Q4 2022 Health Catalyst Inc Earnings Call
Speaker 1: No.
Speaker 2: Welcome to the Health Catalyst fourth quarter and full year 2022 earnings conference call.
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Speaker 2: I would now like to turn the call over to Adam Brown, Senior Vice President of FP&A and investor relations.
Speaker 3: Good afternoon and welcome to Health Catalyst's earnings conference call for the fourth quarter of 2022, which ended on December 31, 2022. My name is Adam Brown. I am the Senior Vice President of Investor Relations and Financial Planning and Analysis for Health Catalyst. Samson Delta is a maintainer of our government and organization, and chiefpriority runs for
Speaker 3: And with me on the call is Dan Burton, our Chief Executive Officer, and Brian Hun, our Chief Financial Officer. A complete disclosure of our results can be found in our press release issue today, as well as in our related Form 8K furnished to the SEC, both of which are available on the Investor Relations section of our website at ir.healthcatalyst.com.
Speaker 3: A reminder, today's call is being recorded and a replay will be available following the conclusion of the call.
Speaker 3: During today's call, we will make forward-looking statements pursuant to the safe harbor provisions of the Private Security's litigation reform act of 1995 regarding trends, strategies, the impact of the macroeconomic challenges, including high levels of inflation and high interest rates, the tight labor market and the lingering impact of the COVID-19 pandemic on our business.
Speaker 3: update any forward-looking statements or outlook. Actual results may materially differ. Please refer to the risk factors in our Form 10Q for Q3 2022, filed with the SEC on November 9, 2022, and our Form 10K for the full year 2022 that will be filed with the SEC.
Speaker 3: 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 Brian will subsequently provide his prepared remarks. Dan and Brian will then take your questions.
Speaker 3: 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 Brian will subsequently provide his prepared remarks. Dan and Brian will then take your questions. Dan? Dan, how are you doing yesterday?
Speaker 4: Thank you, Adam, and thank you to everyone who has joined us this afternoon. We are excited to share our fourth quarter and full year 2022 financial performance, along with additional highlights from the fourth quarter. Reflecting on 2022, it proved to be a more challenging year than anticipated as a result of the inflationary macroeconomic environment and the meaningful financial strain that our health system and market faced.
Speaker 4: primarily due to significant increases in labor and supply costs without a commensurate increase in revenue, leading to substantial margin pressures.
Speaker 4: while those items resulted in challenges related to our bookings performance in the first half of 2022.
Speaker 4: I am pleased with our financial performance in the second half of 2022, and overall, I am proud of all that we accomplished during the year.
Speaker 4: especially in light of the continued challenging macro environment. For the full year 2022, our total revenue was $276.2 million.
Speaker 4: This represents 14% year-over-year revenue growth and an outperformance relative to the midpoint of the guidance that we shared on our last quarterly earnings call.
Speaker 4: Likewise, for the full year 2022, our adjusted EBITDA was a loss of $2.5 million. This represents an improvement of $8.8 million relative to 2021.
Speaker 4: Importantly, this suggested EBITDA outperformed the midpoint of the original full-year guidance we provided at the beginning of 2022, demonstrating continued operating leverage in our business despite lower annual revenue growth for 2022 as compared to our initial guidance for 2022.
Speaker 4: Now let me highlight some additional items from the quarter.
Speaker 4: 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.
Speaker 4: and we'll discuss our quarterly results with you in each of these categories. The first category, Improvement, is focused on evaluating our ability to enable our clients to realize massive, measurable improvements.
Speaker 4: while also maintaining industry leading client and team member engagement.
Speaker 4: Let me begin by sharing a client improvement example from a recently published case study. We have observed over time that healthcare organizations that build a homegrown data and analytics infrastructure frequently underestimate its complexity and total cost of ownership.
Speaker 4: with the problems getting worse as the infrastructure ages. Integra's help spent years attempting to build and maintain an internal data warehouse, but ultimately concluded that operating costs were too high and that this infrastructure was unable to maintain the infrastructure.
Speaker 4: to produce the data, analytics, and insights at scale that its leadership and teams needed. In response, Integra sought out an industry-leading, commercial-grade solution, ultimately selecting Health Catalyst as its enterprise solution.
Speaker 4: After implementing our data platform, inclusive of healthcare.ai, along with a robust set of our analytics applications, including PopInsights, Touchstone, and PowerCosting, Integris now has a scalable data and analytics platform.
Speaker 4: that can deliver the high-value data and analytics required to understand and continually improve its organizational performance at scale.
Speaker 4: Following implementation, Integrus has realized more than $3 million in annual indirect labor cost savings through a reduction in duplicative data ecosystem costs, including the resources required to maintain a homegrown data and analytics platform.
Speaker 4: Building on this recent client success story, we are pleased to have announced today that Integris has recently meaningfully expanded its partnership with Help Catalyst, inclusive of an All Access Technology subscription and a new Tech-enabled Managed Services contract.
Speaker 4: This larger multi-year contract nearly doubles the total revenue from our relationship and makes integrus one of health catalysts 10 largest clients. Health catalysts will staff, manage and maintain integruses, enterprise integrated analytics and data abstraction programs to further enable integrus to achieve data informed healthcare improvements.
Speaker 4: We are excited to share another example of our clients simultaneously expanding their technology relationship with us while we deliver valuable talent retention and cost savings to our tech-enabled managed services offerings.
Speaker 4: and one of the best companies to work for in 2022 by Utah Business Magazine. Next, we're pleased to have recently received a Top Workplaces USA award, placing 16th out of more than 100 organizations on the list of top workplaces with 1,000.
Speaker 4: to 2,499 employees selected based on employee feedback survey results. Additionally, we are appreciative to have recently received recognition by Newsweek as one of America's greatest workplaces for women in 2023.... and finally....
Speaker 4: We're grateful to share that Health Catalyst was also recently named by Newsweek as one of America's greatest workplaces for diversity in 2023. Our next strategic objective category is growth, which includes beginning new client relationships while also expanding existing client relationships.
Speaker 4: First, let me provide some commentary on our 2022 bookings performance. At a summary level, I am pleased with our growth-related performance in the second half of 2022, which included bookings results that were toward the top end of the range we shared from our last E distraction series.
Speaker 4: quarterly earnings call. Our dollar-based retention rate achievement for 2022 was 100% towards the high end of the 97% to 101% expectation range we provided last quarter.
Speaker 4: In terms of the segment breakdown of our 2022 dollar-based retention,
Speaker 4: consistent with our prior expectations. Our professional services dollar-based retention rate was slightly higher than 100%, and our technology dollar-based retention was slightly lower than 100%. In the professional services segment, our tech-enabled-managed services comprised the largest component.
Speaker 4: of the expansion ARR in 2022, with a significant portion driven by the previously announced Carl Health expansion. Next, our net new DAS subscription client editions for 2022 was eight.
Speaker 4: We were pleased to come in towards the high end of the mid to high single digit expected range provided on our last quarterly earnings call. And we would note that, relative to prior years, a slightly higher proportion of our net client ads came from our more modular DOS Lite offering.
Speaker 4: as we mentioned we anticipated on our last earnings call. As a few highlights of our recent net new DAW subscription client additions, we are excited to publicly announce today our partnership with Deaconess Health System, a leading provider of healthcare services to 50 counties throughout Indiana, Illinois, and Kentucky.
Speaker 4: Through this five-year partnership, Deaconess will utilize health catalyst enterprise, analytic solution, and outcomes improvement expertise to transform its clinical, financial, and operational domains and improve analytic efficiency across its team. Also, we are excited today to announce an expansive multi-year
Speaker 4: Brian Health will leverage our DOS data platform and a subset of our analytics applications, including value optimizer, measurable, and self-service analytics in its effort to improve system-wide performance and quality of care. Lastly, I'm happy to share.
Speaker 4: that the GI quality improvement consortium has announced that it has selected Health Catalyst for the purposes of deploying our recently acquired ARMIS hybrid cloud-based registry technology. Health Catalyst's extensive experience with data extraction will allow the GI quality improvement consortium a streamlined user experience.
Speaker 4: while our ARMIS technology will enable longitudinal data collection and robust reporting to fuel quality improvement as well as reporting to CMS's Quality Payment Program.
Speaker 4: Next, as it relates to our current selling environment, I have personally had the opportunity over the past approximately six months to now have held over 80 face-to-face visits with C-suite executives at our top 100 clients.
Speaker 4: as I along with our growth organization have synthesized recent feedback from our clients and prospects.
Speaker 4: I would share that we continue to see both headwinds and tailwinds as it relates to our growth in 2023. As it relates to headwinds aligned with what we shared on our Q3 earnings call.
Speaker 4: Our health system end market continues to experience meaningful financial strain, primarily due to significant increases in labor and supply costs, without a commensurate increase in revenue, leading to substantial margin pressure.
Speaker 4: We anticipate this dynamic will persist for at least the next few quarters. Translating this to our business, we have seen a decrease in pipeline demand and some anticipated elevated churn levels for the parts of our solution portfolio that do not offer near-term measurable ROI.
Speaker 4: such as our clinically focused technology offerings and are more traditional consulting professional services. As it relates to tailwinds, while we have seen that financial strain has continued to pressure health system budgets.
Speaker 4: In our recent sales conversations, we have continued to hear a strong acknowledgement that our portfolio includes solutions that directly reduce Health System's current financial pressure.
Speaker 4: especially related to the segments of our offering that have a clear near-term financial ROI, such as our tech and evil managed services offering, our financial empowerment technology suite, and components of our population health technology suite. We are encouraged to continue to see a meaningful increase in the size of our pipeline in these parts of our portfolio.
Speaker 4: that offer near-term hard dollar cost savings.
Speaker 4: These offerings largely drove our strong second half 2022 bookings results and comprise a significant portion of our projected 2023 sales pipeline.
Speaker 4: Given the increased demand levels for our Tech-Enabled Managed Services offering as compared to historical levels, and that this solution offering has been a higher priority focus area for us over the last few quarters based on the feedback from our end market, let me take a few moments to comment on this offering.
Speaker 4: and why we are seeing heightened pipeline demand in this area. First, in terms of our tech-enabled managed services offering, we currently offer this solution in two main functional areas that include chart abstraction and core analytics. Currently less than 10% of our DOS client base.
Speaker 4: has a tech-enabled managed services contract with us. Next, in terms of why we are seeing a more robust increase in demand, our client conversations over the past six months have validated our belief that as health systems have seen increasingly significant pressure related to their labor expense.
Speaker 4: which typically comprises well over half of their operating expenses, they have sought solutions to effectively address their near-term labor expense challenges.
Speaker 4: especially in areas that are not typically their core competencies or in areas where they typically struggle to recruit and retain talent. Our tech-enabled managed services offering typically allows a help system to realize near-term cost savings and give some certainty in their labor expense profile.
Speaker 4: over a multi-year period. Lastly, we would highlight a few reasons why Health Catalyst has been and continues to be differentiated in our solutions in this operating area. One, unlike traditional business process outsourcing vendors, Health Catalyst primarily drives efficiencies.
Speaker 4: In labor costs utilizing our robust technology solutions, as opposed to primarily leveraging offshoreing.
Speaker 4: bus technology solutions as opposed to primarily leveraging offshoring.
Speaker 4: We have already developed the technology needed for efficiency gains in these core offering areas like analytics and chart abstraction.
Speaker 4: so the time to value is significantly faster. And lastly, our tech-enabled managed services clients have chosen Health Catalyst because of our long-term trusted partnerships with these clients. That includes a multi-year track record of shared success. With each of the tech-enabled managed services expansion contracts we have signed to date.
Speaker 4: None of them have gone out to an RFP. A recent example we announced in December was Carl Health's decision to enter into the largest expansion in the history of Health Catalyst, inclusive of an all-access technology subscription, plus tech-enabled managed services in the areas of analytics, data management, reporting, and abstraction.
Speaker 4: This five-year contract totals approximately $80 million over the life of the contract and is inclusive of an $11 million a year expansion resulting from a technology increase and a significant Tech-Enabled Managed Services contract. Later in our prepared remarks, Brian will comment on the typical financial profile of these types of Tech-Enabled Managed Services relationships. We'll use all of that as background.
Speaker 4: Let me now provide some commentary on our 2023 bookings expectations. First, I would share that we anticipate that a higher proportion of our gross bookings will come from our existing client base as compared to historical levels, inclusive of upsells to both our DOS client base as well as upsells to our over 400 other more modular non-DOS clients. This expectation is driven by the current and marked...
Speaker 4: in market dynamics in which we have observed that existing clients that have already realized a strong ROI and are aligned on a long-term partnership framework tend to be more receptive to expansion conversation, particularly in areas of near-term financial ROI as compared to discussions with potential clients regarding that new client logos.
Speaker 4: Next, in terms of our 2023 bookings expectations, we anticipate a higher proportion of our bookings will come from our tech-enabled managed services offering. As I just shared, this solution offering is strongly resonating with clients, given its near-term hard dollar ROI, allowing health systems to effectively address their near-term labor expense challenges, and providing a more efficient and more efficient solution for their clients.
Speaker 4: by deepening their relationship with a trusted long-term partner.
Speaker 4: Importantly, given the size of these tech and evil managed services contracts and are somewhat limited forecasting history,
Speaker 4: They may create some lumpiness in our quarterly bookings results, translating to a $20-23 base for tension range that is wider than we have provided historically. Last, let me share that we anticipate a higher skew of our bookings will occur in the second half of the year, as compared to our historical average.
Speaker 4: largely resulting from the anticipated timing of our larger pipeline opportunities inclusive of our Tech-Enabled Managed Services pipeline. As you may recall, we began more proactively discussing Tech-Enabled Managed Services opportunities with existing clients starting in Q3 of 2022.
Speaker 4: While we continue to gather data on the progression of these opportunities, we anticipate that the sales cycle for tech-annual bandwidth services deals will be similar on average to the company's overall one-year estimated sales cycle. With this backdrop, I will now share some perspectives on our anticipated 2023 Bookings achievement levels. PM Brock Street Football
Speaker 4: First, as it relates to our 2023 dollar-based retention, we anticipate realizing meaningful improvement relative to 2022 with an anticipation of dollar-based retention achievement for 2023 between 102% and 110%. As previously mentioned, we anticipate our professional services achievement.
Speaker 4: to be higher than technology driven by our tech and naval-managed services pipeline. In our technology segment, we continue to anticipate that our contractual expansions will drive the bulk of our expansion.
Speaker 4: Based on many recent discussions with our largest clients, we feel encouraged by their long-term commitment to the Health Catalyst Partnership. At the same time, we anticipate some modular technology turn in our smaller, more limited client relationships.
Speaker 4: and some professional services churn outside of technical managed services, driven primarily by continued financial pressures faced by these health systems. Next has a link to our net new DAW subscription client achievement. We anticipate improvement relative to 2022.
Speaker 4: likely resulting in low double-digit NetNudas subscription clients in 2023, but not yet a return to pre-2022 NetNudas subscription ads due to continued macroeconomic pressures.
Speaker 4: Lastly, as it relates to our financial performance, let me share that I am extremely pleased with our full-year adjusted EBITDA performance in 2022 and our significantly higher EBITDA guidance range for 2023 relative to 2022.
Speaker 4: Our 2022 achievement level, the Spyder lower than originally anticipated revenue growth, demonstrates the continued operating leverage of our business, and is highly encouraging as we look to 2023. In 2023, as Brian will cover in his prepared remarks, I am pleased that the midpoint of our adjusted EBITDA guidance is well ahead of our previous expectations.
Speaker 4: percent plus.
Speaker 4: In a few moments, Brian will provide more color on our anticipated revenue mix in 2023 and our ability to continue to drive towards these adjusted EBITDA targets, even if our revenue mix moderately shifts towards more professional services over time.
Speaker 4: Let me conclude my remarks by sharing that we are honored to announce that Matthew Kolb, Executive Vice President and Chief Operating Officer of Carle Health, will be joining Health Catalyst's Board of Directors, effective July 1, 2023.
Speaker 4: Matt is deeply committed to Health Catalysts and Carl Health's shared mission of data-informed healthcare improvement and has been an extraordinary leader throughout his career in enabling massive improvements in the healthcare ecosystem. We are honored to have Matt contribute his depth of character, commitment, and experience to our board and anticipate his contributions to be significant and impactful in the months and years ahead. 100 years later freeway people to a comparison of better Vietnam chosen hub for OH
Speaker 4: Additionally, Carl helped us make the decision to deepen its long-term investment in Health Catalyst with a meaningful purchase on the open market of Health Catalyst common stock. We welcome them as a deeply mission aligned, long-term oriented owner in the company. Consistent with my own personal decisions to purchase Health Catalyst shares on the open market over the past several months, which we estimate places me among Health Catalyst's 20 largest shareholders, I'm grateful to add a like-minded, deeply mission focused, and long-term oriented fellow shareholder.
Speaker 4: to our company's ownership group. This announcement builds on the news we shared in December 2022 at which time Carl nearly quadrupled the size of its client relationship with health catalyst. We are grateful for this deep, long-term, and multifaceted relationship of Carl Health, which mirrors some similar positive dynamics we've historically experienced with a few of our other most successful client relationships.
Speaker 5: And with that, I'll turn the call over to Brian . Brian ? Thank you, Dan. Before diving into our quarterly and annual financial results, I want to echo what Dan shared and say that I am pleased with our fourth quarter financial performance.
Speaker 5: I will now comment on our strategic objective category of scale. For the fourth quarter of 2022, we generate at a $69.2 million in total revenue.
Speaker 5: This total represents an outperformance relative to the midpoint of our quarterly guidance, and it is an increase of 7% year-over-year. For the full year 2022, our total revenue was $276.2 million, representing 14% growth year-over-year.
Speaker 5: Technology revenue for the fourth quarter of 2022 was $44.7 million, representing 11% growth year-over-year.
Speaker 5: 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.
Speaker 5: For the full year 2022, technology revenue was $176.3 million, representing 19% year-over-year growth. Professional services revenue for Q4 2022 was $24.5 million, representing a 1% decline relative to the same period last year.
Speaker 5: This year's year performance was primarily due to our professional services dollar-based retention in the first half of 2022 being less than 100%.
Speaker 5: as well as a modest amount of non-recurring professional services revenue that was recognized in the fourth quarter of 2021. For the full year 2022, our professional services revenue was 99.9 million, representing 6% year-of-year growth.
Speaker 5: For the fourth quarter of 2022, total adjusted gross margin was 51%, representing a decrease of approximately 140 basis points year by year. For the full year 2022, total adjusted gross margin was 53%.
Speaker 5: representing a decrease of approximately 10 basis points here or here. In the technology segment, our Q4 2022 adjusted technology gross margin was 69%.
Speaker 5: a decrease of approximately 90 basis points relative to the same period last year. This year over year performance was mainly driven by headwinds due to the continued costs.
Speaker 5: associated with transitioning a portion of our client base to third-party cloud-hosted data centers in Microsoft Azure, which increases our hosting costs, partially offset by existing clients paying higher technology access fees from contractual built-in escalators without a commensurate increase in hosting costs.
Speaker 5: For the full year 2022, our adjusted technology gross margin was 69%.
Speaker 5: and approximately 10 basis point increase year over year. In the professional services segment, our Q4 2022 adjusted professional services gross margin was 18%, representing a decrease of approximately 570 basis points year over year and a decrease of approximately 280 basis points relative to Q3 2022.
Speaker 5: This quarterly performance was roughly in line with the expectations we shared on our last earnings call, with these results partially driven by lower utilization rates, a result of higher per-client staffing levels than we anticipate at steady state, and partially driven by the mix of services delivered in the quarter.
Speaker 5: For the full year 2022, our adjusted professional services gross margin was 24%, an approximately 350 basis point decrease year-over-year. In Q4 2022, adjusted total operating expenses were $35.6 million.
Speaker 5: As a percentage of revenue, adjusted total operating expenses were 52%, which compares favorably to 62% in Q4 2021. For the full year, adjusted total operating expenses were $148.3 million.
Speaker 5: As a percentage of revenue, adjusted total operating expenses were 54% for the full year 2022, which compares favorably to 58% in the full year 2021.
Speaker 5: Adjusted EBITDA in Q4 2022 was a loss of 0.6 million.
Speaker 5: which outperformed the midpoint of our guidance, mainly driven by the strong quarterly revenue performance mentioned previously, and our cost reduction efforts.
Speaker 5: For the full year 2022, our adjusted EBITDA was a loss of $2.5 million, which compared favorably to an adjusted EBITDA loss of $11.2 million in 2021. Our adjusted net loss per share in Q4 2022, which compared favorably to an adjusted EBITDA loss of $12.5 million,
Speaker 5: was five cents. The weighted average number of shares used in calculating adjusted net loss per share in Q4 was approximately 54.5 million shares.
Speaker 5: For the full year 2022, our adjusted net loss per share was 26 cents.
Speaker 5: And the weighted average number of shares used in calculating adjusted net loss per share in 2022 was approximately 53.7 million shares.
Speaker 5: Turning to the balance sheet, we ended 2022 with $363.5 million of cash, cash equivalents, and short-term investments.
Speaker 5: compared to $445 million at year-end 2021. Additionally, the face value of our outstanding convertible notes is a principal amount of $230 million.
Speaker 5: and the net carrying amount of the liability component is currently 226.5 million. As it relates to our financial guidance for the first quarter of 2023, we expect total revenue between 70.3 million and 72.3 million, and adjusted EBITDA between 1 million.
Speaker 5: and $2.5 million. For the full year 2023, we expect total revenue between $290 million and $2.5 million.
Speaker 5: 295 million and adjusted EBITDA between 9 million and 11 million. Now let me provide a few additional details related to our 2023 guidance.
Speaker 5: First, as it relates to our Q1 2023 revenue expectations, we anticipate that both our technology and professional services revenue will grow a few points sequentially. Next, in terms of our adjusted gross margin, we continue to anticipate that our adjusted technology gross margin will be in the high 60s in the first quarter.
Speaker 5: In the professional services segment, we anticipate that our Q1 professional services adjusted gross margin will be roughly flat as compared to Q4 2022. This is partially driven by our continued 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.
Speaker 5: inclusive of a higher percentage of tech-enabled managed services, which start out at a lower gross margin. Lastly, we anticipate our operating expenses will decrease relative to Q4 2022.
Speaker 5: mainly the results of the cost reduction efforts that continued in Q4 2022 and into Q1 2023. Next, let me share a few additional details related to our full year 2023 guidance.
Speaker 5: From a revenue mix standpoint, we anticipate 2023 professional services year-over-year revenue growth will slightly outpace technology year-over-year revenue growth.
Speaker 5: driven by the heavier weighting of our tech-enabled managed services bookings in the second half of 2022 and anticipated in 2023.
Speaker 5: In the first half of 2023, we anticipate limited year-over-year professional services revenue growth, driven by the tougher year-over-year comparison, and that this revenue segment will not have the benefit of our anticipated first half bookings achievement, with professional services year-over-year growth meaningfully increasing in the second half of the year.
Speaker 5: Next, in terms of our adjusted gross margin, we expect our adjusted technology gross margin will be in the high 60s through 2023. We anticipate the built-in client-level technology gross margin expansion driven mainly by contractual escalators.
Speaker 5: will be partially offset by the headwinds of a small subset of our client base, transitioning from on-premise to third-party cloud hosted data centers in Microsoft Azure, as well as from costs associated with migrating a subset of our client base to our multi-tenant, Snowflake and Databricks enabled data platform environment. We anticipate our adjusted professional services gross margin will be roughly 20% for the year.
Speaker 5: Given that our anticipated utilization rates continue to be lower than historical levels for the next couple of quarters and that our mix of professional services is comprised of a larger percentage of tech-enabled managed services, which start out at a lower gross margin. Next, we anticipate our adjusted operating expenses as a percentage of revenue will be down between approximately 500 to 750 basis points year-over-year. Largely the result of our restructuring efforts.
Speaker 5: meaningful continued operating leverage. The largest year-over-year reduction will
Speaker 5: the result of further M&A integration, the pausing of our life sciences adjacency, and right-sizing our cost structure to align with our current go-to-market inclusive of tech-enabled managed services unit economics.
Speaker 5: Next, we anticipate our adjusted free cash flow will also make meaningful progress in 2023.
Speaker 5: and will be in line to slightly better than our adjusted EBITDA progress as a percentage of revenue. Lastly, we anticipate our stock-based compensation as a percentage of revenue will be meaningfully reduced by approximately 500 basis points in 2023.
Speaker 5: which in absolute dollars will result in stock-based compensation declining your career.
Speaker 5: Next, as Dan mentioned earlier, let me share some comments on the typical unit economics of our tech-enabled managed services offering.
Speaker 5: First in terms of contract structure, we are usually signing long term locked in contracts.
Speaker 5: which also require clients to sign a long-term technology subscription renewal or expansion.
Speaker 5: As part of a tech-enabled managed services contract, Health Catalyst typically rebadges existing health system team members within the applicable functional area.
Speaker 5: As part of a tech-enabled managed services contract, Health Catalyst typically rebadges existing Health System team members within the applicable functional area as Health Catalyst employees.
Speaker 5: We aim to provide a client with cost savings relative to their existing spend typically starting nine months after contract signing. And we drive incremental gross margin over time by leveraging our technology, scale efficiencies and process improvement efficiencies to reduce the labor footprint necessary at that client.
Speaker 5: while also providing opportunities to displaced team members in other growth areas at Health Catalyst.
Speaker 5: As such, and consistent with what we've seen with our historical relationships, typically the Tech-enabled Managed Services component of our contract starts at a low gross margin in year one, typically 0-10%.
Speaker 5: and increases over a few year period to an approximately 25% gross margin.
Speaker 5: Importantly, there is very little incremental operating expense associated with these contracts.
Speaker 5: as they typically come from existing client relationships and do not require meaningful incremental sGNA or R&D.
Speaker 5: Thus, over the long run, we feel confident that the total client economics
Speaker 5: are in line with our long-term targeted adjusted Debit-Dom margins. Lastly, related to this topic, let me share a couple of comments on our long-term revenue mix. For the full year 2022.
Speaker 5: our technology revenue comprised 64% of total revenue. As mentioned previously, we expect a higher proportion of our bookings mix to come from professional services in 2023.
Speaker 5: Based on the pipeline demand we are seeing for tech-enabled managed services. In terms of our longer-term revenue mix, at this point in time, we are continuing to assess our bookings mix by segment over time.
Speaker 5: which will inform our mid and longer-term revenue mix projections. If the elevated demand for our tech-enabled managed services persist over the long run, such that we continue to see a higher percentage of our bookings come from professional services over time.
Speaker 5: We still continue to be confident in our ability to drive operating leverage and meet our mid and longer term adjusted Ipita and profitability targets.
Speaker 5: Given the Tech and Abled managed services, Uniteconomics and Significant Operating Leverage that I just described. With that, I will conclude my prepared remarks. Dan?
Speaker 5: managed services unit economics and significant operating leverage that I just described. With that, I will conclude my prepared remarks. Dan? Thanks, Brian .
Speaker 4: In conclusion, I would like to recognize and thank our committed and mission-aligned clients and our highly engaged team members, as well as express my excitement and optimism for the future. And with that, I will turn the call back to the operator for questions.
Speaker 2: Thank you, sir. At this time, if you would like to ask a question, please press star one on your telephone keypad.
Speaker 2: If at any time your question has been answered, you may remove yourself from the queue by pressing star 2.
Speaker 2: To get as many questions as time permits, we do ask that you limit yourself to one question. So others can hear your questions clearly, we ask that you pick up your handset to allow optimal sound quality. Once again, that is star one to ask a question. And our first question will come from Stephanie Davis with SVB Securities.
Speaker 2: Your line is open. Hey guys, thank you for taking my questions.
Speaker 2: So, Dan, you were super positive on tech and April outsourcing last time. We met up and on this call and you were super cautious on dots and what the demand it looked like. But you announced a bunch of dots wins with a print.
Speaker 2: So, what changed? Is it a change in the environment, was it a change in the outlook after you did the year-end rounds of clients, or is it something else I'm missing?
Speaker 4: Yeah, thanks for the question, Stephanie. So we continue to be optimistic and encouraged by the pipeline that we're seeing with regards to tech-enabled managed services. We were excited since the last earnings call to announce the Carle Health Meaningful Expansion and today to announce the Integris Health Meaningful Tech-enabled Managed Services expansion as well.
Speaker 4: And we have a robust pipeline that we're excited about as well. As we've discussed in the past, and as we mentioned in our prepared remarks, we do anticipate that there's still a meaningful sales cycle associated with these large technical advantage services deals, and we might estimate that they will look on average.
Speaker 4: similar to our overall one-year sales cycle. So it'll take some time for that to play out. And we wanted to be thoughtful in the way that we forecast the timing of the conversion of that part of our pipeline. And so that informed our perspective and some of what we shared in the prepared remarks around back half weighting, the way that we think about the pipeline conversion.
Speaker 4: If we found that the sales cycle was a little bit earlier or faster than that one year, that might represent a little bit of upside in terms of that part of the pipeline. As it relates to DOS, we continue to be pleased to see that DOS does offer, it is one of those solutions that offers an ROI.
Speaker 4: to clients like the Integris case study example that we shared that it is often a lot lower cost to maintain as a commercial grade alternative to a homegrown solution, and I think that's what we have been seeing in the marketplace. We did have a strong Q4 from a bookings perspective, and we were pleased.
Speaker 4: to see that strong Q4 play out both on the existing client expansion side and on the new client side. But we also still recognize that there are headwinds that both are existing clients are facing, especially I think we're seeing that more in our smaller, more modular client relationships.
Speaker 4: as well as professional services side perspective, but also in terms of prospective client discussions. And we wanted to just recognize that there still are those financial pressures that are making it challenging for health systems as they consider purchasing decisions.
Speaker 5: no doubt we were encouraged by a really strong Q4. Just one thing to add to that, Stephanie, I agree with Dan. The other dynamic that we saw in Q4 as we ended the year, and we mentioned this in the prepared remarks, was that our DAS ads did skew a little bit more toward the DAS-like offering that we have, just given the financial constraints that Dan mentioned. And that made our average ARR for our net new DAS ads a little lower than our historical target of 1.5.
Speaker 4: We are anticipating both on the existing client side and on the new client side in a meaningful progress relative to what we saw in 2022. But that that progress back to maybe those long-term growth targets that we've talked about of 20 plus percent will take some time to work their way through.
Speaker 2: I understood super helpful color. Just a follow up on that, Brian , you...
Speaker 2: You've talked about the economics of these PEO contracts and how there's a pretty media revenue uptick from them. So, give in what we're seeing in the guidance. Could you share what level of new wins is baked in? Certainly, yeah. So, in terms of our two bookings metrics that we provide color on for 2023.
Speaker 5: So on the retention rate side first, the dollar-based retention rate, what we shared in terms of the range there was 102% to 110%, and that's overall between tech and services. So as an example, just at the midpoint of that range at 106%, that's meaningful improvement compared to the 100% that we realized in 2022. So we're encouraged there. Now in terms of the tech-enabled managed services portion of that, a good portion of that expansion with existing clients does come from tech-enabled managed services deals.
Speaker 5: So we shared a little bit of color that are, if you kind of split that dollar-based retention rate into segments, the services proportion, that will be a little higher than the technology will in 2023. So as Dan mentioned, we do have material kind of pipeline for those opportunities. We're assuming that those come through in 2023. Based on the sales cycle, we did weight those a little bit heavier toward the back end of the year than we typically have seen historically.
Speaker 5: And that's kind of the dynamic on the existing client side. On the net new DAS client side, we guided to low double digits for 2023, again, an improvement over 2022, but wanted to just be aware of the continued kind of financial constraints that are, and markets working within, and it will take a little bit of time to ramp that up, you know, closer to historical levels. Thanks for your help. Thanks folks.
Speaker 5: On the net new DAS client side, we guided to low double digits for 2023, again an improvement over 2022, but wanted to just be aware of the continued kind of financial constraints that are in markets working within. And it will take a little bit of time to ramp that up closer to historical levels. Thanks for your help. Thanks folks. Thanks, Stephanie.
Speaker 2: Thank you. Our next question will come from Ann Samuel with JP Morgan. Your line is open. Hi. Thanks so much for taking the question. Your guidance implies some pretty outstanding margin expansion next year despite revenue growth below your historical rate. I was just wondering if you could share if the annual 300 basis points of margin expansion that you pointed to going forward.
Speaker 4: is predicated on you returning to that historical rate, or if similar to this year, you can achieve it, even if the pipeline remains somewhat delayed. Yeah, thanks for the question, Annie. I'll share a few thoughts, and then Brian , please feel free to add as well. So, similar to what we experienced in 2022, even with lower revenue growth.
Speaker 4: than what we had originally forecasted. We did find that there were multiple ways for us to achieve meaningful operating leverage and thereby get back to beating even the original EBITDA guidance for 2022. We have been diligent in pursuing those operating leverage and cost-saving opportunities, and we've been encouraged as we have in particular seen some meaningful existing client expansions where we have been able to get back to the existing client expansions
Speaker 4: the operating leverage is really significant. Carl Health is a good example, Integris Health is a good example, where, like from a go-to-market perspective, we found that one strong senior account executive was able to manage that relationship size even when it doubles or triples or quadruples in size, and that we didn't require very much in a way of incremental G&A or R&D spend. And so that's informing our approach and perspective and strategy moving forward that we believe there is meaningful operating leverage in our...
Speaker 4: future in 2023 and beyond, that increases our confidence level because that's very much under our control. And we're continuing to try to simplify and focus on doing a few things really, really well for our clients. And we found that our existing portfolio is compelling for our clients and offers a tremendous amount of value in a few years of runway in terms of...
Speaker 4: them expanding the use of our technology and our full portfolio with us. So all of that informed our ability to achieve meaningful EBITDA progress even ahead of schedule like what we've guided you for 2023 and we believe that that will continue to enable us to stay on track even in a scenario where
Speaker 4: It may take us a little beyond 2024, for example, to get back to that 20-plus percent growth trajectory. We won't likely get back to that 20 percent growth trajectory in 2024, but we still feel confident we can stay on the right trajectory from a profitability and margin perspective. That's terrific to hear. Thanks for the color. Thanks, Annie. Thank you.
Speaker 5: Our next question comes from Ryan Daniels with William Blair. The line is open. Yeah, good evening. This is Jared Haasen for Ryan. Thanks for taking the questions. You know, obviously a lot of great data just around technical and without sourcing. I'm curious in terms of the demand that you continue to highlight there. You know, Dan, I think you mentioned the two sort of core functional areas where your solution is currently focused just around sort of general analytics or chart abstraction. It's not serious just given the demand.
Speaker 4: I believe there will be some additional areas beyond those core areas that we mentioned in the prepared remarks around analytics and chart abstraction. Those are areas where we have real depth of experience and depth of technology that we've already developed. But there are other areas where we have developed technology where we believe that same value proposition of us managing the end-to-end
Speaker 4: areas, similar in strategic focus to what we described in the prepared remarks of health systems focusing on what is in their core competency and being open to the right carefully vetted long-term partnerships in areas that are non-core and non-clinical operational categories.
Speaker 4: could be examples of that. We're first focused on these two areas where we have a really strong, demonstrated track record, both on the technology side and on the tech enabled managed services side where we've been managing this on behalf of clients for over eight years in a number of cases. But we're also looking for opportunities to pilot.
Speaker 5: some other potential expansion areas, and we're grateful that clients seem willing to consider that together with us. I would just add to that, Jared, it's a good question. We do, as Dan mentioned, prioritize these areas first because we do have competitive differentiation in those areas. I think as Dan mentioned on the prepared remarks, like these opportunities are typically with existing clients.
Speaker 5: and they're not going out to RFP in a competitive process. They're more sole source opportunities for expansion, just based on that relationship of trust with that client. So we feel that that's a meaningful differentiator for us.
Speaker 5: And then also to the earlier question from Annie, we want to be cognizant of balancing additional investment if there were to be any needed for additional areas with the robust current market opportunity that we have today, where roughly 10% of our DOS clients are penetrated with this technical demand and service opportunity now.
Speaker 5: And so there's a lot of growth runway that we can do in a cost-efficient way moving forward with that opportunity. Great, makes sense and I'll go ahead and hop back in the queue. Thanks.
Speaker 5: growth runway that we can do in a cost-efficient way moving forward with that opportunity. Great. Makes sense and I'll go ahead and hop back in the queue.
Speaker 2: Thank you. Our next question will come from Jessica Toussaint with Piper Sandler. Your line is open. Hi, thank you guys so much for the questions. I was hoping you could maybe talk about any early experience in the migration to the multi-tenant architecture. Is there any incremental revenue or gross profit available?
Speaker 4: We've had a few migrations already under our belt, and we do see from a cost structure perspective some long-term gross profit expansion that will likely take place as a result of this multi-tenant Snowflake and Databricks enabled platform infrastructure. So we're encouraged by that. Now, that'll be offset in the near term by some migration costs.
Speaker 4: And so that'll take some time to show up, but we are already seeing from a union economics perspective some meaningful additional leverage and the possibility of gross margin expansion combined with our ability to potentially choose a little lower revenue price point and still maintain a strong gross profit margin.
Speaker 5: We'll work our way through how we leverage that lower cost position, but we are seeing meaningful cost structure advantages in this multi-tenant infrastructure. The other area, in addition to the technology gross margin that is impacting our P&L now, is the investment. So we are in the middle of the investment.
Speaker 5: on the R&D side development cost of the Multitonet platform. We've made good progress. We also have some internally used capitalization of software that we're allocating in terms of cost today. That will start to ramp down as we go into 2024 and beyond and is a meaningful opportunity for us to drive additional R&D efficiency as we kind of ramp down that investment. On it, that's really helpful. And then just I had to quick clarification questions. So.
Speaker 5: The LifePoint contract was essentially fully ramped, almost nearly fully ramped in Q4, just in terms of revenue. And then on the tech-enabled managed services side, so of our total professional services revenue, around 35% to 40% is this tech-enabled managed services component across those clients that we've shared, the DaaS clients.
Speaker 5: with the majority of it being this traditional professional services consulting that we've had in the past and then a small amount of implementation revenue as well.
Speaker 5: being this traditional professional services consulting that we've had in the past, and then a small amount of implementation revenue as well. Awesome. Thank you.
Speaker 3: Thanks, Jess. Thank you. Our next question will come from Daniel Grosslight with Citi. Your line is open. Hi, thanks for taking the question. I just want to make sure I understand the cadence of NetNew Dots ads in 23. So if I look at 22.
Speaker 6: You likely had around five-ish or so net ads in the second half of the year and call it around three or four life sciences clients roll off. So if I gross that up, I get to around eight or nine-ish gross ads in the second half of 22. So if I annualize that gross number,
Speaker 6: eight or nine gross ads. For 2023, I get to around mid to high teens, which is higher than your low double digit guidance.
Speaker 6: So, you know, my question is do you still anticipate having a bit higher than normal attrition this year to get that high to mid teens gross ads down to low double-digit net ads or is there a bit of conservatism in that guide? And then a larger question for 24 and beyond.
Speaker 6: Are we operating in a new environment where more of your growth is going to come from existing client expansion over net new doff ads? Or is this just a temporary factor of those health system headwinds you've laid out?
Speaker 4: Yeah, great questions, Daniel. So I'll make a few comments and Brian , please feel free to add as well. So I think your general assessment of the way to think about 2022 is directionally a fair assessment of it, and I appreciate that that's not believed directly, let me clear my electrolysis prophecy now,
Speaker 4: of what happened. We did have a very strong comeback in terms of our second half, 2022 performance and Q4 in particular was very strong for the company. So we were encouraged by that. At the same time, I've certainly heard over and over again across those 80 plus visits that I've had face to face with C-suite executives that there still is a very real strong.
Speaker 4: financial pressure that's significant. Now, among our larger clients, we continue to sense and feel that they want to continue to expand their existing relationships with us, and that is one of the reasons why, longer term, we're excited about the foundational element of our growth coming from existing client expansion and we see a lot of
Speaker 4: and prospective client doesn't have a track record of success with Health Catalyst, then the kind of relationship you can—discussion you can have where the relationship is multi-year and we've already had a strong ROI and success together. So that is a dynamic and while we had a strong Q4 and we were encouraged by that and while we do anticipate with our larger DAS subscription clients that—
Speaker 4: that those will continue to maintain and expand their relationships with us. As we mentioned in the prepared remarks, we do expect in some of our smaller, more modular client relationships, both on the DOS side and the NONDOS side, to experience some level of churn. It will still be progress relative to where we were in 2022, but it will still be a little elevated relative to what we might expect as a more steady state. And so we wanted to factor that in as well as we thought about a projection or a range.
Speaker 5: of NetDDoS subscription clients for 2023. Ryan, what would you add? Yeah, I mean, as well as that. And just to add to your question around to kind of Daniel longer term, 2024 existing client focus, we are, so one, we're still gathering data and learning and kind of assessing the best way to drive toward our long-term growth model. We're encouraged to see the improvement this year on both the existing...
Speaker 5: Modular clients that will again be more of a focus for us moving forward on how we can drive Cross-Soul and expansion to those clients and so We've a lot to be excited about in terms of how we can drive growth within the existing client-based Makes sense. Thanks for the call
Speaker 5: will again be more of a focus for us moving forward on how we can drive cross-sell and expansion to those clients. And so we have a lot to be excited about in terms of how we can drive growth within the existing client base. Makes sense. Thanks for the call. Thanks, Daniel.
Speaker 2: Thank you. Our next question will come from Elizabeth Anderson with Evercore ISI. Your line is open. Hi guys, thanks so much for the question. As you think about the R&D spend going forward, maybe longer term, how do you think about what your priorities are between some of these short term?
Speaker 7: maybe financially focused products and sort of your longer term need to sort of integrate what you know sort of customers will need over the longer term in regards to sort of you know also balancing the OPEX leverage. I'm just kind of wondering where your sort of priorities and focus areas are for the next maybe year or two. Yeah, thank you for the question, Elizabeth. So I think that's well said. But according to those
Speaker 4: help meet them where they are and deliver what they need. And so we will be focusing there. We will be focusing our go-to-market and focusing our R&D investment in those elements both at the data platform level and at the use case level.
Speaker 4: that really help us make sure that we're in good stead there. I think longer term, we do feel good about the portfolio that we have and have found over and over, and I've heard this directly many, many times, that the portfolio that we have from a technology perspective is already compelling. It gives us multiple years.
Speaker 4: meaningful R&D, OPEX leverage in 2024 and beyond. One that Brian mentioned earlier is, we've been meaningfully investing in our multi-tenant Snowflake and Databricks enabled data platform infrastructure. The bulk of that investment will really finish in 2023 and start really tapering down.
Speaker 4: in 2024 and beyond, there will be a lot of leverage as we deploy that infrastructure for a number of years. So that will provide us with some meaningful R&D operating leverage. And then I think us focusing on the existing portfolio that we have.
Speaker 4: and refining and strengthening that is a higher leverage activity than trying to go into a new area, as an example. And because we have a strong portfolio as it stands today, for a number of years we feel like there's some pretty meaningful leverage in making sure that all of our clients are taking advantage of that full portfolio.
Speaker 4: refining and strengthening that is a higher leverage activity than trying to go into a new area, as an example. And because we have a strong portfolio as it stands today, for a number of years we feel like there's some pretty meaningful leverage in making sure that all of our clients are taking advantage of that full portfolio. Got it. Thanks so much.
Speaker 4: Thanks, Elizabeth. Thank you. Our next question will come from Richard Close with Canaccord Genuity. Your line is open. Yeah, thanks for the questions. Congratulations on the year end. One thing on the tech enabled sourcing, you know, I'm curious if there's such a need in the ROI is there for the offering. Why is the sales cycle so long at like a year or so?
Speaker 4: Thanks, Elizabeth. Thank you. Our next question will come from Richard Close with Canaccord Genuity. Your line is open. Yeah, thanks for the questions. Congratulations on the year-end. One thing on the tech-enabled sourcing, you know, I'm curious if there's such a need in the ROI is there for the offering. Why is the sales cycle so long at like a year or so? Just curious.
Speaker 4: Yeah, it's a great question, Richard. And I would share, we're still learning. And as we mentioned in the prepared remarks, we have a limited data set thus far in terms of understanding exactly those dynamics. And we have had some cases where the cell cycle has been shorter than one year. But there are some unique components that we've also observed take some time to work their way through, even though we already have an existing client relationship in the vast majority of these pipeline opportunities. And it's a strong existing relationship. First, the size of these deals is often very large. And
Speaker 4: and as such needs to often go up to the board for review and discussion and approval. It's also a big strategic move, and these health systems realize also that the lives of the individuals that are involved in the rebatch process are directly impacted, and they take that very seriously, and we do as well. It's one of the differentiating factors that we care so much about those team members, and we keep them locally deployed as we rebatch them.
Speaker 4: But there's a lot of concern about how do we most effectively enable those team members to feel really good about that. And that involves some steps that take time like going and meeting with the team members before, you know, typically a month before the contract comes to fruition so that they have time to adjust to that reality. We can answer their questions. We can extend them offers to come and join Health Catalysts Rebatch team members.
Speaker 4: And then often, when this is involving multiple functional areas like abstraction and analytics, there are often multiple C-suite executives and the management teams associated with those C-suite executives that all need to feel good about what we're going to be doing together.
Speaker 4: Now, all of this takes time, but it also reinforces and strengthens the relationship as we go through that process and a thoughtful way together with our clients. We come out of those discussions and those experiences with an even more deep and multifaceted relationship. So it's worth the time and we are seeing a very high conversion rate.
Speaker 4: as we work through these opportunities in the pipeline book. But there are also some dynamics where if we tried to artificially pressure or move things through the process faster than would be in natural cadence, we can do a little bit of relationship damage. We want to avoid that. These are long-term decisions.
Speaker 4: you know, often five-year renewable contracts and our clients are thinking about this over the next 10, 15, 20 years. And so if it takes a few months longer to just make sure everyone's on board, it's well worth that extra effort. We wanted to be thoughtful about that and build that into our forecast so that we're always taking the right long view of those client relationships.
Speaker 4: as we progress them through. Okay, that's helpful. And then with respect to appreciate the tech enabled, bookings weighted to the second half, just curious what you would say in terms of how you guys set your guidance this year as compared to last year. And like maybe steps you have taken to the world.
Speaker 4: sort of the risk it. Yeah, I appreciate that Richard. I think we have striven to incorporate lots of feedback from our client base and from a more prospective client base about what they're facing and.
Speaker 4: than certainly we did at this time last year. I think our clients didn't have a full understanding of the headwinds this time last year. So that is certainly much more deeply embedded in the forecast. I would say another element that we've talked about in the prepared remarks and in the Q&A is the foundation of growth.
Speaker 4: for health catalysts moving forward from a go-to-market perspective is our existing clients and their expansion. We've re-engaged at a really deep level with those existing clients. I referenced in our prepared remarks that now I've had over 80 face-to-face C-suite executive discussions over the last six months or so. And that is consistent with what our team is doing now.
Speaker 4: And then we're trying to take the same approach with perspective clients, be data informed, or taking more time to spend face-to-face time with those perspective clients and let that inform our perspective moving forward. Appreciate it. Thank you.
Speaker 4: I think we're trying to take the same approach with prospective clients, be data informed. We're taking more time to spend face-to-face time with those prospective clients and let that inform our perspective moving forward. Appreciate it. Thank you. Thanks, Richard.
Speaker 6: Thank you. Our next question will come from Shawn Dodge with RBC Capital Markets. Your line is open. Hey, good afternoon. This is Thomas Keller here on for Shawn. Thanks for taking the question. So I wanted to go back to the Carla Health expansion. You'd mentioned a revenue opportunity before of like up to $16 million per year. How much of that is included in the 23 guidance? And I wanted to confirm, is that $16 million?
Speaker 4: You know, pretty much locked in or is any portion of that going to be performance based? Yeah, thank you, Thomas. So all of that 16 million is locked in and it is all included in a five year contract structure with Carl Halt. And so that is embedded in the 2023 revenue guidance given that we signed that deal.
Speaker 5: late last year, so that is included in 2023. And just to add to that, there are no other kind of performance-based components at risk components in terms of that contract structure because Carl wanted to have the visibility around what they'd be spending as well, which is kind of part of the value proposition of.
Speaker 5: locking in that spend, especially on the services side, where they're having retention issues as well as feeling the significant impacts from inflation on that type of talent. All right, great, thank you. Welcome, man. Thanks, Thomas. Thanks, Thomas. Thank you. Our next question will come from David Larson with BTIG. Your line is open.
Speaker 5: Hi, when I look at the dollar-based retention rate guidance of a hundred and two hundred and ten percent, if we use the midpoint of that at six percent, it doesn't let imply six percent top line growth in 2023 without adding any new clients. And if so, it doesn't that sort of mean that your guidance for 23 is somewhat conservative or...
Speaker 4: What am I missing? Yeah, thanks for the question David. So think of it as a one-year lag where that bookings guidance that we were providing would be where we end 2023 relative to the start of 2023. So that would be a good building block for 2024 growth. That 6% of the midpoint would be the first foundational part of the growth expectation for 2024. And then you add to that.
Speaker 4: you know, the expectation around NetNeedOS subscription client ads and any in-year revenue growth. But that would be for 2024 and then for building blocks for 2023 growth, you'd take our dollar-vacere attention that we just shared, which was 100% with existing clients as a good building block for 2023. Add to that, the NetNeedOS subscription clients that we shared was 8.
Speaker 4: add a little bit lower starting point because we had a little bit more of those docileite, so more like at that one million of ARR per client, plus some in-year revenue growth to kind of get you to that revenue guide that we shared that's around that 6%.
Speaker 5: Just to add to that, David, in your revenue component, that last piece that Dan mentioned, is a little bit more muted this year, just given, like we've talked about, we have assumed a heavier weighting of our 2023 bookings toward the back half of the year in the second half, with the heavier weighting toward Q4 as well.
Speaker 5: Okay, great. That's very helpful. And then to the best of your knowledge, are you retaining all of your existing DOS customers? You haven't like gotten any notice or anything from any of your DOS customers about expectations to convert to a competing platform or anything like that, or taking it in-house? Yeah, we're pleased as I mentioned just a few minutes ago.
Speaker 4: after more than 80 face-to-face C-suite visits with our top 100 health system clients, we're pleased to see, especially with our larger clients that have a more deep relationship with us, that there's a strong desire to continue to do business with health catalysts and to expand with health catalysts. Now, as we also mentioned, I think with our smaller, more modular, even the smaller of the DOS clients, there may be a little bit more.
Speaker 4: of a possibility of churn and then certainly are non-dust more modular clients, or even more modular, we expect some churn as it relates to the financial pressures that they're under. But those larger DOS subscription clients who have been pleased to see that they are continuing and even excited about expanding the relationship with Elk Atlas. Good, thanks very much. Thanks, David. Thank you.
Speaker 2: Our next question will come from Jack Wallace with Duganheim Securities. Your line is open. Thanks for taking my questions. Two here. You want to, if you could remind us what the...
Speaker 6: the mix of the tech revenue that is for the modular clients only. And then if I'm thinking about the upsells within the base this year, how much of that is your DOS slide and your modular customers buying more modules versus upgrading to more of a full DOS relationship? And I imagine it's probably more of the former, but I just want to get your take on that. Thank you. Yeah, thank you, Jack. It was a little bit hard to hear, but I think we got the two questions.
Speaker 4: modular to an all access tech relationship. And that's definitely a pattern that we want to follow and see some meaningful tech growth from that. There will also be in our larger DOS customers the contribution of those built-in contractual escalators that will continue to add to our growth in technology.
Speaker 4: And then we are excited about the opportunity to cross sell among our DOS light customer base as well as our non-DOS customer base both at the DOS level and at the apps level. And we are focused there. We are excited about getting better and better at that cross-sum much.
Speaker 5: What would you add to that? Yeah, just on your first question, Jack. So of our technology revenue, the majority of that technology revenue is related to our horizontal offering, our data platform offering on the technology side.
Speaker 5: And then we do have in addition to that kind of platform revenue, application revenue, that's in three main domains. So one is clinical and quality, use cases, the second is pop help, use cases, and the third is our financial empowerment use cases.
And so that's a decent way to kind of proxy for the revenue, kind of attribution of those categories. Where we're seeing more of the headwind that Dan described is on our clinical and quality offerings, just given there is less of a near-term financial ROI for those offerings. And as well as a little bit in our population health offering around patient engagement, which again is less of a kind of hard dollar savings.
while we're still seeing good demand in terms of the financial empowerment suite. Thank you, that's helpful. Jack. Thank you.
Our last question will come from Scott Schoenhaus with Keybank. Your line is open. Hi, team. Thanks for taking my question. So this is a follow-up to that last question. You know, you mentioned some expected modular churn from smaller customers, low double digit net new DOS ads in 2023.
Can you maybe provide the breakout in the expected DAS Lite ads versus pure DAS ads that you set the double digit growth and what are the average margin contributions on DAS versus DAS Lite versus pure modular customers, which is probably harder to get an average, but if you could provide any color on this.
I appreciate it. Thanks. Sure. Yeah, good question, Scott. So yeah, in terms of our ads for 2023, the majority of our ads will continue to be under more of a kind of non-DOS Lite enterprise DOS approach in 2023. However, the DOS Lite will make up a little higher proportion than the last couple of years. Our average ARR for net new DOS ads average IP address isicel.com.
around one million per new client in 2022. That's probably a decent proxy for what to expect in 2023, just given a little higher mix towards those DOS Lite offerings. In terms of the kind of gross margin and contribution margin, so the DOS Lite offering, the smaller offerings, has a slightly lower technology gross margin profile, but fairly similar to our DOS profile in year one. And then those offerings that are modular and DOS Lite don't have that built-in technology kind of contract escalator.
Each year it's more of a traditional kind of upsell motion. And so we do have a little less visibility on the technology gross margin progression on those deals, just given they don't have that locked in pricing over time, which drives an incremental gross profit. But we do have the opportunity to upsell and cross-sell those clients as well. Thanks, and I'm...
Just my follow up here, you know, you mentioned your gross technology, gross margin at high sixties for the 2023, but you also mentioned some cost structure advantages with the multi-tenant infrastructure and you're ramping down investments. Is it possible to get to, you know, mid to high 70% gross margins out in the out years based on all those moving parts? Thanks.
Great question. Yeah, it is. Yeah, to your point, we will have a little less progression on technology gross margin than we would typically expect because we are working through some of that migration cost in 2023 and into 2024. However, long-term we continue to feel confident in our mid-70s range of technology gross margin as we continue to drive these efficiencies through the multi-tener architecture.
support cost efficiencies as well as additional technology growth for a given client.
as well as additional technology growth for a given client. Thank you. Thank you. All right, thank you.
At this time, there are no further questions in the queue, so I would like to turn it back over to our speakers for any additional or closing remarks. All right, thank you all for your interest and the time that you've invested with us, and we look forward to keeping in touch in the future. Take care. Thank you, ladies and gentlemen. This does conclude today's teleconference, and we appreciate your time.