Q3 2021 Definitive Healthcare Corp Earnings Call

Greetings and welcome to the definitive healthcare third quarter 2021 earnings call.

At this time all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Brian venue from ICR. Thank you you may begin.

Good afternoon, and thank you for joining us today to review definitive health care of <unk> third quarter 2021 and financial results.

Turning the call today are Jason cramps definitive healthcare, its founder and CEO and Rick Booth definitive healthcare CFO.

During this call we will make forward looking statements, including but not limited to statements related to our market and the future growth opportunities the benefits of our health care commercial intelligence solutions, our competitive position customer behaviors, our financial guidance, our planned investments and the anticipated impacts of the COVID-19 pandemic on our business and results of <unk>.

Operation as well as on our clients the health care industry generally and the macroeconomic environment.

Any forward looking statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.

Forward looking statements involve a number of risks and uncertainties, including those discussed in the risk factors section of our filings with the SEC.

Actual results may differ materially from any forward looking statements.

The company undertakes no obligation to revise or update any forward looking statements to reflect events that may arise. After this conference call, except as required by law.

For more information. Please refer the cautionary statement included in the earnings release that we have just posted to the Investor relations portion of our website.

Additionally, we will discuss non-GAAP financial measures on this conference call.

References during this call the profitability on an adjusted EBITDA basis.

Is it for the tables in our earnings release on the Investor Relations portion of our website for a reconciliation of these measures the most directly comparable GAAP financial measure.

With that I'd like to turn the call over to Jason.

Thanks, Brian.

I would like to welcome everyone to definitive health Care's third quarter earnings call. Our first as a publicly traded company.

We were thrilled to complete our successful IPO in September which was an important milestone for the company.

However, as proud as I am of everything that we have accomplished so far I know that we are just at the beginning of delivering on our vision to be the premier provider of health care commercial intelligence.

I want to thank our investors for their confidence and definitive healthcare and thank every one of our employees for all they do everyday to make our customers successful.

On today's call I want to start by reviewing our success in the third quarter.

Then since they didn't have the opportunity to meet all of you during our IPO Roadshow I'll provide a brief introduction to our business our strategy and the market opportunity we are targeting.

Let me start with a quick review of our third quarter financial results.

For the third quarter, we continued to deliver in the three financial characteristics that make definitive health care, a unique investment opportunity, which are the combination of high growth high profitability and a tremendous amount of visibility into our future performance.

From a growth standpoint, we delivered total revenue of $43 1 million, which represents 43% year over year growth.

At the same time, we continued to produce exceptional profitability as indicated by our adjusted EBITDA of $15 5 billion, which translates into a 36% margin as well as our unlevered free cash flow of $11 5 million.

Finally, we continue to produce revenues that are almost exclusively subscription based and the majority of which are multiyear contracts.

Rick of course will dive into these numbers in much greater detail, but before I hand, the meeting over to him I'd like to dive into our business and what I believe makes definitive such a special company.

As we all know the health care sector is huge it's a four trillion dollar market that represents 18% of annual U S GDP and touches over 300 million patients in the U S.

However, in addition to being large health care industry is constantly changing and meaningfully more complex than other industries, creating huge challenges for the companies that sell into health care.

That is where we come in.

I found the definitive health care to help companies analyze navigate and sell into the complex health care ecosystem.

We bring clarity and in depth knowledge of the entire market and we have a deep understanding of the interconnected relationships between physicians hospitals providers insurance companies government regulators and the patients themselves.

Let me provide you an example of what this complexity looks like.

A pharmaceutical company developing a new drug.

To be successful not only does this company need to develop a new cutting edge technology that provides benefits beyond the current standard of care.

But they also need to convince multiple parties of the value of this drug including physicians, who utilize their product hospitals, where the procedures taking place the patients who ultimately take the drug and the insurance companies and government agencies that will pay for it.

We help companies across this whole process.

First by helping them identify the best experts from around the globe to assist in designing new drug trial protocols.

And then as the company progresses towards approval and beyond we helped them size their markets and segment positions with our advanced analytics trends and we layer in payer reimbursement to help them develop and execute upon the optimal commercialization effort.

But let's take a telehealth company.

A health company needs to not only understand existing technology infrastructure at a hospital or a physician group.

They also need to understand the web of relationships with physicians and surgery centers and how this is changing over time.

Finally, if I can understand the distinct business problems of their targets, perhaps as a quality problem or a customer service problem. They can go to market with exactly the right message to make sure they can grow as quickly as possible.

We provide the intelligence and insight at every provider across the healthcare ecosystem to help our customers develop go to market strategies as well as the tactical information like position location data and executive information to execute upon those strategies.

So how do we do it we.

We have defined a new category called health care commercial intelligence, which provides customers with a comprehensive integrated picture of the entire health care system. We.

We do this by combining three key elements.

First we are comprehensive in depth and proprietary intelligence on health care providers across the entire continuum of health care.

We track every provider across the U S, including physicians hospitals imaging centers skilled nursing facilities and much more.

We understand the complex affiliations between these organizations to provide deeper insight on the care they provide and their underlying business.

We have collected and built this proprietary hub of information over the last 10 years from hundreds of thousands of different sources, including websites industry journals publications and over 700000 phone calls that our teams make every year.

Second our proprietary AI engine takes the information that we gather from these hundreds of thousands of sources and a pub and apply sophisticated data science techniques to cleanse it link it and create new intelligence.

I like to call this our flywheel of innovation.

With our flywheel of innovation, we are constantly adjusting new information and we are applying new algorithms to our data to create new insight for our customers.

And over the last 10 years, we have been able to create a comprehensive view of the entire health care ecosystem that doesn't exist anywhere else.

And now that we have that hub of intelligence, we can innovate at an even more accelerated pace by creating new powerful predictive insights with information we already have.

And finally all of this is delivered through a modern intuitive SaaS platform that puts the right information in the hands of customers to make real time actionable business decisions.

We have product has the ability for customers to quickly analyze and act, thereby increasing their chances of commercial success in the complex ecosystem.

So who do we sell this offering too.

We play in an extraordinarily large market, we sell to anyone who wants to sell into or compete within the complex health care ecosystem.

This includes life sciences organizations like biotech and medical device firms health care it companies health care providers themselves like hospitals and large physician groups.

The whole group of diversified companies. These are companies that sell to many industries, but understand that healthcare is a critical market and to succeed in health care require specific commercial intelligence.

These companies include organizations as varied as commercial real estate firms food suppliers and wood flooring companies.

In total there are over 100000 companies that we believe are potential buyers of our product and today, we count less than 3% of these companies as customers.

As a result, we estimate our Tam to be $10 billion and growing every day as health care continues to expand and we continue to innovate and develop Tam expanding disruptive products.

We hope all of these customers solve a broad range of high stakes business problems, including sales and marketing, where we help our customers utilize our platform to access actionable intelligence that generates highly targeted go to market strategies and effective marketing campaigns.

We also help our customers with clinical research and product development, where they use the definitive health care platform to identify experts across the globe within a specific disease area in order to find important sites for clinical trials and make data driven investment decisions.

Our customers also use definitive healthcare and developing their strategy they sized markets and understand therapeutic adjacencies to make better business decisions about investments and new therapeutics diagnostics and technologies.

We help our customers with talent acquisition by helping them identify and engage the right candidates for health care roles, including nurses physicians and hospital executives.

And finally physician network management.

This is a multibillion dollar problem for the industry.

We help our customers strengthen their networks by identifying the most attractive physicians and then we help them understand existing referral patterns and affiliations and importantly, how are these changing over time.

These are all high stakes problems for our customers that the definitive healthcare platform help solve.

And as we innovate every day, we are constantly coming up with new ways to solve even more important business issues for this critical sector.

As you look at how we have disrupted the market. We have created something that is highly unique and proprietary.

Our customers tell us that our platform has many unique advantages available nowhere else, including deep healthcare expertise.

A full comprehensive 360 degree view of the entire market.

Modern integrated platform.

<unk> is our insights to provide immediate insights as opposed to long expense of one off consulting engagements.

As we look to the future we are incredibly focused on continuing our trajectory of high growth and profitability.

We'll do this in four key ways.

First we will continue to acquire new customers by making significant investments in sales to grow our team and in marketing to generate more inbound demand.

With less than 3% penetration today into a market opportunity of 100000 companies, we have significant opportunity ahead of us.

Second we will continue to expand within our existing client base.

We have a land and expand model that has been highly successful as evidenced by our strong net retention rates with our enterprise customers.

We can expand within our existing client base by adding users moving into new functions or therapeutic areas are selling them new product modules.

In fact, we have 14 modules today that we can sell to existing customers and a typical new customer will buy just over to <unk>.

Leaving a substantial opportunity to grow and expand these relationships.

Third.

We will continue to innovate.

In fact, this innovation will accelerate as we're able to leverage our proprietary hub of intelligence to create new insights more and more quickly off of data we already have.

This innovation will continue to expand our product portfolio, which provides additional opportunities to increase wallet share with customers and to expand into new markets, our new functions within our existing customers.

For example, we rarely sold to health care providers three years ago.

But as we innovated and created more intelligence and tools to develop and manage physician networks. Our products has become a natural fit and we have seen rapid growth in this new large market.

And finally, we will opportunistically pursue strategic acquisitions.

While nearly all of our growth historically has been organic we have made selective tuck in acquisitions that enable a new capability or extend our dataset, which can be applied to our existing customers.

We maintain an active M&A pipeline and being public provides us with greater flexibility.

We believe selective acquisitions can be an efficient way to accelerate product innovation and extend our value proposition.

With that background, let's look at our third quarter performance in more detail.

We had a great quarter across the board with strength in each of our core markets from life Sciences to health care it to diversified companies, who want to sell into the health care ecosystem.

Like to highlight several of our key wins in the quarter.

In the life Sciences space, we had several six figure new logo wins, including a large pharmaceutical technology company that chose definitive healthcare to accelerate its push into the hospital and health system market.

This customer has a new drug delivery implant recently approved by the FDA and have found significant value in our intelligence about executives affiliations procedure volumes and doctors.

Notably this customer plans to incorporate our hospital data into its Viva installation to improve the quality of the data and its CRM.

We had multiple wins this quarter with technology vendors as well.

One of these customers was a cloud based electronic health record vendor that targets small practices with less than 10 doctors.

This customer selected definitive health care to size segment, and then sell more effectively it is very hard to reach market.

It also will use our technology stack data to analyze its competitive landscape.

Additionally, we signed a six figure deal in Q3 with one of the market leaders in the electronic health record market.

This customer plans to use our platform to identify which practices are using its competition software.

Understand usage data like hospital bed counts and clinical metrics.

And gain insight into the nature of the practices patients using claims data.

Finally, we had a number of big wins that diversified companies, who are looking to sell into the health care market.

For example, one of the world's leading venture capital firms signed a significant deal with us to help them size and evaluate the market for potential investments in the health care space.

In addition, what are the largest global logistics providers subscribe to the definitive health care platform to help validate location and address data and ensure accurate package delivery.

We also had two construction companies sign on in Q3 to leverage our hospital view product to identify growing hospital systems that might need new facilities or other infrastructure improvements.

These are just some of the many deals we signed in Q3.

I want to thank all of these customers for their partnership and congratulate our hardworking commercial team on their success.

Definitive healthcare continues to deliver product innovations in response to customer demand.

Some of these recent innovations include an expansion of the physician view product to include new intelligence around physician specialties.

Which allows clients to precisely target healthcare providers based on specific areas of focus.

Users can now Leverages claims based specialty data to identify individual physicians more accurately which means companies can sharpen their sales strategies with a better picture of their audience.

In the quarter. We also expanded our hospital view product to include new intelligence around organization charts.

This new feature enables users to easily map out of hospitals different departments and sub departments to understand the many layers of management and to identify the right people, who may be searching for their product or service.

And our Monaco product line, we made significant enhancements to our expert profiles, including adding index medical keywords to publications clinical trials grants and industry payments.

These additions make it even easier for medical affairs professionals to identify exactly the right clinical and scientific expert to assist in product development.

Before I turn the call over to our CFO, Rick Booth I wanted to take a moment to highlight the recent announcement that Robert Musselwhite has joined our executive leadership team is definitive healthcare's president.

Robert It's one of the brightest minds in the health care industry.

Having served as a longtime CEO of the Advisory Board company and most recently as the CEO of Optum insight.

We were thrilled when Robert joined definitive healthcare Board of directors earlier, this year, where he immediately made important contributions to the company.

As Robert learn more about our vision he appreciated the size of the market opportunity and wanted to take a hands on role.

I'd also like to welcome Kathleen Winters to our board of directors Cathy.

Kathleen is an accomplished finance and operations executive most recently, serving as the Chief financial Officer of ADP.

Her experience at ADP as well as her prior experience at the fast growing MSCI will be invaluable to definitive healthcare and our board.

We're thrilled to have Kathleen joined the board and I'm confident that we will benefit from her expertise in multiple areas.

To wrap up I would like to take a moment to thank all of the creative energetic and dedicated employees of definitive healthcare.

It is this amazing group of talented individuals that leads to our success.

And it is these individuals who have created a culture of collaboration and decisiveness and inclusion and honesty.

And it is these individuals that are working hard everyday to help our customers transform health care as we know it.

Definitive healthcare delivered excellent third quarter results that reflect the strong momentum we have across all parts of our business.

Customers and prospects increasingly recognize our ability to solve some of the most challenging and valuable issues facing their business.

We believe we are well positioned to continue to deliver an attractive and unique combination of growth profitability and high predictability for the foreseeable future generating significant value for long term shareholders.

I'd now like to turn the call over to Rick Booth to walk you through the numbers Rick.

Thanks, Jason.

Q3 was a strong quarter.

<unk> revenue growth.

<unk> profitability.

Today is our first earnings call as a public company I will start with a brief overview of our business model from a financial perspective.

Then provide a detailed review of our third quarter results before finishing with our outlook for the fourth quarter.

Therefore, the full year 2021.

And all my remarks, I will be discussing our results on a non-GAAP basis, unless otherwise noted.

Turning to our business model.

To me, it's gonna do demonstrate many of the best attribute to vertical software business model.

Hi, Greg.

Triptan business.

Going into a $10 billion.

Total addressable market with single digit market penetration.

Operating profitably due to high gross margins and very efficient customer acquisition and product development engines.

And finally.

Our upfront billings and low capex requirements help us translate our profit sufficiently into cash flows and shareholder value.

Our revenue from there.

Almost entirely from subscriptions to our platform.

We had excellent forward looking visibility through our predominantly multi year contracts and high net dollar retention rates.

And finally billings are in advance of the usage most commonly on an annual basis, which resulted in very strong cash flows.

We have high gross margins due to our multi tenant platform.

Our go to market model is very efficient as evidenced by our very high LTV to CAC ratio.

And finally, our product development engine efficiently deliver its an ongoing stream of innovation.

Turning to quarterly results.

Our Q3 results illustrate how this business model plays out in practice.

Highlights of the quarter.

43% revenue growth compared to Q3 2020.

33% adjusted EBITDA margin.

38% Unlevered free cash flow margin on a trailing 12 month basis.

And revenue growth plus trailing 12 month unlevered free cash flow.

Equals 81%.

Relative to the traditional rule the rule of 40 or rule at 70.

Turning to our results in more detail revs.

Revenue for the third quarter was $43 1 million.

Up 43% from prior year.

The growth rate reflects 900 basis points of benefit from the acquisition of <unk> in October 2020.

The growth was above our long term targeted organic growth rate to 30%.

Even without Marco.

This revenue growth was driven by strong sales momentum.

We now have 377 enterprise customers defined as customers with over 100000 in annual recurring revenue.

This was an increase of 125 year over year.

Enterprise customers are the majority of our IRR and a key focus of our go to market efforts.

When you include smaller customers, we ended the quarter with 2000 and 761 customers.

From 2000 and 370 in Q3 2020.

We're pleased with the strong consistent revenue growth, we're realizing across our entire customer base and in particular from our enterprise customers.

We expect their share of our overall revenue will continue to increase.

And the strong retention rates within this cohort reflect the value customers get from our platform.

As well as the multiple opportunities we have to expand our offerings over time.

Gross profit was $37 $7 million.

Up 38% from Q3 2020.

Gross margin of 88%.

Was down from 91% in Q3 2020 due to recent investments to add prescription claims data.

Prescription data represents a significant opportunity for us to innovate and expand our upsell opportunity within life Sciences.

And we expect to leverage these investments over time as we did with medical claims information.

Sales and marketing expense was $13 7 million.

67% from Q3 2020.

As a percentage of revenue sales and marketing expenses were 32%.

Up from 27% of revenue in Q3 2020, as we continue to invest in our targeted digital marketing capabilities.

Inside sales team and strong customer success function.

We have a proven and efficient go to market motion.

As evidenced by our 10 times LTV to CAC ratio.

And we're in the very early stages of growth in this $10 billion market, we're committed to steadily building out our sales demand generation capabilities.

Product development expense was $4 4 million up 74% from Q3 2020.

As a percentage of revenue product development expenses were 10% of revenue.

Compared to 8% in Q3 2020.

Our ability to leverage existing datasets to launch our enhanced multiple products enables us to very efficiently expand the value our platform delivers for customers.

We have an extensive list of innovation and enhancements underway on our product roadmap and we plan to continue to invest in product development.

G&A expense was $5 4 million.

Up 140% from Q3 2020.

As a percentage of revenue.

G&A expense was 13% of revenue.

Up from 8% in Q3 2020.

G&A expense in the third quarter reflected incremental operating expenses related to operating as a public company.

And over time will generate operating operating leverage from G&A as we grow into these fixed costs.

But fourth quarter will reflect a full period of public company costs versus the partial quarter that we had this quarter.

Operating income was.

It was $13 7 million down 3% from Q3 2020.

As a percentage of revenue operating income was 32% of revenue.

Compared to 47% in Q3 2020.

The year over year change in margin is related to four key investments.

First.

Continued investments in sales and marketing.

Okay.

The increased costs required to operate as a public company that are reflected in G&A.

And third investments in prescription data, which are reflected in cost of goods sold.

And finally, the acquisition of Monical Streeteasy.

Strategically will help drive long term growth and profitability, but it has a short term drag on EBITDA margins.

EBITDA was $14 4 million.

Compared to $14 5 million in Q3 2020.

EBITDA margin of 33% was down approximately 500 bps from 48% in Q3 2020.

Due to the investments noted above.

Net income in Q3 was $2 2 million.

<unk> per diluted share based on $149 7 million weighted average shares outstanding.

Turning to our balance sheet and cash flow, our IPO provided $452 million of net proceeds, which we used to strengthen our balance sheet and replace our debt with lower cost financing.

We ended the quarter with $190 million of cash and $272 million of debt.

Our <unk> 3 million of net debt.

Results in one four times net leverage which is a substantial reduction from seven six times in Q2 before the IPO.

We view this strong balance sheet as a strategic asset.

We're very comfortable operating at current leverage levels, while knowing that we have additional capacity for M&A or other needs.

It's been it has high margins upfront billing and low capex requirements provide substantial free cash flow generation.

Historically this cash flow has been strongest in Q4 and Q1 due to the timing of year end invoicing and we expect that trend to continue.

As a result, we believe looking at cash flow during the trailing 12 months basis provides the best view consistently strong cash generating capabilities of the business.

Operating cash flows were $29 $7 million on a trailing 12 month basis up from $16 2 million in the comparable period a year ago.

Looking at Q3 on a standalone basis.

Q3 is traditionally our low point in quarterly operating cash flow due to the timing of year end renewals and collections.

In Q3 operating cash flow was.

Zero point $9 million use of cash.

Compared to 0.8 million source of cash in the prior year due to both normal seasonality and a $4 9 million one time payment of accrued interest associated with paying off our prior debt.

Going forward, we will benefit from both the lower debt balances and the improved rates associated with our new bank facility.

On a trailing 12 month basis Unlevered free cash flow was $59 1 million.

38% Unlevered free cash flow margin.

Effectively converting 106% of adjusted EBITDA into cash.

Looking at Q3 on a standalone basis, Unlevered free cash flow of $11 5 million.

That 27% Unlevered free cash flow margin due to the seasonality you discussed about.

Turning to our tax structure.

Definitive has a very efficient tax profile cash taxes are expected to be less than 500000 in 2021 and.

And rates are expected to remain low in the short to medium term.

Even in the long term.

Pro forma tax rates are expected to be below 25%.

I mean guidance.

Definitive operational and metric driven management philosophy carries over to our guidance.

Guidance is based on a bottoms up operating model.

And excludes any new M&A or changes in capital structure.

We will guide the fourth quarter of today, and we will update full year 2022 in Q1 2022 in our next call.

In general.

The extent yogurt performed on revenue.

C to reinvest this upside and incremental growth opportunities rather than maximizing short term profitability, although that will vary from quarter to quarter.

I'll now turn to specific guidance, beginning with the fourth quarter.

As a reminder, we acquired <unk> in October of 2020, So Q4 will be the first quarter with Monaco in the year ago period.

In Q4, we expect total revenue between 44 and $45 million for medium growth rate at 32%.

Non-GAAP income from operations of 11, five to $12 5 million.

Adjusted EBITDA.

12, five to $13 $5 million.

Non-GAAP net income of $6 million to $7 million.

We're four to five cents per diluted share.

On $148 6 million weighted average shares outstanding.

This means for the full year 2021.

We expect total revenue of $164 million to $165 million.

Non-GAAP income from operations of $52 million to $53 million.

Adjusted EBITDA of $55 to $56 million.

And non-GAAP net income of $13 million to $14 million.

For diluted.

And.

Earnings per diluted share to be between eight and nine cents.

$148 5 million weighted average shares outstanding.

So in conclusion.

To summarize we're in the early days of penetrating a large and attractive market opportunity.

We have clear plans for durable highly predictable and profitable revenue growth over a multiyear time horizon.

And we believe executing on this plan combined with capital efficiency will create shareholder value for a long time to come.

I look forward to updating you on our progress.

And with that we can open the call to questions.

Thank you we will now be conducting a question and answer session. We would like to ask a question. Please press Star then one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

Press Star two if you would like to remove your question from the queue.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the pause.

One moment, please while we poll for questions.

And our first question today is going to come from Sterling Auty with J P. Morgan.

Yeah, Thanks, Hi, guys. So I.

I Wonder if you could characterize for us how much of the growth in the quarter actually came from new customers that you added versus actually upselling, either more muscles or more seats into your existing customers.

It's a great question Sterling, we had strong growth contributions from both one of the great things about our predictable business model. However is that the bookings in any given period have only a marginal impact on the reported revenue so really youre seeing strong expansion in the revenue from existing customers.

And then over time, you also see <unk>.

<unk> HCV as each of those relationships get get bigger so the two combined are what drive our overall revenue growth of 43% and we really aim at the overall is our biggest biggest target.

Alright, Great and then maybe one follow up.

Wondering what your experience was in the quarter in terms of the buying centers across because you gave examples of.

Customers that you won in a number of different industries are you expanding out into different buying centers within those types of companies within all of those industry. So in other words are you expanding with an expanding base.

We are thanks for the question appreciate it so as you know we have about 100000 companies in total that we sell to that we think is our end market and that falls under four key segments that we sell into life sciences, like Biopharma and medical devices healthcare it.

Health care providers, and then a whole group of diversified companies that sell to many industries, where health care is a really important industry for them and they realize they need that specific intelligence.

In all cases, we're not only expanding markets that we sell into for example, we didn't really sell to providers three years ago, but as we've innovated. That's now a great growing market for us, but within the clients that we're selling into we're continuing to expand as well. So for example in Biopharma, we increasingly sell into medical affair.

<unk> and market access, whereas three or four years ago, we sold mostly in the commercial.

So for us continuing to innovate and solve more business problems for our clients is absolutely essential and that continues to expand the markets that we sell into and our ability to penetrate deeply within our existing clients.

That makes sense. Thank you guys.

Yeah.

And our next question comes from Craig Hutton Walk with Morgan Stanley.

Yeah.

Yes. Thank you Jason I just wanted to follow up on the commentary about health care providers. Some of the more recent new momentum in that space can you just touch on how your sales approach might change in a market like that in terms of as you get deeper into health care providers.

Yes, it's a really important market for us and it's growing overall, so we're solving multiple different problems for healthcare providers. So we're helping them build fantastic physician and facility networks. So the referral management is really important as well as helping them figure out how do they keep patients within their.

Which is just an incredibly strategic high stakes problem for them.

And then finally as they think about competitive benchmarking and where they are having success and where they might be able to attract new patients into their health system and IBM are all major problems for them.

So what we're going to see is a couple of things we will continue to invest in new product that we think well.

Meet the needs of that particular space, so investing in new ways of utilizing our existing data to meet the very specific needs is going to be important and then we're continuing to invest in the sales and marketing resources to go attack that market.

That group is going to grow relatively quickly over the next year as we continue to expand and deepen our relationships within the provider market.

Got it. Thank you and then just as a follow up can you touch on just the pace of organic development for new modules as well as perhaps the pipeline for kind of tuck ins.

Really in the context of you know.

The goal to kind of rollout wanted to Michael's annually.

Yeah.

Yes. So I appreciate it innovation is incredibly important and it really is a combination of organic and then we'll complement that with inorganic when the right opportunities arise on the organic side, we rollout a couple of key modules each year.

That will be similar next year targeting all parts of the market that we sell into so we have modules coming out within life Sciences as I mentioned, we will be expanding within provider and also within that core segment and creating more upsell opportunities and also opportunities to raise ACB on new logos within that.

<unk> market as well.

So that will continue as planned and as in previous years and what we're able to see is because we built this proprietary set of intelligence that doesn't exist anywhere else, we're able to innovate extremely quickly enable to reuse information and apply new data science techniques to solve new business problems for our clients.

So innovation is very exciting and very important.

Our.

Organic inorganically, we're looking at different candidates all the time, we're very disciplined in our approach as you know so we're looking for companies that can provide a new capability or a new data set that we can link into our existing proprietary platform and sell more to our existing clients and also take data.

We already have and data science that we already have and push that into the company that we're acquiring as a platform to make that better.

<unk> just a great example of that we bought the company back in October and instantly achieve those two synergies.

Accelerating their growth by making their product better with our existing datasets and then so and aggressively through our existing commercial sales force to our existing clients.

Got it thank you.

And our next question comes from socket Calia with Barclays.

Okay, Great Hey, guys. Thanks for taking my questions here and congrats on becoming a public company.

Yeah.

Jason maybe maybe first for you maybe just.

Tacking on to that last question on modules can you just talk about which modules you feel like are particularly important for the business right now and maybe Conversely, what are what are the ones that you feel like maybe have the most room for upside and adoption.

Sure. Thanks appreciate the question.

Health care is incredibly fragmented and changing over time, which really means that the need to understand the entire health care ecosystem is becoming more important to more of our clients. So that's great news for us as we think about ways, where we can penetrate our existing clients more deeply and sell more into exist.

And clients so new logo today will by just over two about 2.2 of our modules. We have 14 to sell so there's a lot of room to continue to sell more to existing clients.

Areas of particular excitement as our clients.

Fast majority of companies want to sell to multiple different facility types, including the hospitals physician groups are becoming increasingly important physician does obviously.

Key part of the market, but then our claims data and Monocles important as well. So these are ways that we can expand the number of use cases that we're solving for big life Sciences companies that have an almost insatiable appetite for the type of data science and the insights that we can provide so we will be investing heavily.

New ways to utilize that data.

Monika, we just added Asian data, which is a really important addition, and we now cover a $11 million of experts across the globe. So a lot of great innovation happening across all the different products that will drive deeper adoption.

Got it that's great Rick maybe for my follow up for you.

Touched on a couple of statistics here just for.

The enterprise business, but could you just remind remind us roughly how big the enterprise business is here and and maybe just touch on how is that cohort of customers is just different economically from the broader sort of customer base for definitive that does that makes sense.

Absolutely and it's a great question.

Those enterprise customers are really the engine that powers our growth.

Those 377 customers generate more than half of our annual recurring revenue and they have very strong net dollar retention rates.

As you may recall from some of our earlier discussions as part of the IPO process.

We have customers that are well into seven figures.

In terms of revenue with a long way to expand in our existing customers. So we're really focused the majority of our sales and marketing efforts on enterprise customer.

Very helpful guys. Thank you.

Yeah.

Our next question comes from Kash Rangan with Goldman Sachs.

Hey, Jason and drip congratulations I'm curious to get your perspective on everything that we're reading the headlines this labor shortage and I read somewhere that half a million health care workers are resilient since the pandemic. Then you also have supply chain issues, causing to potentially rising costs at hospital systems. What are the things that are that.

Definitive can do too.

To address some of these near term issues in your industry. In addition to the things that you've already quite good right. Thank you so much.

Thanks, I appreciate that.

Those are challenges for the industry for sure and what that does is it creates more complexity frankly to try to understand this industry and to try to solve their problems. So we're working with companies that are transforming healthcare.

Driving down cost.

Moving quality, whether it be new.

New therapeutics that save lives or new construction companies that are looking for more efficient ways to deliver health care, so continuing to invest and help those companies understand this entire ecosystem and how the changes in the market might affect them is growing in importance. So a great example.

Is telemedicine, so when COVID-19 hit last year telemedicine exploded and our clients came to us to try to understand.

How it who is adopting telemedicine the most quickly and how is that going to change the way that they.

Their customers are providing care.

We use data we already had in our data science team analyzed that to come up with a telemedicine propensity score and that showed our clients in one piece of information who is adopting telemedicine and who was most likely to in the future. So it's that type of innovation that we can help our clients with to identify where labor shortages might happen for example.

In order to so that they can put their resources in ways that can help solve those problems.

And thank you so much and then as a follow up how about your own.

The ability to hire to support your ongoing.

Growth aspirations, how is how is that part of the the demand for your own employees and how you plan to do to fight the labor market, which seems to be Uber Uber competitive with wage inflation as well. Thank you so much.

It is a very competitive market right now what we've always done we've tended to have very low attrition within our employee base and the reason is really all about the culture that we provide.

Our employees come to us because they want to be something part of they want to be part of something bigger than just a company that they work for and our culture is all about collaboration in solving interesting difficult problems that are going to change healthcare and actually have an impact.

We also have a culture of giving back to the community.

Our definitive cares program, where we provide volunteer opportunities for our employees. We've had 100% participation in that every single year that we've had and it's just a great way for employees to get to know other employees and take leadership roles in all of this results. We've got a best place to work five years in a row.

We were the number one place to work in all of Massachusetts in 2019.

Hopefully, we're going to be number one again this year, we're awaiting the results, but if you can develop a culture like that it gives you a real competitive advantage as you try to find the very best and brightest to work at our company.

Wonderful Thanks, Rick.

Our next question comes from Thailand, dressing with credit Suisse.

Hi, This is Adam on for Gilenya today, Thanks for taking my question and congrats on the quarter.

Can you just talk about some of the early traction you've seen thus far with the prescription claims data how the pricing might compare to some of your other modules and maybe just how big of an opportunity that perhaps can be even within your existing customer base.

Sure I'll take that thanks for the question Rx is a really important opportunity for us.

When you combine the whole power or to what we've done as a company is all about creating a platform where all of this different data comes together to solve problems in different ways that have never been solved before.

So we've developed over the last 10 years, our proprietary view of the entire health care ecosystem, we layered on medical claims in 2019, which has been a tremendous success and then we just added Rx claims in 2021, and we think it can be as large as medical claims. So we've had really good adoption to date.

Like I said when you combine the Rx claims of other stuff that we've already pulled together, we're now allowing clients to solve problems. They haven't been able to solve before when they just get raw feeds of Rx claims. So we're very excited about that and we're building on we're building new technologies on top of that that really.

Just kind of continue with this flywheel of innovation, where you apply new data science and create new information that has not been utilized before and this creates a deepen the moat that we have so it's an important piece for us it's a big opportunity I think we're in the top half of the first inning and going to achieve it but we're excited about.

Where we can take that over the coming years.

Great that's very helpful and maybe as a follow up.

As you continue to onboard new customers and expand the number of modules on the platform are you seeing any uptick in the levels of inbound interest or I guess, how would you characterize the mix of lead generation and recently thank you.

It's a great question. So we've been a typically a sales driven organization since the beginning so very outbound focused but we've been investing in the last year.

Heavily into marketing so.

So figuring out how do we go find these 100000 companies and have them come to us. So we've seen significant growth in inbound <unk> over the last year. We're excited about that we think theres, a tremendous amount of opportunity to drive that up even further.

We think public being a public company is very helpful in that and our brand just continues to increase in the market. We're driving a lot of thought leadership right now through white papers and blogs to bring people to us. So we're excited about what we've done from an inbound standpoint, and where we can potentially drive further growth in the future.

Great. Thank you.

Our next question comes from George Hill with Deutsche Bank.

Okay.

Good evening, Jason and Rick and welcome to the Big show as we call it <unk>.

Can you talk about the company, having 14 modules with the App.

Average company, having just over to let's assume for a second that we're not going to introduce new modules, but what's the right number.

The average customer to have recognizing that like the flooring vendor isn't kind of by monical or anything like that so as you grow from just north of two two a a.

More mature number what's the right way to think about customer penetration.

It's a really good question and it varies dependent on this segment that we're selling into so within certain segments. For example, life Sciences providers, which I would say are two of our most important segments over the next several years. They really are interested in everything that we have to offer. So all of this data is important.

To each of them.

You get outside of that market into maybe.

Some of the diversified firms like a flooring company, which are fantastic clients for us.

Typically speaking theyre going to probably want two thirds of our modules over time as you said monocle doesn't necessarily fit with that type of company, but they want to sell to all different facility types and physician groups and surgery centers and skilled nursing facilities.

The opportunity to expand deeply as health care continues to fragment is absolutely there against across the entirety of the customer base.

Okay, and if I could have a quick follow up kind of you guys had the the good fortunate debut at a pretty attractive equity valuation I guess can you talk about whether you've seen that impact either the competitive environment or the M&A environment with people either looking to sell to your kind of chase kind of the scarcity value that you can.

Have created.

Yes, I guess when you think about the competitive environment I mean, what we've done over the last 10 years is incredibly unique we've pulled together information from hundreds of thousands of sources. We made 700000 phone calls a year and then we've applied incredible data science to it too.

To create new information and claims that information and link it together.

And this is very very difficult to recreate it takes time and it takes iteration. It takes working with our customers. So I don't think we've seen any impact from a competitive standpoint on that.

Public of course gives us more flexibility as we think about new M&A opportunities. So.

Are there more opportunities than there were before maybe but in general we've always had a good pipeline of M&A opportunities and we're very focused on remaining disciplined in finding companies that have significant strategic value for us where we can get synergies and added capability that more quickly than we might builder.

On an organic basis.

So we will continue to focus on it and look for great opportunities.

Great very helpful. Thank you.

Our next question comes from DJ Hynes with Canaccord.

Hey, Jason Rick Congrats on the good start here.

Thanks for taking the question.

Jason is there any way to think about what a top decile customer looks like in terms of spend with you versus maybe the average customer and then like what percent of the mix do you feel like over time could ultimately look like a top decile customer I am just trying to get a sense for what the opportunity in the base might look like.

Yes, so as you think about just varies a little bit by segment.

You look at it. So if you look at top decile customers overall, we expect these to be multimillion dollar clients. So within life Sciences, we already have clients well over $1 million within technology firms, we have multiple six figure type of clients.

Well into the mid six figures. So there is a tremendous amount of room for us to continue to grow and expand and sell more modules really across our entire base.

That's kind of how we think about it is we want to push we're very focused on enterprise clients as Rick had mentioned before we saw tremendous growth in that over the last year.

We continue to innovate and meet more of their needs and we will continue to drive up that average ACB overtime by innovating and by deeper penetration with our existing products.

Okay.

Rick a follow up for you I mean to the extent that you are still new to the public markets can you just talk a little bit about.

How we should think about the model and potential upside playing out from here I mean, if you guys continue to beat like we saw in Q3 should we expect that upside to flow to the bottom line or we reinvest in it.

Assuming it's the latter maybe just talk about some of the areas you flagged some of that incremental spend.

Got it.

Question D. J. Thank you for asking it our philosophy overall is to reinvest profitability upside in the continued growth of the business. We're very measured in how we do that and we have a test and learn philosophy.

So to the extent that you see profitability upside today, we will begin turning the lever primarily in sales and marketing and in product to continue to drive that all important long term growth.

So we're not we're not focused on optimizing any single quarter in terms of profitability, but given our revenue visibility.

We should be a very predictable model.

Yeah that makes sense. Thank you guys.

Our next question comes from Brian Peterson with Raymond James.

Hi, gentlemen, thanks for taking my question and congrats on a strong start. So just one question from me on the innovation cadence. So you have 14 modules today, you've seen you build that out both organically and through M&A record. He was pretty clear on the investment philosophy, but curious to think about the cadence of kind of new modules at over the next couple of years any color on that.

Yes on average we will rollout a couple of we innovate in two different ways. The first is new modules that we can sell in some way through packaging Arthur and additional price on average will rollout one to two of those per year and thats been pretty steady over the course of our.

Over the course of the business the second way that we innovate which is maybe equally important is we're constantly adding new features and new analytics and new algorithms and new data science to our platform.

Hello, Madison propensity score that I mentioned before it's just a great example of that where we are not charging more for that or the dozens of other innovations that we had throughout the year, but we are able to benefit significantly in a few ways. We it drives up velocity of bringing on new deals we're able to.

Charge, a higher price to new logos. So we've seen significant ACB growth in new logos each year as a result of that innovation and then when we renew clients not only are we able to renew at a higher rate, but were able to renew.

Into multiyear deals with price escalators built into them. So.

So all of that innovation, which is happening every single month as we're continuing to improve the product had substantial long term benefits on our business.

Great to hear thank you.

Yeah.

Our next question comes from David Grossman with Stifel.

Thank you.

I have a couple of quick follow ups to some questions that I haven't already asked first.

Maybe you could speak to the activity levels as health care utilization rates continue to migrate to more normalized levels, our vendors selling into the end markets are you seeing any acceleration in their selling efforts.

Correspond to that kind of if you will come back to normal back to more normal.

Kind of activity in the health care space and end markets.

Yeah.

I think we're seeing a little bit of that health care health care is a giant market. So four trillion dollar market. So I think all of our clients have always been incredibly aggressive in figuring out new ways to grow within this market obviously.

Obviously that means theres lots of new entrants I always coming into this as well to figure out how they can.

They can grow along with the health care market as it continues to grow with agent population and other and all the other tail winds that are happening within that market. So have we seen a significant increase this year in that.

Im sure that anything of particular note.

But it's an aggressive market and people are trying to succeed in our data can help them succeed.

Got it and then I know you've provided the number of accounts greater than 100000 at the end of the third quarter or do you perhaps have that information for you.

At the end of the first and second quarter, just to see how that trend sequentially.

I don't have that sitting here in front of me.

Let me see.

Alright, Chris why don't you give it.

End of Q2, we were at $3 49, and the end of Q1, we were at $3 20.

Yeah.

Alright, great. Thanks very much.

Thank you.

There are no further questions at this time I'd like to turn the floor back over to Jason for closing comments.

Great. Thank you very much well first of all I just wanted to thank everybody for their time today and for joining our first customer first earnings call. We appreciate it and we appreciate the support of all of our investors as we try to achieve our goal of highly durable profitable growth.

But I also want to personally. Thank this 700 employees a definitive health care their commitment to our mission of helping our clients transform health care is remarkable and their passion for what we do every day is contagious.

I just want to have a heartfelt thank you for that.

Have a good evening everyone. Thanks again for the time, we appreciate it.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you.

Thank you for your participation.

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