Q3 2020 Health Catalyst Inc Earnings Call
Good afternoon, and welcome to the catalyst earnings conference call for the third quarter of 2020. My name is Jonathan and I will be your operator for this call at the conclusion of todays call their health countless management team will be available to take questions with that let me turn the call over to Adam Brown Health catalyst Senior Vice President.
<unk> Investor relations to begin todays call.
Good afternoon, and welcome to help catalyst earnings conference call for the third quarter of 2020, which ended on September Thirtyth 2029.
My name is Adam Brown Im the senior Vice President of Investor Relations for help catalyze and with me on the call is Dan Burton, our Chief Executive Officer.
Patrick Kelly, 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 8-K furnished to the FCC both of which are available on the Investor Relations section of our website at IR Dot health catalyst dotcom.
As a reminder, today's call is being recorded and a replay will be available following the conclusion of all.
During the call we will make forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 regarding trends strategies and the impact of the cold in 19 pandemic on our business and results of operations.
Our pipeline conversion rates and our general anticipated performance of the 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.
Please refer to the risk factors in our form 10-Q for the second quarter up 2020 filed with the FTC on August 12, 2020, and our form 10-Q for the third quarter of 2020 that will be filed with the FCC.
We will also refer to certain non-GAAP financial measures to provide additional information to investors.
A reconciliation of these non-GAAP measures to their most comparable GAAP measures is provided in our press release.
With that let me turn the call over to Dan for his prepared remarks, and then Patrick will subsequently provide his prepared remarks.
Daniel Patrick will then take your questions.
Dan.
Thank you Adam and thank you to everyone who has joined US This afternoon. We're.
We're excited to share our third quarter financial performance, along with the other highlights from the quarter.
I will begin today's call by communicating our third quarter 2020 financial results.
First let me share that I am pleased with our performance across the board aside.
Especially in light of the macroeconomic backdrop.
To start I am happy to report that our total revenue for Q3 2020.
Was 47.2 million.
Excluding the one month contribution from our recent vital where acquisition art.
Our total revenue for Q3 2020 was 46.3 million.
This represents an outperformance relative to the midpoint of our guidance our.
Our total technology revenue for Q3, 2020 was 28 million.
Excluding the one month contribution from our recent Vida where acquisitions are.
Our total technology revenue for Q3, 2020 was 27.2 million representing 28% growth.
Relative to the same period last year.
Total adjusted gross margin in the third quarter 2020 was 51%.
The increase of approximately 170 basis points compared to the second quarter of 2020.
And our Q3 2020 adjusted EBITDA.
It was a loss of 6.4 million.
Which also represents an outperformance relative to the midpoint of our guidance and shows an improvement from a loss of 8.4 million for the same period in the prior year.
Now, let me transition to some of the highlights from the quarter.
You will recall from our previous earnings calls that we measure our company's performance in three primary strategic objective categories.
Of improvement growth and scale and will discuss our quarterly results with you in each of these categories.
The first category improvement is focused on evaluating our ability to enable massive measurable improvements for our customers, while sustaining industry, leading satisfaction and engagement.
I will first share two examples of recently documented customer improvements from newly published case studies.
The first improvement been yet highlights our work with one of our customers supporting their journey to financial and operational recovery from COVID-19.
While the latter demonstrates that a number of customers have widened their focus.
And our back to leveraging our technology and services to do meaningful improvement work outside of their code at 19 responses.
First banner health leveraged our solution, including our data platform and Workover 19 elective surgery impact analysis application.
To visualize the impact of cancelled surgeries on revenue and develop a data informed recovery plan through integrated clinical financial and operational data and analytics.
This allowed banner to safely resume more than 3000 cases resolving 32%.
Of the Harry operatives services backlog.
And recapturing billions in revenue.
Next let me highlight a recent improvement at Multicare health system from their work outside of the realm of cobot 19th.
Multicare to leverage store solution, including our data platform and leading wisely analytics application to develop a system wide data informed approach and standard improvement methodology to address their hospital length of stay challenges.
These improvement efforts resulted in 24 million and documented customer savings the outcome of a 0.6 day reduction in length of stay system wide across multicare.
Our next performance measurement category is growth, which we define as adding new customers, while also deepening existing customer relationships.
In the growth category.
With COVID-19, as a backdrop I'll share a detailed update on the state of our company along with some broader perspectives about how the health care delivery ecosystem has adjusted to the temporary new normal operating environment.
First I would share that our perspectives on the current operating environment are largely consistent with the detail we shared on our Q2 2020 earnings call.
To start I would underscore that the current COVID-19 surge likely indicates that our country and national health care system will be under continued meaningful stream over the coming months.
We continue to do everything in our power to support our customers to ensure they successfully manage through this unprecedented time.
That said.
We continue to be encouraged as we witness meaningful evidence that the health care provider ecosystem is better equipped and prepared to respond to the ongoing pandemic, including its treatment efficacy supply chain logistics capacity planning.
And broader operational optimization.
Lastly, we see additional reasons for optimism over the medium term as we anticipate more scientific progress, including progress on a vaccine and improved treatment efficacy related to containing the cobi 19 pandemic.
Now let me provide some commentary on what the current operating environment means for our business in the near term.
First we are fortunate to have a highly recurring revenue model.
In which greater than 90% of our revenue is recurring in nature.
This model means that the near term impact of COVID-19 on our top line is relatively muted.
As evidenced by our strong year to date 2020 revenue performance.
As it relates to our existing customer relationships, let me first share some additional detail on our technology since.
Since the onset of the COVID-19 pandemic arc.
Our customers overall usage of our data platform continues to increase and has never been higher.
Of particular note, our foundational analytics applications, which are crucial components of our COVID-19 technology response.
I've seen a significant increase in usage, resulting in a roughly 40% increase since the onset of the pandemic.
I also would highlight that we benefit from a high level of technology revenue predictability.
Yes. They are all access das subscription customers that have built in contractual technology revenue escalators.
Additionally, I would share that we have seen usage of our cobot 18 specific products in a number of cases meaningfully shift from those focused on Cobi 19 preparedness to.
Those focused on financial recovery and planting analytics in areas, such as elective procedures ambulatory care and revenue cycle.
Given all these factors, we would anticipate strong full year technology dollar based retention performance similar to historical levels.
Moving on to professional services, we continue to see high levels of engagement of our team member base, which remain engaged on both Kobin 18 recovery work as well as focusing on more general clinical financial and operational improvement work.
That said consistent with what we discussed on our last earnings call.
The financial strain imposed by COVID-19 on a number of our customers has led to a lower year to date professional services dollar based retention.
And we would expect to have a meaningfully lower full year 2020 professional services dollar base retention than we have achieved historically.
Now, let me transition to providing some commentary on new das subscription customer additions in 2020.
First I would share that the additional context, we will provide is consistent with the details we provided on our Q2 2020 earnings call.
As a reminder, we were pleased to sign multiple new customers in the first half of 2020.
But as a result of Carbonite team.
The number of new customer additions was lower than we originally anticipated entering the year.
As we entered the second half of 2020.
We have been pleased to see health care organizations, adjusting well to the new normal operating environment.
With cobian, 19th significantly highlighting the need for a more robust commercial grade data and analytics solution.
On the other hand coconut team continues to create some near term financial uncertainty making.
Making some health systems more cautious in their near term purchasing decisions.
Given these competing factors we have continued to see our second half pipeline and conversion rates progress similar to the second half of 2019.
Thus, we feel confident about the expectations, we shared on our previous earnings call of high single digit net new das subscription customers for full year 2020.
Moving onto the longer term impact of COVID-19, I would share that we cannot think of any event in recent history.
Galvanized the awareness and importance of data and analytics more than covered the team.
And thus we believe it will serve as a meaningful tailwind in the industry's adoption of data and analytics.
And at the health system level, we are seeing meaningful evidence COVID-19 is highlighting the need for a commercial grade data and analytics solution to replace patchwork home grown systems.
Also in the context of our growth efforts, let me mention that we hosted our seventh annual healthcare analytics summit in September.
The format was virtual this year's conference with a meaningful opportunity for health catalyst to continue to provide thought leadership within the health care data and analytics ecosystem.
And also carefully listened to our customers and prospects as we further cultivate and deepen those relationships.
We viewed this year's summit as a significant success with record registration of more than 3500 attendees and some of our highest attendee satisfaction scores.
Next let me share some brief commentary on our recent acquisitions.
While we are still early in the integration process with both the health Finch and vital where transactions closing in the last couple of months, we're pleased to share that our integration efforts, including team member technology and sales.
Are progressing well and are in line with our expectations.
Likewise, our acquisition of able help from February is largely integrated from a technical perspective.
And we are pleased with the early market receptivity, we're seeing for the consolidated product offering.
More broadly as we heard countless times at our health care analytics summit existing and prospective customers are enthusiastic about the increased breadth of our offering following these acquisitions.
I'm also happy to share some new leadership promotions connected with our annual planning process.
And in response to the company's continued growth and expansion.
We are pleased to announce the introduction of the role of President at health catalyst with responsibility for all the major growth functions of the company, including with existing clients new clients International expansion sales operations marketing and communications.
This role will report directly to the CEO and will have responsibility for overseeing our anticipated growth and expansion in the years ahead.
The introduction of the role of President has been under consideration for over a year.
As we have continued to grow in scale and as we anticipate sustained high growth for many years to come.
During this year's planning process after multiple discussions with our board and with other senior leaders, we determined that this year would be the right time to introduce this role.
As a result of an interview process that involves numerous help catalysts leadership team.
And board members, we are pleased to announce the promotion of Patrick Nellie helped catalyst current chief financial officer to the role of President effective January one 2021.
Patrick joined health catalyst in 2013, after having filled roles in healthcare investment banking at Mccall partners and in private equity at GTC are.
At help catalyst Patrick first built the company's internal analytics group.
And then build the company's benchmarking product line named Touchtone into.
In 2017, Patrick was promoted to Chief Financial Officer of Health catalyst responsible for the finance accounting Investor Relations human resources, I cheat and real estate functions.
During Patrick's tenure as Chief Financial Officer.
Played a central leadership role in the company's IPO in July 2019.
Hi, Patrick has also for a number of years been involved in supporting the company's growth initiatives with existing and new customers.
Quitting serving on customers executive governance committees and acting as an executive sponsor for a number of help catalyst largest customer relationships.
Patrick has a degree in physics with a concentration in bio physics, and biochemistry from wake Forest University.
During the past seven years I have worked with Patrick on a wide variety of strategic and operational issues.
Through these interactions I've come to appreciate Patrick's character.
And leadership capability.
I have tremendous respect for Patrick's intellectual capacity.
His strategic prowess and his boundless energy.
And he is earned my trust as he continues to demonstrate its keep his deep commitment to our company's mission operating principles and cultural attributes.
Patrick has my full support and confidence and the unanimous support and confidence of our board of directors I look forward to continuing to work closely with Patrick during the years to come.
Patricks promotion to the President role also necessitated company selection of its next Chief Financial Officer.
We followed a very similar process in the selection of our next Chief Financial Officer as the process, we followed in the selection that the president.
Including forming an interview team interviewing multiple candidates coming to a unanimous recommendation.
Reviewing with our board and receiving full support to extend an offer which has been accepted.
I'm pleased to announce the promotion of Bryan Hunt Health catalyst current senior Vice President of financial planning and analysis to the role of Chief Financial Officer.
Active January one 2021.
Brian has been with help catalyst for over six years, having worked closely with me with Patrick and with many other leaders across the company.
During Brian's tenure at health catalyst. He has served in leadership roles in the finance organization.
Including Vice President and director of financial planning and analysis, along with serving in our internal analytics function.
Prior to joining health catalyst in 2014.
Brian gained experience as an investment banker with Deloitte corporate finance and with Moelis and company.
Brian holds a bachelors degree in accounting from Brigham Young University.
I have also had the benefit of hundreds of interactions with Brian.
During the course of many years and from these interactions I have developed significant respect for Brian.
Confidence in his ability as a leader and as a financial steward.
Understands our business had a deep and multifaceted level.
Brian has my full confidence and support along with that of our board of directors to receive this additional responsibility.
And I look forward to working closely with Brian in the years ahead.
Brian has joined today's earnings call and will be leading the financial sections of future earnings calls beginning with our Q4 earnings call early in 2021.
I'm also pleased to announce two additional promotions related to these announced changes.
Jason Alga, our senior Vice President Finance has been promoted to Chief Accounting Officer, and Adam Brown, Our senior Vice President of Investor Relations has been promoted to senior Vice President of Investor Relations and financial planning and analysis.
Jason and Adam have each been with the company for more than five years and of each demonstrated their extraordinary capabilities during their health catalyst tenure.
We are fortunate to continue to benefit from their expertise dedication and leadership as respected teammates and colleagues easier.
Each of these promotions will be effective January one 2021 and.
And will contribute to our continued ability to grow and scale as an organization.
Lastly, before I turn the call over to Patrick.
I would like to share that Mike Dixon will be completing his service on our board of directors effective December 30 Onest.
I want to take this opportunity to share my heartfelt gratitude for Mike and his more than nine years of impacts will service on our board.
Mike and I are two of the original board members from the fall of 2011, when the company first organized the board of directors.
And it has been an honor to serve alongside Mike over the past decade.
Without mikes countless contributions to our company over many years starting in its very early stages.
I am certain that we would not be where we are today.
Patrick.
Thank you Dan.
Before diving into our quarterly financial results I.
I would like to Echo Dan's sentiment.
And say that I am pleased with our third quarter results.
Especially in light of the macro economic backdrop.
Encoded 19 pandemic.
Now, let me comment on our performance measurement category at scale.
For the for the third quarter of 2020.
We generated 47.2 million in total revenue.
Excluding the one month contribution from our recent acquisition of vital where.
Total revenue was 46.3 million.
As Dan mentioned this represents an outperformance relative to the midpoint of our guidance.
And it represents an increase of 18% year over year.
The year over year growth was driven primarily by recurring revenue from new customer additions.
From existing customers paying higher technology access fees as a result of contractual built in escalators.
Technology revenue for Q3 2020.
Was 28 million.
Excluding the one month contribution from our recent vital where acquisition our total technology revenue for Q3, 2020 was 27.2 million rep.
Representing 28% growth relative to the same period last year.
Professional services revenue for Q3 2020.
Was $19.2 million, both before and after excluding the one month contribution from our recent final where acquisition.
Representing 5% growth relative to the same period last year.
This growth is primarily due to our services being provided to new das subscription customers.
And expanded deployment of services with existing customers.
That growth was partially offset by lower professional services dollar base retention achieved year to date relative to historical performance due to COVID-19, and some spill over from temporary professional services discounts provided to support our customers through the near term financial.
Strain they have experienced related to cope in 19.
Total adjusted gross margin in the third quarter was 50.7%.
This represents an increase of approximately 170 basis points compared to the second quarter of 2020.
And a decrease of approximately 300 basis points year over year.
On the technology side, our adjusted gross margin was 68.4% roughly flat year over year.
This year over year performance was mainly driven by headwinds due to the continued costs associated with transitioning a portion of our customer base.
Third party cloud hosted data centers in Microsoft Azure.
Offset by existing customers paying higher technology access fees from contractual built in escalators without the corresponding increase in hosting cost.
And on the professional services side.
Our adjusted gross margin was 25.1%.
This represents a decrease of approximately 1100 50 basis points year over year and.
And an increase of roughly 410 basis points relative to Q2 2020.
This year over year decrease was mainly the result, the previously mentioned COVID-19 impact our professional services dollar based retention.
Previously mentioned spillover temporary professional services discounts due to cope at 19.
As well as some shift in the mix of professional services delivered.
In Q3 2020.
Adjusted operating expenses totaled 30.4 million.
As a percentage of revenue adjusted total operating expenses were 64%, which compares compares favorably to 75% in Q3 2019.
Adjusted EBITDA in Q3, 2020, with a loss of 6.4 million.
Which compares favorably to an adjusted EBITDA loss of $8.4 million in the third quarter of 2019.
As Dan mentioned earlier.
We are pleased to report that we outperformed the midpoint of our guidance. This adjusted EBITDA performance was mainly driven by the revenue outperformance mentioned previously.
Expense management efforts as well as some non head count expenses that we anticipate will be pushed out.
Into the fourth quarter of 2020.
Our adjusted net loss per share in Q3 2020.
21 cents.
The weighted average number of shares used in calculating adjusted net loss per share was approximately 40.3 million shares.
Turning to the balance sheet.
We ended the third quarter of 2020.
$275 million of cash cash equivalents and short term investments.
Compared to $228 million at year end 2019.
As a reminder, in April 2020, we issued a private placement of convertible notes with a principal amount of $230 million and we used a portion of the proceeds to extinguish an outstanding term loan.
After deducting the unamortized debt discount related to the conversion feature of $59 million and unamortized issuance cost of $5 million.
As of September Thirtyth 2020.
The net carrying amount of the liability component of the convertible notes is $166 million.
As it relates to our financial guidance.
For the fourth quarter 2020, we expect.
Total revenue between $50.5 million.
And $53.5 million.
And adjusted EBITDA losses between $7.3 million.
And $5.3 million.
In terms of our Q4 2020 guidance.
We anticipate vital where will contribute a little over $4 million in revenue inclusive of purchase accounting related deferred revenue write down.
Breaking down the remaining revenue growth expectations, we expect technology year over year revenue growth to.
To continue to be very robust, while we anticipate professional services year over year revenue.
Growth to be slightly negative.
The anticipated professional services year over year growth rate as a result of less implementation revenue due to lower first half 2020, new customer additions.
As well as the previously mentioned lower professional services dollar based retention.
Which we anticipate will be in the low to mid ninetys in the full year 2020 due to the negative impact of 19.
This Q4 2020 guidance leads us to raise our full year 2020 guidance as follows.
Total revenue between $186.1 million.
And the $189.1 million.
At their respective Midpoints. This represents an increase.
8.4 million compared to the full year revenue guidance, we shared last quarter.
Adjusted EBITDA losses between $23.9 million and $21.9 million.
At their respective Midpoints. This represents an improvement of $1.1 million compared to the full year guidance, we provided last quarter.
Lastly, while we acknowledge that the fluidity of the current environment.
Makes it challenging to precisely forecast.
We would like to share a few preliminary observations related to 2021 revenue growth.
From where we sit today.
We would like to ensure a clear understanding of the 2021 revenue impact, resulting from cobot nineteens impact.
On our previously shared 2020 bookings estimates.
As well as our estimated 2021 revenue contribution from Vidacare.
Under normal circumstances.
We would have expected our total 2021 annual revenue growth rate, including vital where.
The 25 plus percent.
Given the impact of COVID-19.
On our 2020 bookings however weeks.
We expect our total GAAP revenue, including vital where to grow at a slower pace in 2021.
At approximately 20%.
Consistent with what we shared on our Q1 2020 earnings call.
Because we are a recurring revenue subscription business model.
Mathematically this means that our bookings metrics, both new customer additions and dollar based retention are forward looking metrics.
These metrics will impact both in year revenue as well as the following years revenue.
Given that new recurring revenue contracts are recognized ratably over the course of the year from their signing date.
Thus, we anticipate that lower performance.
On our first half 2020, new client adds and full year 2020 professional services dollar based retention.
Will negatively impact our 2021 core business revenue growth rate.
We expect the largest COVID-19 impact on 2021 revenue.
Well beyond our Q1 2021 professional services revenue year over year growth rate.
Given this quarter is comparing to a year ago quarter.
Where revenue was not materially impacted by COVID-19.
While the 2020 COVID-19 bookings impact has an inherent effect on our 2021 revenue growth given the recurring nature of our revenue model.
We believe the fundamentals are long term revenue growth remain intact.
Therefore, we are reiterating our long term revenue growth target of.
20 plus percent.
With that I will conclude my prepared remarks.
Dan.
Thanks, Patrick I'll conclude my commentary by thanking our committed and highly engaged team members. These teammates and colleagues have worked tirelessly over the last several months in support of our heroic health system customers in response to COVID-19.
And I've never been more proud to be associated with these teammates as we work together to fulfill the company's mission a mission that is more relevant and important now than ever.
And with that.
I will turn the call back to the operator for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key and our first question comes from the line of Robert Jones from Goldman Sachs. Your question. Please.
Great. Thanks, so much for the questions and congrats to Patrick Brian Adam for the elevated roles.
I guess, Patrick just at the end there you made some comments some preliminary thoughts around 2021, if I if I heard you correctly it still sounds like you're expecting high single digit Das ads for 2020, and I thought you said Dan in the prepared remarks that the pipeline was behaving like it did in the back half of last year in the back half of this year.
If I heard that correctly. So I guess the question with the good just trying to put those two comments together how are you thinking about the potential or the opportunity for new Das Ed as.
As we get into 2021 is it is it the assumption that we shouldn't be thinking about next year being a more normal year I know, we used to target mid teens ads in.
In a normal year is the message Tonight that we're really thinking about next year, just given the prolonged covert environment to be more similar to 2020.
Yes, Thanks for the question, Bob and for the congratulations Mike we should and to also share a couple of thoughts and then Patrick Please feel free to share additional thoughts. So I would reinforce what you shared that as we are observing the second half.
2020 pipeline. It continues to feel very much like the second half of 2019 pipeline pre Cove it.
And what we have observed and we reinforced this in our prepared comments as well is that in the first half from a sales perspective, we did experience.
A lower performance relative to what we had anticipated as a result of of Covance.
But importantly, we do we do.
Observe from where we stand right now that that second half pipeline performance.
Is performing very much like what we experienced pre cobot and from where we sit right now we would.
I would anticipate that that would continue but with the note that this is a fluid environment.
That we continue to monitor.
Exactly how this will play out, but we didn't want to try to be transparent in sharing some preliminary observations.
As we are a highly recurring revenue model and what happens in 2020 does directly impact what will play out on the on the PNM Alan from a GAAP revenue perspective in 2021, Patrick what would you add yes.
Yes, the only item I would highlight is the difference between 25 plus percent growth in a year that did not exist.
Include covered but included bioware and approximately 20% growth in 2021 that we shared in our prepared remarks are primarily two factors, it's fewer new das subscription adds in the first half of 2020.
In a lower full year professional services dollar based net retention in 2020.
Given how they flow onto the income statement in 2021.
Okay, Great I. Appreciate this wouldn't be in a situation I guess, maybe just to take a step back then inter quarter. I believe you announce your first middle East customer I know international sounds like it's a bigger focus given the the new role expanded role of president and that being a focus of that role and just maybe a little bit on the international.
The opportunity as we look out a little further what should we expect here will this be a bigger piece of the of the growth outlook going forward.
Yes. So thank you for that additional question we were excited to sign.
That contractual relationship in the Middle East with Saudi German Hospital, we have made some modest investments in our international expansion, but I would reiterate what we shared in the past with regards to our adjacent market investments that they have been modest and that we have realized that that takes time.
For those investments to really bear fruit and so I would I would.
Suggest that there is still more time before.
These investments would become a material part.
Our income statement.
Great. Thank you.
Your next question.
Our next question comes from the line of Anthony from JP Morgan Your question. Please.
Hi, guys congrats to Patrick on the on the promotion.
Hi, My first question is as we think about next year you outlined some of the moving pieces of revenue growth, but just wondering you know how should we think about the puts and takes at the margin.
Are there any headwinds or tailwinds that we should be aware of you know should the mix shift.
Impact the margins as well.
Yeah happy to take that one in any thank you for the congratulations.
So as far as our gross margins go on the tech side.
As you've seen those were in the mid Sixtys from a tech gross margin perspective, a couple of years ago.
They have moved up to the high Sixtys, we would expect for our tech gross margins to stay roughly flat over the next several quarters given previous dynamics that we've discussed before on the professional services side.
Professional services gross margins have been in the Twentys This year and we'd expect professional services gross margins.
To continue to be in the Twentys for the next several quarters.
We would expect our technology revenue to grow faster than our professional services revenue and that means from a mix perspective, a higher mix of Tac right.
Revenue, obviously helps our overall gross margins. So we would expect our overall gross margins to be flat to slightly up over the next several quarters.
That's very helpful. Thanks, and then maybe just one on housekeeping I was wondering how much acquisition contribution that you saw it tell us about one month, what's embedded in the fourth quarter and looking to next year is it fair to think that that kind of 500 basis point delta between between that and the income 20% hit.
Stork what rate is it's related acquisition.
Yes happy to talk about the acquisition impact we shared that it was approximately by two words acquisition impact on revenue in Q3 was approximately 900 K.
It's approximately.
4 million in.
In Q4 guidance.
And as we look.
Next year, it's roughly 20 million from a GAAP revenue impact perspective, just given the deferred revenue write down that always occurs with SAS acquisitions.
Very helpful.
Thank you. Our next question comes from the line of Ryan Daniels from William Blair. Your question. Please.
Yes, thanks for taking the question and I'll add my congratulations to the team on their promotions.
Two follow ups here number one in regards to the relationship over the Middle East kind of interesting is you've got to third party consultancy that is going to be working with the.
Partners there on your operating platform so I'm curious.
In that regard number one if that's the opportunity going forward for them to kind of also help so youre solution set to other healthcare entities in the middle East and number two how do you ensure that the clients get the maximum value from it.
The Oss platform given that it's not a third party more on the services from kind of managing the use of the analytics to improve quality of care outcomes and financial results. Thank you.
Thank you for the congratulations Ryan. Thank you for those two questions. So as it relates to that announced relationship in the middle East.
There is a component of that relationship where we're going to be partnering with cop Mad.
The delivery and implementation of much of the services related items associated with the implementation of our technology and the use of that technology to drive measurable improvement.
And this was part of the reason why we could get to a comfort level in moving forward, even though we have a very modest presence in the middle East and so leveraging a partnership where theres an organization that is located there understands the region and can partner with US first in the delivery of.
Have a successful relationship with Saudi German hospital, but also to your question. We do anticipate leveraging this partnership in the future and we're going to invest extra time to try to ensure that each of our clients continues to realize those massive measurable improvements that.
All right at the heart of our strategy as a company. So we're we're investing extra time in this partnership we spent a good deal of time.
Researching and confirming that we felt good about this partnership and and and as a result and in future potential engagements will will keep that focus on.
During that those clients realize massive measurable improvement.
Great. Thank you for that and then one follow up on the sales front maybe for Patrick.
Interesting I completely appreciate the cobot related.
Packed on the pipeline services revenue, we look forward however in things hopefully normalize in the marketplace and analytics growing importance I'm curious if you think you can re accelerate the sales cycle, even more rapidly, particularly given some of the M&A activity, you've done which offers the opportunity for both Upselling and cross selling.
In which you might not have had.
Over the last two years at least to this level. So it seems like with the importance of analytics and with.
More shots on goal.
See an acceleration in growth.
Nothing beyond what normally might be the case into 2022 2023 would you have any thoughts on that.
Yes. Thank you Ryan so to your point, we do believe this pandemic highlights the need for data and analytics potentially more so than any other event in recent history.
And we are also excited about the cross sell potential from recent acquisitions that we've made also to your point.
That said, we like to be data informed when we think about.
Communicating our expectations were for performance and we certainly won't some more time to go by.
Before.
Speaking too much about.
Poured out years.
Okay Fair enough guys. Thank you so much congrats again.
Thank you. Thank you Ryan.
Thank you. Our next question comes from the line of Jessica tasks from Piper Sandler Your question. Please.
Hi, Thank you for taking my question.
Graduations on the promotion to everyone.
So I think we were interested to know just how the das Lite solution. I think are introduced relatively recently, how that's performing in the market.
And then if you could just speak to what percent of the pipeline maybe you can price. It does like nurses lack that if it's changed the sales cycle and that you've had there year to date at all.
Thank you for the question Jessica.
What I would share is that we did introduce the.
A solution that included the concept of a light version of Das that was a little earlier than we had originally planned but it was in response to the COVID-19 pandemic and we wanted to be responsive and provide.
Every meaningful suit solution that we could so we are early in that process and we have a pipeline that is developing and has developed as it relates to that us light version, but we continue to see our pipeline.
In the second half in particular performing at about the right at the same cadence that we've seen in the past and so we're still early in the process of really understanding if there are any differences as it relates to how the pipeline conversion, where the sales cycle will play out, but we should have more data.
Over the next several quarters about that.
All right Awesome and then just one follow up would be.
Could you talk a little bit about your role or potential role in that.
In distribution I think you guys pivot it pretty quickly and with respect to Covidien capacity planning to get any dilution on that you're working on or anticipate being able to modify to help with the vaccine distribution.
Eventually that long.
Yes. Thank you for that additional question. We're obviously encouraged by some of the recent news with regards to vaccine development and and potential pending approvals.
And as we have in other ways in response to the pandemic, we do anticipate providing meaningful analytic support.
And and planning support as it relates to the distribution process for each one of our health system clients. We already have an infrastructure in place of the data platform layer and at the apps there that can be customized and modified towards that specific and so we we do anticipate that will play a meaningful role from an analytic support perspective.
Thank you.
Thank you. Our next question comes from the line of Sandy Draper from Securities. Your question. Please.
Thanks, very much and I'll echo congrats all around to everyone.
Great connections and I'd also say, Dan nice to see all internal it really I would think with this it's fair to people, saying that upward mentality within the company. So nice shot there.
I did get on a little late to I'm not sure I caught the tail end of summer Patrick's comments.
I was trying to understand the outperformance in the third quarter, but the same comments about.
Sales I'm, just trying to understand if sales didn't pick up.
What caused the outperformance not just I think you said a million dollars and the acquisition, but outperformance relative to expectations.
There wasn't sales I'm, just trying to sort of bridge that better number in the quarter, but not talking about better sales environment. Thanks.
Yes of course, Sandy and thank you again for the kind words so.
So when we think about outperforming over a short time period. It is from a closing new business earlier than expected or expanding within our client base earlier than expected. Those are typically the two largest drivers.
And I would say that the largest driver this past quarter is our technology dollar based net retention performing very robustly.
It is performing strong similar to performance the prior years and one of the reasons that is is because the use of data and analytics is extremely valuable during the pandemic and the usage of our software is up 40 plus percent since the onset of this pandemic.
Send the amount might also add just to your first comment. Thank you for for calling out that that what we have announced is meaningful opportunities for individuals to be promoted from within the company and that is certainly a part of our long term strategy.
And our focus on team members as we went every team member to feel like they have a bright future and an incredible career path and so we do have a default position.
We're excited to see existing team members qualified for promotions. It isn't the case in every circumstances, but but we are excited when that occurs and that is our default position. So thanks for calling that out.
Thank you. Our next question comes from the line of Elizabeth Anderson from Evercore. Your question. Please.
Hi, Good afternoon, guys. Thank you so much for the question and congratulations on the promotion.
My question is on the.
Cash balance in the quarter I was just wondering how you guys are thinking about that in terms of the obviously ongoing Craig called my situation what opportunities might that pay guidance.
In terms of conserving some cash but also in terms of potential acquisition opportunities.
For sure. Thanks, Melissa so to your point, we have approximately 275 million of cash and cash equivalents.
And there was not a significant amount of cash needed for ongoing operational needs.
Since we continue to expect to begin 2022 on a run rate adjusted EBITDA breakeven basis.
So given that the vast majority of cash can be leveraged for M&A purposes.
And as we've shared previously we continue to believe we have significant opportunity on the M&A front, we will be disciplined but we're excited to have the cash to be active on that front.
Okay, perfect that sounds like no no change from there from your prior operating process for that that's helpful to hear.
And then my second question is in.
In terms of you were very clear answer came at the revenue contribution from idle plant, but I was wondering if you could comment on the.
The impact on revenues in the quarter from how pension able house just intense on the revenue line that would be helpful. Thank you.
Happy to so as a reminder for everyone. We closed two other acquisitions able health and health Finch earlier this year.
Various points in time.
Those were for much smaller purchase prices that might aware and primarily a technology and naval meant.
Thesis around M&A for those acquisitions so.
So we shared that they had.
At time of deal an immaterial impact.
On our GAAP revenue in 2020.
And would continue to share that information given their kind of much smaller and more focused on product enablement their revenue contribution as a good bit smaller.
I would add at the same time Elizabeth that we are encouraged by some of the early signals from our customers with regards to the cross sell opportunity of these additional solutions.
But we do expect that will take a number of quarters to play out.
Okay. That's helpful color. Thank you.
Thank you. Our next question comes from the line of Stephanie Davis from SVB Leerink. Your question. Please.
Thank you for taking my question again, let me add to the congratulations Patrick Great Newby.
Thank you Stephanie.
Last we spoke very clean way, finding a pretty dire note for second half professional services looking at the ports you guidance it came in much better than expected.
Could you walk us through maybe what changed that made you get more comfortable with it sort of uptick or have anything changing the point on the headwind on the environment.
Yeah of course happy to share.
Additional color there to your point, we have shared for the last several months that our professional services dollar based net retention, we expect it to be lower than historical levels in 2020.
In the prepared remarks, we shared that we would expect it to be in the low to mid Ninetys. So we wanted to quantify that a little bit more for investors. So I would say, it's been a relative consistent performer.
Performance compared to expectations at least for the last few months.
Where we have been performing quite well.
I would say better than our expectations as a few months ago is our technology revenue line. Our technology dollar based net retention has been minimally impacted.
From the onset of this pandemic, we'd expect it to be roughly similar to past years, given just the usage of our software has never been higher onto the outperformance is primarily on the technology side.
I said.
And then.
I guess now that you've had NBC, especially where it has been announced for about two hours now.
Walk us through your priority for your first year and then we created president he wasnt here your goals for the role.
Yes happy to share some thoughts.
So I think that's right. It's a long time to think of it.
Yes.
Thanks Juan.
Im personally very excited for us to continue to fulfill our mission.
And help ultimately accelerate a future where all health care decisions our data informed.
We I think are in the very early stages of the healthcare ecosystem adopting data and analytics and I wont to help us get there faster and to help with that adoption hepatic dot adoption accelerates. We also at health catalyst sit in a very strategic position.
In the sense that we can help our customers find insights in all types of data and that gives us a lot of expansion potential to help customers generate more value from data informed insights across their business.
So I am personally very excited for that as we think through to 2021, we have shared that we believe the impact of co that is a medium to long term tailwind Bennett.
And it highlights the need for data and analytics. So we wont to be ready and invest ahead of getting a getting ahead of that tailwind that we believe.
Cody creates and Stephanie I would just reinforce that.
As I mentioned in our prepared remarks, we've been considering the timing of the introduction of the president role for over a year now and to Patricks last point, there I think the sense that we're heading into a year in 2021, where we may well start to feel the effects of some of that those.
Medium term tailwind.
It was definitely informing my discussions with the board and our decision.
As a full board to move forward with this position so that we're in in the best possible place.
To to accelerate that tailwind and enable greater adoption of data and analytics and we're excited to see that play out.
Given the magnitude of the opportunity to patch a need to hire more folks underneath them or do you think this is something that can add a little bit more structured a little bottom dropouts.
Yes, I'm happy to provide some thoughts there we've shared before that we have made significant investments in building out a robust sales and marketing infrastructure to be able to sell a fairly.
Hi, dollar product to the C suite at these large organizations. So given we have made significant.
Significant investments in sales and marketing, we feel like a large number of those investments can be leverage over the next several years.
All right that's helpful. Thank you.
Thank you thanks, everyone.
Thank you. Our next question comes the line of John Ransom from Raymond James Your question. Please.
You may have your phone on mute.
Hi can you hear me, yes, we can hear you now.
Sorry.
So just a couple of questions for me.
As we think about the long term growth and mix that your business is there anything changed positive or negative that than your path to EBITDA positive in the future.
No.
We continue to feel very good John about what we've shared previously that we plan to begin 2022 on a run rate adjusted EBITDA breakeven basis, and we're continuing to plan towards hitting that same time horizon.
As Patrick mentioned earlier, we are starting to observe.
And expect that over the next few quarters, we may see it our mix of revenue.
Are you a little bit more towards technology growth.
And a little less from a services perspective, and we expect with the various puts and takes that that would keep our gross margin profile.
Neutral to slightly positive.
Thank you and second question would be as you think about your R&D and you think about any.
Product holes that you might have where where should we think about you investing.
Either M&A or R&D over the next two or three years that might be the same or different than where you have invested in the past.
I would reinforce were following the same model that we've discussed in the past and that is focused in two primary areas. So the first is that the apps layer, where we are.
We continue to benefit from lots of interactions with their clients and an understanding of which app categories, whether their clinical financial or operational categories really yield the greatest opportunities for measurable improvement.
And as we identify areas that our clients consistently are asking for help.
And we identify gaps in our technology offering that will inform both our R&D investment decisions as well as our M&A decisions that will be the first major category. The second major category of M&A as we've discussed previously would be to accelerate our performance at our presence in adjacent market areas and.
As we've discussed in the past two of those areas that we focused on have been life Sciences and international So that will continue to be part of our framework for M&A moving forward and I would I would conclude this answer by just Reemphasizing something that Patrick mentioned, which is we also feel it's very important for us to re.
Remained disciplined in evaluating opportunities and ensuring that we feel very good before we move forward as.
The integration process is significant we understand that and so we will try to remain disciplined.
In what we pursue.
Great. Thanks, so much.
Thanks, John.
Thank you. Our next question comes from the line of David Grossman from Stifel. Your question. Please.
Thank you.
You know you guys did a great job Im just articulating you know kind of the current trends in the business and how that may impact the not only the fourth quarter, but next year or so.
Based on what you described is it logical to assume that this professional services growth.
In the first quarter would probably look similar to the fourth quarter and then improve its comps is well tech revenue would be off modestly next year, but probably a little more heavily weighted to the first half just to reflect that one half you know 20 bookings experience.
Yes, David you're generally thinking about that trend correctly.
On an overall note we would expect 2021 annual professional services revenue growth, but it to be below the overall, 20% estimate and on the technology side, we would expect robust 2021 revenue growth just like we've seen robust.
2020 technology revenue growth.
So the Fourq you kind of implied tech growth is a good proxy for kind of the kind of momentum to bring into 2021.
Yes, as we think more specifically about 2021, we want to wait another quarter or so before providing.
Too much detail into the exact makeup of 2021 overall revenue, but I would share that we would expect.
Overall, our technology 2021 year over year.
Revenue growth roughly similar technologies 2020 and.
Annual revenue growth.
And similar on the professional services side, we'd expect 2021 annual professional services revenue growth to be similar to 2000 Twentys annual professional services revenue growth.
Okay got it thanks very helpful. Thank you for that and then you know that God forbid we have a second wave I mean, do you have a thought or some insight into.
You know what the impact would be on your business compared to the first do you think your client base, it's really kind of adjusted to that shock and you know if there were a second wave that they would probably not have the type of disruption on your business that the first wave.
Yeah, Great question, David we do feel that our clients are better prepared now certainly than they were for really the past two waves that we've experienced and we even saw a meaningful improvement in the preparedness and the infrastructure that was in place.
Between the first wave and the second wave that we experienced in the in the summertime Likewise, we're encouraged to see.
Significant scientific advancement in the use of therapeutics that have been very effective and we've been directly involved in some of the research associated with those therapeutics through our our touchstone.
Activities with various national organizations. So that's another component as I think helps us and then.
That's certainly further helped by the progress overall with regards to vaccines and and so while we recognize that this is a fluid situation we're staying very.
Very closely in communication with each of our clients in almost every case, we feel much better prepared with.
With our clients to handle.
This this next few.
A few months.
Okay, great. Thanks, very much very helpful.
Thank you. Our next question comes from the line of Glenn San Angelo from Guggenheim Securities. Your question. Please.
Oh, yeah. Thanks for taking my question.
Dan I just want to follow up on some of your prepared remarks, you made with respect to the dollar based retention I think if I heard you correctly you seem to suggest that the dollar based retention would be normal on the technology side below on the professional services side and I Wonder if you can help us maybe compare that to.
The 107% to 109% retention you had you know over the three prior years and I'm I'm trying to think about that retention rate and reconcile that.
Patrick's comments with respect to the 2021 revenue growth you know, particularly ex the acquisition contribution so any any sort of clarification or color you can give us on that thank you.
Yes. Thank you for the question Glenn So I will share that prior to 2020, what we've shared in the past has been a general observation that in prior years, we had observed that the tech and services dollar based net retention percentages were roughly similar to the.
Overall performance, we didnt observe significant differences between tech and services that is not the case in 2020, we see a meaningful difference between our tech and services dollar based retention and to Patrick's earlier comments, we wanted to to be transparent and helpful. In Q.
On to find what we're observing on the services side.
As a meaningful difference this year versus what we've experienced in prior years I would also reinforce the.
The comments and the observations that you made that were that were also supported by our prepared remarks, which is that our technology dollar based retention has been strong and robust and consistent with what we've seen in prior quarters and as Patrick mentioned.
A few minutes ago.
If we re round the clock and thought about what we might have projected we're performing a little ahead of what we would have projected from a technology dollar based retention and really not seeing any degradation as it relates to our 2020 performance relative to prior years and we expect moving forward.
As Patrick mentioned, a few minutes ago that bill.
Because we are a recurring revenue business model and and so much that happened. This year will play out next year, we would expect those 2021.
Revenue dollar based retention numbers to play into the revenue growth rates that you might expect for technology and for services in 2021 to look very similar to the revenue growth rates that we're observing in 2020 for tech and services, which are different.
Whereas in prior years, they've been more similar.
Okay. Thank you very much.
Thanks, Glenn Thanks.
Thank you. Our next question comes in line of Sean Dodge from RBC capital markets. Your question. Please.
Yes, thanks, and good afternoon, maybe.
Going back to the non head count expense items add one Patrick you mentioned being pushed into into the fourth quarter can you give us just a couple of examples of what those are maybe some book ends around the magnitude and then just some thoughts on are they recurring or are these something phase.
We should expect to carry into next year.
Yes, Sean happy to provide some color so the.
A significant majority of our expenses, our salary and benefits related our team member head count related. However, we do have a minority but a material portion of our expenses that are associated with third party contractors or third party sales and marketing type expenses those are the non head.
Count expenses I was referring to.
These can be you know the swing in any one quarter.
Can be up to a few million just given that the way we manage the business as far as expense management goes is typically on an annual basis. So we enable managers to.
To move non headcount expenses between quarters and that can lead to a slight differences in expectations.
Versus actuals in non head count expense in any one quarter.
Got it Okay. That's helpful and then.
The transition of your hosted clients to is your can you give us a quick update on our progress there or are those migrations on track has there been any.
Disruption in that fund the pandemic and then maybe just a quick reminder, when you expect that.
That could be a complete.
Yes, happy to Sean so depending did slow that migration down a little bit, but we're seeing more of a.
US being back to a normal cadence in the second half of this year. So we do anticipate that that migration to the Azure environment will continue.
At a similar pace to what we're experiencing here in the second half, but we'll still take over the next two years or so to to really complete that migration.
Got it okay. Thank you again.
Thank you.
Thank you. Our next question comes from the line of Brian Hoffman from Canaccord Genuity. Your question. Please.
Hey, This is Brian Hoffman on for Richard close.
Following up on Glenn's question I wanted to drill down a bit more into the lower dollar based retention that you mentioned and professional services.
I'm curious if that's related to the pricing discounts that you have talked about over the last couple of quarters due to coated and or is that related to customers, maybe just not renewing their contracts at the same levels.
The color you can provide to help us understand that better would be helpful. Thank you.
Yeah happy to.
It is not related to the short term professional services pricing discount that we provided to customers.
Those mostly impacted our GAAP revenue in Q2, but there was a little bit of spill over in Q3.
So the lower professional services dollars resident retention.
From a few factors so first I would share that the vast majority of our team members continue to be deployed at customers and are helping them with analytics initiatives associated with coated and other analytics improvements.
That were helping to facilitate that said this year compared to a year ago. There are select number of customers that are choosing to use.
Fewer number of services resources than they did a year ago.
And also the onset of this pandemic, causing financial uncertainty for health systems has meant we've had fewer expect professional services expansion opportunities this year compared to the previous year. So those are the primary primary drivers of lower professional services.
Dollar retention this.
This year.
Great. Thank you.
Thank you. Our next question comes from the line of Steve Halper from Canaccord Fitzgerald. Your question. Please.
Cantor Fitzgerald.
So the 20% number that you talked about.
For 2021 revenue growth I, just want to make sure that includes vital where is that correct.
That is correct Steve Okay.
I'm good thank you.
Thank you.
Conclude the question and answer session of today's program I'd like to hand, the program back to Dan Burton for any further remarks.
Alright. Thank you again for your interest in health catalyst for your participation in todays earnings call. We look forward to staying in touch in the months ahead take care.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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