Health Catalyst, Inc

Welcome to the Health Catalyst second 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 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 kindly 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. Sir?

Good afternoon, and welcome to Health Catalyst's earnings conference call for the second quarter of 2023, which ended on June 30, 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 rate, 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-Q for Q1 2023, filed with the SEC on May 10, 2023, and our Form 10-Q for the second quarter 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?

Thank you, Adam, and thank you to everyone who has joined us this afternoon. We are excited to share our second quarter 2023 financial performance along with additional highlights from the quarter. I will begin today's call with some summary commentary on our second quarter results and outlook. We are pleased with our second quarter 2023 financial results, including total revenue of $73.2 million and adjusted EBITDA of $3.5 million, with these results beating the midpoint of our quarterly guidance on each metric. Additionally, we are tracking slightly ahead of our previous full-year revenue and adjusted EBITDA guidance, and as a result, we are raising our 2023 revenue and adjusted EBITDA guidance. Likewise, we are pleased with our strong first-half bookings performance, and we are reiterating our full-year 2023 bookings expectations, inclusive of net new DAS subscription client additions and dollar-based retention rate. 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 an example of a client improvement from a recently published case study. As Women's Hospital in Louisiana faced increasing costs, Consistent with the broader health system and market, their leadership team understood that they needed a technology solution that would support strategic decision-making and provide them with a detailed, comprehensive view of their costs. To achieve this goal, Women's Hospital implemented our power-costing analytics application, part of our financial empowerment technology suite. to enable them to better manage their cost of care, leading to improvement in their revenue performance and enhancements in their strategic decision-making effectiveness. Our power costing application allowed the women's hospital team to analyze detailed cost data and look at the contribution margin for each of their services, enabling their leadership team to answer important strategic questions. Ultimately, utilization of the detailed cost data from our power costing application empowered the women's hospital team to be awarded $10 million in additional funding from the Department of Health for their OBGYN residency program. Likewise, women identified $2 million in labor cost savings opportunities. the result of decreasing contract labor costs while providing market-based salary adjustments for registered nurses and improving retention of highly qualified nursing staff. Also in the improvement category, we have been fortunate to receive additional external recognitions related to our team member engagement. First, for the 11th year in a row, Health Catalyst has been named the best place to work in healthcare by Modern Healthcare. Additionally, Health Catalyst has been included in this year's top workplaces in the healthcare industry list by Energage. Likewise, we are pleased to be, for the first time, Great Place to Work certified in India, a recognition of our high team member engagement in this region. Lastly, we are excited to share that Health Catalyst has been named as one of America's greatest workplaces for job starters in 2023 by Newsweek. Our next strategic objective category is growth, which includes expanding existing client relationships and beginning new client relationships. To summarize, our operating environment continues to align with what we have shared in prior quarters, with some slight improvement in recent months. This has translated to a strong first half bookings performance that was consistent with our expectations. And during the second half of 2023, our pipeline continues to grow, and our anticipated second half bookings are also in line with our previously shared expectations. As such, we are reiterating our full year 2023 bookings expectations. inclusive of a dollar-based retention rate between 102% and 110%, and net new DOS subscription client additions in the low double digits. As it relates to our current selling environment, we continue to experience similar tailwinds and headwinds that are consistent with what we have described over the last couple of quarters. While health system operating margins continue to be challenged relative to longer-term historical levels, we are encouraged to see their operating margins improving slightly in recent months. Given the budgeting cycles of most health systems and the typical length of our sales cycles, we anticipate this will translate as a mid-term bookings tailwind. Related to our full year 2023 bookings expectations, a reminder that we continue to anticipate professional services bookings growth to be higher than technology bookings growth, driven by our tech-enabled managed services offering. From July 1st of 2022 through June 30th of 2023, our tech-enabled managed services ARR grew by more than 80% and represents nearly 50% of our total professional services ARR. To date, Roughly 10% of our DOS subscription clients have entered into a tech-enabled managed services relationship with Help Catalyst. These long-term partnerships include multi-year contracts with, on average, more than $8 million of total ARR per client, which is about four times larger than the average ARR per DOS subscription client. Next, I'm excited to announce two recent tech-enabled managed services contracts. First, we are pleased to have entered into an expanded relationship with a regional health system who has been a client of Health Catalyst for nearly a decade. This five-year, $50 million all-access technology and services contract more than quintupled the size of the client's relationship with Health Catalyst and includes an opportunity for an additional shared success bonus based on improved client profitability. At approximately $10 million in annual recurring revenue before any shared success bonus, this health system has become one of Health Catalyst's 10 largest clients. This annual spend level also represents approximately 5% of this client's net patient revenue, highlighting the depth of this long-term partnership. Importantly, this relationship represents a new tech-enabled managed services offering area for us, in which we are managing the vast majority of the non-clinical staff across this health system's ambulatory clinics. We anticipate this new tech-enabled managed service in ambulatory operations will provide us with another meaningful growth engine in addition to our current tech-enabled managed services in analytics and chart abstraction. Additionally, I am pleased to share another significant tech-enabled managed services expansion that was signed recently with another health system who has been a client of Health Catalyst for nearly a decade. This new five-year contract is sized at approximately $60 million, and at roughly $12 million of annual recurring revenue, it represents approximately a doubling in the size of this client relationship relative to last year. The expansion is inclusive of an all-access technology subscription, as well as an expansion to tech-enabled managed services within the chart of traction and analytics domain, with an emphasis on clinical quality improvement and health equity. We are excited to deepen this longstanding partnership, and we are encouraged that it represents another meaningful example that demonstrates the strong value proposition of our tech-enabled managed services offerings. To summarize from a growth perspective, we had a strong first-half bookings performance. Our pipeline continues to grow, and we anticipate our second-half bookings performance will be in line with our prior expectations. Likewise, we are excited to have announced multiple sizable technical managed services expansions as further evidence of our meaningful traction with clients. Lastly, as you'll hear from Brian later in our prepared remarks, We are pleased to raise our revenue and adjusted EBITDA guidance for the full year, and we continue to feel confident in our long-term revenue growth target of 20-plus percent and our long-term adjusted EBITDA margin target of 20-plus percent. Additionally, we continue to track well towards our mid-term targets, including 10% adjusted EBITDA margin in 2025 and meaningful positive adjusted free cash flow in 2025. We continue to see material operating leverage in our financial model, inclusive of significant tech-enabled managed services expansions that require little incremental operating expenses. Likewise, we anticipate seeing more material R&D operating leverage beginning in 2024 as we streamline and work to complete certain investments in our data platform. With that, let me turn the call over to Brian. Brian?