Q3 2022 Health Catalyst Inc Earnings Call
Welcome to the health catalyst third quarter 2022 earnings conference call.
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Sound quality.
Lastly, if you should require operator assistance. Please press star zero and I would now like to turn the call over to Adam Brown Senior Vice President of S P&A and Investor Relations.
Sir please begin.
Good afternoon, and welcome to Health Catalyst's earnings Conference call for the third quarter of 2022.
Which ended on September 32022 my.
My name is Adam Brown, and I'm, the senior Vice President of Investor Relations and financial planning and analysis for health catalyst with me on the call is Dan Burton, Our Chief Executive Officer, and Brian Hahn, Our Chief Financial Officer.
A complete disclosure of our results can be found in our press release issued today as well as in our related form 8-K furnished to the SEC.
Of which are available on the Investor Relations section of our website and IR Dot health catalyst Dot com.
As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call.
During today's call we.
We will make forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Regarding trends strategies, the impact of the COVID-19, pandemic and inflationary macroeconomic environment on our business and the results of operations, our pipeline conversion rates and our general anticipated performance of the business.
These forward looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date.
We disclaim any obligation to update any forward looking statements or outlook.
Actual results may materially differ.
Please refer to the risk factors in our Form 10-Q for Q2 2022 filed with the SEC on August five 2022, and our Form 10-Q for Q3 2022 that will be filed with the SEC.
We will also refer to certain non-GAAP financial measures to provide additional information to investors.
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 Bryan will subsequently provide his prepared remarks.
Dan and Bryan will then take your questions.
Dan.
Thank you Adam.
And thank you to everyone who has joined US this afternoon.
We are excited to share our third quarter 2022 financial performance along with additional highlights from the quarter.
I will begin today's call with some commentary on our third quarter 2020 to financial results by sharing that we are pleased with the company's overall financial performance. Our Q3 2022 total revenue was $68 4 million, representing 11% growth year over year and our adjusted EBITDA was it.
Loss of $4 6 million with these results, beating the midpoint of our quarterly guidance on each metric.
Additional financial highlights from the third quarter include our technology revenue of $44 million, representing 15% growth year over year.
Our adjusted overall gross margin of 51, 2%, representing an increase of approximately 25 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 first category improvement is focused on evaluating our ability to enable our clients to realize massive measurable improvements while also maintaining industry, leading client and team member satisfaction and engagement.
Let me begin by sharing a few examples of client improvements from recently published case studies.
First as part of its population health strategy, Wakemed health and hospitals utilized our software, including our Daas data platform and health care about AI to meaningfully improve patient access performance.
To implementing our solution wakemed knew that patients often had trouble accessing it system, but it lacks the actionable data that would enable the identification prioritization and management of improvement opportunities.
Leveraging our technology Wakemed can now visualize patients across key performance indicators.
<unk> referral conversion rates.
<unk> utilization new patient visits cancellations no shows visit types and patient portal activation rates.
After learning from its data wakemed prioritized upgrading and improving its patient patient scheduling process optimizing its patient referral process and increasing the number of new patients while simultaneously growing the number of wakemed physician practices.
Just one year the combination of our health catalyst solution and the Wakemed team's efforts ultimately led to wakemed, increasing its revenue by over $25 million and achieving more than 15% relative increase output.
Outpatient visits visits.
<unk> is part of a broader client relationship banner health engaged in a tech enabled outsourcing relationship with health catalyst related to their clinical charter traction needs, which included help catalyst hiring a portion of banners charter Jackson team has re badge to health catalyst team members, who continue to perform charter distraction for banner.
Health.
Leveraging our daas data platform to automate several components of the obstruction process.
We effectively allowed banner to lower its cost and improve its clinical chartered traction efficiency, while simultaneously improving the abstracts and team member experience.
Tech enabled outsourcing relationship has resulted in banner realizing hard dollar annual savings of over 750000, an abstraction labor costs and registry cost save.
Additionally, this automation has allowed the clinical chart abstraction resources to support banners quality improvement initiatives, including a 46% improvement in case submission accuracy for electronic clinical quality measures reporting Andy identify the identification of over 71000 cases out of 200.
25000 that would've been submitted in error lastly.
Lastly, the team member engagement scores. So the re badge chart abstraction team has seen a 30% relative improvement.
Also in the improvement category, we have been fortunate to receive multiple recent external recognitions related to our team member engagement first.
First we're excited to have been named to modern Healthcare's 2022, Best places to work list for the 10th year in a row. Additionally, we are pleased to have been recently named the Salt Lake Tribune 2022 top workplaces in Utah a.
A list that is based solely on employee feedback marking the ninth year in a row that we've achieved this distinction.
Our next strategic objective categories growth, which includes the beginning new client relationships, while also expanding existing client relationships.
In this category, let me first share that in September we hosted our ninth annual healthcare analytics summit inclusive of our annual user conference. We were excited to hold this year's conference back in person and Salt Lake City, and we were energized by what we viewed as a highly successful growth focused event that included over 1000.
Attendees, representing more than 175 existing clients and prospective client organizations and included over 70 representatives from existing client organizations presenting their improvement case studies realized in partnership with health catalyst.
As it relates to our current selling environment, our healthcare analytics summit, along with numerous other existing client and prospective client conversations over the last quarter have given us hundreds of opportunities to listen and gather additional data and feedback related to the current growth environment.
A subset of those hundreds of interactions I have personally had the opportunity over the past three months to visit face to face with the Ceos.
Oz Cfos.
<unk> and other executives at 15 of our top 20 clients and over half of our top 50 clients with our top 50 clients representing over two thirds of our company's total recurring revenue under contract.
In person meetings had been a significant recent focus of our team and of mind given our current end market dynamics as we strive to better understand our clients' challenges and to help ensure that we are offering solutions that help our clients overcome these challenges and succeed.
I, along with our client and growth organizations will continue these visits with our largest client in the months ahead to ensure that we strengthen these relationships by offering solutions that enable both short term and long term success for our clients.
As we have synthesized feedback from our clients and prospects I would share that while we see both headwinds and tailwind as it relates to our growth in Q4 and beyond we are encouraged to see a meaningful increase in the size of our pipeline, particularly in those parts of our portfolio that offer near term hard dollar cost.
Cost savings.
As it relates to headwinds aligned with what we shared last quarter, our health system and market continues to experience meaningful financial strength.
Primarily due to significant increases in labor and supply cost without a commensurate increase in revenue.
Leading to substantial margin pressure we.
We anticipate this dynamic will persist for at least the next few quarters.
The number one theme we heard at our healthcare analytics summit was the significant financial pressure and health systems interest in leveraging technology and services solutions to help mitigate that pressure.
Next as shared on our last earnings call.
In the first half of this year, we experienced an elongation in several of our sales cycles as many health systems temporarily pause purchasing decisions to give themselves time to realign their budgets with our updated financial outlook.
Now as it relates to tailwind.
As we've continued through the second half of the year most health care organizations. We've spoken with have had the opportunity to work through 2022 re budgeting process that now aligns with their updated annual financial expectations, which we expect will enable more purchasing decisions by the end of this year relative to the first half of 2000.
22.
And we expected those purchasing decisions will be largely focused on solutions that deliver hard dollar financial improvement in the near term.
This gives us incremental confidence in our pipeline conversion expectations for the remainder of 2022.
Second as it relates to tailwind while financial strain has continued to pressure health system budgets in our recent sales conversations we have heard a strong acknowledgement from our clients that our portfolio includes solutions that directly reduce health systems current financial pressure.
Especially related to the segments of our offering but have a clear near term financial ROI, such as our financial empowerment suite, our population health suite and our tech enabled outsourcing offering.
Coming out of this quarter, we feel highly energized that our offering along with our partnership approach with clients is resonating with current and perspective clients.
That provides us with a high level of confidence in our Q4 and full year 2022 performance in guidance the.
The meaningful increase in the size of our pipeline that we have observed over the last 90 days, particularly in those solutions that offer near term hard dollar client benefit also encourage us as we look forward to the reacceleration of our bookings growth in 2023 and beyond even as we navigate a challenging macroeconomic.
And market environment.
Lastly related to <unk> My recent face to face conversations with senior executives at dozens of our largest clients has reinforced my conviction in the strength and strategic nature of those partnerships I have confidence that these relationships will continue and expand well into the future.
These updates inform an increase to our projected 2022 dollar based retention.
And our forecasted revenue for full year 2022.
Brian will cover the update to our 2022 revenue projection in a few minutes and I'm happy to share that we now expect our 2022 dollar based retention achievement level to be between 97% and 101% an increase relative to the range, we shared last quarter.
Criminal confidence is driven by growth in our existing client expansion pipeline relative to prior expectations and a modest reduction in forecasted churn for 2022.
The largest increase in expansion opportunities.
It has come in the area of tech enabled outsourcing.
Related to our dos subscription customer bookings metric, we are reaffirming our expectation to achieve mid to high single digits net new dos subscription customer additions in 2022.
As it relates to our net new dos subscription customer metric.
A reminder, that we typically experience seasonality in our new client bookings with Q2 and Q4 normally representing the majority of our sales aligned with health care organization fiscal years. This fourth quarter will also represent an important new client selling season as most most fourth quarters have been for our.
Throughout its history.
In terms of the mix of our Q4, new client pipeline, we do anticipate a few opportunities with new Das light subscription clients will begin at a lower price points than our historical average and will also include other newer platform offerings, including continued integration with the <unk> platform components.
With significant upside opportunity over the medium to long term, which will enable us to get started with certain prospects, while they navigate near term budget constraints.
Lastly in the strategic objective category of growth I wanted to first thank Patrick Nelli for his countless contributions to our company's success over the last nine years as he transitions to a strategic adviser role and I wanted to share my excitement for Kevin Freeman recently appointed as our Chief growth Officer.
And Todd knew Jr, Brian as our Chief marketing Officer.
Kevin and Tara bring decades of experience to their respective roles.
And we will have overall responsibility for strategic growth functions at health catalyst I am highly confident each of them will be instrumental in driving our success as we strive to reaccelerate our growth moving forward.
Next I would like to provide an update on a few of the strategic investment areas that we've covered on our last earnings call.
Based on the multitude of client and prospect conversations that we have had over the last quarter, including at our healthcare analytics summit. It is clear to us that there is high satisfaction with many aspects of health catalyst existing solutions as clients and prospects are focused on the most effective ways to utilize our software and services.
To alleviate their near term financial strength, we are continuing to make several strategic R&D investments in order to maintain our position as a market leading data platform over the long term with a focus on providing our clients with a strong ROI over time as we have continued to share these investment focus areas with our clients and <unk>.
<unk>, including at our recent healthcare analytics summit user group.
The feedback was very enthusiastic and affirming of our R&D direction as a reminder, our investment and our data platform scalability includes cloud native modern architecture capabilities with Snowflake enablement elastic commute compute and event driven processing.
As we have previously shared we have been investing in this initiative for the last couple of years.
In terms of rolling these capabilities out to clients one of our largest recent client additions is deployed in a cloud native environment and we have begun migrating one of our longest standing on premise clients to a similar cloud native environment more broadly for existing clients. We are in the early stages of a migration process that we anticipate.
We'll take two to three years as our existing database infrastructure continues to function well for the vast majority of our clients individual migration decisions will be driven by the size of the client data footprint and their desire and readiness to transition.
Also as a reminder, we have been investing in our technology is time to value capabilities, including standard space data models plug and play data acquisition enablement enhanced data quality embedded AI and machine learning capabilities and extensible unified data model, we expect the bolus of this investment to be.
Completed in 2023 with meaningful progress already made to date and with many of our clients currently benefiting from the results of these investments.
Weighted to our strategic technology investments, let me also share my excitement for the recent appointment of Dave Ross is our Chief Technology Officer, Dave Dave joined Health catalyst in 2021 as part of our twist <unk> acquisition and was previously the Chief Technology Officer, and co founder of twist, all leading all product development and engineering activities.
For over 10 years prior to <unk> being acquired by health catalyst, Dave brings a wealth of experience directly related to the strategic investments. We are currently making in our technology and I am confident he is the right leader to enable our success in this chapter of our company's growth.
I would like to thank Brian Hinton for his 10 years of service dedication and significant contributions to our company's mission and success and various technology leadership roles over the years, we wish Brian hidden continued success in his future endeavors.
Finally, let me share that as we continue to invest strategically in our software and services. We are strongly committed to balancing those investments in order to achieve the profitability targets. We shared on our last earnings call. While we have certainly approached our cost reduction efforts to be consistent with the health catalyst way as you will hear from Brian .
We are pleased to be ahead of schedule relative to our prior cost reduction forecast, including for 2022 and as such we are raising our adjusted EBITDA guidance for 2022. This is a strong signal of our commitment in 2022 and beyond to execute on our previously stated.
Near and midterm profitability and free cash flow targets.
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, what Dan shared and say that I am pleased with our third quarter performance.
I will now comment on our strategic objective category of scale.
For the third quarter of 2022, we generated $68 4 million in total revenue.
This total represents an outperformance relative to the midpoint of our guidance and it represents an increase of 11% year over year.
Technology revenue for the third quarter of 2022 was $44 million Rep.
Representing 15% growth year over year.
This year over year growth was driven primarily by recurring revenue from new client additions and from existing clients paying higher technology access fees as a result of contractual built in escalators.
Professional services revenue for Q3, 2022 was $24 4 million.
Representing 4% growth relative to the same period last year.
Overall, our Q3 2022 total revenue performance was slightly higher than our guidance contemplated.
Primarily due to technology environment go lives occurring on average faster than anticipated.
And delayed timing of certain previously known churn events.
Okay.
For the third quarter 2022.
Total adjusted gross margin was 51, 2%.
Representing an increase of approximately 25 basis points year over year.
In the technology segment, our Q3 2022 adjusted Technology gross margin was 68, 2% of.
A decrease of approximately 170 basis points relative to the same period last year.
This year over year performance was mainly driven by continued costs associated with transitioning a portion of our client base to third party cloud hosted data centers in Microsoft Azure.
Which increases our hosting costs.
As well as increased support costs.
Really offset by existing clients paying higher technology access fees.
Contractual built in escalators.
In the professional services segment, our Q3 2022 adjusted professional services gross margin was 24%.
Representing an increase of approximately 40 basis points year over year.
And a decrease of approximately 610 basis points relative to the second quarter of 2022.
This quarterly performance was in line with the expectations, we shared on our last earnings call.
Mainly driven by lower utilization rates as compared to Q2.
A result of higher per client staffing levels than we anticipate at steady state.
In Q3 2022, adjusted total operating expenses were $39 5 million.
As a percentage of revenue adjusted total operating expenses were 57, 8%.
Which compares favorably to 63% in Q3 2021.
Adjusted EBITDA in Q3, 2022 was a loss of $4 6 million.
With this figure outperforming the midpoint of our guidance and comparing favorably to an adjusted EBITDA loss of $5 8 million in the third quarter of 2021.
As a reminder, our Q3 operating expense is inclusive of approximately $3 million in expense related to our healthcare analytics summit.
Our adjusted net loss per share in Q3, 2022 was the loss of 13th.
The weighted average number of shares used in calculating adjusted net loss per share in Q3 was approximately 54 3 million shares.
Turning to the balance sheet. We ended the third quarter of 2022 with $380 million of cash cash equivalents and short term investments.
Compared to $445 million at year end 2021.
Additionally, the face value of our outstanding convertible notes as a principal amount of $230 million.
And the net carrying amount of the liability component is currently $226 1 million.
As it relates to our financial guidance for the fourth quarter of 2022 weeks.
We expect total revenue between $66 9 million.
And $68 9 million.
And adjusted EBITDA losses between $2 1 million.
<unk> zero point $1 million.
And for the full year 2022.
This implies we are raising our full year revenue and adjusted EBITDA outlook.
Now expect.
Total revenue between $274 million.
And $276 million.
At their respective midpoint.
This represents an increase of $1 5 million.
Compared to the full year revenue guidance, we provided last quarter.
We also expect adjusted EBITDA losses between $4 million and $2 million.
At their respective midpoint. This represents an improvement of $2 million compared to the full year adjusted EBITDA guidance, we provided last quarter.
Now let me provide a few additional details related to our guidance expectations.
In terms of Q4 revenue expectations, we anticipate that our technology revenue will be flat to slightly up sequentially.
And that our professional services revenue will.
It will be flat to slightly down sequentially.
Next in terms of our adjusted gross margin.
Continue to anticipate that our adjusted technology gross margin will be in the high <unk> for the fourth quarter.
And the professional services segment, we anticipate that our professional services adjusted gross margin will be flat to slightly down as compared to Q3 2022.
This was partially driven by lower anticipated utilization rates as a result of higher per client staffing levels than we anticipate at steady state.
And partially driven by the anticipated mix of services to be delivered in the quarter.
Lastly, as Dan mentioned, we are ahead of schedule on our cost reduction efforts for 2022.
Which enabled us to provide improved EBITDA guidance for 2022.
With most of these restructuring events occurring in the second half of 2022.
And a portion in early 2023.
As a reminder, these restructuring efforts include pausing our investment in the life Sciences adjacent market.
Realizing further SG&A savings as a result of M&A integration and an additional focus on sales efficiency.
Streamlining our expenses and other selected areas and further expanding our offshore delivery capabilities.
Importantly, as it relates to our updated.
Adjusted EBITDA full year guidance.
Our current range is now consistent with the original full year guidance that we provided entering 2022.
Demonstrating continued operating leverage in our business model, despite lowered annual revenue guidance for 2022.
With that I will conclude my prepared remarks, Dan.
Thanks, Brian in conclusion, I would like to recognize and thank our committed and mission aligned clients and our highly engaged team members for their continued commitment to our mission in the midst of challenging circumstances and with that I will turn the call back to the operator for questions.
Thank you Sir.
And the floor is now open for questions.
At this time, if you have a question or comment please press star one on your telephone keypad.
At any point. Your question is answered you may remove yourself from the queue by pressing star Q.
Again, we do ask that you pick up your handset when posing a question to provide optimal sound quality.
Our first question will come from Anne Samuel with Jpmorgan. Your line is open.
Hey, guys. Congrats on the results and thank you for the question.
You saw your cost improvements come in sooner than expected I was hoping maybe you could talk a little bit about well you've done there so far and if there's still any areas left proceedings.
Yes happy to address that thanks Annie.
We are pleased to see that our cost reduction.
Objectives are ahead of schedule and we have found in a couple of areas, particularly those SG&A areas.
That we have some meaningful operating leverage we mentioned it in her prepared remarks some.
Some operating leverage as it relates to sales efficiency and we will continue to pursue operating leverage moving forward importantly, as we also mentioned in our prepared remarks, we are going to continue to invest from an R&D perspective, and some high priority strategic investment areas, but we were pleased to find operating leverage.
In other parts of our operation and our operating expenses.
Dan to that to make some quick question any or is it some of the some of the expense reductions you've seen kind of through Q3. Some we're working on in Q4. So there is not a full quarter's worth of kind of impact there yet in terms of opex in Q4.
And then we will likely work through some in early 2023, and so as we as we get into our kind of final operating plan early next year will provide specifics on.
More detail in terms of those reductions in our progress on EBITDA and cash flow.
That's great looking forward to hearing more color on that in the future.
You also had some really encouraging commentary on the pipeline I was wondering if you could talk a little bit about is that related to dollar based retention. Since you were able to raise there or if you're also seeing it in new client demand as well and maybe what sort of the conversations are like with perspective customers right now just given the macro environment.
Yeah happy to address that any.
So we do see meaningful encouraging signs with our existing clients and we see some encouraging signs with new clients. I've spent the majority of my time focused on our existing clients that have spent some time with new clients as well.
As mentioned in our prepared remarks have spent and had the opportunity to have dozens of face to face interactions with C suite executives at our largest clients.
And what I would characterize as the as the environment is number one very much a focus on the financial pressure that these health systems are facing but number two.
A really productive series of discussions about us being part of that solution and being able to focus on those parts of our portfolio that really deliver near term cost savings near term financial improvement.
And that's the part of our pipeline, where we've seen really meaningful expansion.
And that's certainly been encouraging to us. So we're we're excited to see that.
That progression take place and we've been encouraged thus far we will have to see kind of how that exactly progresses. As you know historically, we've typically had longer sales cycles of about 12 months. So we'll need to see exactly how that increased pipeline plays out over time.
But we've certainly been encouraged to see so many of our existing clients and some of our prospective clients also recognize that we have parts of our portfolio that can really deliver for them in the near term from a financial perspective.
That's great to hear thanks for the color.
Thanks, Andy.
Thank you.
Our next question will come from Ryan Daniels with William Blair. Your line is open.
Yes, good evening, thanks for taking the questions. Congrats on the strong performance Dan one for you as a follow up to your prepared comments. Besides the conversations youre, having with clients I'm curious how your organization can actually proactively analyzed data existing clients to help them uncover more near term savings opportunities.
And to really propagate best practices between clients to ensure they are achieving improvement.
Yeah. Thanks for the question Ryan that's very much the approach that we're trying to take with each of our clients, there's sort of a multi layered way in which we can help them in the near term with their financial savings. The first layer is as I mentioned, just a minute ago and in our prepared.
Remarks, often that direct near term hard dollar savings that we can offer through something like tech enabled outsourcing or through our financial empowerment suite or pop health really helps.
Our clients feel that assurance that yeah. Those are the kinds of cost savings that they can build right into their budget in the near term.
That's not where we stop so there's a there's a second layer, which is that full force multiplying impact which is we not only look for the specific savings within areas, where we might take more direct responsibility, but we're also looking much more broadly within the entirety of the health system setting where are there specific.
Data informed opportunities for improvement that sometimes those take a little bit more time to go after but are there.
Theyre actually enabled in terms of the ability to go after them by some of the efficiency gains that we gained in that first category. One example is outsourced charter distraction, where almost everyone that has involved before we use our tech enablement is typically clinically trained often nurses.
We're performing that manual chart abstraction.
Inexpensive at an inefficient way.
We leverage our technology, including the Dodge data platform to automate certain steps in that process that frees up critical resources that can then be redeployed towards specific improvement projects that can be that force multiplier in cost savings opportunity and the client doesn't need to come up with incremental budget because they can just redeploy the savings.
To go after a larger opportunity from a cost perspective, and so that is an important part of that multi layered.
Partnership that our clients get with US is yes, the direct cost savings from some of the specific parts of our portfolio, but also the second layer of force multiplier cost savings across the organization just to add to that.
The other component Brian that we're working on in addition to the.
Got it.
Key member contributions that Dan mentioned, the use of the technology to share data and best practices and uncover opportunities for cities. We're also working on.
Continuing to utilize our case studies are success stories across our client base to share with other clients and prospects on what's working well we had a great opportunity to do that just recently at our healthcare analytics summit, where there were over 70 clients presenting those best practices those results have been achieved.
Recently, and so that was just a great event to get additional feedback into really promoting share opportunities across our client and prospect base.
Great. That's super helpful color I appreciate all the detail and maybe one more question.
As we think about the ability to offer hard dollar savings that clients can actually budget, obviously very attractive thats got to drive your revenue retention in your pipeline conversion I'm curious if you've contemplated doing more risk based contracting given.
Given your ability to kind of prove this time and time again, maybe that touches them forward does that occurring conversations either at the management level or client level. Thanks, guys.
You bet. Thanks for the question Ryan. So we we are open to multiple <unk>.
Types of structures with our clients, what we're finding that they're most interested in right now in that first category that I talked about is just the ability to budget specific cost savings often in.
Our tech enabled outsource contracts for example, we can write in something like up to 15% savings within the first nine months relative to what they've been spending.
And do that while re badging their team members and when we realize those efficiencies we're able to often still retain those team members just deploy them elsewhere in other projects at the same client or in other projects with a different client in so it's a it's a win for the health system from a cost savings perspective, and it's a win for the team member as well in terms of.
Their career path moving forward.
We've been open to additional shared savings or or shared benefit types of models, but often we find that our clients. Just appreciate the simple straightforward nature.
What we typically offer which is just especially the cfo's appreciating that they can budget a specific dollar savings that happens on a very predictable time horizon in that first year and then we typically agreed to and a very modest annual increases that often expand their relative.
Improvement in cost structure over time.
Versus what they would've experienced themselves in terms of their own cost structure growing.
Thank you again guys I appreciate it.
Thanks Ryan.
Thank you.
Our next question will come from Jessica <unk> with Piper Sandler Your line is now open.
Hi, Thank you so much for taking the question.
I was hoping you could maybe talk a little bit about how the life point deployments going and then just from kind of a tech architecture perspective can you help us understand how each cat work either with or alongside of the Google Health cloud deployment, but I think life point sort of signed concurrently like we're just one vendor start.
On the other end.
Thanks.
Yeah.
Thanks for the question Jess.
As we mentioned last quarter and published as a press release, we were really excited to welcome life point as a client of health catalyst, we were grateful to have them meaningfully participating in healthcare analytics summit and we're excited to see the deployment.
On schedule and moving along meaningfully well.
It is a cloud native deployment and in this architecture that we referenced in our prepared remarks.
Part of the benefit of this architecture is its ability to integrate.
To integrate with other modules with other modular components that a client might.
<unk> is important to them and so that was one of the elements that was appealing to life point about the architecture that we shared with them and that's working well so far.
The main focus.
Terms of our initial use case at life point Justice clinical improvement related to clinical variation. Some population health use cases as well all leveraging the data platform.
And from what we understand the initiative with Google was a little bit more so focused on.
That kind of front door.
The health system getting out to patients and longitudinal patient record. So it is a different use case that we have there currently.
Got it and then if I could just squeeze in one more on the tech enabled outsourcing I feel like we've seen that.
Come up more and more in the last couple of months.
Can you just help us understand where does that fit in terms of add on services or <unk> revenue and then is that considered recurring revenue.
Kind of what does that offering.
It does.
Yes.
Like what types of services.
Yeah, absolutely so we do.
Classify their tech enable outsourcing as services revenue.
And it's been one of the <unk>.
Services offerings that we've offered now for eight years and so we have a meaningful track record in quite a bit of experience.
Offering tech enable outsourcing to a number of our clients starting with Atlanta help eight years ago.
Some of the areas, where we have the most experience in crude outsource charter distraction like we shared in the prepared remarks with banner health and others are leveraging and realizing meaningful cost savings.
It is typically structured as a multi year contract offer at a five or longer year contract recurring revenue on the services side one other of the other benefits that we've seen over the last eight years is because we use our own technology to produce that meaningful savings often up to 15.
Percent savings relative.
Relative to what the client has been spending.
We do require that in most cases that our clients remain current on their technology subscription and so we've found over time that that the stickiness of the technology subscription is very strong very significant.
In all of our relationships, where we have tech enabled outsourcing in place as well and so there is just a component of both technology and services in terms of the revenue drivers there as Dan mentioned the technology subscription use of the data platform increased utilization there into the technology side and the.
And the kind of offering that Dan mentioned of analytics or try to extraction hits more on the services side from a revenue standpoint.
Got it thank you.
Thanks Jess.
Thank you.
Our next question will come from Elizabeth Anderson with Evercore ISI. Your line is open.
Hi, guys. Thanks, so much for that question.
Thanks.
You guys are thinking and I think I haven't heard this before as you were talking about the delay of a certain churn event benefiting revenues is that sort of like a.
Change in the churn event itself or is that sort of just a push out of that I was wondering if you could just sort of give a few more details on sort of your expected timing there that'd be helpful.
Yeah, absolutely. So Elizabeth we have been encouraged and in a couple of things that we mentioned in our prepared remarks I mentioned that.
I have been encouraged to see the existing client pipeline expand meaningfully and we've also seen a relative.
Modest reduction in the forecasted churn that we were expecting in 2022, we've also experienced as Brian mentioned in some of his prepared remarks some delays.
In potential churn that we had forecasted and sometimes that results in just there being a delay other times it results in the client, making a different decision.
And we appreciate the opportunity to have a little bit more time to explore how to move forward in the most positively with our clients. So both of those dynamics are elements that we've observed.
Got it that's really helpful. And then I think you also talked about as well as your customers being more interested in generics short term ROI hard dollar decision. You also talked about some investments that you guys have made in sort of.
Improving the ROI or the speed of the ROI on your core Das platform I was wondering if you could expand on that a little bit like what those are.
Sort of how that's I'm sure it's early in that progression, but.
If you could talk a little more about that as well.
Yes, absolutely Elizabeth so our clients are definitely focused on how can we alleviate our own financial pressures and what opportunities do we have both with technology and with services.
That will enable that to occur and we gave a few examples in our prepared remarks for example.
In the area of Tech enabled outsourcing, we've been investing in Tac, but more quickly automate certain processes that were manual a good example of some of that tech includes the acquisitions recently of RMS and KPN Ninja importantly.
Importantly, keep you in India is becoming an important part of our data platform and it does enable us from a time to value perspective to realize some of those automation steps faster than we otherwise could have likewise, when we think about the foundational value proposition of the data platform, we want to make sure that that kind of.
Value is always really strong and the investments that we're making in the cloud native architecture speed up the implementation time and our ability to scale up in terms of the data thats flowing into the into the data platform much more quickly and much more significantly which just opens up.
Roy use cases, much sooner than they otherwise would be available to the client.
But you don't have a specific timeline on sort of like a new type of I know previously you talked about it seems like it's more like a two year period.
I think new type of period, you're just making improvements across the board as you guys see that.
We are we shared in our prepared remarks that we expect that most of the investment in this next iteration of our data platform will be completed in 2023, and then we'll be working with clients and migrating them to be able to take advantage of all of those capabilities over the next couple of years.
To add to that to your question Elizabeth.
Our ways that we're driving that hard dollar ROI savings a little more quickly than what would be typical it kind of an analytics platform deployment and that is based on focusing on those three areas that Dan mentioned at the financial empowerment suite. The pop health suite Tech enabled outsourcing, which can drive that budget savings more near term and then in addition to that we still have.
That kind of core analytics value proposition, where once you are using the data you can identify.
Good ways to drive additional costs or or improvement work on top of that data and we're trying to again speed up that component as well got.
Got it that's super helpful clarification, Thank you very much.
Thanks Elizabeth.
Thank you.
Our next question will come from Stephanie Davis with SVP Securities. Your line is open.
Hi, guys. This is Andy presenting on for Stephanie. Thank you for taking our questions and congrats on the quarter.
The next data point on I can spend trends across the banners. So I was hoping you could share some color from your recent client conversation, we're focused on investing and where are they coming back.
Yes, it's a great question. Thanks Ana.
We would observe and I would personally observed just having completed dozens of these face to face discussions with CIO as well as Ceos or cfos that as we mentioned in our prepared remarks theres a theres a very significant focus on what solutions deliver near term hard dollar financial results.
And there is there is a definite shift away from <unk>.
What I might characterize as the more traditional sort of a science project and we will.
Really excited about this new technology, and you need to come up with new budget and there is no guarantee as to whether it will produce anything from an ROI perspective, theres actually been a lot of that in healthcare over the years and and I have certainly heard over and over and over again.
Our existing clients.
Pivoting strongly away from those.
And in many cases consolidating.
What remaining spend that they are prioritizing on fewer long term partners like health catalyst in.
We happen to also share a number of customers with epic.
And there are definitely another consolidation platform, where we see our clients doing more and more with epic and we encourage that mindset and that strategy.
And often our clients are able to to realize a much more significant ROI on the investments they've already made in those consolidation platforms and we're fortunate at health catalyst to be considered one of those consolidation platforms and we're fortunate to have a few elements of our portfolio that are specifically designed to deliver that.
Near term ROI that is absolutely kind of a 100%.
Of my conversations with C suite executives have been focused right on that that ROI and making sure that all of that our investments are going to produce a very measurable hard dollar ROI or they're not investing.
Got it alright, thank you for that color.
Follow up.
Given the current labor market can you give us an update on where you are recruiting from and just how that's developed over time and how are you ensuring that your income from Cowen.
So quite healthy.
Yes, absolutely great question, and we are seeing that.
As I think.
The broader industry.
Experiences some more headwinds in terms of its financial performance certainly we're finding that there's a little bit more equilibrium in terms of labor supply and labor demand, it's still challenging but we have benefited at health catalyst from.
Long term multi year more than a decade focused on being a highly engaged.
Lawyer, and a best place to work and so we continued to benefit from that we continue to see turnover rates that are well below industry averages and very very high engagement levels. So what do we do have open positions at health catalyst.
We benefit from the fact that we get many many applicants for those physicians in a very high conversion rate when we extend offers that.
That is a process, where we will never be done focusing on high team member engagement, but we have found that that's that's a benefit.
At health catalyst realizes and it's one of the reasons why many of our clients are interested in tech enabled outsourcing where they've had a lot of difficulty from a hiring perspective, and a retention perspective and they see the results that health catalyst is achieved and believe that we can help them benefit.
From much higher engagement levels are much lower turnover levels as well.
We are we are also focused on.
As we mentioned driving additional efficiencies in areas like like SG&A in particular.
On the services side and like.
But we are investing in certain areas as well and so that's where a little bit more of the hiring like ensuring that we have the right health care specific talent comes in is more so on the R&D side, and particularly related to our platform and other investments.
Awesome. Thank you so much for the color and congrats again on the quarter.
Thanks Anna.
Thank you.
Our next question will come from Richard close with Canaccord Genuity. Your line is open.
Thank you congratulations.
Dan.
And maybe expanding on tech outsourcing I'm curious, how you think about the company.
The company's overall business longer term and that is the mix between technology and professional services revenues longer term and then the gross margin profile of the company.
Yes, great question Richard So.
As you will recall because you were there when we went public three and a half years ago, we talked as part of our IPO Roadshow about the fact that services is really important part of our overall solution set and at the time of IPO. We were closer to 50 50 in terms of the tech and services mix.
For the next three years or so we found that our tech.
Revenue grew at a faster pace than our services revenue and that happened for a variety of reasons. Good reasons, and we expanded our tech portfolio to be much more compelling and much more comprehensive for clients.
When I think forward.
The next few years I wouldn't be surprised if services catches up.
To what we've experienced over the last few years from a from a tech revenue growth perspective in terms of.
Getting back to closer to that balance.
Of around $50 50 that we looked like when we went public and that's how we messaged long term that we expect a really meaningful component of our business to come from both Tech and services. We continue to believe that and we also continue to focus on which elements of our portfolio help our clients be successful given.
They are facing and certainly right now we wanted to be transparent with the investment community that that we're certainly seeing certain elements of our portfolio and that includes technology meaningful technology like our financial impoundments, we like our pop health suite and even with tech enabled outsourcing, we used us heavily and other components of our technology.
Earned us heavily to automate steps in the process.
For for items like charter distraction that would've otherwise been manual and Thats one of the reasons why we require that our clients that are using us for tech enabled outsourcing stay current on their tech subscription for the data platform and so even even in cases, where we might see a part of our services mix grow rapidly.
Like tech enable outsourcing, it's still pulls with that technology at a meaningful level and in the overall context, we probably got a few years of services kind of catching up to the revenue growth that we've experienced over the last few years in the tech space.
Add to that Richard the other kind of item that we're highly focused on us.
Managing to and continuing to drive operating leverage and EBITDA performance.
You saw some of that in terms of being a little bit ahead on our 2022 initiatives.
We are highly focused on that from an SG&A standpoint in particular going into next year.
Take those commitments that we made to EBITDA and free cash flow flow seriously and so that'll be to Dan's point.
We're seeing a little bit of an uptick in terms of our pipeline on the services side.
We'll look at we'll work through that in Q4 in the first half of next year, but we will continue to drive leverage on the EBITDA and cash flow side.
Okay. That's very helpful and then.
You mentioned the.
The investments in the platform over the last couple years.
And expectation of multiyear transition can you talk to us about like how you see the impact of that.
That on the number of dos clients.
That you expect to be signing.
Signing over the next couple of years do you think people wait.
<unk>.
Until the transition fully.
<unk> sort of speak.
I don't think so.
I do believe that with our existing clients as we mentioned in our prepared remarks, we tried to be really thoughtful with those clients about what timeframe makes the most sense and as we mentioned we've already begun that transition.
With one of our largest existing clients and on the new client side, it's actually a lot more straightforward to start with the new technology, the new architecture, because theres not a lot of legacy to migrate and so with new clients. It's more straightforward in that regard, but we do believe.
That the feedback that we've received in terms of the architecture itself. Its scalability. Its modularity is very compelling it's very interesting to both existing clients and new clients. So we're we're excited about that would be great. I think the driver of the das client adds which it will be less so that the technology infrastructure, given we have that we've been marketing that.
Time, more so driven by the end market dynamics that we mentioned the financial pressure on systems can be coupled at platform use case with the near term hard dollar ROI opportunity like we mentioned.
I think I think that <unk> can we can we land in certain areas. It a little bit of a more narrow starting point like what the das side opportunity and then expand from there. So I think those would be the main drivers as compared to the tech and I would share one other dynamic Richard that we're watching.
I mentioned this a few minutes ago that I personally am spending more of my time with our existing clients I would say we want to make sure. Our first focus is always enabling our existing clients to be really successful. We are seeing a pretty dramatic increase in the pipeline of opportunity for growth with our existing clients and I believe we will pray.
<unk>, enabling those clients to grow and be really really successful and get what they need from health catalyst first and foremost and then secondly, we will focus on how can we add new clients as well, but that will be an impact as well as we as we evaluate our growth opportunities and as you know Richard it's often there's often more leverage from our sales efficiency.
Active by growing with existing clients, where you already have an existing relationship and and.
So we will be cognizant of that as we think about our growth trajectory moving forward and the significant opportunities that are presenting themselves for us to expand our relationship with existing clients.
Okay. Thank you very much.
Thanks Richard.
Thank you. Our next question will come from Daniel <unk> with Citi. Your line is open.
Hi, guys. Thanks for taking the question you mentioned youre seeing new opportunities in Das light type pricing models.
As we think about the mid to high single digit net debt. This.
This year what percent do you think will be on the top flight type modeling, what the pricing differential between that and the typical enterprise that subscription.
Yeah happy to take that Danielle. So we mentioned in our prepared remarks that we might expect a few of that total number for the year to fall within that Das light category.
And we've shared previously but often das light you can think of us as starting at about half the price of a typical enterprise.
Starting point, but we do expect most of our.
New dos subscription clients in 2020 to be about that enterprise type of starting point.
Got it okay and on the net dollar based retention of 97% to 101% is that for both tech and professional services or can you kind of bifurcate that out because we have it.
Chip.
It is overall so it's an overall projection and we haven't shared specifics, but we have shared some directional color over time, and we would share that consistent with what we shared just a couple of minutes ago in answer to another question. We are seeing the part of our pipeline that is growing the fastest is tech enabled.
Sourcing and so that would that would push up the services component.
Be a little higher than that overall average and then the tech component, maybe just slightly lower than that overall range average as well.
Got it thanks for the color.
You bet.
Yes.
Thank you.
Our next question will come from David Larsen with BTG. Your line is open.
Hi, congratulations on the good quarter.
It sounds like.
Attrition levels are improving and the pipeline is improving can you provide any color around.
Bookings or backlog and signed deals.
With respect to the <unk>.
Back half of <unk> 'twenty, two what youre seeing so far in <unk> and how.
2023 is shaping out thank you.
Yeah happy to so we are encouraged David as you mentioned to see.
Some improvement as it relates to what we had previously forecasted for churn and certainly a meaningful expansion in our existing client pipeline relative to what we had previously forecasted those are all encouraging signs.
As we have shared before Q2, and Q4 tend to be higher volume quarters than Q1, and Q3 and so we have fewer data points in terms of what we observed for Q3, but we were pleased with.
With our bookings performance for Q3 and early in Q4 as well.
As we mentioned in her prepared remarks Q4 always represents.
Porton meaningful.
Part of the year from a sales perspective, both with new clients and with existing clients and so we're focused on ensuring that we aimed at year strong and we're encouraged by the progress that we're seeing thus far.
The only thing that I would add is the late stage pipeline has continued to progress.
David such that we have high confidence in terms of our coverage for the expansion and new client side that we're working.
Okay, Great. That's very helpful. And then just with the life Sciences solution Das solution is that to lead or have you decided to just sort of not pursue that or could you pick it up like I say next year or two years from now and then.
Like can you talk about growth in your health plan customers would it be possible to create a das type of solution for health plans, we charge a sort of a P. M. P. M REIT and you coordinate care with your largest.
Hospital customers. It seems to me like there's a lot of demand there we're seeing a lot of growth in antibodies like Avalon Test service health plans, just any thoughts there would be very helpful. Thank you.
Yeah happy to address both of those so with regards to our life Sciences solution. We have paused our go to market activities related to life Sciences, I do believe and anticipate that perhaps in a couple of years, we'll come back to that solution set.
Part of that decision was driven by the fact that in our core market, we see significant opportunities to do more to help our clients be successful.
That leads to your second question as it relates to what we might offer to health plans I think our primary focus since inception has been primarily focused on providers now many of our provider clients have also grown into the payer space and we want to grow with them, but our primary focus is still on.
Remaining very deeply aligned with providers and ensuring that we're helping them to be successful and so our pop health offering for example is catered towards providers that are moving into that into the payer space should help on space, but it's for example, very focused on keeping the patient at the center keeps.
Clinical improvement at the center.
Not necessarily something that is always prioritize when you come in at first and foremost from a health plan perspective. So I think we're going to stay with our core focus on our core market being providers and ensuring that we're helping them in every way possible, but that does include helping them to expand into the payer space.
Be really effective and successful there.
Thanks very much.
Thanks, David.
Thank you.
Our next question will come from Cindy Motz with Goldman Sachs. Your line is open.
Hi, Thanks for taking my question and also congratulations on the quarter.
Following up on that last question I know that youre, not giving 'twenty guidance right now, but you do sound encouraged by your bookings.
And it looks like the one client last quarter was just a one off and you raised your net dollar retention guidance to now.
97% to 101 would you expect that 97% to 101 to continue maybe into next year and if there's anything you can give us just in terms of like.
Relative to this year, obviously 'twenty three is still challenging but.
Would you foresee maybe the growth rate that you were thinking about maybe being a little bit better for next year. Thanks, and then I have a file.
Sure.
Yeah. Thank you for the question.
I would share that from a bookings perspective.
We're certainly encouraged by the meaningful expansion in our existing client pipeline that we expressed in the prepared remarks.
Think about how that flows through into 2023.
I would expect our dollar based retention for 2023 to be meaningfully better than our dollar based retention for 2022.
We will provide more of that color on guidance at our next earnings call, but certainly we're encouraged by that as you know based on our recurring revenue business. It does take time for bookings strength in bookings improvement to translate to the P&L and so as we shared previously that will take some time and and.
2023, as a result, we will still be meaningfully impacted by the fact that our 2022 bookings while the second half is turning out to be more robust meaningfully more robust in the first half.
We're still for the year behind what we had originally projected and so that will impact 2023 from a P&L perspective.
But we do.
We do expect based on what we're seeing especially.
Among our existing clients and as I mentioned in the prepared remarks, having had opportunities to have face to face in person discussions with the majority of our largest clients that they want to expand with us they want to continue their relationship with us and they need the help in terms of the cost structure improvements for example, especially that we have.
Solutions that that can help in the near term and there is a significant need and interest for that and so I expect that that will continue throughout the rest of this year and well into next year as well and that should directly impact.
Meaningful improvement in dollar based retention in 2023, but we'll share more specifics at our next earnings call.
I think the way, we think about it as India as what Dan said were bookings. This year in terms of dollar based retention rate is kind of the trough bookings year.
Which does lead to the revenue growth trough here on the P&L being 2023, and particularly in the first half of 2023 as we get into next year, but as our bookings continues to improve and the retention rate improves that will lead to the growth that we expect to reaccelerate in.
2023, second half and in 2024 and beyond.
Okay, Great and just a follow up Brian you talked a lot about R&D being committed to that but also balancing.
The EBITDA margin growth I, just wanted to make sure. So so we're still because youre doing better this year, obviously youre going to come in and it looks like.
With less of a loss this year and so next year, we're at the point, where we'll then were adjusted.
Adjusted EBITDA positive correct and then do you still foresee in the past you've given some guidelines just about where you saw margins going to in a few years is that still.
What youre thinking right now.
Correct, Yes, yes, no no major updates to what we've shared Cindy in terms of the EBITDA progression that we expect in 2020, Threep, which we shared would be about 300 basis points of EBITDA margin improvement. We also shared on our last call a mid term kind of a medium term EBITDA target of 2020 in $2025 to 10 <unk>.
<unk> and then our long term target of 20% plus and so.
No major updates to that we continue to have are encouraged by the progress we're making in 2022, but that will be a key focus for us as we finalize our plan for next year and just along those lines. We were encouraged to see that in 2022 were ahead of schedule with regards to cost reduction and we will continue to make this a.
Focus and certainly share more specific updates.
As it relates to this in our next earnings call for 2023.
Great. Thanks, a lot.
Thank you.
Thank you.
Next we have Jack Wallace with Guggenheim Securities. Your line is open.
And thanks for taking my questions and congrats on a really solid quarter.
Wanted to talk a little bit about some of the.
Faster to burn in demand.
Revenue opportunities you have.
Population health suites Tech enabled.
Outsourcing financial empowerment suites, I'm thinking about the top 50 clients represented the majority of your revenue how penetrated are those offerings inside of that base and then you won't be.
If you could.
You gave us a number for what the potential revenue opportunity is.
And those customers. Thank you.
Yeah, absolutely. So thank you for that question.
I would say as it relates to the to the penetration within our top 50 or top 100 clients.
Our financial empowerment suite.
As.
Inclusive of our recent acquisition of vital Ware.
In the last two years, and then a longer standing solution that we've developed on the cost side with power costing and power labor and.
And both of those though are relatively recent.
Elements in our portfolio and so theres, a great deal of opportunity for us to to further penetrate our existing client install base, even among our largest clients and so on.
Majority of those clients still have the opportunity for expansion opportunities and realizing the meaningful ROI from the financial empowerment suite as well as our <unk> suite and so we're excited about that and we're also focused with our existing clients in particular on enabling that cross sell to be as easy as possible and so as you may recall.
In many cases as our clients grow with us.
So many of them choose to move more towards that all access tech subscription, which has built an meaningful contractual escalators that are often in the double digits from a percentage growth perspective, and the way do they feel good about that as just the ability to add new modules like the financial empowerment suite of the pop health.
That gives them even more value for that tech subscription and so.
Especially with our largest clients that's likely the means of.
Providing that satisfaction and providing that continued.
Reliable tech expansion through the all access subscription contracts there are others of our clients typically are smaller clients that are on more of a modular.
<unk> subscription, where it's more of a step function of revenue opportunity, but but but more of our large clients or are moving towards or have already moved towards that all access subscription trends and then on the other components of tech enabled outsource side I would just mentioned Jack again, there is ample opportunity with that offering as well.
The analytics and charter Protraction side.
Terms of the upsell potential with our call. It top 50 top 100 customers.
Got it that's helpful. Thank you.
Thanks Jack.
Thank you.
This does conclude our Q&A session and I would now like to turn the floor back over to Dan Burton for any additional or closing remarks.
Thank you all for your continued interest in health catalyst and we look forward to future discussions take care.
Thank you ladies and gentlemen, this does conclude today's health Catalyst's third quarter 2022 earnings conference call.
Please disconnect your lines at this time and have a wonderful day.
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