Health Catalyst, Inc

Welcome to the HealthCatalyst fourth quarter and full year 2022 earnings conference call. At this time, all participants have been placed on 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. To get as many questions as time permits, we ask that you limit yourself to one question. If you have any follow-ups, please re-enter the queue. So others can hear your questions clearly, we ask that you pick up your handset for optimal sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Adam Brown, Senior Vice President of FP&A and Investor Relations.

Good afternoon and welcome to Health Catalyst's earnings conference call for the fourth quarter of 2022, which ended on December 31st, 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. 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 macroeconomic challenges, including high levels of inflation and high interest rates, the tight labor market, and the lingering 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-Q for Q3 2022 filed with the SEC on November 9, 2022, and our Form 10-K for the full year 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 fourth quarter and full year 2022 financial performance along with additional highlights from the fourth quarter. Reflecting on 2022, it proved to be a more challenging year than anticipated as a result of the inflationary macroeconomic environment and the meaningful financial strain that our health system and market faced, primarily due to significant increases in labor and supply costs without a commensurate increase in revenue, leading to substantial margin pressures. While those items resulted in challenges related to our bookings performance in the first half of 2022, I am pleased with our financial performance in the second half of 2022. And overall, I am proud of all that we accomplished during the year, especially in light of the continued challenging macro environment. For the full year 2022, our total revenue was $276.2 million, This represents 14% year-over-year revenue growth and an outperformance relative to the midpoint of the guidance that we shared on our last quarterly earnings call. Likewise, for the full year 2022, our adjusted EBITDA was a loss of $2.5 million. This represents an improvement of $8.8 million relative to 2021. Importantly, this suggests that EBITDA outperformed the midpoint of the original full-year guidance we provided at the beginning of 2022, demonstrating continued operating leverage in our business despite lower annual revenue growth for 2022 as compared to our initial guidance for 2022. 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 engagement. Let me begin by sharing a client improvement example from a recently published case study. We have observed over time that healthcare organizations that build a homegrown data and analytics infrastructure frequently underestimate its complexity and total cost of ownership, with the problems getting worse as the infrastructure ages. Integra's help spent years attempting to build and maintain an internal data warehouse. but ultimately concluded that operating costs were too high and that this infrastructure was unable to produce the data, analytics, and insights at scale that its leadership and teams needed. In response, Integra sought out an industry-leading commercial-grade solution, ultimately selecting Health Catalyst as its enterprise solution. After implementing our data platform, inclusive of healthcare.ai, along with a robust set of our analytics applications, including Pop Insights, Touchstone, and Power Costing, Integris now has a scalable data and analytics platform that can deliver the high-value data and analytics required to understand and continually improve its organizational performance at scale. Following implementation, Integris has realized more than $3 million in annual indirect labor cost savings through a reduction in duplicative data ecosystem costs, including the resources required to maintain a homegrown data and analytics platform. Building on this recent client success story, we are pleased to have announced today that Integris has recently meaningfully expanded its partnership with Health Catalysts. inclusive of an all-access technology subscription and a new tech-enabled managed services contract. This larger multi-year contract nearly doubles the total revenue from our relationship and makes Integris one of Health Catalyst's 10 largest clients. Health Catalyst will staff, manage, and maintain Integris' enterprise integrated analytics and data abstraction programs to further enable Integris to to achieve data-informed healthcare improvements. We are excited to share another example of our clients simultaneously expanding their technology relationship with us while we deliver valuable talent retention and cost savings through our tech-enabled managed services offerings. Also in the improvement category, we have been fortunate to receive multiple recent external recognitions related to our team member engagement, First, we are honored to have been named one of the best companies to work for in 2022 by Utah Business Magazine. Next, we're pleased to have recently received the Top Workplaces USA Award, placing 16th out of more than 100 organizations on the list of top workplaces with 1,000 to 2,499 employees, selected based on employee feedback survey results. Additionally, we are appreciative to have recently received recognition by Newsweek as one of America's greatest workplaces for women in 2023. And finally, we're grateful to share that Health Catalyst was also recently named by Newsweek as one of America's greatest workplaces for diversity in 2023. Our next strategic objective category is growth. which includes beginning new client relationships while also expanding existing client relationships. First, let me provide some commentary on our 2022 bookings performance. At a summary level, I am pleased with our growth-related performance in the second half of 2022, which included bookings results that were toward the top end of the range we shared from our last quarterly earnings call. Our dollar-based retention rate achievement for 2022 was 100%, towards the high end of the 97% to 101% expectation range we provided last quarter. In terms of the segment breakdown of our 2022 dollar-based retention, consistent with our prior expectations, our professional services dollar-based retention rate was slightly higher than 100%, and our technology dollar-based retention was slightly lower than 100%. In the professional services segment, our tech-enabled managed services comprised the largest component of the expansion ARR in 2022, with a significant portion driven by the previously announced Carle Health expansion. Next, our net new DAS subscription client additions for 2022 was eight, we were pleased to come in towards the high end of the mid-to-high single-digit expected range provided on our last quarterly earnings call. And we would note that, relative to prior years, a slightly higher proportion of our net client ads came from our more modular DOS Lite offering, as we mentioned we anticipated on our last earnings call. As a few highlights of our recent net new DAS subscription client additions, we are excited to publicly announce today our partnership with Deaconess Health System, a leading provider of healthcare services to 50 counties throughout Indiana, Illinois, and Kentucky. Through this five-year partnership, Deaconess will utilize Health Catalyst's enterprise analytics solution and outcomes improvement expertise to transform its clinical, financial, and operational domains and improve analytic efficiency across its team. Also, we are excited today to announce an expansive multi-year partnership with Bryan Health, a Nebraska-based health system that includes five acute care medical centers, a physician network, the Bryan College of Health Sciences, and over 6,000 highly trained staff members. Bryan Health will leverage our DOS data platform and a subset of our analytics applications, including value optimizer, measurable, and self-service analytics in its effort to improve system-wide performance and quality of care. Lastly, I'm happy to share that the GI Quality Improvement Consortium has announced that it has selected Health Catalyst for the purposes of deploying our recently acquired Armistice hybrid cloud-based registry technology. Health Catalyst's extensive experience with data extraction will allow the GI Quality Improvement Consortium a streamlined user experience, while our ARMIS technology will enable longitudinal data collection and robust reporting to fuel quality improvement as well as reporting to CMS's quality payment program. Next, as it relates to our current selling environment, I have personally had the opportunity over the past approximately six months to now have held over 80 face-to-face visits with C-suite executives at our top 100 clients. As I, along with our growth organization, have synthesized recent feedback from our clients and prospects, I would share that we continue to see both headwinds and tailwinds as it relates to our growth in 2023. As it relates to headwinds, Aligned with what we shared on our Q3 earnings call, our health system and market continues to experience meaningful financial strain, 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. Translating this to our business, we have seen a decrease in pipeline demand and some anticipated elevated churn levels for the parts of our solution portfolio that do not offer near-term measurable ROI, such as our clinically focused technology offerings and our more traditional consulting professional services. As it relates to tailwinds, while we have seen that financial strain has continued to pressure health system budgets, In our recent sales conversations, we have continued to hear a strong acknowledgement 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 tech-enabled managed services offering, our financial empowerment technology suite, and components of our population health technology suite. We are encouraged to continue to see a meaningful increase in the size of our pipeline in these parts of our portfolio that offer near-term hard dollar cost savings. These offerings largely drove our strong second half 2022 bookings results and comprise a significant portion of our projected 2023 sales pipelines. Given the increased demand levels for our tech-enabled managed services offering as compared to historical levels, and that this solution offering has been a higher priority focus area for us over the last few quarters based on the feedback from our end market, let me take a few moments to comment on this offering and why we are seeing heightened pipeline demand in this area. First, in terms of our tech-enabled managed services offering, We currently offer this solution in two main functional areas that include chart abstraction and core analytics. Currently, less than 10% of our DOS client base has a tech-enabled managed services contract with us. Next, in terms of why we are seeing a more robust increase in demand, Our quiet conversations over the past six months have validated our belief that as health systems have seen increasingly significant pressure related to their labor expense, which typically comprises well over half of their operating expenses, they have sought solutions to effectively address their near-term labor expense challenges, especially in areas that are not typically their core competencies. or in areas where they typically struggle to recruit and retain talent. Our tech-enabled managed services offering typically allows a health system to realize near-term cost savings and gives them certainty in their labor expense profile over a multi-year period. Lastly, we would highlight a few reasons why Health Catalyst has been and continues to be differentiated in our solutions in this offering area. Unlike traditional business process outsourcing vendors, Health Catalyst primarily drives efficiencies in labor costs utilizing our robust technology solutions, as opposed to primarily leveraging offshoring. Two, we have already developed the technology needed for efficiency gains in these core operating areas like analytics and chart abstraction, so the time to value is significantly faster. And lastly, our tech-enabled managed services clients have chosen Health Catalyst because of our long-term trusted partnerships with these clients. That includes a multi-year track record of shared success. With each of the tech-enabled managed services expansion contracts we have signed to date, none of them have gone out to an RFP. A recent example we announced in December was Carl Health's decision to enter into the largest expansion in the history of Health Catalysts. inclusive of an all-access technology subscription, plus tech-enabled managed services in the areas of analytics, data management, reporting, and abstraction. This five-year contract totals approximately $80 million over the life of the contract and is inclusive of an $11 million a year expansion, resulting from a technology increase and a significant tech-enabled managed services contract. Later in our prepared remarks, Brian will comment on the typical financial profile of these types of tech-enabled managed services relationships. With all of that as background, let me now provide some commentary on our 2023 bookings expectations. First, I would share that we anticipate that a higher proportion of our gross bookings will come from our existing client base as compared to historical levels. inclusive of upsells to both our DOS client base as well as upsells to our over 400 other more modular non-DOS clients. This expectation is driven by the current in-market dynamics in which we have observed that existing clients that have already realized a strong ROI and are aligned on a long-term partnership framework tend to be more receptive to expansion conversation, particularly in areas of near-term financial ROI. as compared to discussions with potential clients regarding net new client logos. Next, in terms of our 2023 bookings expectations, we anticipate a higher proportion of our bookings will come from our tech-enabled managed services offering. As I just shared, this solution offering is strongly resonating with clients, given its near-term hard dollar ROI, allowing help systems to effectively address their near-term labor expense challenges by deepening their relationship with a trusted long-term partner. Importantly, given the size of these tech-enabled managed services contracts and our somewhat limited forecasting history, they may create some lumpiness in our quarterly bookings results, translating to a 2023 dollar-based retention range that is wider than we have provided historically. Lastly, let me share that we anticipate a higher skew of our bookings will occur in the second half of the year as compared to our historical average, largely resulting from the anticipated timing of our larger pipeline opportunities, inclusive of our tech-enabled managed services pipeline. As you may recall, we began more proactively discussing tech-enabled managed services opportunities with existing clients starting in Q3 of 2022. While we continue to gather data on the progression of these opportunities, we anticipate that the sales cycle for tech and mobile banded services deals will be similar on average to the company's overall one-year estimated sales cycle. With this backdrop, I will now share some perspectives on our anticipated 2023 bookings achievement levels. First, as it relates to our 2023 dollar-based retention, We anticipate realizing meaningful improvement relative to 2022 with an anticipation of dollar-based retention achievement for 2023 between 102% and 110%. As previously mentioned, we anticipate our professional services achievement to be higher than technology, driven by our tech-enabled managed services pipeline. In our technology segment, we continue to anticipate that our contractual expansions will drive the bulk of our expansion. Based on many recent discussions with our largest clients, we feel encouraged by their long-term commitment to the Health Catalyst Partnership. At the same time, we anticipate some modular technology churn in our smaller, more limited client relationships, and some professional services churn outside of technical managed services, driven primarily by continued financial pressures faced by these health systems. Next, as it relates to our net new DOS subscription client achievement, we anticipate improvement relative to 2022, likely resulting in low double-digit net new DOS subscription clients in 2023, but not yet a return to pre-2022 net new DOS subscription ads due to continued macroeconomic pressures. Lastly, as it relates to our financial performance, let me share that I am extremely pleased with our full year adjusted EBITDA performance in 2022 and our significantly higher EBITDA guidance range for 2023 relative to 2022. Our 2022 achievement level, despite our lower than originally anticipated revenue growth, demonstrates the continued operating leverage of our business and is highly encouraging as we look to 2023. In 2023, as Brian will cover in his prepared remarks, I am pleased. that the midpoint of our adjusted EBITDA guidance is well ahead of our previous expectations of approximately 300 basis points of year-over-year margin improvement. I continue to feel confident in our near-term adjusted EBITDA progress as well as our mid-term adjusted EBITDA margin target of 10% in 2025 and our long-term adjusted EBITDA margin target of 20% plus. In a few moments, Brian will provide more color on our anticipated revenue mix in 2023 and our ability to continue to drive towards these adjusted EBITDA targets, even if our revenue mix moderately shifts towards more professional services over time. Let me conclude my remarks by sharing that we are honored to announce that Matthew Kolb, Executive Vice President and Chief Operating Officer of Carl Health, will be joining Health Catalyst's Board of Directors, effective July 1st, 2023. Matt is deeply committed to Health Catalyst's and Carl Health's shared mission of data-informed healthcare improvement and has been an extraordinary leader throughout his career in enabling massive improvements in the healthcare ecosystem. We are honored to have Matt contribute his depth of character, commitment, and experience to our board and anticipate his contributions to be significant and impactful in the months and years ahead. Additionally, Carl Health has made the decision to deepen its long-term investment in Health Catalyst with a meaningful purchase on the open market of Health Catalyst common stock. We welcome them as a deeply mission-aligned, long-term-oriented owner in the company. Consistent with my own personal decisions to purchase Health Catalyst shares on the open market over the past several months, which we estimate places me among Health Catalyst's 20 largest shareholders, I'm grateful to add a like-minded, deeply mission-focused, and long-term-oriented fellow shareholder to our company's ownership group. This announcement builds on the news we shared in December 2022, at which time Carl nearly quadrupled the size of its client relationship with Health Catalyst. We are grateful for this deep, long-term, and multifaceted relationship with Carle Health, which mirrors some similar positive dynamics we've historically experienced with a few of our other most successful client relationships. And with that, I'll turn the call over to Brian.