Q3 2021 Health Catalyst Inc Earnings Call
Thank you for standing by and welcome to the health catalyst third quarter of 2021 earnings Conference call. At this time, all participants aren't listen only mode. After the speaker's presentation that will be a question and answer session to ask a question during the session you'll need a bright star one on your telephone as a reminder, today's program is being recorded.
And now I'd like to hand, the program over to Adam Brown.
Good afternoon, and welcome to help catalysts earnings conference call for the third quarter of 2021, which.
Which ended on September 30th 2021.
My name is Adam Brown, I'm senior Vice President of Investor Relations and financial planning and analysis for help catalog.
And with me on the call is Dan Burton R Chief Executive Officer, and Bryan on 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.
Furnish to the SEC.
Both of which are available on the Investor Relations section of our web site and I are that helped catalysts dot com.
As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call.
During the call we will make forward looking statement pursuant to the safe Harbor provision of the private Securities Litigation Reform Act of 1995.
Regarding trends strategies the impact of the COVID-19 endemic on our business and results of operations are.
Pipeline conversion rates and our general anticipated performance of the business.
These forward looking statements are based on management current views and expectations as of today and should not be relied upon as representing our views as in any subsequent gate.
We disclaim any obligation to update any forward looking statements away outlook actual results may materially differ.
Please refer to the risk factors in our Form 10-Q, four Q2 2021.
The SEC on August 6th 2021, and our Form 10-Q for the third quarter of 2021 that will be filed with the SEC SEC.
We will have to refer to certain non-GAAP financial measures to provide additional information to investors Ah.
A reconciliation of these non-GAAP financial 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 Brian will subsequently provide his prepared remarks, Dan and Brian will then take your questions.
Damn.
Thank you Adam and thank you to everyone who has joined US. This afternoon. We are excited to share our third quarter of 2021 financial performance along with additional highlights from the quarter.
I will begin today's call with some commentary on our third quarter of 2021 financial results by sharing that we're pleased with the company's overall financial performance.
Q3, 2021 total revenue was 61.7 million Andrew I adjusted EBITDA was a loss of five $8 million with these results, beating the midpoint of our quarterly guidance on each metric. Additionally, R. Q3, 2021 technology revenue was $38.3 million representing 30 <unk>.
7% growth year over year, and our Q3 2021 adjusted technology gross margin was 69.9% representing an increase of approximately 150 basis points year over year.
Now let me highlight some additional items from the quarter you will recall from our previous earnings calls that we measure our company's performance in the three strategic objective categories of improvement growth and scale and we will discuss our quarterly results with you in each of these categories. The.
The first category improvement is focused on evaluating our ability to enable our customers to realize massive measurable improvements, while also maintaining industry, leading customer and team member satisfaction and engagement.
Let me begin by sharing a couple of examples of customer improvements from recently published case studies.
First Carl help and its affiliated Health Alliance Health plan struggle with a largely manual approach to its population health and value based contracting initiatives.
In response, Carl and helped alliance leveraged our dos data platform and our new value Optimizer analytics application, which we introduced on our last earnings call. The software allowed Carl to have real time insight into a multitude of cost utilization and performance metrics from across 10.
Key population health areas, including inpatient and skilled nursing facility readmission.
And patient discharge disposition and emergency department utilization.
This integrated data and analytics technology solution enabled Carl to improve its risk based contract performance, including greater than $10 million in cost and utilization opportunity identified 100000, and manual labor costs avoided and a greater than 90% improvement in analytics iffy.
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Next unity help recognize that his patients with complex chronic conditions were over utilizing its health care services, particularly when transitioning from hospital admission to an ambulatory care setting yet despite having access to large volumes of data, it's clinicians and care managers.
Lacked timely insight into care provided across acute and ambulatory settings. In response unity point utilized or dos data platform, along with a robust robust suite of analytics applications and AI software to effectively identify patients with high risk of worsening health.
Conditions that often result in non urgent emergency department visits or unplanned hospital admissions and enrolled them in their care management program.
Your management program, then enabled unity points care managers to appropriately intervene preventing unnecessary health care utilization and reduce spending.
In the 30 months since undertaking this improvement initiative unity point has decreased health care spending by more than $32.2 million. The result of the 50, 454% relative reduction in hospital admissions and a 39% relative production and E D visits.
Likewise, it's patients have gained more than 11000 more days at home and had nearly 2000 fewer E D visits.
Also in the improvement category I would highlight that we have been fortunate to received multiple recent external recognitions related to our team member engagement.
First help catalyst achieved inclusion in modern healthcare is the best place to work with the ninth year in a row, achieving this distinction ranking number 39 this year.
We were also recognised by Great places to work Fortune magazine's 2021, best workplaces for women list and were named the inks two 2021 best Pled companies list health.
<unk> catalysts was also fortunate to have Hollywood Mosh, Chief Clinical Officer, Senior Vice President and general manager of clinical quality analytics out catalysts be named the modern healthcare is 2021 class of top twenty-five innovators for her work related to COVID-19.
Likewise, Sadhika my mood General manager and senior Vice President of our Life Sciences business unit received the women Tech Council's 2021 award for transformational leadership.
We are thankful to have Holly and Sadhika has two great examples of the benefits of having deep healthcare domain expertise and the differentiation that this provides our company.
Our next strategic objected categories growth, which includes beginning new customer relationships, while also expanding existing customer relationships.
To begin the current sales environment is largely consistent with commentary that we've shared throughout 2021. The COVID-19 pandemic continues to result in both headwinds and Tailwinds as it relates to our growth.
In terms of headwinds are provider and market has continued to be under some amount of financial strain. While also experiencing operational distraction. The result of health care organizations dealing with the continued COVID-19 pandemic, especially with the rise in the Delta variance in the third quarter alongside vaccine row.
All out logistics.
N as it relates to Tailwinds, we continue to see meaningful evidence that the health care provider ecosystem is much better equipped and prepared to respond to the ongoing pandemic in areas, including treatment efficacy supply chain logistics capacity planning and broader operational optimization.
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And as we've shared before we continue to believe that the COVID-19 pandemic will serve as an overall tailwind and the industry's adoption of data and analytics significantly highlighting the need for a commercial grade data and analytics solution to replace patchwork homegrown system.
In terms of our 2021 bookings expectations are dollar based retention continues to track in line with the expectations. We shared at the beginning of the year.
As a reminder, at the beginning of the year, we shared that we anticipate or 2021 technology dollar base for attention to continue to be robust in line with historical levels of one O seven to one O 9%.
And for professional services, we expected our full year 2021 performance to be significantly stronger than our 2020 performance, but that we would still experienced some strain on this metric relative to historical levels neck.
Next related to a net new dos subscription customer additions, let me provide a reminder, that we typically experience seasonality and our new customer bookings with Q2 and Q4 normally representing the majority of our sales are lined with health care organization fiscal years.
This fourth quarter will also represent an important new customer selling season.
As most most fourth quarters have been for our company throughout its history.
As shared at the beginning of the year, we continue to expect mid teens net new dos subscription.
Customer bookings achievement.
We can do need to be encouraged by our late stage, new customer pipeline driven by strong demand in areas such as enterprise analytics population help revenue and cost optimization analytics.
Also in the growth category and as a follow up to our last earnings call commentary in September we hosted our eighth annual healthcare analytic summit, along with our annual customer focused user group.
This year's virtual conference was once again, a success welcoming a few thousand registrants, representing more than 675 organizations in 18 countries.
<unk> satisfaction was again greater than 97%.
With participants having the opportunity to hear for many of the leading healthcare and analytics voices in the world.
Provide their perspectives on this year's theme of multi domain analytics, highlighting how the most successful health care organizations integrate data and analytics across multiple domains to achieve significant revenue cost and quality outcomes.
This year's summit and use your group also provided help catalyst with a meaningful opportunity to continue to provide thought leadership within the health care data and then bolitics ecosystem of further cultivating and deepening our relationships with customers and prospects.
Next as it relates to growth. We're excited to have publicly announced a few of our recent customer additions, including mountain, Let me help in Oklahoma Heart Hospital.
Mount Nittany help located in central Pennsylvania plans to leverage our dos data platform, along with key elements of our population health technology offering to enable new performance insights better manage its risks and drive population health improvements across it system.
Likewise, Oklahoma Heart Hospital, one of the largest cardiovascular networks in the United States partnered with help catalyst with the objective of accelerating systems cost transparency goals, including helping executives and analysts better understand and evaluate the true cost of care delivered and and.
Powering clinicians with the right data to inform their decision making.
To support this transformational work, Oklahoma Heart will leverage our dos data popcorn and our power costing analytics application delivering Oklahoma hard with a comprehensive view of the true cost of their patient care.
With that let me turn the call over to Bryan Bryan.
Thank you Dan.
Before diving into our quarterly financial results I want to Echo Dan sentiment and say that I am pleased with our third quarter 2021 results.
I will now comment on our strategic objective category of scale for.
For the third quarter of 2021, we generated 61.7 million in total revenue.
This represents an increase of 31% year over year.
And wasn't outperformance relative to the midpoint of our guidance.
This outperformance was driven mainly by new contract signing earlier in the quarter then forecasted.
Technology revenue for Q3, 2021 was $38.3 million representing.
Representing 37% growth year over year.
This year over year growth was driven primarily by recurring revenue from new customer editions from existing.
Customers paying higher technology access fees as a result of contractual built in escalators.
As well as from our vital where acquisition that closed September 1st 2020.
And our twisted acquisition that closed on July 1st 2021.
In Q3 twisted contributed $1.4 million of technology revenue.
Inclusive of a of a purchase accounting related deferred revenue right down.
Which was in line with our expectations shared on our last earnings call.
Professional services revenue for Q3, 2021 was 23.5 million rep.
Representing 22% growth relative to the same period last year.
This year over year performance was primarily due to our professional services being provided to new dos subscription customers.
Along with a small amount of COVID-19 related temporary customer discounts that spilled into the third quarter of 2020.
Creating a more favorable year over year comparable.
Also in line with the expectations, we shared on our last earnings call Q3, 2021 professional services revenue was lower than our Q2 2021 revenue given the modest amount of incremental non-recurring project based professional services revenue that we recognized in Q2 2021.
Total adjusted gross margin for the third quarter of 2021 was 59%.
Representing an increase of approximately 20 basis points year over year.
And the technology segment R Q3, 2021, adjusted Technology gross margin was 69.9%.
An increase of approximately 150 basis points relative to the same period last year.
This year over year performance was mainly driven by existing customers paying higher technology access fees from contractual built in escalators without a commensurate increase in hosting costs.
Partially offset by headwinds due to the continued costs associated with transitioning a portion of our customer base to third party cloud hosted data centers and Microsoft Azure.
Which increases are hosting costs.
And the professional services segment R. Q3, 2021, adjusted professional services gross margin was 20%.
Representing a decrease of approximately 510 basis points year over year.
And a decrease of approximately 1390 basis points relative to Q2 2021.
This year over year and quarter over quarter decline was mainly the result of some shift in the mix of professional services delivered toward lower margin implementation and outsource services.
[noise] higher medical claims costs as a self insured company.
And a more normalized utilization rate as compared to the first half of 2021, as we were able to catch up on professional services hiring plans.
In Q3 2021, adjusted total operating expenses were $37.2 million.
As a percentage of revenue adjusted total operating expenses were 60%.
Which compares favorably to 64% in Q3 2020.
In terms of the quarterly increase in operating expenses compared to Q2 2021.
As mentioned on our last earnings call.
This was mainly the result of sales and marketing marketing expenses from our healthcare analytics summit and hymns conference attendance.
Incremental expense from a recent acquisition of <unk>.
As well as increased travel expenses.
Adjusted EBITDA in Q3, 2021 was a loss of five 8 million beats.
Beating the midpoint of our guidance and comparing favourably to an adjusted EBITDA loss of six $4 million in the third quarter of 2020.
This Q3 adjusted EBITDA result was mainly driven by the strong revenue performance mentioned previously.
Along with the timing of some non head kind of expenses that we anticipate will be pushed out into the fourth quarter of 2021.
Are adjusted net loss per share in Q3, 2021 was approximately 18 cents.
The weighted average number of shares used in calculating adjusted net loss per share in Q3 was approximately 49 million shares.
Turning to the balance sheet, we ended the third quarter of 2021 with $455 million in cash cash equivalents and short term investments.
Compared to $271 million at year end 2020.
As a reminder, we conducted an equity follow on offering in August 2021, which.
Which raised $245 million in net proceeds.
For general corporate purposes, including potential acquisitions.
Also as a reminder in April 2020.
We issued a private placement of convertible notes with the principal amount of $230 million.
The net carrying amount of the liability component is currently 177 $8 million.
As it relates to our financial guidance for the fourth quarter of 2021, we expect.
Total revenue between $61.4 million and $64.4 million.
And adjusted EBITDA losses between $7.5 million and $5.5 million.
And for the full year 2021. This implies we are raising our full year revenue outlook.
We now expect total revenue between 238 $6 million and $241.6 million.
At their respective Midpoints. This represents an increase of $1.9 million compared to the full year revenue guidance, we provided last quarter.
We also expect adjusted EBITDA losses between $12.5 million and $10 $5 million.
At their respective Midpoints. This is in line compared to the full year guidance, we provided last quarter.
Now let me provide a few additional details related to our fourth quarter 2021 guidance.
As it relates to our professional services revenue, we anticipate queue for professional services revenue will be roughly in line with our third quarter revenue total.
Additionally, I would mention that we anticipate are adjusted professional services gross margin for Q4 2021 will be similar to Q3 2021.
With the fourth quarter seeing most of the same trend is Q3 <unk>.
Including a similar mix of the professional services delivered.
Or your medical claims cost across our team member base in in the first half.
And a more normalized utilization rate as compared to the first half of 2021.
As well as planned one time bonuses distributed to team members given the tight labor market and strong 2021 performance.
Lastly, as implied by our guidance.
We anticipate our queue for 2021, adjusted EBITDA quarterly performance to be slightly lower than our Q3 performance.
While we won't incur the healthcare analytic summit and hymns conference sales and marketing expense in the fourth quarter.
This quarterly expense reduction is offset by multiple items, including certain operating expense non head count items that had been pushed out until the fourth quarter.
The one time investment an acquisition related integration expenses that we described on our previous earnings calls.
Additional ramp and forecast that travel expenses as well as one time bonuses distributed to team members given the tight labor market and strong 2021 performance.
With that I will conclude my prepared remarks, Dan.
Thanks, Brian in conclusion, I would like to recognize and thank our highly engaged team members without their consistent contributions to our mission and growth. None of this would be possible 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 move yourself from the queue. Please press the pound key our first question comes from the line of Antonio from J P. Morgan Your question. Please.
Hi, guys congrats on a great quarter and thanks for taking the question.
Your phone on mute.
Oh.
We can hear you any.
Oh, Okay, great [laughter], alright, yeah, how can analytics summit Uhm Valley based care wasn't really big theme and was wondering you know are you finding that the pace of change is accelerating there and are you seeing more demand from your clients in that area.
Yes, great question any.
That was a major theme of the healthcare analytic summit and that was data informed based on our interactions with both clients and with prospects in and seeing uhm meaningful increase in interest in specific focus on value based care and population health.
Topics in general and so that focus at has was informed by that data and we continue to see an uptick in an acceleration both with existing clients and with prospective clients as it relates to that being one of the primary focus areas.
Right now in the market.
The thing I would add any is that this has been an area that we've been thinking about and focusing on over the last several quarters in terms of our development strategy and our acquisition strategy as well so you've seen recent acquisitions, there with our health Finch acquisition, a year ago and then the most recent acquisition of <unk> just in July.
Which helps to round out our population health suite of applications in a space patient engagement, specifically that continues to be a focus for our health system customers in process. So we're encouraged by that alignment.
That's a great color and then maybe one we've been hearing a lot about labour inflation Uhm and shortages. This quota from you know probably some of your customers.
Doing anything to help them you know your customers with finding solutions to mitigate some of that impact.
We are and specifically our power labor.
Applications Sweet.
Which we talked about it and the last earnings call.
Is very helpful. As it relates to the management of the Labor force in in specific areas, where where our health system clients are facing shortages and need to optimize.
In very specific ways, so that technology solution as well as our our deep domain expertise services.
Have been highly utilized by our clients and helping them make it through this challenging environment.
That's great to hear thanks, guys.
Thanks to anything.
Thank you. Our next question comes from the line of Brian Daniels from William Blair. Your question. Please.
Hey, guys. This is Jeff sent on for Ron Daniels, Congrats on the corner and the continued to continued success and thanks for taking my question.
Kind of keeping on the trend.
The Labour pressures and you know I think I believe last quarter, you, even mentioned a slower hiring than anticipated, but yeah, I expect that to pick up in the back half of the year. So I guess do you have any additional color on the labour pressures and kind of just how has that been trending so far in the second half and I know too and the prepared prepared remarks, you mentioned one time bonuses so any.
Additional color here is does it really appreciate it thanks.
Yeah, absolutely Jeff so.
As we alluded to in the prepared remarks, we did see some catching up as it relates to specifically are professional services hiring.
In this last quarter, we had reference that we were behind in our last earnings calls we've seen some catching up and we continued to see this current environment.
Is a very tight labor market and environment and so we're cognizant of that that's an important factor as we think about Q4 in the near term and as it relates to what we referenced in terms of one time bonuses to recognize our team members engagement and strong performance and it'll be an important.
Opponent, as we think about our planning process as we do every year.
For next year for 2022 as you all know we we put team members at the centre of everything that we do in their engagement drives our success and so we want to make sure that we're always optimized as it relates to to our team members and their engagement.
The only thing I would add Jeff is that even with some of those delays that Dan reference earlier in the year.
We don't anticipate on shared previously that we didn't anticipate any material impacts to our product development roadmap and our ability to execute against that in 2021 or our ability to kind of to deliver on our bookings expectations that we mentioned on the mark So no major impact to those.
Awesome.
That info and then I guess, just as a follow up I kinda want to pivot towards towards the two o'clock position.
And just kind of how the integration is going so I know I know you mentioned last quarter that one of the early phases for integration was kind of from a sales and marketing standpoint.
Can you guys provide any additional color on how the integration is progressing that would kind of be helpful. And I guess also if you think about the integration how should we think about the contribution to guidance I know you mentioned $3 million and eat at a loss expected.
But but you know kind of how does that tracking relative to the plan and I know I think you said $1.4 million a tech revenue so.
Anything that is helpful. Here. Thanks.
Yeah, I'm I'm happy to share a few comments and then Brian Please sure as well so.
As it relates to how the integration is going.
I'm pleased with where we are relative to our immigration goals and how the how we had forecasted.
Where we would be.
I'll highlight I had an opportunity recently to travel to Albuquerque, which is the headquarters of whistle and we have an office there and spend time, one on one with many of the <unk> team members.
And we continue to be really impressed and excited with the talent level and the expertise in the area of patient engagement, which is so relevant for pop health in other areas of health catalyst focus as well in terms of clinical improvement clinical analytics work as well as our life Sciences use cases, so we're excited.
About the the level of integration.
We are seeing very meaningful interest among our existing dos subscription clients to find out more about torisel I've personally been been asked unprompted by a number of C. Sweet executives that are existing clients to tell me more about twist on it.
And obviously patient engagement is a very important.
Capability and capacity that our health system clients want to have so we're excited about that.
And I'll, let Brian comment about the the financial impacted whistle, yes, certainly so so in 2021, Jeff We did mentioned on the last call that.
<unk> would contribute about $3 million of mostly technology revenue.
The second half of the year inclusive of a deferred revenue right down on the top line and then approximately $3 million of adjusted EBITDA burn in the second half of the year as well.
When you think about going forward into 2022.
The top line, we had shared at the time of the acquisition that you could think about 2021.
Standalone revenue for a total of about $8 million and then growing approximately 35% in 2022.
And then on the EBITDA side that we anticipated two.
Two and a half to 3 million of negative EBITDA contribution in 2022.
On top of our kind of core business.
Inclusive of some integration related expenses that will execute on through next year.
Awesome. Thanks, guys.
Thank you. Our next question comes from the line of Jessica attachment from Piper Sandler Your question. Please.
Hi, Thank you so much for taking my question.
I think they wanted to verify it does the nicotine dos ads for the year does that refer to the kind of all access dos and subscription services customers that lead historically scene.
Yes, it primarily does and with the note that as we've discussed in prior earnings calls when we'd find what is included in that all access subscription.
I've always been certain things that are excluded and importantly elements like new technology that come to us through acquisitions are outside of that technology subscription and so when we perform an acquisition there is an incremental revenue opportunity, but when we talk about the mid teens dos and.
That that incorporates that idea of a subscription based model, where they can access both dos and some application capabilities as well.
And I said, so do you think about your existing all access subscription should we think about that that technologies, you've acquired year to date as being layered and or it may be incremental to that 7% to 9% annual price appreciation.
Yeah, they they would represent incremental growth opportunity from that from that contractual built in.
Those contractual bilton escalators on the technology side that's.
Alright, and we also I'm just.
Part of the thesis there of acquiring at the applications layer as one as Dan mentioned to have a broader portfolio to sell into our current dos customer base and expand over time.
But also to develop more places to land.
Meet a new customer or prospect, where they'd like to start from analytic standpoint, and so that breath of the portfolio helps on both of those growth drivers.
Got it and if I could just sneak in one quick and just follow up I guess, how much of the base have you gone through in terms of an renegotiating be all access subscription to account for the physician keep acquired you have the date.
So that's really a rolling.
That's really a ruling topic of discussion and mostly that happens.
As we acquire a new technology, so less of that happens at the end of a contract period and more happens during the course of the relationship as we as.
As we acquire a new technology, then typically within six months, we will have a discussion.
With our existing client base about their interest level in that newly acquired technology, and we are seeing Jeff and anticipated to see in 2021.
Amount of contribution in particular on R X.
Expansion metrics, where we're able to cross sell an application to adopt subscription customer and that is to lower price point and it is Ah Ah faster sale cycled in the other direction of selling to us into an app customer, but we've seen some early success, there which were encouraged by.
Thank you again.
Thank you. Thank you.
Thank you walk next question comes from the line of Elizabeth Anderson from Evercore. Your question. Please.
Hi, This is Joe on for Elizabeth.
I just wanted to ask a quick question on the life Sciences offering that you guys hosted a webinar on a few weeks ago just wondering.
In general kind of who you see.
Offerings sort of competing with as a competing with.
Cro's competing with another player in the space.
And then on top of that what tends to differentiate those solutions in the space. Thanks.
Yeah. Thank you for that question, Joe So as we think about the the solution in the offering that we.
Are able to bring to life sciences companies.
We are excited about the the possibility and the potential but we're very very early on as we've described in prior earnings calls we recognize there's a great deal that we're learning about this new market this adjacent market and and one of the elements that helps us in that regard as is often partner with her complement.
Another larger player like is ciara or another life Sciences oriented company, where we can provide part of the overall solution, but then benefit from the experience base of another player. So I would think of us as more complimenting and strengthening a solution.
Some established players, especially as we're early in this in this adjacent market.
In terms of where we aim to differentiate one aspect as we.
We do as part of our dos offering customers are able to contribute data from dos a subset of that data into.
The identified centralized platform and that data is very rich in terms of the breadth of clinical data and the depth of that data and the the touch points across patient. So that data represents and so we do think that that data asset as a strength in terms of how we differentiate.
Against other vendors as Dan mentioned, coupled with our ability to build analytic.
Applications on top of that data with the intent to drive improvement in any area that we're working on with life Sciences.
Great. Thank you.
Thank you. Our next question comes from the lining of Stephanie Davis from SVP Lyric your question. Please.
Hi, guys. Thank you for taking my question I was I was going to pivot away from Sandy's labor shortage questions to ask some questions about that new strategic marketing background for.
So just another flavor of labor questions, but.
But can you just tell us a little bit more about this farmer lifesciences strategy, and what sort of a head count filled out.
New arena.
Is it primarily by the sales folks.
Sales team demanded that more familiar with farmer on market.
Or are we going through Marvin R&D rest as well in order to get you.
Okay.
Okay.
Yes. Thank you for the question Stephanie So I think it's both.
We need.
To build and strengthen our capacity as it relates to understanding go to market understanding.
The end user understanding the use cases and then we've also recognized and learned over the last couple of years that we've started to modestly invest here that there is some incremental R&D needed to take that core set of capabilities that is leverageable and that we are excited.
We do believe we see evidence of some differentiation, but that there is some incremental R&D needed to suit. The specific use cases at least life sciences companies as you might imagine in our core market there.
There isn't complete overlap between the kinds of use cases that we've been focused time, particularly as it relates to clinical improvement pop held operational and financial improvement of health system, and then having that translate into contributing.
Contributing to.
Data informed registries or the.
The support of specific clinical trial recruitment of real World data real real world evidence use cases. So we are recognizing the need to continue to make some investments from an R&D perspective, and as I mentioned, just a few minutes ago, we're benefiting from learning from.
Partners, who have been in this space.
Longer than we have in learning through the.
The hiring of experienced team members as well, but as we've shared many times where early in our investments in these adjacent markets were playing the long game as it relates to trying to build something that.
That will be meaningful longterm, but that takes time and we're still very early stage in that process.
And they said the biggest tragedy, where all the evidence is that is a very hard time pronouncing it sounds like I'm not the one.
That alone in that one now yes, we sure that.
That alone in that one now yes, we sure that.
Yeah, Yeah, I hear Ya.
Keeping in mind that.
Buying assets and this very sexy sliver of the market right now is an incredibly high multiple prospect.
Should I lead into that and you guys are thinking more of a build vary by as you expand to the side of the market or do you think there is enough opportunity that could get goodbye.
Higher price tag.
Yeah, that's a great question so.
As we've shared in the past we include adjacent markets as.
One of the areas.
That we pay attention to from an M&A perspective, and we've also shared multiple times in the past we believe in a disciplined process.
From a financial perspective, and we want to maintain that discipline.
And so when there are opportunities and adjacencies whether that's.
And life Sciences, or an international we do consider them, we carefully study them.
And we apply the same discipline from a framework financial framework perspective that we apply across the board and we think that's the right long term strategies. So if there are opportunities that fit within that framework will be pursuing them. If not then we will find other ways to our own investments to continuing to build.
Mentum and these adjacent markets.
Alright, I see but yet though that uncle.
Thanks, Thank you.
Thank you. Our next question comes from the line of David Grossman from Stifel. Your question. Please.
Thanks, Good afternoon.
And I'm wondering if we could just go back for a minute just to the services gross margin and perhaps you could just dimension of the three things that you mentioned, which are most impactful for the margins of this back half of the year and then secondly.
To what extent.
Can you pass through some of the more labor related costs like benefits and.
Wages, just wondering just how much flexibility in my attitude you have in passing that through.
Yeah. Thanks Dana.
So it's a good question so we do.
We have seen over the last couple of years some fluctuation in our professional services gross margin on a quarterly basis much more so than our technology segment as an example.
And there are three primary factors that I mentioned on the prepared remarks that can contribute to that fluctuation so just to kind of.
Dig into those further.
The first is that utilization rate of our team members, which as we've described was a little higher than we would have anticipated in the first half of the year and has more normalized now.
The second is the shift and mix of services that we provide.
So some services are lower margin some are higher like our consulting services and analytic services and that can fluctuate on a quarterly basis.
And then the last was to your point kind of team member of related costs like medical and other costs.
You could think about the Q3 impact.
As being a few percentage points related to the fever related costs that I mentioned.
On the prepared remarks, and then the remainder of that change being the other two factors utilization rate into the mix shift that's how I'd describe Q3 as we kind of look forward to your to your point on kind of pricing power in passing that through that's something that we're trying to think through in assessing over Q4.
We have enough visibility now to provide that color that I mentioned on queue for gross margin looking similar to Q3, just based on the mix that we see in our current cost profile, but that is something that we're thinking through as it relates to 2022. So we will continue to provide updates there as we get more data in terms of the the price points and then also the cost.
T remember that we're seeing going into next year and.
And the only thing I would add David as we continue to strive to be data informed as we're trying to understand pricing changes in pricing input changes that.
We anticipate as many others have shared from an economic Ah macroeconomic backdrop perspective.
Some of the pricing increases will be transitory others may be more long lasting but we're trying to to study that data and be as informed as possible as we think about our own pricing strategy moving into 2022.
Great. Thank you for that.
Then.
Another somewhat forward looking question.
Is that a a call your first tranche of customers.
At the first tranche, but the kind of.
First tranche if you will.
The existing era kind of redo I think start renewing over the next 12 months and this way I've come up and then earlier question, but just curious with the increased portfolio of apps.
Going in your favor and perhaps the automatic escalators, maybe not being as present the renewals how do you want us to think about or what are you targeting in terms of what you think the retention rate will look like a renewal.
Where it's been historically.
Yeah, I am happy to comment on that so one element that's important to remember this that and the way that we structure all of our relationships with all of our clients every year any client who wishes to.
Opt out of the relationship, including the technology subscription relationship and so there isn't a significant buildup.
Buildup of.
Contracts coming up in any given point in time every year, they alls cycled through that opportunity.
And so that's been a helpful mechanism for us to stay on our toes and make sure that each one of our clients is really receiving great value in.
And and by doing that we've seen that robust historical dollar based on retention, particularly as it relates to the technology business remaining robust all the way through the pandemic through to the today and we anticipate that it will continue to be robust at at those historical levels.
As well and.
And I think.
As it relates to discussions about.
Moving forward.
As Brian mentioned, a little bit earlier.
There is a modest amount and we've mentioned this in prior calls as well of of some of that cross cell of those newly acquired technology capabilities that would fall outside of the traditional subscription built into our forecast for 2021.
And overperformance of that modest amount of cross sell would represent upside to the way that we forecast and model in 2021 and beyond.
Just add to that.
So we have seen to your point some of those.
Contracts with the kind of a three to seven year original term and ramp coming up for renewal.
As Dan mentioned that things that are helping with that or the broader portfolio. So the crossville opportunity with those new applications.
The only thing I would mention is that we we do also have typically a.
A contractual constraint on the amount of data and the computing power that are posted environments for dusk and Ken at which they can perform and as customers continue to grow in that data and go beyond that there is an expansion mechanism even for those all access customers as well. So that's that has helped us <unk>.
Due to drive that on average.
Similar dollar based retention rate that you've seen historically.
So just activity levels alone will generate some same store sales growth is.
With that last comment first there is a mechanism for that as well yeah right. Okay.
Okay very good thanks very much.
Thanks, David.
Thank you. Our next question comes from the line of Daniel Gross link from City. Your question. Please.
Hi, Thanks for taking the question as you move further into pop have this sales cycles have you have you seen more traction outside of traditional health systems with payers or or risk bearing providers and have you had to invest in additional sales resources as you move outside the health system market.
Yes, and yes, Daniel we're seeing general generally increased interest in pop health offerings, and we're seeing that interest in broader places than just the core health system.
Client or prospect environment and so.
As part of our response to that.
It's been helpful for us to expand our capacity and our capabilities there.
One of the the case studies that we referenced in our prepared remarks includes a good example of that where.
In our relationship with Carl help <unk>.
Included in that relationship is is a meaningful pair capability with their help alliance organization.
And we continue to benefit as a company from those experiences where we're working more directly with.
With organizations broader than a traditional health system, and then that informs our population health roadmap that also informs our go to market messaging and strategy and helps us continue to expand.
Okay got it very helpful. And then suddenly to David's question on professional services gross margin I understand you're not guiding yet to 2022, but I was wondering if directionally you could help us out and how we should think about that over the next 12 to 18 months.
Do you anticipate getting back to the thirties are kind of the 2019 level or is it really more of a structural shift here that will keep you in.
Mid to high twenties for some time.
Question. It is something that we're considering and thinking through in assessing that data on through the rest of the year.
So we're not entirely.
The yet to kind of make any to your point more formal of 2022 color or guidance as it relates to professional services gross margin.
I did mentioned, there's some some of that impact that we sign.
Q3.
Some of that could be more run right some could be more one time in nature.
There is also in queue for an impact to our margin related to the outsized team member compensation and bonuses that we described some of that will also impact our professional services gross margin. That's more one time in nature. So we will have more visibility as we get through the end of the year and in particular assess at the beginning of neck.
Last year what.
What mix of services have we sold in queue for what that mix looks like in our first half of 2022 pipeline the utilization rate of our team members and that's really what will drive that that guidance and color that will provide in 2022 and then in terms of the long term professional services target of mid thirties.
Update to that at this at this point in time, something that work again assessing and looking through over the next couple of quarters.
Only thing I would add would be.
Just when we think about the role of professional services that helped catalysts and the purpose of our professional services as we've mentioned a number of times in previous calls.
We think of that is really being focused on providing the right mix of services that enable our clients to measurably improve and when that when what they need changes.
Based on what we are working on together.
We optimize in favor of those measurable improvements, which can mean that the mix shifts meaningfully and you've certainly seen that throughout the past 10 quarters that we've we've reported as a public company.
And we anticipate that that will continue to be a dynamic that that we're optimizing first and foremost for what our customers need in order to measurably improve and we allow those needs to really dictate the kind of mix.
That we offer up to those clients and we think that's the right long term strategy.
Yeah. It makes sense thanks, guys.
Q. Our next question comes from the line on Dodge from RBC capital markets.
Hey, good afternoon. This is thumbs color on for Sean Thanks for taking my questions.
I wanted to talk about the wider dos offering an correct me if I'm wrong here you all been working on that type type of offering prior to the pandemic.
Native sort of Covid specific version that you are selling at a discount and so my question is how many of those are in use and are you all continuing to offer a lite version of the platform and has that offering evolved.
Yes happy to comment on that Thomas so.
As you mentioned, we had begun conceptualizing.
The idea of a lighter dos offering before the pandemic as the pandemic hit in the spring of 2020, we accelerated some of our thought processes there and some specific use cases, there that were most relevant.
Her response to the pandemic and we've continued to evolve and develop and refine that top process, we do believe that.
Enabling a lower price entry point.
For our clients to begin a relationship without the catalyst is a good long term strategy we've seen.
A few successes in that regard.
And were encouraged to see more representation in our pipeline.
As it relates to this letter offering coupling that lighter offering with specific use cases at the app's later.
Which we have more of now.
Through the introduction of our own built capabilities as well as through some of our M&A activities certainly is encouraging to us we've built in a modest amount of of that.
That capacity in that capability into our our forecasting.
And more than a modest amount like we've talked about before.
Success, there would represent some upside tour forecasting.
And so just to clarify the mid teens doth target does include some some lighter option.
At a modest level, yes.
Okay. That's helpful. That's all for me. Thank you.
Thanks Thomas.
You. Our next question comes from the line of Iris long from Bamberg. Your question. Please.
Hi, Thanks for taking my question Sofa, a question on pricing an escalator. So I'm wondering does inflationary environment. How are you thinking about pricing for your solution. In general are you going to and would you be able to raise the price for some of the existing contract.