Health Catalyst Inc. Q1 2023 Earnings Call
Welcome to the health catalyst first quarter 2023 earnings conference call. At this time, all participants have been placed on a listen only mode and the floor will be opened for your questions. Following the presentation. If you would like to ask a question at that time. Please.
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Good afternoon, and welcome to Health Catalyst's earnings Conference call for the first quarter of 2023, which ended on March 31 2023.
My name is Adam Brown, Senior Vice President of Investor Relations and financial planning and analysis for health catalyst and with me on the call is Dan Burton, Our Chief Executive Officer, and Brian <unk>, Our Chief Financial Officer.
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 both of which are available on the Investor Relations section of our website at IR Dot health Catalyst's dotcom.
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 will make forward looking statements pursuant pursuant to the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995 regarding trends strategies, the impact of the macroeconomic challenges, including high levels of inflation and high interest rates a tight labor market.
Our pipeline conversion rates and the general anticipated performance of our business.
These forward looking statements are based on management's current views and expectations as of today 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-K for the full year 2022.
Filed with the SEC on February 28, 2023.
Our Form 10-Q for the first quarter 2023, and will be filed with the SEC.
Representing 12% growth year over year, Android adjusted technology gross margin of 70%.
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.
It's 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 couple of examples of client improvements from recently published case studies.
First as part of its accountable care organization participation.
Unity point helped needed.
Danced analytics capabilities to support it to achievement of shared savings and its risk based contracts.
To achieve this goal unity point partnered with health catalyst, leveraging our data platform and robust suite of analytics applications to develop standard analytics processes.
<unk> and tools that are now used across its organization.
This data informed approach is driven material success and its accountable care organizations risk based contracts.
Including an average achievement of $35 million in annual shared savings as part of unity points Nextgen ACO shared savings participation in 2019 and 2020.
Largely the result of improved care processes and decreased post discharge utilization.
Next blessing health system in an effort to meaningfully improve its revenue integrity and charge capture efforts implemented are vital integrity application a component of our financial empowerment suite.
Benefiting from vital integrity rules management system advanced reporting and analytics and auditing processes.
Lessing health leveraged our software to not only integrate centralized and visualized charged capture issues, but also to identify root causes and quickly address them to reduce revenue leakage.
Adopting our technology enabled blessing to increase its revenue by $552000 in the first full year and achieve a greater than 25% increase increase in charge capture team member productivity, creating capacity for increased performance audits issue identification and resolution.
While also successfully auditing 100% of all charges.
As you can see illustrated in these recent improvement vignettes with unity point health and blessing health system.
Our solution continues to deliver meaningful hard dollar ROI across our client base, which is particularly important to our clients in this operating environment.
Also in the improvement category, we have been fortunate to receive additional recent external recognition related to our team member engagement for.
For the sixth year in a row the women Tech Council named health catalyst to its annual shatter list. The Council's list of technology companies with active programs, leading and accelerating progress towards breaking the glass ceiling for women in the industry.
Our next strategic objective category is growth, which includes beginning new client relationships, while also expanding existing client relationships.
Related to our current selling environment I have now over the last 10 months personally had over 130 opportunities to visit face to face with senior executives at our top 100 clients.
As I, along with our growth organization of synthesize recent feedback from our clients and prospects I would share that we continue to see similar headwind and tailwind related to our growth in 2023 is what we shared in our recent Q4 2022 earnings call.
As it relates to headwinds or health system end market continues to experience meaningful financial strain.
Primarily due to significant increases in labor and supply cost without a commensurate increase in revenue leading to substantial margin pressure.
We continue to anticipate this dynamic will persist for the next few quarters.
Translating this to our business, we have seen a decrease in pipeline demand and some realized and anticipated elevated churn levels, primarily for the parts of our solution portfolio that did not offer near term financial ROI.
Such as our clinically focused technology offerings, and our more traditional consulting professional services.
As it relates to tailwind, while we have seen that the financial strain has continued to pressure health system budgets.
In a recent sales conversations we have also received strong acknowledgment that our portfolio include solutions that directly reduce health systems financial pressure.
Especially related to the segments of our offering that have a clear near term financial ROI such.
Such as our Tech enabled managed services offering our financial empowerment technology suite and components of our population health technology suite.
Likewise, as I step back and reflect on our progress over the last few quarters I am confident that our go to market focus on strategic demonstrable ROI solutions is resonating across our client base and that the breadth and comprehensive nature of our end to end solution is well suited to serve our health system.
End market in this current market environment.
Influenced by the headwinds and tailwind that I just described.
Our Q1, 2023 overall pipeline development and bookings conversion rates inclusive of Tech enabled managed services performed largely in line with expectations and our sales pipeline continues to support the 2023 bookings expectations shared on our most recent earnings call.
As such we are reiterating our 2023 bookings expectations inclusive of net new dos subscription client additions in the low double digits and a dollar based retention rate between 102% and 110%.
Related to our full year 2023 bookings expectations, let me share some additional commentary, which largely aligns with what we shared on our recent Q4 2022 earnings call.
First we continue to anticipate 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 das client base as well as upsells to our over 400 other more modular non dos clients.
Aligned with what we shared last quarter. This expectation is driven by the current end market dynamics, and which we have observed that many existing clients who have already realized a strong rois.
We're aligned on a long term partnership framework tend to be more receptive to expansion conversations in this financial environment.
Next we continue to anticipate our 2023 professional services dollar based retention achievement will be higher than our technology dollar based retention rate.
Largely driven by our tech enabled managed services expansion achievement to date and pipeline.
Additionally, we anticipate that the elevated technology churn levels, primarily for the parts of our portfolio that do not offer near term financial ROI will.
We will be more heavily weighted towards the first half of 2023 inclusive of some smaller more modular das relationships.
Next let me share that we continue to anticipate a higher portion of our net bookings will occur in the second half of the year as compared to our historical average largely resulting from the anticipated timing of our larger pipeline opportunities inclusive of our tech enabled managed services pipeline.
Lastly, we continue to expect that our new daas client additions will have a lower average starting error or as compared to historical levels driven by the current end market dynamics influencing a greater proportion of clients.
Start with a more modular solution as compared to historical levels.
Next I'm excited to announce a meaningful expansion of our tech enabled managed services partnership with our longest standing client aligning help.
This expansion, which includes more charter obstruction responsibility shifting to health catalyst.
Increases our recurring revenue with a light it to now be approximately $11 million per year.
We continue to appreciate online is multifaceted partnership and trust and health catalyst since the beginning of our relationship with them nearly 15 years ago.
And we are encouraged to see other potential areas of expansion with them in the future we.
We look forward to welcoming these teammates to health catalyst in the near future.
Additionally, we are excited to announce a new das client partnership with Seamark community Health centers, a national leader in health and social services delivering high quality integrated care for underserved communities specializing in service to Latinos in Washington State.
TMR services include a network of more than 90 medical dental and behavioral health clinics, and a wide variety of nutritional social and educational services.
TMR will leverage our technology, including our data platform pop analyzer pop insight and self service analytics, along with our professional services in order to make more proactive data informed decisions throughout their patient care.
We are honored to welcome this mission aligned healthcare provider into our client base.
Lastly, prior to turning the call over to Brian I would like to share a couple of additional updates related to new leadership promotions that health catalyst connected to our annual planning process and in response to the company's continued growth and expansion.
First as previously disclosed Anne Marie Bickmore has been named Health Catalyst's, Chief Operating Officer. In addition to her responsibilities as chief product Officer.
Ann Marie has served in various leadership roles at health catalyst since joining the company in 2012, most recently as our chief product officer since 2021.
<unk> contributions to health catalyst historic success.
Are significant and I am thrilled.
To expand and raise set of responsibilities and leveraged our proven ability.
To lead high performing teams and develop innovative products to further the health catalyst mission.
As a reminder.
Horst minor health catalyst prior Chief operating officer has taken a three year leave of absence to serve as emission precedent for the church of Jesus Christ of latter day Saints.
I would like to once more acknowledge and thank Paul for all that he has done for health catalyst over the course of more than a decade and we look forward to his return in a few years.
Additionally, as previously disclosed Ben Landry has been promoted to general counsel and corporate Secretary Ben has been withheld catalysts. Since 2019. Most recently most recently serving as assistant General Counsel Dan.
And has a proven track record of wise counsel and strategic thinking.
And I am confident he will enable health catalyst to continue its position as a leading healthcare company.
I also want to thank Dan Orenstein for his many contributions to our company's success is general counsel over the last seven years.
As he transitions to a strategic adviser role.
Lastly, as part of our normal course annual planning cycle, we have simplified our business unit structure, leading to expanded responsibilities for T. J Albert as the general manager of our data platform business unit.
Dan Unger as the general manager of the improvement applications business unit.
And Dan This where is the general manager of the professional services business unit.
I'm confident in each of these leaders capabilities and driving our growth and profitability moving forward.
With that let me turn the call over to Brian .
Ryan.
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 first quarter performance.
I will now comment on our strategic objective category of scale for the first quarter of 2023.
We generated $73 9 million in total revenue.
This represents an outperformance relative to the midpoint of our guidance.
And it represents an increase of 8% year over year.
Technology revenue for the first quarter of 2023 was.
It was $47 2 million representing.
Representing 12% 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.
This quarterly revenue performance was slightly higher than anticipated and our quarterly guidance due to a few technology environment go lives that generated a deferred revenue catch up occurring earlier than forecasted.
Professional services revenue for Q1, 2023 was $26 7 million.
Representing 3% growth relative to the same period last year.
This amount was also slightly higher than anticipated in our quarterly guidance.
Mostly the result of a timing related pull forward from a few nonrecurring revenue items that we had forecasted to hit in subsequent quarters.
Given that this upside resulted from nonrecurring revenue items that were primarily timing related we.
We do not anticipate that these quarterly revenue outperformance items will represent upside to our full year 2023 forecast.
For the first quarter of 2023 total adjusted gross margin was 52%.
Representing a decrease of approximately 270 basis points year over year.
In the technology segment, our Q1 2023 adjusted technology gross margin was 70%.
A decrease of approximately 20 basis points relative to the same period last year.
This year over year performance was mainly driven by headwinds due to the 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.
Partially offset by existing clients paying higher technology access fees from contractual built in escalators without a commensurate increase in hosting costs.
And the professional services segment, our Q1 2023 adjusted professional services gross margin was 20%.
Representing a decrease of approximately 900 basis points year over year.
And an increase of roughly 260 basis points relative to the fourth quarter of 2022.
This quarterly performance was slightly higher than the expectations, we shared on our last earnings call.
Mostly the result of the Q1 higher margin nonrecurring revenue milestones mentioned previously.
In Q1 2023, adjusted total operating expenses were $34 2 million.
As a percentage of revenue adjusted total operating expenses were 46%.
Which compares favorably to 54% in Q1 2022.
Adjusted EBITDA in Q1, 2023 was $4 2 million.
With this performance exceeding the midpoint of our guidance and representing an increase of $3 5 million relative to the same period last year.
This Q1 2023 adjusted EBITDA results was mainly driven by the quarterly revenue outperformance mentioned previously.
Along with the timing of some non head count expenses that we anticipate will be pushed out to later in the year.
Our adjusted basic net income per share in Q1 2023 was five <unk>.
The weighted average number of shares used in calculating adjusted basic net income per share in Q1.
It was approximately $56 3 million shares.
Turning to the balance sheet. We ended Q1 2023 with $356 9 million of cash cash equivalents and short term investments compared.
Compared to $363 5 million at year end 2022.
Additionally, the face value of our outstanding convertible notes as a principal amount of $230 million.
And the net carrying amount of the liability liability component is currently $226 9 million.
As it relates to our financial guidance for the second quarter of 2023, we expect.
Total revenue between $73 million and $74 3 million.
And adjusted EBITDA between zero point $75 million and four.
$75 million.
And for the full year 2023, we continue to expect total revenue between $290 million and $295 million.
And adjusted EBITDA between $9 million and $11 million.
Now let me provide a few additional details related to our 2023 guidance.
First as it relates to our Q2 2023 revenue expectations.
We anticipate that our technologies segment revenue will be flat to slightly down quarter over quarter.
Primarily driven by the previously mentioned Q1 go lives that generated a deferred revenue catch up.
For our professional services segment, we anticipate that our Q2 revenue will also be flat to slightly down sequentially may.
Mainly driven by the previously mentioned pull forward to Q1 of a few nonrecurring revenue items.
Next in terms of our adjusted gross margin, we continue to anticipate that our adjusted technology gross margin will be in the high <unk> in the second quarter.
And the professional services segment, we anticipate that our Q2 professional services adjusted gross margin will be flat to slightly down.
As compared to Q1 2023.
Lastly, we anticipate our operating expenses will be roughly flat to slightly up to Q1 2023.
Mainly mainly the result of some non head count expenses.
We now anticipate will occur in Q2 as opposed to Q1 2023.
Next let me share a few additional details related to our full year 2023 guidance.
Which is largely consistent with what we shared on our Q4 2022 earnings call.
From a revenue mix standpoint, we continue to anticipate professionals.
<unk> year over year revenue growth will slightly outpace technology year over year revenue growth.
Driven by the heavier weighting of our tech enabled managed services bookings.
Next in terms of our adjusted gross margin, we continue to expect that our adjusted technology gross margin will be in the high <unk> through 2023.
Also we anticipate our adjusted professional services gross margin will be roughly 20% for the year.
Given that our anticipated utilization rates will 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 can expand over time.
Lastly, we continue to 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 and meaningful continued operating leverage with the largest year over year reduction occurring in SG&A.
With that I will conclude my prepared remarks, Dan.
Thanks, Brian .
In conclusion, I would like to recognize and thank our highly engaged clients and team members without their consistent contributions to our shared mission. None of this would be possible and with that I will turn the call back to the operator for questions.
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. If at any point. Your question is answered you may remove yourself from the queue by pressing star two we ask that you pick up your handset when posing your questions to provide optimal sound quality.
Thank you.
Our first question is coming from Anne Samuel with Jpmorgan. Your line is open.
Hi, guys and thanks for the question and congratulations on the great results.
I wanted to ask about the hospital customers. It seems like commentary that we've heard out of some of the publicly traded hospitals that have reported so far has actually been a little bit better around labor, but still very focused on cost management and I was wondering if perhaps you know as a result of that youre seeing maybe any shifts in what types of products. Your customers are looking to utilize or if it's still.
Similar to what you saw in prior quarters.
Yes. Thank you Andy for the question. We are also observing among our client base that over the last few months, there's been a slight improvement in their overall financial performance, though it is only slight in our experience both across the not for profit health system.
And in the for profit health systems that we work with we've also observed that theres been a slight easing of the of the pressure on labor expenses.
That has been so significant over the last few years, but but in our experience and it might direct conversations face to face with these clients.
Still it took only elevated levels of expense and expense growth relative to what we might have experienced five years ago. As an example, and so while the trend is slightly better.
The overall rents of these health systems from a finance financial perspective is still I would characterize as under meaningful financial pressure and that includes in the labor category and to your point.
Non labor categories like supplies expenses and other expenses as well so there's still meaningful financial pressure that is still largely from for my direct experience in our direct experience.
Recently in terms of face to face conversations with our top 100 clients still the primary focus for these clients and as a result, as we said in our prepared remarks, we continue to focus on those parts of our solution that offer that near term ROI in that and Thats still is the primary focus of our clients we do anticipate.
Eight over the coming quarters.
But hopefully as we continue to see some slight improvements that there will be more of an openness to discuss other parts of our portfolio that also meaningfully contribute to improvement, but night might not deliver as many short term.
Financial ROI elements as some of the other components of our solution, but I would still classify the current environment is very much largely still focused on that near term financial pressure in the near term financial ROI that's needed.
That's really helpful color. Thank you and hopefully we start to see.
Soon.
You spoke about the opportunity to sell into your modular client base and you have a lot of those customers now I was hoping you could speak to what proportion of your low double digit no doubt.
<unk> come from that and maybe what the cross sell opportunity looks like down the line that that base just given you have so many of those plans.
Yes, great question.
We do think about the foundation of our growth over the next several years really coming from our full existing client base and that includes obviously, our 100 or so dos subscription clients, but also the other 400 or so clients, where we have a relationship that's more modular to your point.
But theres an open door there that's that's.
A meaningful difference from starting from scratch with a prospective client and so I would characterize that we're thinking of.
A large percentage of those net new dos subscription client adds coming probably from that base of the 400, plus non dos clients that we have where we have that open door at an opportunity to visit with them without expanding the relationship though we will still have some meaningful ads we anticipate from.
From prospective clients as well the only thing I would add Andy is in.
In terms of the use case and focus areas that we're engaging with with those types of prospects and existing clients to Dan's point.
They focus again on those near term.
Hard dollar savings opportunities, so things like our financial empowerment suite.
Coupled with our data platform as well as the meaningful kind of technology enabled managed services opportunities that those health systems also can benefit from in terms of saving costs.
That's really helpful color. Thanks, so much guys.
Thanks, Ed.
Our next question comes from Ryan Daniels with William Blair. Your line is open.
Yeah. Good afternoon. This is Jared haase in for Ryan Thanks for taking my questions and congrats on a solid start to the year.
Was hoping to get a little more color on the aligner relationship.
I was just hoping you could maybe speak to how that's evolved over the years and.
And specifically then what drove this this tech services expansion.
<unk> sides at approximately $11 million per year, but could you just maybe help us understand what's incremental in terms of how big of that expansion was.
Yeah, absolutely. Thanks for the question Jared so.
Paired remarks.
<unk> is our longest standing client relationship and we're coming up on our 15th anniversary as a company and our 15th anniversary with them here in a couple of months and over time that that relationship has evolved and changed and expanded really meaningfully as we've mentioned previously Atlanta was the first client to enter into a <unk>.
<unk> enabled managed services relationship with health catalyst about eight and a half years ago.
That relationship is expanding the tech enabled managed services scope.
Is expanding with this most recent.
Contractual expansion and as we mentioned in the prepared remarks that expands our responsibility for charter traction.
And represents.
A few million dollars expansion just meaningful in the context of that overarching relationship.
And as we mentioned in the prepared remarks, we're excited about additional opportunities to expand.
In terms of what led to the expansion opportunity at a foundational level. This is true at a lineup that's true with all of our clients. The foundational element that opens the door for expansion is great delivery against the eggs.
No its possibilities that we have and that always needs to be the foundation of our focus in and that has been the case at Atlanta and we've been grateful.
Throughout the partnership to have really meaningful shared success together and.
And a lighter like so many other health systems is facing additional financial pressure.
And this was an opportunity to help them.
With regards to the financial pressures that they're facing with catalysts being viewed as a trusted long term partner, where we had had success in this kind of a partnership model for many years and so this was an exciting opportunity for us to expand and our relationship model that both sides knew was working well.
And it's one of the reasons why we're excited about.
Potential for additional expansion opportunities in the future just to add to that Jared and then kind of alluded to the directional kind of size of that that expansion. But this is an example, where our lineup has chosen to extend meaningfully over several years and over time as compared to other examples where we can engage with a client who may take on.
A larger portion at once like with Carl or Integra. Those recent expansions that we had so grateful to have kind of different options for clients in terms of the level of expansion over time.
Absolutely, yes that that makes sense and I appreciate all the color and then maybe I'll sneak one in on the other customer announcement.
Seemed like there was a health equity component with the <unk> I'm wondering if you could maybe speak to the role of data in helping clients achieve equity initiatives and maybe how you communicate that as a value proposition to clients.
Thank you for bringing that up Jared and health equity is something that we care a great deal about we try to start with health catalyst first and foremost.
And then ex extends to our health.
Health component to our data and analytics and improvement.
Tech enabled services that we offer to clients.
And we certainly are always welcome clients, who have a deep mission alignment and <unk> is certainly one of those clients that deeply cares about the patients and the members that they serve and has a passion around health equity and data and analytics play such an important role in understanding where each health system is.
On their journey towards a critical care.
And we have a specific solution that we've now implemented across many clients.
That will also be available this summer to ensure that understand how well, we're doing where we're doing well, where we could improve and then we specifically focus on those areas of improvement and see measurable improvement results as.
As we focus in those areas.
<unk> and our shared focus with sema among other areas of focus.
And it will continue to be our focus with many other clients as well.
Our next question comes from Jessica <unk> with Piper Sandler Your line is open.
Okay.
Hi, Thank you guys. So much for taking the question.
Dan I know you've been visiting customers.
Maybe six or nine months.
We're actively visiting customers.
Do you have a good sense at this point of customer intention with respect to kind of.
Contact persistence across the entire base and then just curious to know what percent of the das space is going to have managed services attached by the end of 2023.
And kind of when do we expect churn or retention rate to normalize and at what level alright. Thanks.
Yeah.
Yes, great questions I'm, just taking some notes suggest thank you for this those questions. So first as it relates to <unk>.
Those customer visits yes over the last 10 months as mentioned in the prepared remarks, I've now had over 130 opportunities to have face to face discussions with our top 100 clients.
And that's not going to stop and it's not just me. It's the team that's going out and visiting face to face with these clients.
And that very much informed.
What we shared in terms of both headwinds as well as tailwind that our clients are facing on the headwind side as we've mentioned in previous quarters as well we continue to observe I continue to observe that there's meaningful financial pressure and while that is improving slightly.
Its pretty slight in terms of operating margin performance and there's still very very significant financial pressure and that's one of the reasons why.
We see both on the tailwind side elevated interest.
In elements of our of our portfolio that offer that near term ROI like Tech enabled managed services like the financial empowerment suite like elements of our pop health suite, and we're excited and encouraged to see the large meaningful pipeline opportunities there primarily with our existing clients.
And then on the flip side, we see headwinds.
As we've mentioned.
In our prepared remarks today and over the last few quarters.
As it relates to particularly for us more of our smaller more modular client relationships and particularly those modules.
And in client relationships, where those modules don't offer our near term financial ROI and so we see a little bit of elevated continued elevated somewhat elevated churn.
In that category.
So there are both headwinds and tailwind I would share that from a tone perspective.
Been appreciative of the way in which are our top 100 clients. In particular, you health catalyst is an important long term partner are encouraged and excited about.
Long term expansion of the relationship and that's where I would classify maybe some of the headwinds is more near term to mid term, which gets to one of your questions around normalizing churn and I do think maybe for a couple more quarters, we might see the results of some of that elevated.
Financial pressure, resulting in a little bit more modular churn than than what might happen.
Might have happened a few years ago, but on the flip side I feel like the the tailwind interest and those parts of our portfolio that are that are meaningfully delivering against.
Hard dollar financial ROI are more of a permanent tailwind a long term tailwind and and maybe that gets to your last question about.
Where are we where do we see the client base.
Materializing from a tech enabled managed services perspective, right now we're sitting at.
Around 10% of our dos subscription clients that have a tech enabled managed services relationship I certainly hope that five years from now that number will be 100%.
We'll work very hard with our clients to enable them to tap into that those advantages, but as we've also shared we're finding as we gather data on the pipeline conversion and the timing and cadence that it takes some time to work through those expansion opportunities in a one year timeline might be a reasonable X.
Spectation and that is one of the reasons why we we continue to forecast that more of our overall bookings will likely happen in the second half of this year is as we really started those significant discussions about expansion opportunities like terms starting in the July timeframe of last year Brian .
Just to add just great questions.
To Dan's point, the 10% penetration rate roughly of the terms opportunity is applicable to our das client base.
And we do anticipate as Dan shared a few more wins like we've seen in the last few quarters with Karl and Tigris in our lineup as we continue forward through the rest of 2023. So we're encouraged by that pipeline. The other nice thing is that even with an existing <unk> client like a lineup.
There are still opportunities to expand further be in different areas with analytics with further tried abstraction opportunities in another areas that our clients are potentially interested in so that's also a nice potential run rate runway for us as we deepen the temps footprint as well as expand within those clients just one note along those lines Jess.
We have the most experience as you know expanding in tech enabled managed services relationships around areas like analytics and charter abstraction data management, we have quite a bit of experience now there with many clients that are leveraging our our capabilities and our teams to do that we are finding that that we have.
The number of clients that are asking us about some other adjacent areas, where they might want us to consider a tech enabled managed services and so we try to be very careful and thoughtful.
As we consider those other growth opportunities and expansion opportunities to try to make sure that we have some tech component that we can directly leveraged to drive efficiencies.
And we feel strategically like this is an area that we would like to occupy and that we feel we can be differentiated long term, but that is something that.
That is included in our pipeline is a lot of opportunities in these core areas, where we have a lot of experience and then some opportunities that are adjacent to those areas as well.
Thank you that's that's helpful and my quick follow up.
B with respect to the ACO enablement or the data management with the port and the ACL.
What exactly is the health catalyst skewing to support kind of shared savings performance and then just and I don't know if you have today or have an opportunity to share in the economics.
Some of the savings for January .
Thanks.
Yeah, Great question. So we do have the opportunity to work with a number of.
<unk> AC.
So clients and actually the first improvement case study that we leverage is probably a great example.
Theres more details about the unity point shared savings.
The success story on our website and maybe we can follow up and just send you some more information about that but that was a significant opportunity and a good example of of what we have to offer from a data.
That form perspective, and then from an analytics and an expertise perspective to help our clients be really successful with those shared savings programs just on the financial side of that just yet.
We have been open to some kind of shared savings contractual elements with our clients in the past, we havent seen a lot of uptake on that in terms of that contracting model, but it's something that we're open to overtime and just typically what we see from clients is that they often just want to benefit from more of a locked in fixed.
Building on budget, but that is something just to Dan's point based on what we can deliver that we're open to forgot.
Thanks again.
Thanks Jess.
Our next question comes from Elizabeth Anderson with Evercore ISI. Your line is open.
Hey, guys. Thanks, so much for the question.
As I noted.
This quarter is that.
Okay accounts receivable ticked up sequentially by a fair degree could you talk about sort of what were the driving factors of that on a quarter over quarter basis.
Yeah.
Yeah. Good question Elizabeth.
So we typically don't speak to trends in that much detail on a quarterly basis for that for the reason being that.
A lot of our invoicing per our contracts can be fairly lumpy.
From a timing standpoint, so there can be larger onetime annual technology invoices professional services invoices. So we had a little bit of that in Q1, where that ticked up but you should see that kind of move around as those get collected insight.
Take too much from it other than we do have a fairly lumpy kind of invoicing model.
Got it so we shouldnt, we shouldnt read that as a sign of like financial stress on many of your customers.
No no not not outsized compared to what we've seen in the last couple of years.
Okay, perfect and then.
Just a quick follow up I know you talked about and that was very helpful. The details that you gave on the gross margin in the second quarter can you just talk about sort of any particular push.
Paul on the gross.
Margin in the back half of the year, particularly as we think about the technology.
Technology segment.
Yeah.
Definitely so yeah. We were we were pleased to see the technology gross margin tick up a little bit in Q1, so roughly.
70% was our performance and we did share in the prepared remarks, Elizabeth that we anticipate that to be in the high <unk> range for the for the next.
The remaining quarters of 2023.
And the main drivers of that are primarily that we did have some some kind of earlier revenue recognition in Q1 on the technology side than we had we had forecasted to occur later in the year and so some of that revenue was pulled forward and some of that dropped down to the gross profit level. So if you kind of normalize for that.
Q1 dynamic.
We do view, our technology gross margins isn't that high <unk> range, which is picked up from a couple of years ago, but is it kind of consistent with what we shared at the last the last couple of quarters.
Got it perfect. Thank you so much.
Thanks Elizabeth.
Our next question comes from Stephanie Davis with SBB Securities. Your line is open.
Hey, guys. This is Andrew.
Yeah.
Thank you for taking our questions and congrats.
On the corner.
And what the EMR.
Tech enabled house I think.
Dan You said that you start thinking about a 12 month sales cycle.
Curious, if there's any potential to accelerate that doesn't Neil lane and <unk>.
Yeah. Thank you Anna for the question.
We do see.
Kind of a spectrum of ways in which these things play out.
But we're still limited in terms of the number of data points that we have and.
When we look at the data that we have thus far it does average around that one year timeframe.
On one hand from a tailwind perspective as it relates to the time you know these are existing clients in most cases, where we have a deep relationship and Theres a lot of trust on the other hand, Theres a lot of complexity and this affects individual people's lives, it's changing who their employer is in many cases and these are <unk>.
Large contracts in a number of cases and so.
That often takes a little bit more of an approval process, sometimes it goes up to the board.
What are the benefits I think of this kind of a model as is our opportunity my opportunity to get to know.
C suite executives and even board members as part of these expansion discussions, but that takes some time and what we have found is its worth the time, it's it's worth not rushing these things are in.
In order to really set things up for success in a lot of what we've also described when we set up these tech enabled services relationships is but they are long term there often five year contracts and renewable for five years and so we wanted to make sure that everyone feels really good about the structure.
Sometimes it takes a little bit longer.
But in the context of the long term relationship it's worth it and that's where we've tried to kind of optimize for all the most important factors even when.
Sometimes we wish we could go a little bit faster.
But in the context of a long term relationship it's worth taking a little bit more time.
Got it that's helpful. Thank you.
A quick follow up also.
Also curious about the sizing and rollout in <unk> and should we be thinking about that as a potential strategy Jeff.
Rytary.
Thank you for that question. We are excited about the work that we're able to do in the ambulatory space and we view that as a major trend. If you would if you think about the next five or 10 years in health care delivery is such an important part of the delivery ecosystem.
So.
We're excited about any opportunity for us to do more in the ambulatory setting.
We do believe that.
There's a lot to add a lot of value to add within the ambulatory setting whether it's with.
Standalone providers that only focusing their ambulatory setting or if it's with a larger health system that has a meaningful ambulatory footprint increasingly.
Most health systems are trying to increase their ambulatory footprint and so we're trying to be a great partner in increasing our offerings and our focus in an ambulatory setting as well and we believe that that that it incorporates both technology.
We can offer to improve ambulatory performance operational performance pop health performance.
And it is.
Involves expertise and services could even involve tech enabled managed services in the future as well. So we're really excited about the work that we're going to do with FEMA. We're excited about continued expanding work in the ambulatory setting that we're seeing across many of our other clients and just to add to that and in terms of the size of the relationship so given the.
The nature of the client.
It is a little bit of a smaller relationship as compared to a a das agreement with a large health system. For example, given the nature of this this client.
But it includes our data platform, our self service analytics components and as Dan mentioned, we found that our data platform continues to be highly relevant for ambulatory systems like this as well as for health systems, who have an ambulatory component.
Does it often involves.
Variety of EMR ours, and a real data integration workflow that we excel at and can find value and so we're encouraged by that as well.
Well. Thank you thanks again.
Thanks Sandra.
Our next question comes from Richard close with Canaccord Genuity. Your line is open.
Yes, thanks for the questions. Congratulations Brian I was wondering if you could walk through the second quarter revenue range, maybe at the low end and the high end what gets you to take each it seems a little bit wide relatively speaking.
When you compare it to the annual number.
So just any help there would be great.
Absolutely. Thanks, Richard Yeah. So the dynamic that we're seeing there in Q Q2, primarily relates to what we saw in Q1, which as I mentioned with some <unk>.
Some pull forward on the technology and on the professional services side.
Revenues that we had previously forecasted a little later in the year. So when you when you adjust for that and normalize for that.
The Q2 number would have been a little higher than our year over year growth rates and the like a little bit higher.
What we what we were trying to think through Richard on the site the sizing of the range.
Actually relates to that as well, where while the vast majority of our revenue recognition is as recurring in nature.
Occasionally in a given quarter, we do have some some pull forward of nonrecurring items in the services side or or technology go lives that can have a deferred revenue catch up and so we wanted to be cognizant of that in terms of informing our range for Q2.
The other driver of the range can be timing of deal signing so if we have an expansion contract a new contract that occurs a little early in the quarter.
That can drive some some upside so I would point to kind of the midpoint of the range is a good proxy.
For what we're expecting and then again kind of the dynamic around some of that pull forward in Q1, but overall, we're encouraged by the performance and the overall increase in visibility that we have for the remainder of the year.
Okay, and just as a follow up on that visibility can you just remind us.
What percentage of the call it the annual.
Number is recurring in nature or they're highly visible revenue.
Yeah, it's typically a little north of 90% in a given year, it's under contract and kind of in and recurring revenue models.
Great. Thanks.
Thank you Richard.
Yeah.
Our next question comes from Daniel <unk> with Citi. Your line is open.
Hi, Thanks for taking the question.
You mentioned that lower dollar based retention continues to be driven by.
Modular churn of.
Some of those more clinically focused modular, but I'm curious given continued health system pressures are you seeing any push back from Dod.
<unk> enterprise clients on the automatic escalators each year and have you contract have you changed the quantum of those escalators in recent contracting.
Yeah. Thanks for the question Daniel So I think you've you've.
Highlighted that the tailwind and the headwind.
As it relates to tech dollar base retention I think on that on the headwind side.
We have as we've shared today and in prior quarters seen some of that elevated somewhat elevated churn.
In those more modular client relationship smaller client relationship even some of our smaller das client relationships that are more modular in nature. So that's definitely a headwind that we believe will persist for a few more quarters at a little bit somewhat elevated levels.
We do believe that will come down overtime.
And so we'll see some benefit from that is as the financial pressure on these health systems subside over time.
The tailwind that the help that we continue to see as you know most of our of our contracts are more in that enterprise or more like an all access kind of tech relationship with our clients and those do have those built in escalators in those escalators continue to help us.
As a tailwind as it relates to our dollar based retention, but those they are definitely tailwind and headwinds that are that are combining.
Together to kind of come up with an overall tech dollar based retention for 2023, a little more pressure on that because of those near term headwinds in the near to mid term that should subside over time, though.
And to Dan's point, we also shared that.
We expect our professional services dollar based retention rate to be to be higher than technology. This year and also that's what drives more of the.
Kind of variation in the range that we provided is those tech enabled managed services contracts can be quite large and significant and really really impact that range and a little a little more lumpy and large in nature either benefit there is that we're often to dan's comments.
Locking in and renewing a more enterprise relationship over a longer fixed term and so that benefits us on the technology side as well as we migrate more of those clients to that model.
Got it so it sounds like no real pressure on the escalators themselves.
And then just a quick.
Housekeeping question, there is at $11 $7 million of AR.
The litigation expenses that you generally don't see I'm, just curious what's driving that charge this quarter.
Yes.
So we disclosed in the 10-K and you'll also see some further detail in the 10-Q that will be filing shortly.
A summary description of that litigation, which includes <unk>.
<unk> portion of that $11 7 million is an accrual and a small portion of that is actual outside legal expenses in preparation for that matter. So we'd refer you to the to the 10-Q for a little bit more detail on that.
Got it thank you.
Oh, Thanks Daniel.
Our next question comes from John Ransom with Raymond James Your line is open.
Hey, good evening all.
Wondering if there was an update on your life point Onboarding.
Yeah, absolutely John .
We continue to be pleased with the execution against them.
That relationship.
That is a relationship as we've shared previously were.
We are leveraging the.
The cloud native.
Data platform capabilities and components.
That are enabling this very large health system with a very complex data environment to be in a position to understand the opportunities for improvement clinically financially operationally and then work with our teams.
To execute against those this will take time as it always does with all of our clients. It's hard to change it's hard to.
Two two.
<unk> massive measurable improvement, but we're encouraged by the work that we're doing together they are a great partner and we're encouraged that we will see over time, some really meaningful results that come through that shared work. So.
We're pleased with.
With that relationship as with all relationships.
There are many challenges in a very complex data environment. As you know life plays a very large health system. That's a very heterogeneous data environment with multiple EMR as multiple other data sources are very complex data environment, but we're grateful to be an important partner there and understanding that data.
Getting it into a single source of truth, and then using the data and analytics to guide, where we prioritize our improvement efforts.
Yeah.
Great and my follow up would be I mean, just given what I wouldn't assume to be the.
In a reset of valuations on money.
While our H T point solutions.
And given your cash hoard and given the environment.
Is there.
A way to think about that opportunity as it more than 50 per cent or loved one metric, it's not likely that you might go shopping for some other functions to augment your already pretty comprehensive suite of Melissa.
Yes. Thanks for the question John It is an interesting environment that's for sure in the public markets and in the private markets.
And we continue to keep our ear to the ground keep our eyes open.
But we also are informed by the size of the growth opportunity organically, that's available to us, especially with our existing clients I think we're really excited about.
Really large expansions that we've recently announced with our existing clients. So we see a really large pipeline of opportunity for growth.
Organically with our with our existing clients, we also see that.
As you as you mentioned, John we have a meaningful existing portfolio that offers a lot of advantages and and so many of our clients are not yet fully taking advantage of the portfolio that we have and so I think our prioritized focus is.
To keep growing organically and we see really meaningful 20, plus percent long term organic growth possibilities for us.
We're excited to run against and that's obviously very cash capital efficient as well and I think we're tuned into that we're shareholders as well.
Myself included and we want to make sure that.
We're creating great shareholder value and we're excited about the growth possibilities that are before us from organic growth perspective, So that's our priority right now.
Paul Packer cluster several wholesale one more.
Yes stock comp and stuff.
That's bubbling up is a little bit more of an issue.
You speak perhaps.
The longer term view of how Scott cough would relate to your adjusted EBITDA.
Yeah.
Yes, I'm happy to share a few thoughts and then Brian Please add as well. So you may have have noted John that's Q1 stock comp as a percent of revenue has come down meaningfully from where it was last year.
We have spoken at a high level that we expect continued leverage and stock comp as a percent of revenue in the months and years ahead as a company and as we as we look longer term for other companies as they mature and grow.
In their profile. It that we would also expect to see meaningful leverage likely to see that stock based comp over time.
Migrate to the mid to high single digits as a percent of revenue, but that will take time.
But we're certainly on that path.
Demonstrating some leverage starting.
This last quarter in Q1.
Thanks, so much.
Our next question comes from Sean Dodge with RBC capital markets. Your line is open.
Hey, good afternoon, Thomas Keller, one for Sean Thanks for taking the questions.
So you do start to add more of these tech enabled services offerings and I appreciate that you can use journal.
And automation capabilities, but as you grow this part of the business little more quickly.
Are there any limitations to sort of how fast you can scale and are you able to leverage offshore resources for any part of these services if needed.
Yeah. Thanks for the questions. Thomas So one interesting element of of these tech enabled managed services opportunities that scales well is the fact that in most of these cases, we're re badging existing team members. So theyre already performing the functions that that our clients are going to be relying on us to perform.
And so as a starting point, we just ask them to keep doing what they're doing and then over time, we leverage more and more technology to automate processes that might've been Emmanuel in the past and deliver more efficiencies and more speed.
But its skills quite well in the sense that the team already exists in most cases not in every case in some case.
Some cases were building out the team that in most cases, the team already exists and Theyre being re batched and so in that sense the scales quite well.
I think there is a sense in which we wanted to make sure from a quality perspective, and a delivery perspective that were outstanding that every one of our of our clients to choose us for Tech enabled managed services will continue to be a reference for us and so we're mindful of that but we've been encouraged to see that business growing rapidly.
And historically, we've been able to absorb that growth.
And continue at a high level from an execution perspective.
We do have a model that doesn't primarily rely on offshoring and that is actually one of the value propositions of choosing health catalyst. We we keep team members locally forward deployed.
And often our clients really care about those teammates they.
They've worked together with them for many many years in a number of cases and the prospect of them keeping their jobs and continuing to focus on the mission that they care. So much about in supporting this health system client is an important component of of health catalyst value proposition.
That we can do that and still offer cost savings primarily through Tac now we are.
As a company pursuing various.
Initiatives that involve global delivery and we will continue to pursue those initiatives and there may be some cases, where we find that.
Global delivery can help us in different aspects of our business that could include Tech enabled managed services, we would make sure that our clients are supportive of that.
That is something that will work well for our clients and that isn't today currently a primary component of our tech enabled minute services offering to Dan's point Thomas we do have global team member base.
Focused on in particular two areas one in support of the technology and the other is important implementation of data and the technology.
And that fits well in terms of faster implementation cycles.
To get to that initial ROI in those savings a little more quickly as we deploy our technology across dos clients as well as our technology enabled managed services clients. So we will continue to invest in those areas as well.
Alright, perfect I'll leave it there thanks guys.
Thank you.
Our next question comes Jeff.
With <unk> your line is open.
Hi, can you talk a little bit about Carl health integrity in our lineup when do those roll on to.
The P&L and then one of the I guess concerns I might have is.
When we've seen large revenue cycle deals in the past where <unk>.
Vendors, helping collect cash and or the earning of percentage of fees eventually.
The hospital system wants to in source that but Dan I think you've mentioned a couple of times, you're actually improving cost trend for these clients just any any color around this would be very helpful. Thanks very much.
Yeah, absolutely David so.
As it relates to your first question and typically as we as we sign these relationships and we begin.
With the re badging process.
Services perspective, that's the first month, where we start recognizing revenue that occurs mostly if theres a tech expansion component to that there's sometimes some specific deliverables that need to be in place for the tech revenue recognition to occur, but usually in that first month. When the team members have been re badge, that's when the revenue recognition occur.
<unk>.
Part of that first question.
Yeah. So it's a so for example, so carl signing.
At the end of 2022 has contributed in Q1 to the revenue dynamic Integra is more and more in Q2, our lineup kind of late Q2 early Q3, that's kind of the rough cadence.
Great.
And then the second question.
As it relates to the structure of our relationships compared to maybe some rev cycle type relationships. There are some differences in the <unk>.
Way that we structure our relationship so first of all.
I think ours are a little bit simpler in there in their construct in that.
In most cases, we're typically offering some cost savings as part of that rebate process, usually in the first nine months or so.
And it depends on how the health system client wants that that cost savings to be manifested sometimes clients needed in that year that we're in and so we focus more on delivering those cost savings.
That calendar year as an example, others want the certainty of knowing that Theres cost savings built over time over the next five years and they have really good visibility and it's locked in and they know exactly what it would be and we're open to.
A couple of different models, there, but fundamentally those health systems are realizing cost savings as a result of.
Working with health catalyst and as Brian mentioned, sometimes there's a shared success component there's a shared success shared.
Bonus that we might.
Sharing together in some cases they did.
A lot of cases.
Just focused on delivering well and the contractual component as a cost savings component and what we've seen over time is as we deliver an excellent way at extraordinary levels over time.
That our clients are very happy to have health catalyst continue to advantage.
The teams that are delivering and as we deploy technologies that enable automation to occur and and.
For the for this solution to be better faster and cheaper.
It has also led to our clients.
Choosing to continue long term and that relationship and then theres the contractual component, which is typically a five year run.
<unk> ship that the client is committed to that.
Then they can renew overtime, but we've seen our clients have.
Have been interested in continuing and.
That's been more the rule rather than any sort of in sourcing.
Okay, great. Thanks, very much and then the dollar based retention rate, it's still a 102% to 110% for the year and low double digit Doc adds for the year for fiscal 'twenty. Three is that correct any color on that now that we're halfway through the year.
That's still correct, we reiterated that full year guidance.
Okay and then.
Okay. Thanks, very much and then I guess just the last one I had was there's been some discussions around.
Your relationship with Snowflake and migrate migrating to snowflake like solutions I'm, assuming that that has been in process for a couple of years.
Is that correct.
You basically progressed at the pace of the client wants to progress that is that right.
That's right, David and we have a few clients that are leveraging.
Snowflake capabilities data breaks capabilities, other new technologies and capabilities in.
And we continue to make that.
And.
<unk> for our clients as we as we talk about the long term.
Migration path for them as we've mentioned in previous quarters, what we found especially over the last 10 months or so inclusive of my 130, or so face to face discussions with clients. The vast majority of our clients are focused a lot more on how can we save money how can we.
Reduce the financial pressure and let's focus on that right now.
As opposed to.
Scaling up.
New technology productivity capabilities, which do sometimes have an ROI, but but but require some investment upfront.
Before you get that ROI, that's harder for most of our health systems to do and so to your point, we kind of follow their lead as it relates to what's most important to them and in the vast majority of cases, they've been more focused on how can we deliver cost savings sooner in terms of the financial component of that Dave.
We have as we've shared these mid and long term.
Profitability targets embedded the investment that we're making in the snowflake and data bricks capabilities.
And into our R&D and cash flow targets, we felt comfortable there.
As we worked through that investment as well as we've embedded some.
All of that into our into our gross margin color on the technology gross margin side. So there is a there is some parallel cost processing on technology as we go through that migration over the next two or three years, but theres also a long term upside in terms of scalability and elasticity of that platform driving efficiencies in our supply.
Port and delivery costs and hosting moving forward as well.
Okay, great. Thank you.
Thanks, Dave.
Our next question comes from Jack Wallace with Guggenheim Securities. Your line is open.
Hey, Thanks for taking my questions.
I just wanted to talk about the pipeline a little bit.
Stepping back year, you've given out.
Several large expansions over the last couple of quarters.
And just wondering how those announcements.
Have impacted your discussions.
With your existing and essentially.
Customers for attempts relationship.
Or even expansion.
Yeah. Thank you Jack for the question they definitely help and you know they they increase interest and.
Our other existing clients in particular, I would say most of our pipeline and most of our conversations that are leading towards.
Expansion opportunities are with our existing clients, where we have those those relationships, but there are a few where even prospective clients are interested in finding out a little bit more about technium a minute services. So they definitely help and and this gets back to something I shared earlier.
We are very focused at health catalyst as we sign each one of these contracts to make sure we deliver really really well because this health care community as a small community.
They all we all know each other and so it's critical for us to make sure that we're delivering really really well and then that'll keep opening up additional opportunities.
Thank you that's helpful. And then just wanted to ask a follow up on an earlier question around.
Services revenue progression just over the last couple of quarters here.
Our guidance for Q2.
My understanding was that Carl.
Was it meaningful or at least that.
Good chunk of the what's called the <unk>.
What is hitting in the first quarter.
You realize there were some pull forward. It's also impacting the services line.
Just thinking about the second quarter guidance.
A couple of go lives is expected there as well.
Why why would that I guess, what would be the conditions and the factors that way you can make that.
That potential sequential down.
Quarter on that line.
Our attrition there other one time items that were called out or.
Or are we just maybe.
Thank you Matt.
Thanks.
Are not going to contribute in excess of the one time items.
Yeah. Good question, Jackie you cut out a little bit of I think I got the gist of it yes.
Yes, so that the Q2 commentary that we made in the prepared remarks for services with it was that we'd expect that to be flat to slightly down compared to Q1 on.
On the services line item and that's mainly to your point driven by the nonrecurring items that were projects that we completed a little earlier than expected in our initial forecast.
Which is generally a good thing like we want to complete does as quickly as possible.
Don't you would anticipate that we'd backfill at that level in terms of Q2 or the full year guidance range. So.
That's the main dynamic the other there are other drivers that you mentioned and that we'd called out which are.
We have that continued somewhat elevated churn on our traditional consulting services model.
And that's persisted in Q1, and Q2 and like we shared we anticipate that for the next few quarters and then also we've shared that our bookings cadence is a little more backend weighted.
More towards the back half of the year. So you should start to see more more growth as those start to come online but.
But we've not yet.
Kind of included that in Q2, just given the timing of those will likely be later in the year.
Got you that's helpful. Thank you I appreciate it.
Yes.
Okay.
Our next question comes from Scott <unk> with Keybanc. Your line is open.
Yes.
Hi team thanks for the questions.
So it seems like Youre getting nice operating leverage in sales and marketing after divesting. Your life Science Division is this more of a function of the higher proportion of Upsells youre seeing from existing clients.
Rather than new client wins or is this something that we should just expect in terms of <unk>.
Ongoing sales and marketing marketing efficiencies on a go forward basis.
Yes, great question Scott So.
I think yes.
Yes, they're both actually.
It is because we are seeing meaningful operating leverage as we focus a little bit more of our selling efforts on existing client expansion.
And it's yes to the second in terms of expecting that long term, because I think more and more over the next several years. The foundation of our growth as a company will come primarily from existing clients expanding with us and Thats a higher leverage model, it's a lower cost model as we've discussed in the past.
Karl help expansion is a great example, where they quadrupled the size of their relationship and then we still have one account manager there.
Is able to represent the entirety of the relationship between health catalyst and CRO hub. So there's tremendous operating leverage in these deep multifaceted relationships and we see an incredible growth opportunity there and so were focused there.
And we also realized that.
Having that operating leverage is an important component of this model really working and so we do have that mindset moving forward with regards to sales and marketing and frankly that mindset going forward in the coming years across all of our Opex.
Expense categories that were thinking in terms of meaningful operating leverage enabling us to get to those.
20, plus percent long term EBITDA margins that we've that we've talked about in the past.
Thanks, that's really helpful and then.
And lastly have you seen any changes in your conversion time frames from Das flight to full das customers.
Are you or are you expecting to be able to sell like full daas solutions initially like the seamark contract without having to first.
Sell the more das light offering.
Okay.
Yeah. Another good question so.
One of the trends that we're seeing is as we mentioned in our prepared remarks that with regards to prospective clients.
They are under financial pressure and so it's more doable for them to start at a at a lower price point and so we are moving towards more of a modular relationship there.
But we're focused on modules that deliver near term ROI, which I think increases the likelihood that we can expand the relationship over time, whereas.
It historically.
You know a year or two or three years ago. I think we were open to two beginning in the relationship and lots of modular ways now we're pretty focused on those first modules.
Delivering a real near term hard dollar ROI and our anticipation is that as we deliver with those clients that there will be more of an openness to expand and deliver more ROI.
Through that expanded relationships. So we are hopeful that that will take place, but we still recognize that it's there's a lot of financial pressure that these health systems are under and so we've got to be sensitive to that.
Thank you.
Thanks Scott.
Our next question comes from Dan Bernstein with Wells Fargo Securities. Your line is open.
Hi, Thanks for taking my questions.
So you continue to see dollar base retention, a pretty wide range. When do you expect to get some better visibility into where that retention will shake out in the year.
Yeah. Good question.
Okay.
So I think we think about that Stan first of all as I think knowledge meant that.
Within our pipeline, we do have some some larger opportunities and.
And those include Tech enabled managed services opportunities and those tend to be a little bit lumpier and a little bit harder to precisely forecast as we mentioned also in our prepared remarks, we do expect our bookings to be a little bit more back half weighted this year than in historical years for a couple of reasons that we described.
Inclusive of us really beginning.
To proactively discuss things like Tech enabled managed services starting in the back half of last year and our observation that it's typically around a one year sales cycle for us to to sign those contracts. So I think as we sign.
More of those larger contracts and get a little bit more visibility.
We may be in a position to narrow that range, we don't feel like we're in that position today.
But we will keep you apprised and updated as the year progresses.
One other thing that we mentioned in the prepared remarks based on the size and shape and profile of the pipeline. We do anticipate that it's likely this year that our professional services dollar based retention will be a little on the higher end.
Higher than than maybe that the average.
And the tech component will be a little bit lower than the average, but but blend together to that 102 to $1 10 range.
And so we'll see as the year progresses, if we can tighten that range as we get a little bit more visit.
Visibility into signed contracts, especially some of the larger ones.
Got it and then maybe just a quick one on the cash flow statement.
Capitalized software in the quarter was about 25% below where you had an average run rate last year.
Dollars, but still pretty noticeable where are you saving on capex and how should we be thinking about the progression going forward.
Yes, great question.
So that that has ticked down a little bit to your point from prior year levels in terms of Capex and <unk>.
Investing in internal use software that we're capitalizing.
And that's kind of stemming from some of the cost.
Savings in cost trimming efforts that we did primarily last year most of those impacted our SG&A line items, but to some degree R&D as well.
So we do anticipate that run rate to continue through 2023.
The bulk of the investments that we're making.
In R&D in this in this line item are related to the snowflake and data breaks enablement and some standardization components of our of our data platform.
And those will continue and then begin to ramp down in 2024. So that's the current expectation, but that does give us more visibility in terms of efficiencies that we can drive and our operating leverage and our cash flow as we march toward the 10% midterm EBITDA target for 2025 as well as our free cash flow contribution in 2020.
Okay.
Got it thanks, so much.
Thanks, Dan.
Our next question comes from Jeff Garrow with Stephens. Your line is open.
Hi, good afternoon. Thanks for taking the question I was hoping to get some more color on where tech enabled managed services could expand beyond chart abstraction and I'll frame. It that I think in theory health catalyst could manage the entire operation of a health system, but it sounds like you recognized some potential pitfalls and do.
That.
And expanding tech enabled managed services, how would you balance the expertise related to all the systems and data sources that feed into dos against that healthy desire to have some real tech enablement of any outsource services.
Yeah, Great question, Jeff and it's.
One that keeps me up at night and a good way.
It is exciting when we have a client that asks us to maybe look into a new area.
And as you mentioned, we do have a lot of experience with tech enabled managed services around charter traction with Tech enabled managed services around data management and analytics, we've done that a lot and I think we continue to see really meaningful growth opportunities in those two anchor areas.
Some other areas like was mentioned earlier in the call.
There's so much going on in the ambulatory space is so important and there's a lot of operational components to delivery in the ambulatory space.
That.
May have room for improvement.
So that could be an area, where warehouse catalysts, you know works with health system clients and other clients that want to really focus on the performance in that space I think to your point and other areas that require meaningful data and analytics to guide our.
The activities of the other corporate functions.
Could be other areas, where we can leverage technology that we already have we have some.
Technology that we referenced in the prepared remarks that delivers in some of the Rev cycle areas. Some other technology that delivers more it efficiency and so we have some technology assets. We have some clients that are asking us about it.
A list of other potential areas, but to your point we.
We realized that we need to make sure that we're convinced that we can be a differentiated long term partner and really deliver for our clients before we move into one of these new adjacent areas and we're excited about the areas, where we have experience and we have a track record and so that'll continue to be a primary focus but.
We also want to help our clients be successful if they need us to go into in a new direction in an adjacent area. We're certainly open to at least exploring it.
Yeah.
Great. That's super helpful. All from me Thanks again.
Thanks, Jeff.
It appears we have no further questions at this time I'll turn the floor back to Dan Burton for any additional or closing remarks.
Alright. Thank you all for your continued interest in and involvement with health catalyst and we look forward to staying in touch in the months and quarters ahead take care.
This concludes today's health catalyst first quarter 2023 earnings conference call. Please disconnect your line and have a wonderful day.
Yeah.
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