rebadged chart abstraction team has seen a 30% relative improvement. Also in the improvement category, we have been fortunate to receive multiple recent external recognitions related to our team member engagement. First, we're excited to have been named to Modern Healthcare's 2022 Best Places to Work list for the 10th year in a row. Additionally, we are pleased to have been recently named the Salt Lake Tribune's 2022 Top Workplaces in Utah, a list that is based solely on employee feedback, marking the ninth year in a row that we've achieved this distinction. Our next strategic objective category is growth, which includes beginning new client relationships while also expanding existing client relationships. In this category, let me first share that in September, we hosted our ninth annual Healthcare Analytics Summit, inclusive of our annual user conference. We were excited to hold this year's conference back in person in Salt Lake City, and we were energized by what we viewed as a highly successful growth-focused event that included over 1,000 attendees representing more than 175 existing client and prospective client organizations, and included over 70 representatives from existing client organizations presenting their improvement case studies realized in partnership with Health Catalyst. As it relates to our current selling environment, our Healthcare Analytics Summit, along with numerous other existing client and prospective client conversations over the last quarter, have given us hundreds of opportunities to listen and gather additional data and feedback related to the current growth environment. As a subset of those hundreds of interactions, I have personally had the opportunity to over the past three months to visit face-to-face with the CEOs, COOs, CFOs, CIOs, and other executives at 15 of our top 20 clients and over half of our top 50 clients, with our top 50 clients representing over two-thirds of our company's total recurring revenue under contract. These in-person meetings have been a significant recent focus of our team and of mine, given our current end market dynamics, as we strive to better understand our client challenges and to help ensure that we are offering solutions that help our clients overcome these challenges and succeed. I, along with our client and growth organizations, will continue these visits with our largest clients in the months ahead, to ensure that we strengthen these relationships by offering solutions that enable both short-term and long-term success for our clients. As we have synthesized feedback from our clients and prospects, I would share that while we see both headwinds and tailwinds as it relates to our growth in Q4 of DR, we are encouraged to see a meaningful increase in the size of our pipeline, particularly in those parts of our portfolio that offer near-term hard dollar cost savings. As it relates to headwinds, aligned with what we shared last quarter, our health system and market continues to experience meaningful financial strength, primarily due to significant increases in labor and supply costs without a commensurate increase in revenue, leading to substantial margin pressure. We anticipate this dynamic will persist for at least the next few quarters. The number one theme we heard at our Healthcare Analytics Summit was the significant financial pressure. and health systems' interest in leveraging technology and services solutions to help mitigate that pressure. Next, as shared on our last earnings call, in the first half of this year, we experienced an elongation in several of our sales cycles as many health systems temporarily paused purchasing decisions to give themselves time to realign their budgets with their updated financial outlook. Now, as it relates to tailwinds, As we've continued through the second half of the year, most healthcare organizations we've spoken with have had the opportunity to work through a 2022 rebudgeting process that now aligns with their updated annual financial expectations, which we expect will enable more purchasing decisions by the end of this year relative to the first half of 2022. And we expect that those purchasing decisions will be largely focused on solutions that deliver hard dollar financial improvement in the near term. This gives us incremental confidence in our pipeline conversion expectations for the remainder of 2022. Second, as it relates to tailwinds, while financial strain has continued to pressure health system budgets, in our recent sales conversations, we have heard a strong acknowledgement from our clients that our portfolio includes solutions that directly reduce health systems' current financial pressure, especially related to the segments of our offering that have a clear near-term financial ROI, such as our financial empowerment suite, our population health suite, and our tech-enabled outsourcing offering. Coming out of this quarter, we feel highly energized that our offering, along with our partnership approach with clients, is resonating with current and prospective clients And that provides us with a high level of confidence in our Q4 and full year 2022 performance and guidance. The meaningful increase in the size of our pipeline that we have observed over the last 90 days, particularly in those solutions that offer near-term hard dollar client benefit, also encourage us as we look forward to the reacceleration of our bookings growth in 2023 and beyond, even as we navigate a challenging macroeconomic and end market environment. Lastly, related to tailwinds, my recent face-to-face conversations with senior executives at dozens of our largest clients has reinforced my conviction in the strength and strategic nature of those partnerships. I have confidence that these relationships will continue and expand well into the future. These updates inform an increase to our projected 2022 dollar-based retention and our forecasted revenue for full year 2022. Brian will cover the update to our 2022 revenue projection in a few minutes, and I'm happy to share that we now expect our 2022 dollar-based retention achievement level to be between 97% and 101%, an increase relative to the range we shared last quarter. This incremental confidence is driven by growth in our existing client expansion pipeline relative to prior expectations, and a modest reduction in forecasted churn for 2022. The largest increase in expansion opportunities has come in the area of tech-enabled outsourcing. Related to our DOS subscription customer bookings metric, we are reaffirming our expectation to achieve mid-to-high single digits net new DOS subscription customer additions in 2022. As it relates to our net new DOS subscription customer metrics, a reminder that we typically experience seasonality in our new client bookings, with Q2 and Q4 normally representing the majority of our sales, aligned with healthcare organization fiscal years. This fourth quarter will also represent an important new client selling season, as most fourth quarters have been for our company throughout its history. In terms of the mix of our Q4 new client pipeline, We do anticipate a few opportunities with new DOS Lite subscription clients. We'll begin at a lower price point than our historical average, and we'll also include other newer platform offerings, including continued integration with the KPI Ninja platform components, with significant upside opportunity over the medium to long term, which will enable us to get started with certain prospects while they navigate near-term budget constraints. Lastly, in the strategic objective category of growth, I wanted to first thank Patrick Nellie for his countless contributions to our company's success over the last nine years as he transitions to a strategic advisor role. And I want to share my excitement for Kevin Freeman, recently appointed as our Chief Growth Officer, and Tara Nujar Bryan as our Chief Marketing Officer. Kevin and Tara bring decades of experience to their respective roles, and will have overall responsibility for strategic growth functions at Health Catalyst. I am highly confident each of them will be instrumental in driving our success as we strive to reaccelerate our growth moving forward. Next, I would like to provide an update on a few of the strategic investment areas that we've covered on our last earnings call. Based on the multitude of client and prospect conversations that we have had over the last quarter, including at our Healthcare Analytics Summit, it is clear to us that there is high satisfaction with many aspects of HealthCatalyst's existing solution, as clients and prospects are focused on the most effective ways to utilize our software and services to alleviate their near-term financial strain. We are continuing to make several strategic R&D investments in order to maintain our position as a market-leading data platform over the long term, with a focus on providing our clients with a strong ROI over time. As we have continued to share these investment focus areas with our clients and prospects, including at our recent Healthcare Analytics Summit user group, the feedback was very enthusiastic and affirming of our R&D direction. As a reminder, our investment in our data platform scalability includes cloud-native, modern architecture capabilities with snowflake enablement, elastic compute, and event-driven processing. As we have previously shared, we have been investing in this initiative for the last couple of years. In terms of rolling these capabilities out to clients, one of our largest recent client additions is deployed in a cloud-native environment. and we have begun migrating one of our longest-standing on-premise clients to a similar cloud-native environment. More broadly for existing clients, we are in the early stages of a migration process that we anticipate will take two to three years, as our existing database infrastructure continues to function well for the vast majority of our clients. Individual migration decisions will be driven by the size of a client's data footprint and their desire and readiness to transition. Also, as a reminder, we have been investing in our technology's time-to-value capabilities, including standards-based data models, plug-and-play data acquisition enablement, enhanced data quality, embedded AI, and machine learning capabilities, and an extensible unified data model. We expect the bolus of this investment to be completed in 2023, with meaningful progress already made to date. and with many of our clients currently benefiting from the results of these investments. Related to our strategic technology investments, let me also share my excitement for the recent appointment of Dave Ross as our Chief Technology Officer. Dave joined Health Catalyst in 2021 as part of our Twistle acquisition and was previously the Chief Technology Officer and co-founder of Twistle, leading all product development and engineering activities for over 10 years prior to Twistle being acquired by Health Catalyst. Dave brings a wealth of experience directly related to the strategic investments we are currently making in our technology, and I am confident he is the right leader to enable our success in this chapter of our company's growth. I would like to thank Brian Hinton for his 10 years of service, dedication, and significant contributions to our company's mission and success in various technology leadership roles over the years. We wish Brian Hinton continued success in his future endeavors. Finally, let me share that as we continue to invest strategically in our software and services, we are strongly committed to balancing those investments in order to achieve the profitability targets we shared on our last earnings call. While we have certainly approached our cost reduction efforts to be consistent with the Health Catalyst way, as you will hear from Brian shortly, we are pleased to be ahead of schedule relative to our prior cost reduction forecasts. including for 2022, and as such, we are raising our adjusted EBITDA guidance for 2022. This is a strong signal of our commitment in 2022 and beyond to execute on our previously stated near and midterm profitability and free cash flow targets. With that, let me turn the call over to Brian.