Health Catalyst, Inc

Welcome to the Health Catalyst fourth quarter and full year 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. If you have any follow-up, 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 Jack Knight, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon, and welcome to Health Catalyst's earnings conference call for the fourth quarter of 2024, which ended on December 31st, 2024. My name is Jack Knight, and 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 LaSueur, 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 2025, our ability to attract new clients and retain and expand our relationships with existing clients, trends, strategies, 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 Ignite data and analytics platform and our applications, Ignite migrations, M&A activity including acquisition integration, 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 third quarter of 2024 filed with the SEC on November 7, 2024, and our Form 10-K for the full year 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 full year 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 gap measure to adjusted professional services gross margin discussed today, technology gross margin, the most directly comparable gap measure to adjusted technology gross margin discussed today, or net cash provided by operating activities, the most directly comparable gap measure to adjusted free cash flow discussed today, and have therefore not provided the 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 excited to share our fourth quarter and full year 2024 financial performance, along with additional highlights from the fourth quarter. Furthermore, we look forward to sharing our perspective on 2025. I will begin today's call with summary commentary on our full year 2024 results. We are pleased with our full year 2024 financial results, including total revenue of $307 million and adjusted EBITDA of $26 million. representing 137% year-over-year growth. Additionally, we are encouraged with the results of our tech segment, which had revenue of $195 million for a full year 2024 and $52 million for the fourth quarter of 2024, which represents 10% growth year-over-year for Q4. 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 client improvement from a recently published case study. The Innovative Healthcare Collaborative of Indiana, or IHCI, leveraged HealthCatalyst data and analytics platform to enhance its value-based care strategies, resulting in significant cost savings. IHCI recognized the need for timely, actionable insights to manage complex risk-based populations. HealthCatalyst data platform, Value Optimizer, and Healthcare.ai enabled IHCI to integrate clinical and claims data, develop customized analytics, and optimize patient care strategies. IHCI used these technologies to improve patient utilization, reduce 30-day readmissions, and lower per-member per-month spending. Key results include $28.3 million in cost savings over one year through improved inpatient utilizations, a $9.88 decrease in per-member-per-month cost, and a significant reduction in readmissions, enabling patients to spend more time at home. This highlights the power of data-driven, value-based care strategies in driving significant cost reductions while improving patient outcomes. Also in the improvement category, we've been fortunate to receive additional external recognitions. First, we are excited that the Health Catalyst was recognized by Black Book Research in the categories of DEI excellence and top-rated behavioral health vendors for analytics and AI, and as a leader in Frost and Sullivan's 2024 U.S. Population Health Management Report, recognizing our proactive approach to innovation. Next, we're pleased to share that we have recently been recognized for several team member engagement awards, including placement on Newsweek's America's greatest places of work for diversity in 2025 for the third year. The National Association for Business Resources, 2024 best and brightest companies to work for in the nation. And earned recognition as one of India's top workplaces in 2024. This recognition is especially meaningful as we expand and invest in our India operations. Now with over 10% of our team member base in India, Our next strategic objective category is growth, which includes expanding existing client relationships and beginning new client relationships. First, let me provide some commentary on our 2024 bookings performance. We're encouraged to see continued progress related to our growth, especially with the momentum from Ignite, as well as continued improvement in our end market. Our net new platform client additions in 2024 were 21, in line with our expectations. However, these additions came toward the lower end of our previously disclosed $400,000 to $1 million ARR plus non-recurring revenue range. Importantly, roughly two-thirds of our new client additions came from cross-selling and converting existing app clients. And we also anticipate that trend will continue in 2025. Additionally, as of the end of 2024, We're pleased to share that we have more than 1,000 total clients when combining platform clients and app clients. We are excited to continue our momentum in cross-selling our Ignite-enabled offerings to our app clients and believe these results reinforce our large and expanding cross-sell opportunity. As we have shared previously, we are making a few updates to our growth metrics to provide greater clarity to investors as our business evolves, beginning in 2025 and going forward. First, as it relates to dollar-based retention rate, we are updating the definition to include only technology and TEMS segments of our platform client base. This updated definition includes the portions of our business that are most recurring in nature, And we anticipate this updated definition for dollar-based retention rate will better encapsulate our go-forward strategy as we continue to focus on driving profitable growth with a focus on technology. Or we anticipate that technology revenue will re-accelerate in 2025 relative to the past couple of years and grow faster than professional services. In 2024, our dollar-based retention rate was 100% under the legacy definition. which is at the low end of our prior range. Under our new definition for dollar-based retention rate for technology and TEMS platform clients, our 2024 performance was 102%. The primary driver of this difference is related to non-TEMS professional services, where we've seen an increasing trend from our clients where many are moving from recurring FTE subscriptions to more non-recurring project-based arrangements. This move had a negative impact on our legacy dollar-based retention rate definition, even though in many cases, the revenue was still retained with the move towards non-recurring professional services revenue. We believe this updated metric will be more meaningful and helpful to our shareholders. Second, we have decided that an updated definition of platform clients would be useful. Increasingly, the Ignite infrastructure is and will be powering all of our applications. As a result, beginning in 2025 and moving forward, net new platform clients will generally include any non-platform technology client that signs contracts with at least 100K of incremental ARR plus non-recurring revenue in a given calendar year. along with clients previously included in the prior definition of this metric in 2024. Please refer to our 10-K that will be filed with the SEC for additional detail on these updates, along with the new definitions of these metrics. Next, we're excited to share several important client wins and expansions across key areas. First, we secured a new Ignite client, Signature Healthcare. which originated from our app client base. This marks a meaningful progression with our sales initiatives for Ignite. Additionally, we saw expansions with existing clients, including Valleywise in the Vitalware space. These clients have strengthened their relationships with us, leveraging our technology and services to meet their growing needs and strategic objectives. We are also pleased to provide an update and report progress in adjacent markets. Following our recent acquisition of CareVive, we closed a life sciences deal, which underscores the increasing relevance of our solutions in the broader healthcare ecosystem. Furthermore, we've signed a new payer client, providing a foothold in this adjacent market segment. These wins reflect our continued commitment to delivering impactful solutions that empower our clients as we focus on serving our as the catalyst for massive measurable data-informed healthcare improvement and innovation. Related to our current growth operating environment, we remain encouraged by the state of the end market. We are pleased to see health system operating margins continue to stabilize and approach pre-pandemic levels. One health catalyst specific growth dynamic that we anticipate will coincide with this robust demand environment is that existing platform clients could adopt more of our apps, but because Ignite is better, faster, and cheaper than DOS, those app additions may not show up at the same level they normally would in our dollar-based retention rate. With this backdrop, I will now share some perspectives on our anticipated 2025 bookings levels. Supported by the strengthening of our end market, as well as continued momentum from Ignite, we anticipate improvement in our bookings metrics compared to 2024. First, we anticipate approximately 40 net new platform client additions. We expect these will be at an average range of 300,000 to 700,000 ARR plus non-recurring revenue, which is similar to our results in 2024. Achieving approximately 40 net new platform clients will include conversion of some of our 900-plus app clients, which we see as a significant opportunity. In that vein, we are encouraged that thus far in 2025, we've already added six platform clients, and we forecast that by the end of Q1, we will have added approximately 10 net new platform clients, which is on pace. for our 2025 target of 40 net new platform client additions. Moving to our existing client metric, we anticipate our 2025 dollar-based retention rate will be approximately 103% under the updated definition of technology and TAMs for our platform client base. As it relates to existing clients, I wanted to highlight one other strategic decision that we mentioned last month. we made the decision to exit our TEMS pilots in ambulatory operations. We anticipate this exit will be finalized by mid-2025. These pilot ambulatory TEMS contracts represent approximately $9 million of annual professional services revenue. Importantly, while we are exiting these ambulatory TEMS pilots to prioritize profitable growth, we remain committed to our other TEMS relationships, primarily in the areas of data and analytics and chart abstraction. In addition to our perspectives on 2025 bookings, Jason will share our 2025 guidance later in our prepared remarks. I'm encouraged by our progress, especially as it relates to our technology sector, where we anticipate approximately $220 million of technology revenue, translating to 13% growth of technology revenue year over year. As it relates to profitability, we are pleased to share that we are a little further along than anticipated in our integration progress with recent acquisitions. As such, we are raising our expected adjusted EBITDA for 2025 by $2 million to approximately $41 million from our previous expectation of approximately $39 million. We projected the technology segment will contribute approximately $40 million to the total adjusted EBITDA, also raised by $2 million. A technology business with 13% top line growth and approximately 18% adjusted EBITDA margins would represent a Rule of 30 profile in 2025. Over the past 12 months, we've been grateful to see meaningful growth in our team member base. However, as is the case with many companies at scale, our annual planning process has also highlighted the need for us to reduce headcount and expenses, primarily in R&D and professional services. We anticipate this will improve our cost structure and allow us to prioritize investment in our core growth areas, enhancing our ability to drive profitable growth and long-term success. We are committed to supporting effective team members during this transition. Given the importance of our Next Generation Ignite platform in enabling our growth and product strategy, and consistent with last quarter's earnings call, our Chief Operating Officer, Dan LeSueur, has joined this earnings call. We expect he will continue to join future earnings calls to provide status updates and help answer Ignite-related questions. With that, let me turn some time over to Dan LeSueur.