Health Catalyst, Inc

Welcome to the Health Catalyst Second Quarter 2024 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 and 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the question queue by pressing star and 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-ups, please reenter 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 and zero. I would now like to turn the call over to Jack Knight, Vice President of Investor Relations.

Good afternoon and welcome to Health Catalyst's earnings conference call for the second quarter of 2024, which ended on June 30, 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, Jason Alger, our Chief Financial Officer, and Dan LeSueur, our Chief Operating 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 third quarter and full year of 2024 and 2025, 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 use of proceeds from loans under our credit facility and the availability of the delayed draw loan thereunder, our ability to refinance our existing indebtedness, the demand for deployment and development of our data and analytics platform, M&A activity, 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 the first quarter of 2024 filed with the SEC on May 10, 2024, and our Form 10-Q for the second 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 second 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 discussed below. technology gross margin, the most directly comparable gap measure to adjusted technology gross margin discussed below, or net cash from operating activities, the most directly comparable gap measure to adjusted free cash flow discussed below, 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 Byrd. Dan?

Thank you, Jack, and thank you to everyone who has joined us this afternoon. We are pleased to share our second quarter 2024 financial performance and other recent highlights. I will begin today's call with summary commentary on our second quarter 2024 results. We are encouraged by our second quarter 2024 financial results, including total revenue of $75.9 million, and adjusted EBITDA of $7.5 million, which both exceeded their respective midpoint of our guidance. Likewise, we are pleased with our bookings performance through Q2 2024, especially as it relates to our net new DOS subscription clients, which we now refer to as our platform subscription clients. 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 an example of a recent client improvement. Often in healthcare, both consumers and health systems struggle with cost transparency. To help combat this issue, Temple University Health adopted the Health Catalyst data platform and our power costing application. a module of Health Catalyst's revenue and cost improvement suite, to power its financial transformation, increase cost transparency, and ensure clinical improvement and excellence. Our solution allows Temple to more precisely and granularly track costs, understand data from patients' electronic medical records, and track each drug and supply used in patient care. Leaders at Temple can then visualize clinical and financial data that is seamlessly combined and integrated, which allows them to budget more accurately, better negotiate with insurers, and remove unnecessary costs. Additionally, power costing allows the organization to compare individual patient outcomes and costs, by a physician more easily than other methods, which are often less precise and require manual analysis. Temple has also leveraged Health Catalyst's power costing application to quantify delivered but not yet reimbursed services. They have shared that this opportunity represents over $3 million of additional annual revenue. Also in the improvement category, we have been fortunate to receive additional external recognitions. First, Newsweek has recognized Health Catalyst as one of the 50 best healthcare data analytics companies in the U.S., one of the world's best digital health companies for 2024, and as one of America's greatest workplaces for parents and families. Additionally, for the 12th year in a row, Health Catalyst has been named the best place to work in healthcare by Modern Healthcare. as one of the best companies to work for by U.S. News and World Report, and for the second year in a row as a certified great place to work in India. Lastly, we are excited to share that Linda Llewellyn, our Chief People Officer, was recognized with the Lifetime Achievement Award at Utah Businesses HR Achievement Awards in 2024, recognizing the exceptional work that Linda does to help make Health Catalyst a great place to work. Our next strategic objective category is growth, which includes expanding existing client relationships and beginning new client relationships. Consistent with what we have shared recently, we are encouraged to see health system operating margins steadily improving and stabilizing in recent months. Our strong pipeline along with this improved end market contributes to our continued confidence in and our expectation that our top-line growth will accelerate back to double digits in 2025. Related to our full-year 2024 bookings expectations, we are pleased to be well ahead of our forecast for net new platform subscription client additions. Driven by the increased modularity and flexibility of the Health Catalyst Ignite platform, our increased effectiveness in cross-selling Ignite to our expanding non-platform client base, and our increased focus on higher margin technology opportunities. Through the first half of 2024, we have already added more net new platform subscription clients than we did in all of 2023. As a result, today we are increasing our forecasted number of 2024 net new platform subscription client additions to be in the low 20s. As a note, achieving this number of additions would represent the strongest year in the company's history in terms of net new platform subscription client additions. Also, it is important to note that our first half new client additions, as well as some material existing client expansion, includes meaningfully greater international and health information exchange clients than we have typically experienced. These international and health information exchange implementations can often take significantly longer than our other clients to ramp into revenue recognition. As a result, we anticipate more of the revenue impact from these wins to occur in late 2024 to early 2025. Given that much of the stronger than the anticipated performance in net new client additions has come from the cross-selling of a more modular Ignite platform to existing non-platform clients, which has a lower average starting price, we anticipate the average ARR plus non-recurring revenue for 2024 net new platform subscription clients will be between $400,000 and $1 million, which is directionally similar to 2023. We are encouraged by our improved cross-selling capability, and over the past year, we have observed that that we have more than twice the conversion rate in winning deals with existing clients, whether they are platform or non-platform clients, than our conversion rate with new clients where we do not have any existing relationship. We anticipate this cross-selling opportunity will be a key driver of our growth moving forward. As it relates to our existing clients, we are pleased with our first half performance and have observed some encouraging trends Through the first half of 2024, we have experienced meaningful improvement in existing client downselling relative to 2023. Additionally, we've outperformed in our technology-related client expansion, highlighting the significant value that our technology solutions provide to our clients, and overperformed in professional services non-recurring expansions. These non-recurring professional services are tend to be higher margin than the initial few years of tech-enabled managed services, or TEMs, and these non-recurring services fall outside our current definition of dollar-based retention. As a result, they do not contribute to our dollar-based retention rate for 2024 under the current defined metric. As a note, these non-recurring services expansion opportunities in aggregate would likely represent approximately three or four points of 2025 revenue growth contribution, which are unaccounted for in the current dollar-based retention metric based on the current trends of clients regularly purchasing non-recurring services for project-based work. For clarity, even with this increase in non-recurring revenue, we continue to benefit from a business model that still includes over 90% of our revenue that is recurring. Second, we are pleased that in the first half, we continued to expand and deepen our relationships with clients through TEMS contracts. But these were smaller expansions than some of the TEMS contracts that we signed in late 2022 and 2023. and more focused on specific areas like chart abstraction or report writing. In the first half, we did not sign any TEMS contracts that were larger than a few million in recurring revenue. While we have a meaningful pipeline of TEMS opportunities, we also have a technology expansion pipeline, a non-recurring services pipeline, and a new client pipeline that are larger than our original forecast at the beginning of 2024. We will continue to prioritize the technology and non-recurring services expansion opportunities with existing clients and new client opportunities within the pipeline as these opportunities are more profitable than TEM's opportunities. As a result of the trend towards a higher proportion of our professional services expansion coming through non-recurring projects and our prioritization of non-TEMS existing client and new client opportunities in the pipeline, we are updating the range of anticipated 2024 dollar-based retention for platform subscription clients to 100% to 106%. Due to some of these dynamics, we are considering updating the metric definition we use to describe existing client retention, consistent with our continued desire to provide shareholders with meaningful insight into our client retention. We anticipate being in a position to share this potential update during the February 2025 earnings call. The updates could include non-recurring revenue in a client retention metric. And they also incorporate all of the solutions that contribute to our client revenue, including acquired solutions, rather than just focusing on our platform subscription clients as currently defined. In summary, these positive growth results, as well as positive momentum from our recent technology-focused acquisitions, reaffirm our confidence and our expectation that double-digit revenue growth will return in 2025. Next, we are pleased to announce a meaningful new client partnership with SingHealth, the largest group of healthcare organizations in Singapore. Health Catalyst's enterprise data platform will be implemented at SingHealth, leveraging Health Catalyst's POP Analyzer, POP Insights, analytics accelerators, and professional services to support data-driven outcomes improvement, value-based care initiatives, and population health management. We are excited to be working with Seeing Health, a world-class health system that is recognized for its efforts to deliver high-quality, accessible healthcare. We are also excited to communicate that Adena Health, a four-hospital system in Ohio, has signed an agreement in the second quarter to implement the Ignite analytics platform later this year. Lastly, we are also excited to announce a meaningful expansion with a long-standing health catalyst client, South Dakota Health Link, a state-designated health information exchange serving communities throughout South Dakota and other states in the Midwest and Western U.S. Over the past decade, we have partnered with South Dakota Health Link to help achieve its mission to foster the sharing of information through a secure platform to improve the quality, safety, and efficiency of care provided to all citizens. As part of this partnership, the renewed expanded agreement will include the migration of technology to Ninja Universe, Health Catalyst Ignite's interoperability platform. Ninja Universe is an end-to-end cloud-native platform with applications purpose-built for health information exchanges like HealthLink. We are grateful for the opportunity to expand our partnership and look forward to continuing to help support South Dakota Helpline's mission, utilizing the power and interoperability of Ninja Universe. Given the importance of our Next Generation Ignite platform in enabling our growth and product strategy, our Chief Operating Officer, Dan LeSueur, has joined this earnings call and we expect he will join future earnings calls to help answer Ignite-related questions. With that, let me turn some time over to Dan LeSueur.