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spk05: Good afternoon, everyone, and welcome to the Health Catalyst first quarter 2024 earnings conference call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. To get to as many questions as time permits, we kindly ask that you limit yourself to one question and one follow-up. 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 conference over to Jack Knight, Vice President of Investor Relations. Please go ahead, sir.
spk09: Good afternoon, and welcome to Health Catalyst's earnings conference call for the first quarter of 2024, which ended on March 31st, 2024. My name is Jack Knight. I'm the Vice President of Investor Relations for Health Catalyst, and with me on the call is Dan Burton, our Chief Executive Officer, and Jason Alger, 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 our future growth and our financial outlook for the second quarter and full year of 2024, our ability to attract new clients and retain and expand our relationships with existing clients, trends, strategies, and the impact of the macroeconomic challenges, including the impact of inflation and the interest rate environment, the tight labor market, bookings, our pipeline conversion rates, the demand for deployment and development of our data and analytics platform, 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 2023, filed with the SEC on February 22, 2024, and our Form 10-Q for the first quarter of 2024 that will be filed with the SEC. We will also refer to certain non-GAAP financial measures to provide additional information to investors. Non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. A reconciliation of non-GAAP financial measures for the first quarters of 2024 and 2023 to their most comparable GAAP measures is provided in our press release. However, we have not provided forward-looking guidance for professional services gross margin, the most directly comparable GAAP measure to adjusted professional services gross margin, we will discuss later. Technology gross margin, the most directly comparable GAAP measure to our adjusted technology gross margin, we will discuss later. or net cash from operating activities the most comparable gap measure to adjusted free cash flow we will discuss later and therefore not provided related reconciliations of these non-gap measures to their most comparable gap measures because there are items that are not within our control or cannot be reasonably forecasted with that i will turn the call over to dan dan thank you jack and thank you to everyone who has joined us this afternoon
spk04: We are pleased to share our first quarter 2024 financial performance, along with additional highlights from the quarter. I will begin today's call with summary commentary on our first quarter 2024 results. We are encouraged by our first quarter 2024 financial results, including total revenue of $74.7 million and adjusted EBITDA of $3.4 million. with these results above the midpoint of our most recent guidance on each metric. Additional financial highlights from the first quarter include our adjusted gross margin of 68% for technology and 22% for professional services. Both of these metrics represent improvement compared to Q4 2023. 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 engagement. Let me begin by sharing a couple of examples of improvements from recently published success stories. First, many healthcare organizations grapple with the challenges of labor-intensive chart abstraction and registry submission. These processes are costly and time-consuming. and demand expertise in clinical and electronic health record systems. Compounded by the industry's imperative to reduce expenses, these burdens underscore the need for innovative solutions. Our tech-enabled managed services solution for chart abstraction leverages our technology and expertise, inclusive of generative AI and process improvement methodologies, to establish substantially more efficient abstraction. Our solution enables improved timeliness, accuracy, and quality of submission, all at a meaningfully lower cost. Data exists in structured and unstructured formats within EHRs, requiring clinical interpretation and posing obstacles to chart abstraction automation. Our chart abstraction generative AI solution extracts pertinent evidence from EHR notes and note segments, learns from previously completed registry data, and recommends answers, and then presents relevant patient data to abstractors in their abstraction and validation workflows. This significantly streamlines the abstraction process by automating the laborious task of finding, interpreting, and gathering data. Additionally, its adaptive learning capabilities continually refine results through user interactions, enhancing accuracy over time. Our initial findings have demonstrated a 24% reduction in abstraction time, accompanied by heightened confidence in responses due to the inclusion of evidence within the chart abstraction generative AI platform. As a result, we are driving chart abstraction efficiencies with significant accuracy and quality, fulfilling our commitment to deliver cost savings to clients while reducing health catalyst labor costs. Next, UnityPoint Health was presented with the Flywheel Award at our 2024 Healthcare Analytics Summit for its outstanding achievements in transforming healthcare and enhancing the lives of those it serves. UnityPoint recognized the need for advanced analytics to support clinical decision-making while addressing population health priorities and effectively managing costs. Their leadership's goal was to gain a deeper understanding of their extensive collection of clinical and claims data. UnityPoint sought consistent data definitions for measuring outcomes and care quality that it was lacking in its current state. This limitation hindered their ability to leverage valuable data insights and analytics to succeed in risk-based contracts like shared savings agreements. To address these challenges, the Iowa-based Health System Network adopted the Health Catalyst Data and Analytics Platform and a suite of analytics applications to establish a single source of truth across various systems. This enabled the conversion of raw data into insights that were consistent and accessible across all settings, providing actionable information on patient characteristics and healthcare utilization patterns. They also built a better predictive model to tackle population health and financial trends. As a result, UnityPoint has been recognized for consistently delivering significant improvements throughout its organization and accomplishing considerable milestones, including over $100 million in cost savings and revenue enhancements over the past several years. These accomplishments encompass dozens of improvement initiatives, such as reducing healthcare costs by $41 million through shorter hospital stays, and saving $32 million in healthcare expenditures in a single year through improved care management practices. Additionally, they achieved a 39% relative decrease in emergency department visits and a 54% relative decrease in hospital admissions. Finally, in addition to UnityPoint receiving our Flywheel Award, Health Catalyst Public would recognize seven other recipients of the Catalyst Awards. an annual awards program recognizing hospitals and health systems that have led the way in data-informed healthcare improvement. These other winners included Baylor Scott & White Health, Providence, the Queens Health System, Wake Med Health and Hospitals, Carle Health, Community Health Network, and Integris Health. Also in the improvement category, We have been fortunate to receive an additional recent external recognition related to our team member engagement. For the seventh year in a row, the Women Tech Council named Health Catalyst to its annual shatter list, the council's list of companies with active programs leading and accelerating progress towards breaking the glass ceiling for women in technology. Our next strategic objective category is growth. which includes expanding existing client relationships and beginning new client relationships. In this category, let me first share that at the end of February, we hosted our 10th Healthcare Analytics Summit. We were excited to host nearly 1,000 attendees, representing more than 200 organizations, including participation from many existing and prospective clients, providing us with meaningful opportunities to deepen these relationships. Our growth organization hosted 115 scheduled face-to-face client and prospective client meetings, in addition to a far greater number of impromptu ad hoc meetings. Other Health Catalyst senior leaders and I personally attended most of these face-to-face client and prospective client meetings during the summit, and we feel encouraged by the momentum we are seeing in our pipeline following this year's conference. In addition, there were more than 100 presenters between keynote presentations, breakout sessions, showcases, and our user conference. And over 50% of these presentations were from clients. Lastly, based on the post-summit survey, overall satisfaction from attendees was 98%, reinforcing and confirming the value that attendees realized from the summit. One key discussion topic during our Healthcare Analytics Summit related to our next-generation data and analytics platform. As a reminder, we've made a meaningful investment in the next generation of our data and analytics platform, allowing for significant increases in its scalability and modularity by integrating cross-industry technology from partners such as Databricks, Microsoft, and Snowflake, while also benefiting from HealthCatalyst differentiated capabilities in areas of healthcare-specific data models and data content, healthcare-specific analytics, AI, and data science, and healthcare improvement expertise. We are excited to announce this next-generation data and analytics platform will be branded as HealthCatalyst Ignite. The initial deployments of Ignite are going as planned and we anticipate that all new client deployments will be on this platform. Additionally, we expect the vast majority of our current data platform subscription clients that utilize DOS will be migrated to help Catalyst Ignite over the next two to three years. Following our Healthcare Analytics Summit, we are encouraged to see strong demand from existing clients and new clients to move to Ignite. Next, related to our current growth operating environment. Consistent with what we have shared recently, we are encouraged to see health system operating margins steadily improving in recent months, specifically compared to 2022 and most of 2023. We anticipate this will be a tailwind for our bookings metrics in 2024 and for our top line growth in 2025. Related to our full-year 2024 bookings expectations, let me share some additional commentary, which is consistent with what we shared a few months ago on our Q4 2023 earnings call. Our pipeline continues to support our 2024 bookings expectations, inclusive of a dollar-based retention rate between 104% and 110%, and net new dollar subscription client additions in the mid-teens. Our pipeline continues to grow, which gives us additional confidence in achieving our 2024 bookings expectations. As a reminder, we typically experience seasonality in our bookings activity, with Q2 and Q4 normally representing the majority of our sales, aligned with healthcare organizations' fiscal years and budget cycles. Next, I am excited to announce a meaningful expansion with one of our international clients. We are pleased to have expanded our relationship with Saudi German Health to elevate health outcomes at Bayat al-Badrji Medical Company's hospitals in the United Arab Emirates. Saudi German Health is a leading private health care provider across the Middle East and North Africa, with 18 medical facilities caring for more than 2.5 million patients. Health Catalyst first announced our partnership with Saudi German in 2020 when we entered a multi-year strategic partnership to service nine Saudi German hospitals in the kingdom of Saudi Arabia. Bayat al-Badrji Medical Company implemented Health Catalyst data and analytics platform, as well as power costing and twizzle patient engagement, along with our professional services expertise. This expansion will equip the hospital staff and executives with accurate and actionable activity-based costing data. We are excited to deepen this strategic relationship. Lastly, as it relates to growth, let me share a few comments related to our M&A strategy. We continue to carefully assess potential acquisitions within our pipeline and are mindful of current market dynamics related to valuations. We will continue to be disciplined in our M&A evaluation process, requiring acquisitions to be both strategic and financially compelling for Help Catalyst. We will aim to be thoughtful about tuck-in acquisitions, and similar to the last few years, we anticipate any M&A would most likely come at the applications layer or in TEMS enablement. I'd also note that we consider M&A as one tool in a broader capital allocation toolbox. We are fortunate to have a strong balance sheet, and we regularly assess all capital allocation alternatives, always with an eye towards creating long-term shareholder value. With that, let me turn the call over to Jason. Jason?
spk00: 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 2024, we generated $74.7 million in total revenue. This total represents a slight outperformance relative to the midpoint of our quarterly guidance. and it is an increase of 1% year over year. Technology revenue for the first quarter of 2024 was $47 million, roughly flat compared to Q1 2023. Professional services revenue for Q1 2024 was $27.8 million, representing a 4% increase relative to the same period last year. This year-over-year performance was primarily due to revenue recognition ramping from the tech-enabled managed services contracts that were signed in the second half of 2023, partially offset by some downselling from our higher margin consulting services. For the first quarter 2024, total adjusted gross margin was 51%, representing a decrease of approximately 70 basis points year-over-year. In the technology segment, our Q1 2024 adjusted technology gross margin was 68%, a decrease of approximately 140 basis points relative to the same period last year. This year-over-year performance was expected and mainly driven by costs associated with migrating a subset of our client base to help Catalyst ignite. our next generation multi-tenant, Snowflake and Databricks-enabled data and analytics platform environment. In the professional services segment, our Q1 2024 adjusted professional services gross margin was 22%, representing an increase of approximately 190 basis points year over year, and an increase of approximately 1,040 basis points relative to Q4 2023. This quarterly performance was ahead of the expectations we shared on our last earnings call, mainly driven by our recent reduction in force that primarily occurred late in the fourth quarter of 2023. In Q1 2024, adjusted total operating expenses were $34.9 million. Adjusted EBITDA in Q1 2024 was $3.4 million, exceeding the midpoint of our guidance. Our adjusted net income per share in Q1 2024 was 5 cents. The weighted average number of shares used in calculating adjusted basic net income per share in Q1 was approximately 58.6 million shares. Turning to the balance sheet, we are pleased with the strength of our financial position, which provides us with meaningful financial and strategic flexibility. We ended Q1 2024 with $327.8 million of cash, cash equivalents, and short-term investments, up $10.1 million compared to year-end 2023. In terms of liabilities, the face value of our outstanding convertible notes is a principal amount of $230 million due in April 2025. And the net carrying amount of the liability component is currently $228.4 million. Along with our advisors, we consistently evaluate our optimal capital structure. We have more than sufficient cash to pay off the convertible notes, but are also confident that we have a range of options available to refinance our upcoming convert maturity, which we intend to address well in advance of the stated maturity. As it relates to our financial guidance, for the second quarter of 2024, we expect total revenue between $73.5 million and $76.5 million, and adjusted EBITDA between $5 million and $7 million. And for the full year 2024, we continue to expect total revenue between $304 million and $312 million, and adjusted EBITDA between $24 million and $26 million. Now let me provide a few additional details related to our 2024 guidance. First, as it relates to our Q2 2024 expectations, we expect that our technology segment revenue will be relatively flat quarter over quarter. For our professional services segment, we anticipate that our Q2 revenue will be roughly flat sequentially. Next, in terms of our adjusted gross margin, we continue to expect that our adjusted technology gross margin will be roughly flat to slightly down quarter over quarter. In the professional services segment, we anticipate our Q2 2024 adjusted gross margin will be slightly down compared to Q1 2024. However, expect it to still be several points higher than our professional services adjusted gross margin in 2023. Lastly, we anticipate that our operating expenses will be down in Q2 2024 relative to Q1 2024. mainly the result of the roll-off of expenses related to our Healthcare Analytics Summit. Next, let me share a few additional details related to our full-year 2024 guidance, which is consistent with what we shared on our Q4 2023 earnings call. We continue to anticipate that our year-over-year total revenue growth will be lower in the first half and will ramp in the second half of 2024. as we benefit from in-year 2024 bookings naturally translating into second-half revenue. Next, in terms of our adjusted gross margin, we continue to expect adjusted technology gross margin will be in the high 60s this year. This adjusted technology gross margin will benefit from built-in technology gross margin expansion driven mainly by contractual escalators. However, we anticipate that this will be mostly offset by the costs associated with migrating additional clients to Ignite from our legacy DOS platform. That said, over the longer term, we expect the migration to Ignite to drive technology gross margin expansion. Additionally, we continue to anticipate our adjusted professional services gross margin will be in the high teens for 2024. This will be primarily driven by the mix of professional services, which we anticipate will be comprised of a larger proportion of tech-enabled managed services, which start out at a low gross margin before ramping meaningfully over time. Next, we expect to continue to see material operating leverage. For instance, we expect R&D expense to be lower in absolute dollars relative to 2023 as we ramp down the larger upfront investment made in Health Catalyst Ignite, our next-generation data and analytics platform. We also anticipate SG&A will decline as a percentage of revenue. Consistent with what we shared on our most recent earnings call, we anticipate we will see a reduction in our stock-based compensation in 2024 as a percentage of revenue relative to 2023, by approximately 350 to 450 basis points, while also noting that this estimate could be impacted by items such as M&A activity and fluctuation in the share price. Lastly, we anticipate that our adjusted free cash flow will be approximately breakeven in 2024. With that, I will conclude my prepared remarks. Dan?
spk04: Thanks, Jason. In conclusion, I would like to recognize and thank our committed and mission-aligned clients and our highly engaged team members for their dedication and contributions to these results and this progress, as well as express my optimism for the future. And with that, I will turn the call back to the operator for questions.
spk05: Thank you, Mr. Burton. Ladies and gentlemen, at this time, if you do have a question. simply 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. Again, we kindly ask that you limit yourself to one question and one follow-up question, and please pick up your handset when posing your questions to provide optimal sound quality. We'll go first this afternoon to Jared Haas of William Blair.
spk02: Yeah, thanks, guys, for taking the questions. This is Jared on for Ryan Daniels. Dan, maybe just since you mentioned in the prepared remarks M&A. I'll ask one around that. I'm curious, could you just maybe remind us kind of any particular product areas or sort of value propositions that might make sense for you guys to look to do a deal around just in terms of that build versus buy question? And then I guess also related to that, could you kind of run through what you typically look for or how we should think about the type of deal size or financial profile?
spk04: Yeah, absolutely, Jared. So when we think about M&A, first, as we mentioned in the prepared remarks, we look for a really strong strategic fit. And specifically, we are focused in those five key areas. There's two horizontal areas around the data and analytics platform and then the measures and registries capability that are more horizontal in nature. And so we focus on ensuring that we're strategically really strong there. Most of our data and analytics platform investments and improvements come through R&D and less about the M&A opportunities. But I would say in the measures and registry space and in the three use case areas of focus for us, those are areas where we're conscious of the opportunities that might exist in buy versus partner versus build uh specific spaces and a few of our recent most recent acquisitions are good examples of that where we have accelerated our capabilities in in measures and registries for example uh through the most recent acquisition of ers or the armis acquisition before that so we'll continue to be focused i think more in that that use case area and the apps layer and will continue to be really financially disciplined as well in the way that we think about these. I do believe that the acquisition opportunities that we'll focus on will be much like those more recent acquisitions over the last few years where they're more tuck-in acquisitions, they're more tech-focused acquisitions that just allow us to accelerate our product roadmap and accelerate our offering to our clients, but likely more in those use case areas and more specifically skewing towards technology tuck-ins. Anything, Jason, you would add?
spk00: Yeah, the only thing I would add is from a financial profile standpoint, profitability is extremely important to us. So we'll be focused on adjusted EBITDA, that these deals are primarily adjusted EBITDA neutral to adjusted EBITDA positive. There could be trades that we might consider in certain deals, but profitability is very important.
spk05: Thank you. We'll go next now to Elizabeth Anderson of Evercore ISI.
spk08: Hi, guys. Thanks so much for the question. I guess one of the things that was interesting to me was just obviously the strong gross margin and the professional services. If we think about the kind of like the maybe separate out the impact of the TEMS deals ramping versus maybe what I'll term like BC, gross margins outside of that. Can you just talk through maybe the non-TABS ramping portion of it just so we kind of understand the multiple moving pieces there?
spk04: Yeah, absolutely. I'll share a few thoughts, Elizabeth, and then Jason, please feel free to add as well. So separating out the mixed dynamic of TEMS deals where they ramp from a low gross margin to a little bit higher gross margin over time, I think the main factor that really helped us was really getting into greater balance from a supply-demand perspective through the workforce reduction that Jason had alluded to in the prepared remarks that In those higher margin consulting services, I think we now have the right size of staff and team with the right level of demand, and that had a meaningful positive gross margin impact.
spk00: Yeah, the only thing I would add there, Elizabeth, is that we do expect our revenue to ramp up. in the second half of the year. Some of that ramp will be due to TEMS bills. Those TEMS bills will put a bit of pressure on our adjusted professional services gross margin. We're very pleased with the progress that we made in Q1 and expect to continue to make progress, but do expect to see a bit of pressure in the second half, which is where we set our expectation at the high teens. from an adjusted professional services gross margin level on the year.
spk08: Got it. That's super helpful, Collar. Thank you. And then just as a follow-up, can you talk a little bit more about the 2Q and maybe to the extent that you have the visibility into the 4Q booking season, just sort of what are you seeing and how is the change in appetite in terms of like making commitments, sort of mix of things that potential customers and current customers are interested in? Any other, Collar, on that would be helpful.
spk04: Yeah, absolutely. Thanks for the question, Elizabeth. So we started with a strong Q1, where our performance was consistent with our expectations, and that's always a good sign. As we mentioned in the prepared remarks, we do see some meaningful overall positive trends as it relates to our end market and operating margins. Now, there's a spectrum of experiences across our client base, and that still includes some on that spectrum really struggling. Many of you may have seen some of the recent announcements as it relates to Steward Healthcare, which does include a part of our client base that still is struggling. But at an overarching level, I think we're encouraged to see those trend lines. Now, specific to Steward Healthcare, given their financial challenges and their announcement around the bankruptcy proceedings that they are working their way through, As you might expect, we're keeping a close eye on that situation, and this is recent information, and the situation is continuing to evolve, and expect that we'll learn a lot more in the weeks and months ahead. We've been in active, frequent, and direct communication with senior leaders at the C-suite level at Steward, including even as recently as over the last few days. And as a reminder, even with the announcements that Stuart has been sharing, each of the more than 30 hospitals, medical centers, and physician offices within Stuart Healthcare are open. They're caring for patients on a daily basis. And we're also actively providing our solutions in the support of that care on a daily basis. Senior leaders at Stuart have communicated with us that they view us and our solutions as critical to their ongoing operations. And the solutions that we provide are critical, and they have meaningful hard dollar financial benefits associated with those ongoing solutions. And as such, our default assumption in this specific scenario is that these solutions will continue in 2024 and beyond, including in various asset sales scenarios. We've been receiving regular payments from Steward, and we anticipate that during the bankruptcy proceedings, Steward will continue to pay for active contracts like those that we are continuing with them. We're actively seeking to collect all of the outstanding payments that are due to Health Catalyst. But, of course, we acknowledge that there are challenges with respect to collection of pre-petition debt in any bankruptcy situation. And there's some uncertainty around collectability of pre-petition amounts. Therefore, we've made some meaningful provision for the possibility that we may not collect all of the pre-petition amount owed.
spk08: Got it. Thank you.
spk05: Thank you. We go next now to Stephanie Davis with Barclays.
spk07: Hi guys, this is Anna Crescenti on for Stephanie. Thank you for taking our questions. The first one I wanted to ask on is just if you could talk maybe a bit about the push pull of the change outage, but then also the improving operating margins and how maybe that's impacting 10 decision making.
spk04: Yeah, absolutely. So in general, we've been grateful to see no major disruption from the perspective of our business as it relates to the challenges of the change healthcare situation. There is one case where, with regards to a meaningful tech-enabled managed services opportunity that has been progressing in our pipeline, one particular existing client asked us to just press pause while they dealt with the near-term operational challenges over the last couple of months. related to the changed healthcare situation. We're grateful to see meaningful progress there, even as recently as just over the last week or so that systems are becoming operational once again. So that was the only major example of some specific pipeline-related delay. related to that one tech-enabled managed services opportunity. But in other parts of our pipeline, both on the new client side and on the existing client side, we have not experienced any specific interruption or challenges related to that. It is important to note that we have a very different business model and solution than what Change Healthcare provides. and that solution continues to be in demand with our clients, and we continue to be really vigilant and focused on information security health catalysts, as evidenced by our HITRUST certification, our SOC 2 certifications, and state RAMP certifications, and we'll continue to be vigilant and focused in that really important area. Anything you'd add, Jason?
spk00: I think you covered it well, Dan. Thanks. Thanks.
spk07: Awesome. Thank you so much for that color. And then just one other one was wondering if you could talk about the expansion with Saudi German health. I'm just curious how much of that book is international.
spk04: Yeah, absolutely. So that is all international opportunity for us. We're excited to see a meaningful expansion in that relationship. And I would say this is a good example of something that we've talked a little bit about earlier, which is as we saw more and more technology-oriented growth opportunities, both with existing clients and new clients, as the end market improved, we have proactively shifted more of our growth resources to focus on those technology opportunities. And Saudi German expansion is a good example of that, where much of the expansion is technology expansion, which obviously is higher growth margin and contributes more to our profitable growth expectations and our forecasts. So we're really excited to see that kind of, you know, which is also encouraging to see in the international segment of our business.
spk07: Appreciate the call. Thanks, guys.
spk05: Thank you. We'll go next now to John Ransom with Raymond James.
spk03: Hey, good afternoon. Just kind of stepping back and asking more of a macro question. Yeah, you've had to come through the end of the free money era, the coming and waning of COVID, you know, some pivots in your strategy. But when you kind of think about health catalysts in 2024 versus the health catalysts that came public in 2019, what do you think the major changes are, the major lessons learned? You know, what did you learn from all this? And how do we think about the company differently than maybe the company that existed a few years ago?
spk04: Yeah, great question, John. The company is very different than what it was five years ago. I would characterize this as more of an adolescent. Five years ago as a company, we were about a third of our current revenue size, and we had less than a fifth of the total number of clients that we have today. We were also meaningfully unprofitable from an adjusted EBITDA perspective. And I think one of the anticipated benefits of the company going public was was the discipline and the rigor that it would require of us and the consistency of performance that it would require of us. And as we approach our five-year anniversary here in just another two months or so, I really feel grateful for that discipline and that capacity for consistency that Health Catalyst has developed through that experience of being a publicly traded company. We're now three times our size from a revenue perspective. We've shifted from meaningful negative EBITDA to meaningful positive EBITDA, and we're excited as we think forward to the next number of years that will continue to mature as more of a grown-up company that has meaningful predictability, has meaningful consistency. Now, what we didn't anticipate in 2019 was that within seven or eight months of going public, we would have a global once-in-a-century pandemic to deal with. So that was interesting and its massive and disproportionate impact on our end market in healthcare and healthcare providers in particular. And that that would be followed by a very brief respite in 2021 and then an incredibly disruptive and challenging financial environment due to the inflation impacts in 2022, 2023 that really hit our end market, our health system end market, really, really hard. And for the vast majority of that time in 2022 and in most of 2023, the average health system operating income was negative. And so that was a very difficult time For our end market and by extension for us to work our way through, I'm really proud of the fact that we found a way to continue to support our clients through all of those difficulties over the past five years, the COVID difficulties, the inflation-related difficulties. And we're certainly encouraged, as we mentioned in our prepared remarks, to see some of that financial pressure subsiding and the end market operating environment improving and We're also grateful to be at greater size and scale as a company with, you know, over $300 million of projected revenue at the midpoint of our guidance this year and, you know, meaningful and growing fast EBITDA margin expansion. And those are all difficult things to enable, and we're excited about that opportunity. Now, through all of those difficulties, I think one of the difficulties that we also faced was the need to shift our mix in our portfolio of solutions, especially when the financial pressure was greatest. to those parts of our portfolio that offered near-term cost savings in hard dollar terms. And that's where we found that, you know, in the back half of 2022 through much of 2023, a lot of our growth and expansion came through tech and evil advantage services. which are fantastic offerings for our clients, but they're lower margin as well. But during that time, there was less appetite for new technology opportunities, and yet we're grateful now, especially starting in the latter part of 2023 and in through Q1 to the present, to see as that end market improves, more of an appetite, more of an openness to our full portfolio. And that does inform our expectation, as we have shared, that we will see a re-acceleration in our growth back to double-digit growth from a bookings perspective this year and from a revenue perspective in 2025. And we're excited to have developed that discipline and that consistency of execution to be able to do that while also continuing to execute well around our profitability expansion. Those are hard things to do. Those are grown-up things to do. And we'll have to work every day to enable that to occur. But I'm certainly encouraged to see that our clients remain loyal to Health Catalyst. They're excited about the next generation of our technology offerings. There's more of an openness and an appetite for the technology components of our solution now than there was particularly during the financial pressures. And those are all reasons why I have personally been a meaningful buyer of shares, why I'm grateful to be one of the largest shareholders of the company, and why I'm really bullish and optimistic for the future. Anything you'd add, Jason?
spk00: Yeah, the one thing that I would add, and this is reiterating some of what Dan mentioned, is one lesson learned is the importance of being able to be agile and really meet our clients where they are. We have went through some challenging macroeconomic times, and I'm grateful that we did have an offering that could support our clients through those times and allow for financial savings and hard dollar ROI identification. So we've seen some swings on the pendulum where at times we were tech focused, at times we were more service focused. Moving into 2024, we are taking a bit more of a balanced approach. We're focused on profitable growth, but also focused on our Thames offering and being thoughtful around growing through Thames as well.
spk03: Yeah, I've been doing this job a long time. That might have been the longest answer I've ever gotten, but it was a good one, so it was worth it. And I promise I didn't script this in advance, so that was a great answer. So my other question is, you've hit on this a little bit, but as you think about the end market healing, you look at companies selling into the hospital space and they hit this sort of inevitable, top-line growth that mirrors the growth of their end market. And you can think of all the mature vendors and some of the public that sell into the hospital industry. And then you also look at HCIT, and HCIT companies or software companies tend to hit the wall at $300 million of revenue, according to McKinsey or somebody. So how do you, when you think about the long term, how do you avoid falling into the trap of either just growing at the or also just hitting the wall as a software company that, and I don't really frankly understand the gravity of why 300 million is the number, but I'm just curious if you've thought about that and just how do you long-term avoid those two traps? Thanks.
spk04: Yeah, great question, John. So I'll try to be a little more brief in this answer, but that was an opportunity for reflection over the last five years. So I appreciate you asking me the first question. So as it relates to, you know, the end market and us moving forward as a company, I think implied in your question is what is it that gives us confidence that we will see a re-acceleration from single-digit percentage growth to double-digit growth like we've forecasted as we shared in our most recent earnings call? I think there's a few dynamics that really help us. First, remember that we provide both technology and services, and it's a relatively large proportion of both. And so we see meaningful growth opportunities from a technology perspective. We also see meaningful growth opportunities from a services perspective, and tech-enabled managed services kind of blend both. And part of what we've seen is as our end market continues to need to drive more and more efficiency, there also is a trend line of consolidation to fewer and fewer vendors that are strategic partners, and those fewer vendors do have the opportunity to continue to grow at a faster pace than the industry as they consolidate and provide more to these existing clients. And there have been examples like that. Epic is a good example of that, where they have continued to grow, even though they're at around $4 billion of revenue, and yet they're still growing at a double-digit pace. Because partners, their client partners, are choosing to consolidate and do more with Epic, we see a similar pattern with our client base where they're choosing to do more and more with Health Catalyst. And one example of that is the amount that our clients who choose to add tech-enabled managed services to the overall solution set spend, you know, about four times as much with Health Catalyst, around $8-plus million today. with Health Catalyst per year versus kind of our overall DAS subscription client average. That's a pattern that we believe will continue really meaningfully. One of the elements that certainly came out as a silver lining to our experience during the difficulties of 2022 and 2023 was that our tech and services offering and our ability to offer that hard dollar guaranteed savings, it's right in the contract, is really important, it's really needed by our clients, and it continues to be a really meaningful part of our pipeline. And we've learned that we can consistently execute against a playbook that enables us to build a profitable business in offering that up. That makes us a more and more strategic partner to our clients. It gives us tremendous growth opportunity where we're not talking about just barely outpacing the industry growth. But in many cases, as we've announced some of these tech-enabled managed services deals, these are a doubling in the size of the relationship or a tripling in the size of the relationship. And there's more and more need that we don't believe will go away over the next few decades for health systems to become more and more efficient. And we're getting better and better at delivering against those efficiency-oriented solutions. So that, to us, represents really meaningful long-term opportunity that plays to the strength of our technology value proposition, as well as our willingness to do the managed services activity that put us right there in the trenches with our clients to reinforce that we are one of those that short list of really strategic partners. And I think that will provide many, many years of double-digit percentage growth opportunity for health catalysts.
spk03: Thanks so much.
spk04: Thanks, John.
spk05: We'll go next now to Daniel Grosslight with Citi.
spk03: Hey, this is Luis, Dr. Daniel. I just had a question. How do we think about the cadence of tech marketing as it migrates clients into the new system? Thanks.
spk04: Yeah, great question. I'll share a few thoughts, and Jason, please add anything as well. So as in all things, there are puts and there are takes. In the near term, as Jason shared in the prepared remarks, there are some near-term migration expenses. that we have incorporated into our 2024 operating plan and that will be part of the next couple of years as we migrate the vast majority of our existing clients onto the Ignite platform. So that's a negative. However, that's offset, and one of the reasons why, even with some of those incremental migration costs, you've seen our technology gross margins essentially stay flat is that the underlying profile from a gross margin perspective of our next-gen Ignite platform is a higher gross margin profile. It's a more efficient offering, much more scalable offering as well. So we do anticipate over the longer term, after we get through those migrations over the next two to three years, to see about a total of around a 10-point improvement in terms of the technology gross margin at the data and analytics platform layer. But that will take a few years to play out as we still have those migration-related costs that are pulling that increased gross margin down a little bit. Anything to add, Jason?
spk00: Yeah, the only thing I would add is that with the wind-down, in our major investment in Health Catalyst Ignite. We do expect our R&D line to be down in absolute dollars compared to 2023. So we do expect to make some progress there as well.
spk05: Got it. Thank you. Thank you. We'll go next now to David Larson with BTIG.
spk07: Hi, this is Jenny Shen on for Dave Larson. Congrats on the quarter and thanks for taking my question. I just wanted to build off of an earlier question on selling into hospitals and that dynamic. And also another question on M&A to expand your solution suite. So it's always made a lot of sense to us for you guys to expand your offerings and sell into like med tech companies, life sciences companies, and even payers. Is that something that you're considering, and if so, what opportunity do you see there? And if you're not considering that, what are some reasons why? Thanks.
spk04: Thank you, Jenny. We might have missed a little bit of your question, but I think you were focused on asking about adjacent markets like med tech or life sciences or payers and how do we evaluate that. Did I capture your question accurately?
spk07: Yes.
spk04: Okay, wonderful. So we do recognize the strategic trades and the strategic importance of being focused as a company and simplifying our focus. And that has been an important part of the last few years of Health Catalyst's existence. And I think we've benefited from that focus on those five key areas of opportunity. but we're also mindful that there are some meaningful and logical adjacent opportunities for us. And, in fact, in many ways, the progress that we've made, for example, with our next-generation data and analytics platform, our Ignite platform, it may well open up not only great opportunities for our core market in the provider space, but the standardization of data elements that come with these updated data models in the next-gen Ignite platform is also may well be really useful and improved infrastructure as it relates to some adjacent market and use case opportunities. You may recall that a few years ago we decided to press pause on some of our life sciences investments. And one of the reasons we pressed pause was we were lacking the infrastructure and the standardization of that infrastructure from a data perspective to really be well positioned to provide meaningful solutions for certain life sciences use cases. Now, we're still early in the process and our primary focus is absolutely on our core market. And I think that's really important for us to continue. But we're also mindful of the meaningful leverage, and often there can be profitable leverage, of a core capability into an adjacent market. And that could include in the future us reevaluating and considering areas like life sciences use cases, though I think we would benefit from some of the learnings of the past by being very focused on just a very small subset of use cases where we were convinced that we could have a differentiated offering and we have the right infrastructure. Likewise, in the payer space, we still do provide solutions to some part of the payer market, but we've there again tried to be focused and really thoughtful and be convinced and persuaded that we have a truly differentiated offering before we make significant investments. International is one more example where that's an adjacency that we've tried to be thoughtful, focused, and opportunistic in targeting just a few areas where we were persuaded that we could leverage our existing strength, provide a differentiated offering. And I think the recent Saudi German announcement is a good example of us meaningfully tapping into and leveraging those core strengths in ways that there again, skew a little bit more towards technology growth, which obviously supports our overall goals for profitable growth moving forward.
spk07: Great. Thank you.
spk05: Thank you. We can go next now to Jack Wallace with Guggenheim.
spk06: Hi, this is Mitchell on for Jack. So AI was a big topic at Haas a few months ago. Do you have anything to share on that, Bron, anything incremental on the progress with how you're utilizing AI over the past few months since then? Thanks.
spk04: Yeah, thanks for the question, Mitchell. We are excited about some advances that we were thrilled to share at the Healthcare Analytics Summit. And really, we have probably three tangible use case areas of focus. One of them we mentioned as one of the success stories in my prepared remarks around using AI, using generative AI as it relates to chart abstraction. And as I mentioned in the prepared remarks, we are seeing about a 24% efficiency improvement through the use of generative AI to help automate the process of hunting and gathering the data that's necessary for registry submission. And we still keep the chart abstractor who's clinically trained in the driver's seat, but we found that we're over 90% accurate in our AI and it improves and learns along the way. And as chart of traction is a meaningful growth area for Health Catalyst, where that is a meaningful tech-enabled managed service for us, obviously the more efficiency gains, the better, the more that we can perhaps share some of those efficiency gains with our clients and build an even more profitable, sustainable business. So that's the first use case, and we'll continue to actively and proactively test out other AI use cases that might apply to other TEMS areas as well. The second area that we talked about it has is version 2.0 of healthcare.ai, which is a fantastic capability, incredibly relevant for us as an analytics company, where we enable on a daily basis thousands of dashboards and visualizations. that the primary benefit of healthcare.ai is to help interpret the data more accurately through the benefits of AI, where AI can help us read a graph much more accurately. We find a step function improvement in humans' ability to interpret data through version 1.0 of healthcare.ai. And we shared examples from version 2.0, which incorporate even more text-based summary explanations of what's going on in a chart or a graph. So that's a second area of focus. And that was particularly meaningful in that There are over 8,000 dashboards a day that are currently tapping into healthcare AI, and those who are viewing those visualizations, those dashboards, are multiple times more likely to interpret the data more correctly and make data-informed decisions that make healthcare better. So we're continuing to use AI in the interpretation of data and analytics. That's the second use case. And then the third use case is as it relates to code development at Health Catalyst, and specifically in our NextGen data and analytics platform at Ignite, we're building in more capabilities to streamline both the maintenance of the current version of the NextGen data platform and the development of new and enhanced capabilities. capabilities so that we accelerate the time to to new features and new capabilities through the use of AI accelerating that process of code development so making it very easy and visible to the programmer to see exactly what's coming from AI but really much in a way that the chart of traction AI works saving steps along the way that can be error prone and and expensive and and utilizing AI for that purpose. So we're encouraged by that efficiency gain as well. And I think there will be lots more to come. But those are the three use case areas that we're primarily focused on.
spk06: Great.
spk05: Thank you very much for the update. Thanks, Mitchell. Thank you. And our final question will come from Stan Bernstein of Wells Fargo.
spk01: Hi. Thanks for squeezing me in here. Maybe sticking on the tech side, so 2024 guidance reflects expectations for a year-on-year improvement in both the number of Dolph client wins as well as the size of the contract. Can you just walk us through what's incremental this year that is yielding these improvement expectations within bookings?
spk04: Yeah, absolutely, Stan. So happy to share a few thoughts about our 2024 bookings guidance and how that impacts 2025. And as usual, there are some puts and takes there. As it relates to the positives that are contributing to that meaningful reacceleration to double-digit growth, I think If you think about the building blocks, including what's going on with our new clients and then what's going on with our existing clients and their retention expansion, the positives that we see there are more activity, more pipeline in the new client space. We had a solid Q1 as it relates to new client activities. We're excited about the growing pipeline that we see in the new client space. We're also excited about the new client as a building block because that skews a little bit more towards technology. So that's certainly encouraging, and that informed our guidance expectation that we shared last quarter of both an increase in the number of net new DOS subscription clients to the mid-teens from 11 last year and our expectation that the average ARR per new client addition would be higher in 2024 than it was in 2023. So that's the first building block. The second building block is with existing client retention and expansion. And here, again, we see some positives that are general positives. And I do want to come back to one specific element that we are watching, you know, specific to Steward Health as one example of something that we're trying to be thoughtful about. But on the positive side, we're seeing some positive trend lines as it relates to client retention, that that continues to improve. And that was true in Q1, and that's certainly encouraging to see across the board that retention improving and strengthening. And then as it relates to expansion, we continue to see a growing pipeline there of opportunities, both from a tech perspective and a services perspective, and specifically on the services side, more as it relates to tech-enabled managed services, which do start at a lower gross margin but then expand over time. So all of those elements, I think, are encouraging, and we see evidence of that. And you can see that existing client confidence reflected in the guidance and the expectation that we shared of the 104% to 110% dollar-based retention, which is meaningfully higher than the 100% dollar-based retention that we saw in 2023. So those are all positive elements. I think As is always the case, we want to be also mindful of specific situations that might be challenging. And one that I mentioned a little bit earlier was with regards to Steward Health. Now, we are actively in communication with them. We are actively monitoring that situation. And as a note, Steward represents less than 2% of our total revenue as a company. So, Specific situations like Steward, while they're very important, it's good to keep them in the broader context. We do have significant experience across our client base with various kinds of asset acquisitions or asset transfers over the years, and certainly that's one of the developing elements of what will likely happen with Steward Health as they potentially sell a number of assets that have been part of Steward Healthcare. But our default assumption, whenever we experience these asset transfers among our client base in the past, has been that our solutions will continue to be utilized by the new owners of those assets. And given the criticality of our solutions, particularly the case at Steward Healthcare. In the vast majority of historical cases where asset transfers have occurred, our solutions have been retained post-asset transfer. That's what we're assuming will be the case with regards to Steward's assets. And therefore, we're assuming the continuation of revenue and ARR related to the solutions specifically at Steward moving forward, including our guidance for revenue and dollar-based retention, And also, as it relates to our adjusted EBITDA guidance for 2024, we just affirmed our previous guidance, even with the incremental inclusion of some bad debt reserve that is informed by the updates from Steward Health. With all of that said, we recognize it's a dynamic situation, and it's unfolding in real time. We'll continue to be in active communication with senior leaders at Steward, and we expect to learn a great deal more in the coming weeks and months. And that's just one specific example of of a number when you service hundreds of clients at any given point in time, there's a wide variety of circumstances that are being faced by our clients. And so we try to be mindful of those. We try to be responsive and helpful to those clients that find themselves in a difficult position that obviously can have some impact as we think about bookings and growth moving forward. But as is the case in the Seward situation, We feel confident that our solutions are critical. We're grateful that those solutions are critical, and that certainly informs our overall perspective of confidence in our growth reacceleration moving forward.
spk01: I appreciate the call. That's very helpful. Maybe just a quick follow-up. You know, tangentially, speaking about the sales pipeline, you had your summit in February this year. It's a plea as in the third quarter. We'd just love to get your impressions if the calendar change had any impact on pipeline formation or on the sales cycle more broadly. Thanks.
spk04: Yeah, great question. So one thing that has remained consistent, whether the summit was in February or in the fall, like it's traditionally been, is the help and the accelerant that it is to the developing and the deepening of our relationships, whether that's more on the developing side with new clients or prospective clients, or the deepening with existing clients. This was an extremely successful summit in that regard. As I mentioned in the prepared remarks, we had 115 face-to-face meetings with senior leaders at existing clients and prospective clients and And I and other senior leaders participated in almost all of those. That's just a tremendous concentrated opportunity, and that may have been the most meetings we've had at a healthcare analytics summit ever. So in that regard, it was fantastic. I think it's also really helpful to have that earlier in the year so that we benefit from that acceleration throughout the year. There were some other challenges not related to the sales cycle where logistically holding a summit in the wintertime where there can be all kinds of weather-related issues proved to be pretty darn challenging. And so we are planning to actually move back to the fall timeframe. But from a sales enablement and a bookings enablement and a pipeline acceleration perspective, I was really pleased with the summit and will continue to find it a very, very helpful sales accelerant for the company.
spk01: Right. Thanks so much.
spk05: Thank you. And we have no further questions at this time. Mr. Burton, I'd like to turn things back to you for any closing comments.
spk04: Thank you again for your time, for your interest in Health Catalyst, and we look forward to staying in touch in the future. Take care, everyone. Thank you, Mr. Burton.
spk05: Ladies and gentlemen, this concludes today's Health Catalyst first quarter 2024 earnings call. Please disconnect your line at this time.
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