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spk11: Welcome to the Health Catalyst first quarter 2023 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 to as many questions as time permits, we ask that you limit yourself to one question. If you have any follow-up questions, please re-enter the queue. 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. I would now like to turn the call over to Adam Brown, Senior Vice President of FP&A and Investor Relations.
spk18: Good afternoon and welcome to Health Catalyst Earnings Conference Call for the first quarter of 2023, which ended on March 31st, 2023. My name is Adam Brown. I am 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 macroeconomic challenges, including high levels of inflation and high interest rates, the tight labor market, our pipeline conversion rates, and the general anticipated performance of our 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 full year 2022 filed with the SEC on February 28, 2023, and our Form 10-Q for the first quarter of 2023 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, I will turn the call over to Dan. Dan?
spk02: Thank you, Adam.
spk17: And thank you to everyone who has joined us this afternoon. We're excited to share our first quarter 2023 financial performance, along with additional highlights from the quarter. I will begin today's call with some commentary on our first quarter 2023 financial results by assuring that we are pleased with the company's overall financial performance. Our Q1 2023 total revenue was $73.9 million, representing 8% growth year over year. and our adjusted EBITDA was $4.2 million, with these results beating the midpoint of our quarterly guidance on each metric. Additional financial highlights from the first quarter include our technology revenue of $47.2 million, representing 12% growth year-over-year, and our adjusted technology gross margin of 70%. 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 clients to realize massive, measurable improvements while also maintaining industry-leading client and team member satisfaction and engagement. Let me begin by sharing a couple of examples of client improvements from recently published case studies. First, as part of its accountable care organization participation, UnityPoint helped needed advanced analytics capabilities to support its achievement of shared savings in its risk-based contracts. To achieve this goal, UnityPoint partnered with Health Catalyst, leveraging our data platform and robust suite of analytics applications. to develop standard analytics, processes, measures, and tools that are now used across its organization. This data-informed approach has driven material success in its accountable care organization's risk-based contracts, including an average achievement of $35 million in annual shared savings as part of UnityPoint's NextGen ACO shared savings participation in 2019 and 2020. largely the result of improved care processes and decreased post-discharge utilization. Next, Blessing Health System, in an effort to meaningfully improve its revenue integrity and charge capture efforts, implemented our Vital Integrity application, a component of our financial empowerment suite. Benefiting from Vital Integrity's rules management system, advanced reporting and analytics, and auditing processes, Blessing helped leverage our software to not only integrate centralized and visualized charge capture issues, but also to identify root causes and quickly address them to reduce revenue leakage. Adopting our technology enabled Blessing to increase its revenue by $552,000 in the first full year and achieve a greater than 25% increase in charge capture team member productivity. creating capacity for increased performance audits, issue identification and resolution, while also successfully auditing 100% of all charges. As you can see illustrated in these recent improvement vignettes with UnityPoint Health and Blessing Health System, our solution continues to deliver meaningful, hard-dollar ROI across our client base, which is particularly important to our clients in this operating environment Also in the improvement category, we have been fortunate to receive additional recent external recognition related to our team member engagement. For the sixth year in a row, the Women Tech Council named Health Catalyst to its annual shatter list. The council's list of technology companies with active programs leading and accelerating progress towards breaking the glass ceiling for women in the industry. Our next strategic objective category is growth. which includes beginning new client relationships while also expanding existing client relationships. Related to our current selling environment, I have now, over the last 10 months, personally had over 130 opportunities to visit face-to-face with senior 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 similar headwinds and tailwinds related to our growth in 2023, as what we shared in our recent Q4 2022 earnings call. As it relates to headwinds, 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 continue to anticipate this dynamic will persist for the next few quarters. Translating this to our business, we have seen a decrease in pipeline demand and some realized and anticipated elevated churn levels, primarily for the parts of our solution portfolio that do not offer near-term financial 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 the financial strain has continued to pressure health system budgets, in our recent sales conversations, we have also received 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. Likewise, as I step back and reflect on our progress over the last few quarters, I am confident that our go-to-market focus on strategic, demonstrable ROI solutions is resonating across our client base and that the breadth and comprehensive nature of our end-to-end solution is well-suited to serve our health system and market in this current market environment. Influenced by the headwinds and tailwinds that I just described, our Q1 2023 overall pipeline development and bookings conversion rates, inclusive of tech-enabled managed services, performed largely in line with expectations. And our sales pipeline continues to support the 2023 bookings expectations shared on our most recent earnings call. As such, we are reiterating our 2023 bookings expectations, inclusive of net NIDAW subscription client additions in the low double digits and a dollar-based retention rate between 102% and 110%. Related to our full year 2023 bookings expectations, let me share some additional commentary, which largely aligns with what we shared on our recent Q4 2022 earnings call. First, we continue to anticipate 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. Aligned with what we shared last quarter, this expectation is driven by the current end market dynamics. in which we have observed that many existing clients who have already realized a strong ROI and are aligned on a long-term partnership framework tend to be more receptive to expansion conversations in this financial environment. Next, we continue to anticipate our 2023 professional services dollar-based retention achievement will be higher than our technology dollar-based retention rate, largely driven by our tech-enabled managed services expansion achievement to date. and pipeline. Additionally, we anticipate that the elevated technology churn levels primarily for the parts of our portfolio that do not offer near-term financial ROI will be more heavily weighted towards the first half of 2023, inclusive of some smaller, more modular DOS relationships. Next, let me share that we continue to anticipate a higher portion of our net 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. Lastly, we continue to expect that our new DOS client additions will have a lower average starting ARR as compared to historical levels, driven by the current end market dynamics influencing a greater proportion of clients to start with a more modular solution as compared to historical levels. Next, I'm excited to announce a meaningful expansion of our tech-enabled managed services partnership with our longest-standing client, Alina Health. This expansion, which includes more chart abstraction responsibilities shifting to health catalysts, increases our recurring revenue with Alina to now be approximately $11 million per year. We continue to appreciate Alina's multifaceted partnership and trust in Health Catalyst since the beginning of our relationship with them nearly 15 years ago. And we are encouraged to see other potential areas of expansion with them in the future. We look forward to welcoming these teammates to Health Catalyst in the near future. Additionally, we are excited to announce a new DAS client partnership with CMAR Community Health Centers. a national leader in health and social services, delivering high-quality, integrated care for underserved communities, specializing in service to Latinos in Washington State. CMARS services include a network of more than 90 medical, dental, and behavioral health clinics, and a wide variety of nutritional, social, and educational services. CMAR will leverage our technology, including our data platform, POP Analyzer, POP Insights, and self-service analytics, along with our professional services, in order to make more proactive, data-informed decisions throughout their patient care. We are honored to welcome this mission-aligned healthcare provider into our client base. Lastly, prior to turning the call over to Brian, I would like to share a couple of additional updates related to new leadership promotions at Health Catalyst connected to our annual planning process and in response to the company's continued growth and expansion. First, as previously disclosed, Anne-Marie Bickmore has been named Health Catalyst's Chief Operating Officer, in addition to her responsibilities as Chief Product Officer. Anne-Marie has served in various leadership roles at Health Catalyst since joining the company in 2012. most recently as our Chief Product Officer since 2021. Anne Marie's contributions to Health Catalyst's historic success are significant, and I am thrilled to expand Anne Marie's set of responsibilities and leverage her proven ability to lead high-performing teams and develop innovative products to further the Health Catalyst mission. As a reminder, Paul Horstmeyer, Health Catalyst's prior Chief Operating Officer, has taken a three-year leave of absence to serve as the mission president for the Church of Jesus Christ of Latter-day Saints. I would like to once more acknowledge and thank Paul for all that he has done for Health Catalyst over the course of more than a decade, and we look forward to his return in a few years. Additionally, as previously disclosed, Ben Landry has been promoted to general counsel and corporate secretary. Ben has been with Health Catalyst since 2019, most recently serving as assistant general counsel. Ben has a proven track record of wise counsel and strategic thinking, and I am confident he will enable Health Catalyst to continue its position as a leading healthcare company. I also want to thank Dan Orenstein for his many contributions to our company's success as general counsel over the last seven years as he transitions to a strategic advisor role. Lastly, as part of our normal course annual planning cycle, we have simplified our business unit structure, leading to expanded responsibilities for TJ Elberg as the general manager of our data platform business unit, Dan Unger as the general manager of the improvement applications business unit, and Dan Lesweir as the general manager of the professional services business unit. I'm confident in each of these leaders' capabilities in driving our growth and profitability moving forward. With that, let me turn the call over to Brian. Brian?
spk05: 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 performance. I will now comment on our strategic objective category of scale. For the first quarter of 2023, we generated $73.9 million in total revenue. This represents an outperformance relative to the midpoint of our guidance, and it represents an increase of 8% year over year. Technology revenue for the first quarter of 2023 was $47.2 million, representing 12% growth year over year. This year over year growth was driven primarily by recurring revenue from new client additions and from existing clients paying higher technology access fees as a result of contractual built-in escalators. This quarterly revenue performance was slightly higher than anticipated in our quarterly guidance due to a few technology environment go-lives that generated a deferred revenue catch-up occurring earlier than forecasted. Professional services revenue for Q1 2023 was $26.7 million, representing 3% growth relative to the same period last year This amount was also slightly higher than anticipated in our quarterly guidance, mostly the result of a timing-related fall forward from a few non-recurring revenue items that we had forecasted to hit in subsequent quarters. Given that this upside resulted from non-recurring revenue items that were primarily timing-related, we do not anticipate that these quarterly revenue outperformance items will represent upsides to our full year 2023 forecast. For the first quarter of 2023, total adjusted gross margin was 52%, representing a decrease of approximately 270 basis points year over year. In the technology segment, our Q1 2023 adjusted technology gross margin was 70%, a decrease of approximately 20 basis points relative to the same period last year. This year-over-year performance was mainly driven by headwinds due to the continued costs associated with transitioning a portion of our client base to third-party cloud-hosted data centers in Microsoft Azure, which increases our hosting costs, partially offset by existing clients paying higher technology access fees from contractual built-in escalators without a commensurate increase in hosting costs. In the professional services segment, our Q1 2023 adjusted professional services gross margin was 20 percent representing a decrease of approximately 900 basis points year over year and an increase of roughly 260 basis points relative to the fourth quarter of 2022. this quarterly performance was slightly higher than the expectations we shared on our last earnings call mostly the result of the q1 higher margin non-recurring revenue milestones mentioned previously In Q1 2023, adjusted total operating expenses were $34.2 million. As a percentage of revenue, adjusted total operating expenses were 46%, which compares favorably to 54% in Q1 2022. Adjusted EBITDA in Q1 2023 was $4.2 million. With this performance exceeding the midpoint of our guidance and representing an increase of $3.5 million relative to the same period last year. This Q1 2023 adjusted EBITDA results was mainly driven by the quarterly revenue outperformance 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 basic net income per share in Q1 2023 was $0.05. the weighted average number of shares used in calculating adjusted basic net income per share in Q1 was approximately 56.3 million shares. Turning to the balance sheet, we ended Q1 2023 with $356.9 million of cash, cash equivalents, and short-term investments, compared to $363.5 million at year-end 2022. Additionally, the face value of our outstanding convertible notes is a principal amount of 230 million, and the net carrying amount of the liability component is currently 226.9 million. As it relates to our financial guidance for the second quarter of 2023, we expect total revenue between 70.3 million and 74.3 million. and adjusted EBITDA between $0.75 million and $4.75 million. And for the full year 2023, we continue to expect total revenue between $290 million and $295 million, and adjusted EBITDA between $9 million and $11 million. Now, let me provide a few additional details related to our 2023 guidance. First, as it relates to our Q2 2023 revenue expectations, we anticipate that our technology segment revenue will be flat to slightly down quarter over quarter, primarily driven by the previously mentioned Q1 go-lives that generated a deferred revenue catch-up. For our professional services segment, we anticipate that our Q2 revenue will also be flat to slightly down sequentially. mainly driven by the previously mentioned pull forward to Q1 of a few non-recurring revenue items. Next, in terms of our adjusted gross margin, we continue to anticipate that our adjusted technology gross margin will be in the high 60s in the second quarter. In the professional services segment, we anticipate that our Q2 professional services adjusted gross margin will be flat to slightly down as compared to Q1 2023. Lastly, we anticipate our operating expenses will be roughly flat to slightly up relative to Q1 2023, mainly the result of some non-headcount expenses that we now anticipate will occur in Q2 as opposed to Q1 2023. Next, let me share a few additional details related to our full year 2023 guidance, which is largely consistent with what we shared on our Q4 2022 earnings call. From a revenue mix standpoint, we continue to anticipate professional services year-over-year revenue growth will slightly outpace technology year-over-year revenue growth, driven by the heavier weighting of our tech-enabled managed services bookings. Next, in terms of our adjusted gross margin, we continue to expect that our adjusted technology gross margin will be in the high 60s through 2023. Also, we anticipate our adjusted professional services gross margin will be roughly 20% for the year, given that our anticipated utilization rates will continue to be lower than historical levels for the next couple of quarters and that our mix of professional services is comprised of a larger percentage of tech-enabled managed services, which start out at a lower gross margin and expand over time. Lastly, we continue to anticipate our adjusted operating expenses as a percentage of revenue will be down between approximately 500 to 750 basis points year-over-year, largely the result of our restructuring efforts and meaningful continued operating leverage with the largest year-over-year reduction occurring in SG&A. With that, I will conclude my prepared remarks.
spk03: Dan?
spk17: Thanks, Brian. In conclusion, I would like to recognize and thank our highly engaged clients and team members. Without their consistent contributions to our shared mission, none of this would be possible. And with that, I will turn the call back to the operator for questions.
spk11: The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. We ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you. Our first question is coming from Anne Samuel with JP Morgan. Your line is open.
spk01: Hi, guys. Thanks for the question and congratulations on the great results. I wanted to ask about, you know, the hospital customers. You know, it seems like commentary that we've heard out of some of the more publicly traded hospitals that have reported so far has actually been a little bit better around labor but still very focused on cost management. And I was wondering if perhaps, you know, as a result of that, you're seeing maybe any shifts in what types of products your customers are looking to utilize or if it's still similar to what you saw, you know, in prior quarters.
spk17: Yes. Thank you, Annie, for the question. We are also observing among our client base that over the last few months there's been a slight improvement in their overall financial performance, though it is only slight in our experience both across the not-for-profit health systems and the for-profit health systems that we work with. We've also observed that there's been a slight easing of the pressure on labor expenses. that has been so significant over the last few years. But in our experience and in my direct conversations face-to-face with these clients, it's still at significantly elevated levels of expense and expense growth relative to what we might have experienced five years ago, as an example. And so while the trend is slightly better, the overall performance of these health systems from a financial perspective is still I would characterize as under meaningful financial pressure. And that includes in the labor category, and to your point, in non-labor categories like supplies expenses and other expenses as well. So there's still meaningful financial pressure. That is still largely from my direct experience and our direct experience recently in terms of face-to-face conversations with our top 100 clients. still the primary focus for these clients. And as a result, as we shared in our prepared remarks, we continue to focus on those parts of our solution that offer that near-term ROI, and that still is the primary focus of our clients. We do anticipate over the coming quarters that hopefully as we continue to see some slight improvements, that there will be more of an openness to discuss other parts of our portfolio that also meaningfully contribute to improvement, but might not deliver as many short-term financial ROI elements as some of the other components of our solution. I would still classify the current environment as very much largely still focused on that near-term financial pressure and the near-term financial ROI that's needed.
spk01: That's really helpful, Collin. Thank you. And hopefully we start to see some green shoots soon. You know, you spoke about the opportunity to sell into your modular client base, and you have a lot of those customers now. I was hoping you could speak to what proportion of your low double-digit new DOS clients you expect to come from that base, and maybe what the cross-sell opportunity looks like down the line with that base, just given you have so many of those clients.
spk17: Yeah, great question. We do think about the foundation of our growth over the next several years really coming from our full existing client base, and that includes obviously our 100 or so DOS subscription clients, but also the other 400 or so. clients where we have a relationship that's more modular, to your point, but there's an open door there that's a meaningful difference from starting from scratch with a prospective client. And so I would characterize that we're thinking of a large percentage of those net new DOS subscription client ads coming probably from that base of the 400-plus non-DOS clients that we have where we have that open door. and an opportunity to visit with them without expanding the relationship, though we'll still have some meaningful ads we anticipate from prospective clients as well.
spk05: The other thing I would add, Annie, is in terms of the use case and focus areas that we're engaging with with those types of prospects and existing clients, to Dan's point, they focus, again, on those near-term hard dollar savings opportunities, so things like our financial empowerment suite coupled with our data platform. as well as the meaningful kind of technology-enabled managed services opportunities that those health systems also can benefit from in terms of saving costs.
spk01: That's really helpful, Collar. Thanks so much, guys.
spk11: Thanks, A. Our next question comes from Brian Daniels with William Blair. Your line is open.
spk14: Yeah, good afternoon. This is Jared Hassan for Orion. Thanks for taking the questions, and congrats on a solid start to the year. I was hoping to get a little more color on the Illino relationship. I was just hoping you could maybe speak to how that's evolved over the years, and specifically then what drove this tech services expansion. And I think you cited approximately $11 million per year, but could you just maybe help us understand what's incremental in terms of how big that expansion was?
spk17: Yeah, absolutely. Thanks for the question, Jared. So as we mentioned in our prepared remarks, Alina is our longest-standing client relationship. And we're coming up on our 15th anniversary as a company and our 15th anniversary with them here in a couple of months. And over time, that relationship has evolved and changed and expanded really meaningfully. As we've mentioned previously, Alina was the first client to enter into a tech-enabled managed services relationship with Health Catalyst about eight and a half years ago. And that relationship is expanding. The tech-enabled managed services scope is expanding with this most recent contractual expansion. And as we mentioned, the prepared remarks, that expands our responsibility for chart abstraction and represents a few million dollar expansion, which is meaningful in the context of that overarching relationship. And as we mentioned in the prepared remarks, we're excited about additional opportunities to expand. And I think in terms of what led to the expansion opportunity, at a foundational level, this is true at Alina and it's true with all of our clients, the foundational element that opens the door for expansion is great delivery against the existing scope of responsibilities that we have. And that always needs to be the foundation of our focus. And that has been the case at Alina, and we've been grateful. throughout the partnership to have really meaningful shared success together. And Alina, like so many other health systems, is facing additional financial pressure. And this was an opportunity to help them with regards to the financial pressures that they're facing. With Health Catalyst being viewed as a trusted long-term partner, where we had had success in this kind of a partnership model for many years. And so this was an exciting opportunity for us to expand in a relationship model that both sides knew was working well. And it's one of the reasons why we're excited about potential for additional expansion opportunities in the future.
spk05: Just to add to that, Jared and Dan kind of alluded to the directional kind of size of that expansion, but this is an example where Alina has chosen to expand meaningfully over several years and over time as compared to other examples where we can engage with a client who may take on a larger portion at once, like with Carl or Integris, those recent expansions that we had. So grateful to have kind of different options for clients in terms of the level of expansion over time.
spk14: Absolutely. Yeah, that makes sense and I appreciate all the color. And then maybe I'll sneak one in on the other customer announcement. It seemed like there was a health equity component with the CMAR win. So I'm wondering if you could maybe speak to the role of sort of data and helping clients achieve equity initiatives and maybe how you communicate that as a value proposition to clients.
spk17: Thank you for bringing that up, Jared. And health equity is something that we care a great deal about. We try to start with health catalysts first and foremost and and then extends to our clients a health equity component to our data and analytics and improvement tech-enabled services that we offer to clients. And we certainly always welcome clients who have a deep mission alignment, and CMAR is certainly one of those clients that deeply cares about the patients and the members that they serve. and has a passion around health equity. And data and analytics play such an important role in understanding where each health system is on their journey towards equitable care. And we have a specific solution that we've now implemented across many clients that will also be available to CMAR to ensure that first we understand how well we're doing, where we're doing well, where we could improve, and then we specifically focus on those areas of improvement and see measurable improvement results as we focus in those areas. And that's our intent and our shared focus with CMAR, among other areas of focus, and it will continue to be our focus with many other clients as well.
spk11: Our next question. comes from Jessica Eason with Piper Sandler. Your line is open.
spk13: Hi, thank you guys so much for taking the question. Suzanne, I know you've been visiting customers for the last maybe six or nine months or actively visiting customers for the last six or nine months. Do you have a good sense at this point of customer intention with respect to kind of contract persistence across the entire base? And then just curious to know, you know, what percent of the dog space is going to have managed services attached by the end of 2023? And kind of when do we expect churn or retention rates to normalize and at what level? Sorry, that was a lot. Thanks.
spk17: Yes, great questions. I'm just taking some notes there, Jess. Thank you for those questions. So first, as it relates to those customer visits, yes, over the last 10 months, as mentioned in the prepared remarks, I've now had over 130 opportunities to have face-to-face discussions with our top 100 clients. And that's not going to stop. And it's not just me. It's the team that's going out and visiting face-to-face with these clients. And that very much informs what we shared in terms of both headwinds as well as tailwinds that our clients are facing. On the headwinds side, as we've mentioned in previous quarters as well, we continue to observe, I continue to observe that there's meaningful financial pressure. And while that's improving slightly, It's pretty slight in terms of operating margin performance, and there's still very, very significant financial pressure. And that's one of the reasons why we see both on the tailwind side elevated interest in elements of our portfolio that offer that near-term ROI, like tech and equal advantage services, like the financial empowerment suite, like elements of our pop health suite. And we're excited and encouraged to see large, meaningful pipeline opportunities there, primarily with our existing clients. And then on the flip side, we see headwinds, as we've mentioned in our prepared remarks today and over the last few quarters, as it relates to, particularly for us, more of our smaller, more modular client relationships, and particularly those modules in client relationships where those modules don't offer a near-term financial ROI. And so we see a little bit of elevated, continued elevated, somewhat elevated churn in that category. So there are both headwinds and tailwinds. I would share that from a tone perspective, I've been appreciative of the way in which our top 100 clients, in particular, view Health Catalyst as an important long-term partner, are encouraged and excited about long-term expansion, that relationship. And that's where I would classify maybe some of the headwinds as more near-term to mid-term, which gets to one of your questions around normalizing churn. And I do think maybe for a couple more quarters, we might see the results of some of that elevated financial pressure resulting in a little bit more modular churn than what might have happened a few years ago. But on the flip side, I feel like the tailwind interest in those parts of our portfolio that are meaningfully delivering against hard dollar financial ROI are more of a permanent tailwind, a long-term tailwind. And maybe that gets to your last question about, you know, where do we see the client base materializing from a technical data services perspective? Right now we're sitting at around 10% of our DOS subscription clients that have a tech-enabled managed services relationship. I certainly hope that five years from now that number will be 100%, and we'll work very hard with our clients to enable them to tap into those advantages. But as we've also shared, we're finding as we gather data on the pipeline conversion and the timing and cadence of that it takes some time to work through those expansion opportunities, and a one-year timeline might be a reasonable expectation. And that is one of the reasons why we continue to forecast that more of our overall bookings will likely happen in the second half of this year as we really started those significant discussions about expansion opportunities like TEMS starting in the July timeframe of last year.
spk05: Just to add, yeah, Jess, great questions. Yeah, to Dan's point, the 10% penetration rate roughly of the TEMS opportunity is applicable to our DOS client base. And we do anticipate, as Dan shared, a few more wins, like we've seen the last few quarters with Carl and Tegris and Alina as we continue forward through the rest of 2023. So we're encouraged by that pipeline. The other nice thing is that even with an existing TEMS client like Alina, there are still opportunities to expand further in different areas with analytics, with further chart abstraction opportunities, and other areas that our clients are potentially interested in. So that's also a nice potential runway for us as we deepen the TEMS footprint as well as expand within those clients.
spk17: Just one note along those lines, Jess. We have the most experience, as you know, expanding in tech-enabled managed services relationships around areas like analytics and chart abstraction, data management. We have quite a bit of experience now there with many clients that are leveraging our capabilities and our teams to do that. We are finding that we have a number of clients that are asking us about some other adjacent areas. where they might want us to consider tech-enabled managed services. And so we try to be very careful and thoughtful as we consider those other growth opportunities and expansion opportunities to try to make sure that we have some tech components that we can directly leverage to drive efficiencies. And we feel strategically like this is an area that we would like to occupy and that we feel we can be differentiated long-term. But that is something that is included in our pipeline is a lot of opportunities in these core areas where we have a lot of experience and then some opportunities that are adjacent to those areas as well.
spk13: Thank you. That's helpful. And my question would just be with respect to the ACO enablement or the data management to support the ACO, what exactly is Health Catalyst doing to support kind of shared savings performance? And then just I don't know if you have today or have an opportunity to share in the economics of some of the savings you're generating. Thank you.
spk17: Yeah, great question. So we do have the opportunity to work with a number of ACO clients. And actually, the first improvement case study that we leveraged is probably a great example. And there's more details about the UnityPoint shared savings program. success story on our website. And maybe we can follow up and just send you some more information about that. But that was a significant opportunity and a good example of what we have to offer from a data platform perspective and then from an analytics and an expertise perspective to help our clients be really successful with those shared savings programs.
spk05: Just on the financial side of that, Jesse, we have been open to some kind of shared savings contractual elements with our clients in the past. We haven't seen a lot of uptake on that in terms of that contracting model, but it's something that we're open to over time. And just typically what we see from clients is that they often just want to benefit from more of a locked-in, fixed kind of visibility on budget. But that is something just to Dan's point based on what we can deliver that we're open to for clients.
spk13: Thanks again.
spk16: Thanks, Jess.
spk11: Our next question comes from Elizabeth Anderson with Evercore ISI. Your line is open.
spk00: Hey, guys. Thanks so much for the question. One of the things I noticed on your balance sheet this quarter is that since they say a challenge receivable picked up sequentially by a fair degree, could you talk about sort of what were the driving factors of that on the quarter-over-quarter basis?
spk05: Yeah, good question, Elizabeth. So we typically don't speak to trends in that much detail on a quarterly basis for the reason being that a lot of our invoicing for our contracts can be fairly lumpy from a timing standpoint. So there can be larger one-time annual technology invoices, professional services invoices. So we had a little bit of that in T1 where that ticked up, but you should see that kind of move around as those get collected. And so I Wouldn't take too much from it other than we do have a fairly lumpy kind of invoicing model.
spk00: Got it. So we shouldn't read that as a sign of like financial sort of stress on any of your customers.
spk05: No, no, not outsized compared to what we've seen in the last couple of years.
spk00: Okay, perfect. And I just have a quick follow-up. I know you checked out, and that was very helpful, the details that you gave on the gross margin in the second quarter. Can you just talk about sort of any particular polls on the gross margin in the back half of the year, particularly as we think about the technology segment?
spk05: Yeah. Definitely. So, yeah, we were pleased to see the technology gross margin tick up a little bit in Q1, so roughly 70% was our performance. We did share in the prepared remarks, Elizabeth, that we anticipate that to be in the high 60s range for the next remaining quarters of 2023. And the main drivers of that are primarily that we did have some kind of earlier revenue recognition in Q1 on the technology side than we had forecasted to occur later in the year. And so some of that revenue was pulled forward and some of that dropped down to the gross profit level. So if you kind of normalize for that Q1 dynamic, we do view our technology gross margins as in that high 60s range. which has ticked up from a couple years ago, but is kind of consistent with what we've shared the last couple quarters.
spk00: Got it. Perfect. Thank you so much.
spk05: Thanks, Elizabeth.
spk11: Our next question comes from Stephanie Davis with SVB Securities. Your line is open.
spk12: Hey, guys. This is Anna Prudenci on for Stephanie. Thank you for taking our questions, and congrats on the quarter. I'd first love to hear more about how the tech-enabled outsourcing timeline you're shaping up. Dan, you said that you're still expecting about a 12-month sales cycle for these deals, but curious if there's any potential to accelerate that, given the Align-A-Win in one case?
spk17: Yeah, thank you, Anna, for the question. We do see... kind of a spectrum of ways in which these things play out. But we're still limited in terms of the number of data points that we have. And when we look at the data that we have thus far, it does average around that one-year timeframe. On one hand, from a tailwind perspective, as it relates to the timeline, these are existing clients in most cases where we have a deep relationship and there's a lot of trust. On the other hand, there's a lot of complexity, and this affects individual people's lives. It's changing who their employer is in many cases, and these are very large contracts in a number of cases. And so that often takes a little bit more of an approval process. Sometimes it goes up to the board. One of the benefits, I think, of this kind of a model is our opportunity, my opportunity to get to know you know, C-suite executives and even board members as part of these expansion discussions, but that takes some time. And what we have found is it's worth the time. It's worth not rushing these things in order to really set things up for success. And, you know, a lot of what we've also described when we set up these technical advantage services relationships is that they're long-term. They're often five-year contracts and renewable for five years. And so we want to make sure that everyone feels really good about the structure and And sometimes that takes a little bit longer. But in the context of the long-term relationship, it's worth it. And that's where we've tried to kind of optimize for all the most important factors, even when, you know, sometimes we wish we could go a little bit faster. But in the context of the long-term relationship, it's worth taking a little bit more time.
spk12: Got it. That's helpful. Thank you for that, Kohler. If I could do a quick follow-up. I'm also curious about the sizing and rollout of the CNR one, and should we be thinking about this as a potential strategy shift into expanding into the ambulatory space?
spk17: Thank you for that question. We are excited about the work that we're able to do in the ambulatory space, and We view that, you know, as a major trend if you think about the next five or ten years in healthcare delivery is such an important part of the delivery ecosystem. So we're excited about any opportunity for us to do more in an ambulatory setting. We do believe that there's a lot to add, a lot of value to add within the ambulatory setting, whether it's with you know, standalone providers that only focus in that ambulatory setting, or if it's with a larger health system that has a meaningful ambulatory footprint. Increasingly, most health systems are trying to increase their ambulatory footprint, and so we're trying to be a great partner in increasing our offerings and our focus in that ambulatory setting as well. And we believe that that incorporates both technology that we can offer to improve ambulatory performance, operational performance, pop health performance, And it involves expertise and services, could even involve tech-enabled managed services in the future as well. So we're really excited about the work that we're going to do with CMAR. We're excited about continuing and expanding work in the ambulatory setting that we're seeing across many of our other clients.
spk05: And just to add to that, and in terms of the size of the relationship, so given the nature of the client, It is a little bit of a smaller relationship as compared to a DOS agreement with a large health system, for example, given the nature of this client. But it includes our data platform, our self-service analytics components. And as Dan mentioned, we found that our data platform continues to be highly relevant for ambulatory systems like this, as well as for health systems who have an ambulatory component. because it often involves a variety of EMRs and a real data integration workflow that we excel at and can find value in. So we're encouraged by that as well.
spk12: That's great to hear. Thanks again.
spk11: Our next question comes from Richard Close with Canaccord GenUni. Your line is open.
spk07: Yes, thanks for the questions. Congratulations. Brian, I was wondering if you could walk through the second quarter revenue range, maybe the low end and the high end, what gets you to each? It seems a little bit wide, relatively speaking, you know, when you compare it to the annual number. So just any help there would be great.
spk05: Absolutely. Yeah, thanks, Richard. Yeah, so the dynamic that we're seeing there in Q2 primarily relates to what we saw in Q1, which, as I mentioned, was some pull forward on the technology and on the professional services side of revenues that we had previously forecasted a little later in the year. So when you adjust for that and normalize for that, the Q2 number would have been a little higher and our year-over-year growth rates and the like a little bit higher. What we were trying to think through, Richard, on the sizing of the range actually relates to that as well, where while the vast majority of our revenue recognition is recurring in nature, occasionally in a given quarter we do have some pull forward of non-recurring items on the services side or technology go-lives that can have a deferred revenue catch-up. And so we wanted to be cognizant of that. in terms of informing our range for q2 the other driver of the range can be timing of deal signing so if we have an expansion contract or new contract that occurs a little early in the quarter that can drive some some upside so i would point to kind of the midpoint of the range as a good proxy for what we're expecting and then again kind of dynamic around some of that pull forward in q1 but Overall, we're encouraged by the performance and the overall increase in visibility that we have for the remainder of the year.
spk07: Okay. And just as a follow-up on that visibility, can you just remind us what percentage of the, you know, call it that annual number is recurring in nature or the highly visible revenue?
spk05: Yeah, it's typically a little north of 90% in a given year. It's under contract and kind of in recurring revenue models.
spk16: Great, thanks. Thank you.
spk11: Our next question comes from Daniel Ghostlight with Citi. Your line is open.
spk08: Hi, thanks for taking the question. You mentioned that lower tech dollar-based retention continues to be driven by modular churn of some of those more clinically focused modulars. But I'm curious, given continued health system pressures, are you seeing any pushback from DOS enterprise science on the automatic escalators each year? And have you changed the quantum of those escalators in recent contractings?
spk17: Yeah, thanks for the question, Daniel. So I think you've highlighted the tailwind and the headwind as it relates to tech dollar-based retention. I think on the headwind side, we have, as we've shared today and in prior quarters, seen some of that elevated, somewhat elevated churn. in those more modular client relationships, smaller client relationships, even some of our smaller DOS client relationships that are more modular in nature. So that's definitely a headwind that we believe will persist for a few more quarters at a little bit somewhat elevated levels. We do believe that will come down over time, and so we'll see some benefit from that as the financial pressure on these health systems subside over time. The tailwind, the help that we continue to see is most of our contracts are more in that enterprise more like an all-access kind of tech relationship with our clients. And those do have those built-in escalators, and those escalators continue to help us as a tailwind as it relates to our dollar-based retention. But there are definitely tailwinds and headwinds that are combining together to kind of come up with an overall tech dollar-based retention for 2023. A little more pressure on that because of those near-term headwinds in the near-to-mid-term that should subside over time, though.
spk05: And to Dan's point, Daniel, we also shared that we expect our professional services dollar-based retention rate to be higher than technology this year, and also that's what drives more the kind of variation in the range that we provided as tech-enabled managed services contracts can be quite large and significant and really impact that range and a little more lumpy and large in nature. The benefit there is that we're often, to Dan's comments, locking in and renewing a more enterprise relationship over a longer fixed term. And so that benefits us on the technology side as well as we migrate more of those clients to that model.
spk08: Got it. So it sounds like no real pressure on the escalators themselves. And then just a quick housekeeping question. There is And $11.7 million of litigation expenses that you generally don't see. I'm just curious what's driving that charge this quarter.
spk17: Yes. So we disclosed in the 10-K, and you'll also see some further detail in the 10-Q that we'll be filing shortly, a summary description of that litigation, which includes a large portion of that $11.7 million is an accrual, And a small portion of that is actual outside legal expenses in preparation for that matter. So we'd refer you to the 10-Q for a little bit more detail on that.
spk16: Thank you. Thanks, Daniel.
spk11: Our next question comes from John Ransom with Raymond James. Your line is open.
spk06: Hey, good evening. I was wondering if there was an update on your light point onboarding. Thanks.
spk17: Yeah, absolutely, John. We continue to be pleased with the execution against that relationship. That is a relationship, as we've shared previously, where we are leveraging the cloud-native infrastructure data platform capabilities and components that are enabling this very large health system with a very complex data environment to be in a position to understand the opportunities for improvement clinically, financially, operationally, and then work with our teams to execute against those. This will take time, as it always does with all of our clients. It's hard to change. It's hard to produce data. massive measurable improvement, but we're encouraged by the work that we're doing together. They're a great partner, and we're encouraged that we will see over time some really meaningful results that come through that shared work. So we're pleased with that relationship. As with all relationships, there are many challenges in a very complex data environment. As you know, LifePoint is a very large health system. It's a very heterogeneous system. data environment with multiple EMRs, multiple other data sources, a very complex data environment. But we're grateful to be an important partner there in understanding that data, getting it into a single source of truth, and then using the data and analytics to guide where we prioritize our improvement efforts.
spk06: Great. And my follow-up would be, I mean, just given what I would assume to be the you know, reset evaluations among the smaller HGIT, you know, point solutions. Given your cash hoard and given the environment, is there a way to think about that opportunity? Is it more than 50% or less than 50% likely that you might go shopping for some other point solutions to augment your already pretty comprehensive suite of solutions?
spk17: Yeah, thanks for the question, John. It is an interesting environment, that's for sure, in the public markets and in the private markets. And we continue to keep our ear to the ground, keep our eyes open, but we also are informed by the size of the growth opportunity organically that's available to us, especially with our existing clients. I think we're really excited about really large expansions that we've recently announced with our existing clients, and we see a really large pipeline of opportunity for growth organically with our existing clients. We also see that, as you mentioned, John, we have a meaningful existing portfolio that offers a lot of advantages. And so many of our clients are not yet fully taking advantage of the portfolio that we have. And so I think our prioritized focus is to keep growing organically. And we see really meaningful 20-plus percent long-term organic growth possibilities for us that we're excited to run against. And that's obviously very capital efficient as well. And I think we're tuned into that. We're shareholders as well, myself included, and we want to make sure that we're creating great shareholder value and we're excited about the growth possibilities that are before us from an organic growth perspective. So that's our priority for right now.
spk06: If I could test your considerable patience, one more. Yes, stock comp is something that's bubbling up as a little bit more of an issue. Could you speak perhaps to the longer-term view of how stock comp would relate to your adjusted EBITDA? Thanks.
spk17: Yeah, I'm happy to share a few thoughts, and then, Brian, please add as well. So you may have noted, John, that our Q1 stock comp as a percent of revenue has come down meaningfully from where it was last year. We have spoken at a high level that we expect continued leverage in stock comp as a percent of revenue in the months and years ahead as a company. And as we look longer term for other companies as they mature and grow in their profile, that we would also expect to see meaningful leverage likely to see that stock-based comp over time increase. migrate to, you know, made to high single digits as a percent of gravity, but that will take time. But we're certainly on that path, demonstrating some leverage starting, you know, this last quarter in Q1.
spk14: Thanks so much.
spk11: Our next question comes from Sean Dodge with RBC Capital Markets. Your line is open.
spk15: Thomas Keller Hey, good afternoon. This is Thomas Keller. I'm for Sean. Thanks for taking the question. So you do start to have more of these tech enabled services offerings, and I appreciate that you can use your own tech and automation capabilities. But as you grow this part of the business a little more quickly, are there any limitations to sort of how fast you can scale? And are you able to kind of leverage offshore resources for any part of these services if needed?
spk17: Yeah, thanks for the questions, Thomas. So One interesting element of these tech-enabled managed services opportunities that scales well is the fact that in most of these cases, we're rebadging existing team members. So they're already performing the functions that our clients are going to be relying on us to perform. And so as a starting point, we just ask them to keep doing what they're doing. And then over time, we leverage more and more technology to automate processes that might have been manual in the past and deliver more efficiencies and more speed. But it scales quite well in the sense that the team already exists in most cases, not in every case. In some cases, we're building out the team. But in most cases, the team already exists and they're being rebadged. And so in that sense, this scales quite well. I think there is a sense in which we want to make sure from a quality perspective and a delivery perspective that we're outstanding and that every one of our clients that chooses us for tech-enabled managed services will continue to be a reference for us. And so we're mindful of that. But we've been encouraged to see that business growing rapidly, and historically we've been able to absorb that growth and continue at a high level from an execution perspective. We do have a model that doesn't primarily rely on offshoring, and that is actually one of the value propositions of choosing Health Catalyst. We keep team members locally forward deployed, and often our clients really care about those teammates. They've worked together with them for many, many years in a number of cases, and and the prospect of them keeping their jobs and continuing to focus on the mission that they care so much about and supporting this health system client is an important component of health catalyst value proposition that we can do that and still offer cost savings primarily through tech. Now, we are... as a company pursuing various initiatives that involve global delivery, and we'll continue to pursue those initiatives. And there may be some cases where we find that global delivery can help us in different aspects of our business. That could include tech-enabled managed services. We would make sure that our clients are supportive of that, that that is something that will work well for our clients, and that isn't today currently a primary issue. component of our tech enablement services offering.
spk05: Dan's point, Thomas, we do have a global team member base that's focused on, in particular, two areas. So one is support of the technology, and the other is implementation of data and the technology. And that fits well in terms of faster implementation cycles to get to that initial ROI and those savings a little more quickly as we deploy our technology across the DOS clients as well as our technology-enabled managed services clients. So we'll continue to invest in those areas as well.
spk15: All right, perfect. I'll leave it there. Thanks, Ed. Thank you.
spk11: Our next question comes from with BTIT. Your line is open.
spk03: Hi. Can you talk a little bit about Carle Health, Integris, and Alina? When do those roll on to the P&L and And then one of the, I guess, concerns I might have is when we've seen large revenue cycle deals in the past where, you know, a vendor is helping collect cash and they're earning a percentage of fees, eventually the hospital system wants to insource that. But, Dan, I think you've mentioned a couple times you're actually improving cost trend for these clients. Just any color around this would be very helpful. Thanks very much.
spk17: Yeah, absolutely, David. So as it relates to your first question, typically as we sign these relationships and we begin with the rebadging process, from a services perspective, that's the first month where we start recognizing revenue, and that occurs monthly. If there's a tech expansion component to that, there's sometimes some specific deliverables that need to be in place for the tech revenue recognition to occur. But usually in that first month when the team members have been rebadged, that's when the revenue recognition occurs. I'll pause on that first question, Brian, if you need anything.
spk05: Yeah. So, for example, so Carl signing at the end of 2022 has contributed in Q1 to the revenue dynamic. Integra is more in Q2. Alina, kind of late Q2, early Q3. That's kind of the rough cadence.
spk17: Great. And then on the second question, as it relates to the structure of our relationships compared to maybe some rev cycle type relationships, there are some differences in the way that we structure our relationships. So first of all, I think ours are a little bit simpler in their construct in that In most cases, we're typically offering some cost savings as part of that rebadge process, usually in the first nine months or so. And it depends on how the help system client wants that cost savings to be manifested. Sometimes clients need it in that year that we're in, and so we focus more on delivering those cost savings there. you know, within that calendar year, as an example. Others want the certainty of knowing that there's cost savings built over time over the next five years, and they have really good visibility, and it's locked in, and they know exactly what it will be. And we're open to, you know, a couple different models there. But fundamentally, those health systems are realizing cost savings as a result of the working with Health Catalyst. And as Brian mentioned, sometimes there's a shared success component, there's a shared success, shared bonus that we might share in together in some cases. But in a lot of cases, we're just focused on delivering well, and the contractual component is a cost savings component. And what we've seen over time is as we deliver in an excellent way at extraordinary levels over time, that our clients are very happy to have Health Catalyst continue to manage the teams that are delivering. And as we deploy technologies that enable automation to occur and for the solution to be better, faster, and cheaper, that has also led to our clients choosing to continue long-term in that relationship. And then there's the contractual component, which is typically a five-year relationship that the client is committed to that then they can renew over time.
spk16: But we've seen our clients have been interested in continuing, and that's been more the rule rather than any sort of insourcing.
spk03: Okay, great. Thanks very much. And then the dollar-based retention rate, it's still 102% to 110% for the year and low double-digit DOS ads for the year for fiscal 23. Is that correct? Any color on that now that we're halfway through the year?
spk17: That's still correct. We reiterated that full year guidance.
spk03: Okay. And then, okay, thanks very much. And then I guess just the last one I had was, There's been some discussions around your relationship with Snowflake and migrating to Snowflake-like solutions. I'm assuming that that has been in process for a couple of years. Is that correct? And you basically progress at the pace that the client wants to progress at. Is that right?
spk17: That's right, David, and we have a few clients that are leveraging, you know, Snowflake capabilities, Databricks capabilities, other new technologies and capabilities, and we continue to make that happen. an option for our clients as we talk about the long-term migration path for them. As we've mentioned in previous quarters, what we found, especially over the last 10 months or so, inclusive of my 130 or so face-to-face discussions with clients, The vast majority of our clients are focused a lot more on how can we save money, how can we reduce the financial pressure, and let's focus on that right now as opposed to, you know, scaling up new technology productivity capabilities, which do sometimes have an ROI but require some investment up front before you get that ROI. That's harder for most of our health systems to do. And so to your point, we kind of follow their lead. as it relates to what's most important to them. And in the vast majority of cases, they were more focused on how can we deliver cost savings sooner.
spk05: In terms of the financial component of that, Dave, we have, as we've shared, these mid- and long-term profitability targets embedded the investment that we're making in the Snowflake and Databricks capabilities into our R&D and cash flow targets. We feel comfortable there. as we work through that investment, as well as we've embedded some of that into our gross margin color on the technology gross margin side. So there is some parallel cost processing on technology as we go through that migration over the next two or three years. But there's also a long-term upside in terms of scalability and elasticity of that platform, driving efficiencies in our support and delivery costs and hosting moving forward as well.
spk03: Great. Thank you.
spk05: Thanks, Dave.
spk11: Our next question comes from Jack Wallace with Goodheim Securities. Your line is open.
spk09: Hey, thanks for taking my questions. Just wanted to talk about the Thames pipeline a little bit. And just stepping back here, you've announced several large expansions over the last couple of quarters. And just wondering how those announcements have impacted your discussions with your existing and potentially some new customers for Temp's relationship or even expansion?
spk17: Yeah, thank you, Jack, for the question. They definitely help, and, you know, they increase interest in our other existing clients. In particular, I would say most of our pipeline and most of our conversations that are leading towards you know, expansion opportunities are with our existing clients where we have those relationships. But there are a few where even prospective clients are interested in finding out a little bit more about technical managed services. So they definitely help. And this gets back to something I shared earlier. We are very focused at Health Catalyst as we sign each one of these contracts to make sure we deliver really, really well because this healthcare community is a small community. We all know each other, and so it's critical for us to make sure that we're delivering really, really well, and then that will keep opening up additional opportunities.
spk09: Thank you. That's helpful. And then I just wanted to ask a follow-up on an earlier question around the services revenue progression just over the last couple of quarters here and with the guidance for 2Q. My understanding was that you had Carl – was a meaningful, or at least a good chunk of what's called the ARR was hitting in the first quarter. You realize there were some pull-forwards also impacting the services line. I'm just thinking about the second quarter guidance with a couple of go-lives expected there as well. What would be the conditions or the factors that would make that a potential sequential down? quarter on that line. Is there attrition there, other one-time items that weren't called out, or are we just maybe thinking that some of the are not going to contribute in excess of the one-time items in the first
spk05: Yeah, good question, Jack. You cut out a little bit, but I think I got the gist of it. Yeah, so the Q2 commentary that we made in the prepared remarks for services was that we'd expect to be flat to slightly down compared to Q1 on the services line item. And that's mainly, to your point, driven by the non-recurring items that were projects that we completed a little earlier than expected in our initial forecast, which is generally a good thing. Like, we want to complete those as quickly as possible We just don't yet anticipate that we'd backfill at that level in terms of Q2 or the full year guidance range. So that's the main dynamic. There are other drivers that you mentioned and that we've called out, which are we have that continued somewhat elevated churn on our traditional consulting services model. And that's persisted in Q1 and Q2. And like we shared, we anticipate that for the next few quarters. And then also we've shared that our bookings cadence is a little more back-end weighted, so more toward the back half of the year. So you should start to see more growth as those start to come online. But we've not yet kind of included that in Q2, just given the timing of those will likely be later in the year.
spk09: Gotcha. That's helpful. Thank you. I appreciate it. Derek.
spk11: Our next question comes from Scott Schoenaas with KeyBank. Your line is open.
spk04: Hi, team. Thanks for the question. So it seems like you're getting nice operating leverage in sales and marketing after divesting your life sciences division. Is this more of a function of the higher proportion of upsells you're seeing from existing clients rather than new client wins, or is this something that we should just expect in terms of ongoing sales and marketing efficiencies on a go-forward basis?
spk17: Yeah, great question, Scott. So I think it's yes to both, actually, that it is because we're seeing meaningful operating leverage as we focus a little bit more of our selling efforts on existing client expansion. And it's yes to the second in terms of expecting that long-term because I think more and more over the next several years, The foundation of our growth as a company will come primarily from existing clients expanding with us. And that's a higher leverage model. It's a lower cost model. As we've discussed in the past, the Carl Hult expansion is a great example where they quadrupled the size of their relationship. And we still have one account manager there that is able to represent that. the entirety of the relationship between Health Catalyst and Carle Health. So there's tremendous operating leverage in these deep, multifaceted relationships. And we see incredible growth opportunity there. And so we're focused there. And we also realize that having that operating leverage is an important component of this model really working. And so we do have that mindset moving forward with regards to sales and marketing and, frankly, that mindset going forward in the coming years across all our OPEX expense categories that we're thinking in terms of meaningful operating leverage, enabling us to get to those 20-plus percent long-term EBITDA margins that we've talked about in the past.
spk04: Thanks. It's really helpful. And lastly, have you seen any changes in your conversion time grains from DOS Lite to full DOS customers? Or are you expecting to be able to sell like full DOS solutions initially like the CMAR contract without having to first sort of sell the more DOS Lite offering?
spk17: Yeah, another good question. So I think one of the trends that we're seeing is, as we mentioned, our prepared remarks that with respect to prospective clients, they are under financial pressure. And so it's more doable for them to start at a lower price point. And so we are moving towards more of a modular relationship there. But we're focused on modules that deliver near-term ROI, which I think increases the likelihood that we can expand the relationship over time. Whereas historically, You know, a year, two, three years ago, I think we were open to beginning the relationship in lots of modular ways. Now we're pretty focused on those first modules delivering a real near-term hard dollar ROI. And our anticipation is that as we deliver with those clients that there will be more of an openness to expand and deliver more ROI through that expanded relationship. So we are hopeful that that will take place, but we still recognize that it's, you know, there's a lot of financial pressure that these health systems are under, and so we've got to be sensitive to that.
spk10: Thank you.
spk16: Thanks, Scott. Yeah.
spk11: Our next question comes from Stan Berenstein with Wells Fargo Securities. Your line is open.
spk03: Hi. Thanks for taking my questions. So you continue to see dollar-based retention in a pretty wide range. When do you expect to get some better visibility into where that retention will shake out in the year?
spk17: Yeah, good question. So I think we think about that, Stan, first of all, as an acknowledgement that within our pipeline, we do have some larger opportunities, and those include tech-enabled managed services opportunities, and those tend to be a little bit lumpier and a little bit harder to precisely forecast. As we mentioned also in our prepared remarks, you know, we do expect our bookings to be a little bit more back half-weighted this year than in historical years for a couple reasons that we described, inclusive of us really beginning to proactively discuss things like technical services starting in the back half of last year, and our observation that it's typically around a one-year sales cycle for us to sign those contracts. So I think as we sign more of those larger contracts and get a little bit more visibility. We may be in a position to narrow that range. We don't feel like we're in that position today, but we'll kind of keep you apprised and updated as the year progresses. One other thing we mentioned in the prepared remarks, based on the size and shape and profile of the pipeline, we do anticipate that it's likely this year that our professional services dollar-based retention will be a little on the higher end, higher than maybe the average. And the tech component will be a little bit lower than the average, but blend together to that 102 to 110 range. And so we'll see as the year progresses if we can tighten that range as we get a little bit more visibility into signed contracts, especially some of the larger ones.
spk03: Got it. And then maybe just a quick one on the cash flow statement. I think capitalized software in the quarter was about 25% below where you had an average on it last year. I mean, it's $1 million, but still pretty noticeable. Where are you saving on CapEx, and how should we be thinking about the progression going forward?
spk05: Yeah, great question. So that has ticked down a little bit, to your point, from kind of prior year levels in terms of CapEx and investing in internal use software that we're capitalizing. And that's kind of stemming from some of the cost savings and cost trimming efforts that we did primarily last year. Most of those impacted our SG line items, but to some degree R&D as well. So we do anticipate that run rate to continue through 2023. The bulk of the investments that we're making in R&D in this line item are related to the Snowflake and Databricks enablement and some standardization components of our data platform. and those will continue and then begin to ramp down in 2024. So that's the current expectation, but that does give us more visibility in terms of efficiencies that we can drive in our operating leverage and in our cash flow as we march toward the 10% midterm EBITDA target for 2025, as well as our free cash flow contribution in 2025. Got it. Thanks so much.
spk03: Thanks, Dan.
spk16: Thanks, Dan.
spk11: Our next question comes from Jeff Garrow with Stevens. Your line is open.
spk02: Hi. Good afternoon. Thanks for taking the question. I was hoping to get some more color on where tech-enabled managed services could expand beyond chart abstraction. And I'll frame it that, you know, I think in theory health catalysts could manage the entire IT operation of a health system. But it sounds like you recognize some potential pitfalls in doing that. So in expanding tech-enabled managed services, how would you balance the expertise related to all the systems and data sources that feed into DOS against that healthy desire to have some real tech enablement of any outsourced services?
spk17: Yeah, great question, Jeff. And it's one that keeps me up at night in a good way. It is exciting when we have a client that asks us to maybe look into a new area. And as you mentioned, we do have a lot of experience with tech-enabled managed services around chart abstraction, with tech-enabled managed services around data management and analytics. We've done that a lot, and I think we continue to see really meaningful growth opportunities in those two anchor areas. I think some other areas, like was mentioned earlier in the call, there's so much going on in the ambulatory space that's so important. And there's a lot of operational components. to delivery in the ambulatory space that may have room for improvement. And so that could be an area where Health Catalyst works with health system clients and other clients that want to really focus on the performance in that space. I think to your point, in other areas that require meaningful data and analytics to guide The activities of other corporate functions could be other areas where we can leverage technology that we already have. You know, we have some technology that we referenced in the prepared remarks that delivers in some of the rev cycle areas, some other technology that delivers more IT efficiency. And so we have some technology assets. We have some clients that are asking us about, you know, a list of other potential areas. But to your point, we realize that we need to make sure that we're convinced that we can be a differentiated long-term partner and really deliver for our clients before we move into one of these new adjacent areas. And we're excited about the areas where we have experience and we have a track record. And so that will continue to be a primary focus. But we also want to help our clients be successful. If they need us to go in a new direction and an adjacent area, you know, we're certainly open to at least exploring it.
spk02: Great. That was super helpful. All for me. Thanks again. Thanks, Jeff.
spk11: It appears we have no further questions at this time. I'll turn the floor back to Dan Burton for any additional or closing remarks.
spk17: All right. Thank you all for your continued interest and involvement with Health Catalyst, and we look forward to staying in touch in the months and quarters ahead. Take care.
spk11: This concludes today's Health Catalyst first quarter 2023 earnings conference call. Please disconnect your lines.
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