Q2 2023 Definitive Healthcare Corp Earnings Call

Speaker 1: Four.

Speaker 2: Welcome to the definitive healthcare Q2 2023 earnings call. Our host for today's call is Robert Muthle White. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session.

Speaker 2: I would now like to turn the call over to your host, Robert Muffaway, you may begin.

Speaker 3: Good afternoon and thank you for joining us today to review definitive health care's quarterly financial results. Joining me on the call today, a Robert Musceweite CEO , Jason Krantz, founder and executive chairman and Rick Booth, CFO . During this call, we will make forward-looking statements including but not limited to statements related to our market and future performance and growth opportunities.

Speaker 3: investments, the anticipated impacts of global macroeconomic conditions on our business results and clients and on the healthcare industry generally. Product features the anticipated benefits of our acquisition of Populi and the impact of the restaping of certain of our financial statements related to sales tax liability.

Speaker 3: Any forward-looking statements are made pursuant to the safe harbor provisions of the Private Security's mitigation reform act of 1995.

Speaker 3: For looking statements involve a number of risks and uncertainties, including those discussed in the risk factor sections and elsewhere in our filings with the SEC. Actual results may differ materially from any forward looking statements.

Speaker 3: The company undertakes no obligation to revise or update any forward-looking statements to reflect events that may arise after this conference call except as required by law.

Speaker 3: For more information, please refer to the cautionary statement included in the earnings release that we have just posted to the Investor Relations portion of our website.

Speaker 3: Additionally, we will discuss non-GAAP financial measures on this conference call. Please refer to the tables in our earnings release on the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I'd like to turn the call over to Robert.

Speaker 4: Thanks Matt, and thanks to all of you for joining us this afternoon to review definitive health care's second quarter financial results.

Speaker 4: On today's call, I'll provide an overview of our second quarter results, provide some perspective on business trends and what we are seeing in the market, and review some of our key wins from the second quarter.

Speaker 4: Then I will turn it over to Jason to highlight some of our latest product innovations, including our recently announced acquisition.

Speaker 4: I'll start by reviewing our second quarter financial results.

Speaker 4: Revenue and adjusted EBITDA for the quarter were in line with our expectations.

Speaker 4: Our ability to continue delivering on our goal of balanced growth and profitability in the midst of a difficult economy is an important reminder of the inherent value of our platform and the efficiency of our business model.

Speaker 4: Our total revenue was $61 million, which represents 12% year-over-year growth. And our Adjusted EBITDA was $17 million, which translates into a 28% margin.

Speaker 4: Our adjusted EBITDA was $17 million, which translates into a 28% margin.

Speaker 4: Our performance in the quarter was driven by important customer wins in each of our target markets with both new and existing customers.

Speaker 4: We continue to see solid demand generation and are having the increasing number of strategic conversations with customers about their long-term investment priorities.

Speaker 4: This ongoing strength in demand generation gives us great confidence for our future growth prospects once economic conditions normalize.

Speaker 4: However, in the near term, the selling environment remains similar to what we have seen in recent quarters.

Speaker 4: Many customers and prospects remain stringent in their purchasing decisions and are deferring investments until they have clear line of sight to when their business performance will begin to improve.

Speaker 4: In the meantime, we continue to focus intently on sales execution, value delivery, and investing in the products that we believe will drive sustainable long-term growth for the company. We have a lot of good work going on across all of these areas.

Speaker 4: A key driver of our current and future success is the growing demand for data and analytics to help drive strategic business decisions and daily sales and marketing effectiveness. The healthcare market is complex and continues to change rapidly with consolidation, introduction of new biopharmaceuticals, and development of new technologies to drive down costs and improve quality.

Speaker 4: All of these changes create challenges for our clients who are trying to develop and execute upon go-to-market strategies in healthcare.

Speaker 4: sophisticated data science that ensures data quality, and an easy-to-use cloud interface to put the right information at the fingertips of business users, or embed the information into their CRM or other systems. Simply put, with definitive healthcare, any company selling into the $4 trillion US healthcare market, will be able to make better data-driven business decisions in its go-to-market or product development initiatives. As Jason will discuss in detail later, we're not standing still. The acquisition of Populi adds a number of purpose-built solutions for our healthcare provider clients that strengthen our competitive differentiation in that key market.

Speaker 4: Populi brings new data to our Atlas data set, and later this month we will release a significant update to our Atlas technology install data set. For all these reasons, we remain very bullish on the long-term growth opportunity in commercial healthcare intelligence.

Speaker 4: This is a $10 billion and growing market that is still in its early stage, and our offerings are well aligned with many of our customers' top strategic priorities.

Speaker 4: Now I'd like to spend a few minutes highlighting some exciting customer wins from the second quarter to demonstrate the numerous ways customers are generating business value from the definitive healthcare platform.

Speaker 4: A global immunology company chose definitive healthcare for a multi-year enterprise contract to profile key opinion leaders across multiple separate disease states using the Atlas AI tools that we introduced in the first quarter.

Speaker 4: This client will leverage claim-based specialty analysis, expert ranking, and key opinion leader industry collaborations to rank KOLs based on proprietary mix of clinical and scientific activity and drive greater efficiency for its medical affairs team.

Speaker 4: A Spanish multinational pharmaceutical and chemical manufacturer signed a three-year contract in excess of $1 million to gain better visibility into their market share and spot trends and opportunities in real time.

Speaker 4: Definitive healthcare will allow them to easily identify the providers treating relevant patients and to track those providers back to the clinics, group practices, and IDNs they are affiliated with.

Speaker 4: In addition, by leveraging the new integration capabilities that we introduced in the first quarter of this year, this company will put this powerful data in the hands of their frontline employees to drive their daily efforts.

Speaker 4: An American on-demand financial and human capital management software vendor signed an enterprise agreement with us to integrate physician data from our Atlas data set into their salesforce.com instance. This company intends to use the Atlas data set as a single source of truth as it increases its focus on the healthcare vertical. With the Atlas data set they can size and segment their total market opportunity.

Speaker 4: significant enterprise sale for passport planning and performance at a large biotech focused on developing and commercializing biopharmaceuticals for rare diseases driven by genetic causes. This company plans to use our solutions to help monitor and report upon a risk evaluation and mitigation strategy study for a drug currently in development.

Speaker 4: In addition, our solution will help this company develop a comprehensive patient journey and real-world evidence plan.

Speaker 4: Finally, turning to our provider business, we signed a multi-year enterprise deal with a nonprofit organization that provides reproductive health care and education in the United States. This organization plans to use our Atlas reference and affiliation data set in combination with our Atlas All Payor claims and latitude reporting suite to better understand where it can and should expand its services.

Speaker 4: based on the distance that patients travel for care and the services provided by existing OBGYNs in that region. In addition, the organization will utilize our solutions to identify care deserts or areas where there's limited or no access to care. And of course, there are many more examples, but only a time to choose a few.

Speaker 4: Popular provides healthcare organizations, including hospitals and health systems with dynamic analytics to optimize their physician relationships, reduce network leakage, and expand their market share both geographically and across service lines. This acquisition furthers definitive healthcare's commitment to leadership in the healthcare commercial intelligence market across the entire healthcare ecosystem, including like sciences, providers, and diversified industries. Founded in 2020, popularized serve some of the country's largest healthcare systems, including University of Pennsylvania Health System and Henry Ford Health.

Speaker 4: The popular acquisition will deepen definitive healthcare's value to our provider clients, helping them drive growth and expansion with the addition of powerful analytics that are utilized across multiple departments and functions.

Speaker 4: Specifically, the solutions will help in the following areas. Business development and strategy leaders can determine which services and locations have the largest opportunities for expansion.

Physician liaisons can identify their highest value physician and organization targets and develop successful messaging and outreach strategies.

Population health teams can create care initiatives and strategic plans with a better understanding of consumer and provider behavior, as well as social determinants of health. Finally, data and analytics departments can leverage powerful integrations to create a single source of truth across their internal systems, ensuring all departments have access to the same accurate, comprehensive, and current data. With aligned strategic visions to transform healthcare commercial intelligence and revolutionize healthcare analytics, definitive healthcare and Populi have strong go-to-market and product synergies that will greatly benefit our healthcare organization clients.

delivering greater speed to value, deeper provider insights, and expanded ROI. As we have shared previously, our acquisition strategy is to find companies that either, one, provide a new set of proprietary data that we can use to enhance our overall offering. We'll expand the Atlas dataset with modeled patient information.

to help our clients identify the most attractive markets and service lines for expansion. Additionally, the powerful Poverlai interface will leverage existing definitive healthcare data and our large provider facing sales team to solve new problems for our current provider clients and increase our deal velocity with new logos. From a culture presenters, products, and technology types that healthcare organizations are leveraging today, which will help our clients better identify the opportunities of tomorrow. Overall, we'll update data on more than 1.5 million technology installations for hospitals, health systems, ambulatory surgery centers, environment.

This year alone, we've updated multiple parts of our industry leading Atlas data set, including our all-payer claims and our reference and affiliations data sets, and we've added new intelligence, including our Atlas behavioral health data set.

Moving forward, we will continue to add more data, and we'll also have several new Atlas AI analytics and development, all in support of our commitment to deliver the best healthcare intelligence to our customers. I'd now like to turn it over to our CFO , Rick Biss, to walk through definitive healthcare's second quarter financial performance in more detail.

Thanks, Jason. I'll start with a detailed review of our Q2 results before finishing with our guidance for Q3 and reconforming guidance for the full year.

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

Our strong business model allowed us to deliver solid results in Q2, despite tough economic conditions and a challenging compare.

The financial highlights in the quarter include 12% revenue growth compared to Q2 2022.

28% adjusted EBITDA margin and a 22% unlevered free cash flow margin over the last 12 months.

Revenue growth plus the trailing 12-month adjusted divita was 40% or 34% using unleavored free cash flow margin.

Growth was primarily driven by new business and upsell as we continued to experience heightened churn due to the tough macro environment.

That macro impact is toughest for customers in the areas of the economy that are struggling most.

including emerging biotech, small software and IT, and healthcare providers. Although we do not formally guide net dollar retention, this could lead to year-end NDR in the mid to low 90s on an overall basis.

This was an increase of 40 enterprise customers or 8% year over year, but a decrease of two enterprise customers from the previous quarter. As a reminder, these customers represent the majority of our ARR and our key focus of our go-to-market programs. Our total customer count, which includes smaller customers, was 2,957 at the end of Q2, down from 2,999 in Q2, 2022, and down 57 from the previous quarter. Overall, economic conditions continue to be challenging in Q2.

Despite the continuing headwinds, we believe new business and expansion opportunities remain strong, even if realization is slightly delayed.

Gross profit was 52.4 million of 8% from Q2 2022.

Rost margin of 86%, decreased 260 basis points from Q2 2022, as the additional data sources in the Atlas data set came online, as we had communicated previously.

Sales and marketing expense was $21.7 million, up 17% from Q2 2022.

As a percentage of revenue, sales and marketing spends with 36% of revenue, up 170 basis points from Q2 2022.

and due to ongoing efforts to lower administrative costs.

Operating income was $16 million of 5% from Q2 2022.

And as a percentage of revenue operating income was 26% of revenue, down 170 BEPs versus Q2 2022.

Adjustive EBITDA was $17.2 million, a 6% increase from Q2 2022, and above the upper end of our guidance range.

Net income in Q2 was $12.4 million, or 8 cents per deleted share, based on 155.6 million weighted average shares outstanding. Turning to cash flow, definitive high gross margins, upfront billing, and low cap-axe requirements, provide substantial free cash flow generation. We focus on trailing 12-month cash flows due to seasonality. Operating cash flows were $33.5 million on a trailing 12-month basis.

up 3% from $32.4 million in the comparable period a year ago. Unlevered free cash flow was $52.5 million on a trailing 12-month basis, down 21% from the comparable period a year ago. Unlevered free cash flow was 22% of revenue on a TTM basis.

driver of Unleaver Tree Cash Flow.

As growth rates stabilize and recover, so should unlevered free cash flow.

With strong profitability and only $263 million of debt were well positioned to fund both organic and inorganic growth initiatives. Current revenue performance obligations of $176.5 million were up 8% year over year. And total revenue performance obligations were up to 3% year over year. Deferred revenue of $97.6 million was up 10% year over year.

You'll note that as expected, CRPO and Divered Revenue grew more slowly than revenue. This is because the primary driver of CRPO is new business and upsells, but we continue to see higher rates of churn, particularly in life sciences, small IT.

and providers, and those cancellations show up immediately as reductions from CRPO. These factors have been largely anticipated, and we believe we remain on track to hit guidance for the year.

Q2 results reflect the impact of an accounting restatement related to the collection and remittance of sales tax. This has no impact on the key metrics of revenue and adjusted EBITDA.

In brief, we undertook a thorough review of the complex never changing sales tax regulations. That review identified up to $8.8 million of potential liability to states in which definitive may have been required to collect sales tax from customers. The liability is contained within the year's 2017 through 2023. We did not expect this to impact profitability on a go-forward basis because we have now updated our invoicing systems to charge sales tax in the impacted areas.

gathering exemption certificates, and taking other actions. Speaking today, we cannot estimate the size or timing of any reduction in costs because VDAs require the consent of states involved. Subsequent to quarter-end, we took two key actions that did not impact quarterly results but are included in our guidance. I'll remark on each before providing guidance for Q3 and the full year. First, on July 21st, we acquired Populai.

Although it is a very small company, popular capability to deliver provider specific analytics strengthens our position in the large and attractive provider market.

Their technology and analytics have been proven with several large hospitals, and we plan to integrate them quickly with our products as we did with monical and analytical wizards.

Given the need to integrate in the mid-year timing, we expect only low single-digit million-dollar revenue contributions in 2023.

The second post-quarter activity was as we exited the first half of the year without seeing any improvements in the commercial conditions. We reassessed our overall sales and marketing spend. As a result, we reduced spending in areas where the market remains troubled. Consequently, we said we could buy 42 colleagues, but we'll end the year with linear and stronger sales team as a result. We believe it is prudent to assume that current conditions extend through the remainder of the year as well.

Adjusted operating income of $16 to $17 million. Adjusted EBITDA of $17.5 to $18.5 million, or 27 to 28% adjusted EBITDA margin. Adjusted net income of $9.5 to $10.5 million, or 5 to 7 cents per diluted share, on $156.9 million weighted average shares outstanding. For the full year, we expect to land within our original guidance range. That range included revenue of $249 to $255.

adjusted EBITDA of $67 to $71 million for a full year margin of 27 to 28%.

Adjusted net income of $30 to $34 million.

and earnings per diluted share of 19 to 23 cents.

This guidance includes the dilutive effect of the acquisition of Populi and assumes no change in external conditions.

Based on the dynamics we discussed earlier about the impacts of the macroeconomic environment, we would expect to end the year in the middle to lower half of revenue guidance, but in the middle to upper half of the profitability ranges.

to summarize, Q2 is a solid quarter for definitive health care despite current economic headwinds and uncertainty.

We're committed to efficiently, and prudently managing the top and bottom line results while continuing to invest in product development to best position the company for long-term growth.

We believe we're well positioned for the long term because we've developed a clear leadership position in a large and attractive market that we believe will support high levels of predictable revenue growth, profitability, and capital efficiency.

And with that, I'll hand it back to Robert for a few closing thoughts before we take questions.

Thanks, Rick.

Before we open the call for questions, I wanted to take a moment and acknowledge the workforce reduction that took place in August 1st.

The decision to eliminate jobs is never one that I take lightly. It was sad for all of us at Definitive Healthcare to say goodbye to our talented colleagues and friends, and we wish them well in their future endeavors.

As we move into the second half of the year, I want to reiterate that we are well positioned to deliver on our financial commitments for the year. Our team is doing a great job remaining focused on our customers and executing on our key product and growth initiatives.

We've built an incredible business in a large dynamic and growing market that provides great opportunity to meaningfully scale our revenue and profitability in the coming years.

And we remain confident in the long-term opportunity for definitive healthcare and our ability to generate substantial value for our customers and shareholders.

With that, we would now like to start the Q&A, operator. Thank you. If you would like to ask a question, please press star one on your telephone keypad now.

You'll be placed into the queue in the order received.

Please be prepared to ask your question when prompted, and please limit yourself to one question and one follow-up question.

Once again, if you have a question, please press star one on your phone now.

And our first question today comes from Craig Hettenbach with Morgan Stanley .

What would you say would be a reasonable full year run rate for that business revenue in 2024? And would it remain dilutive or how you think about the profitability as you look out to next year for that business? Well, we're very proud that we managed to cover the initial dilution this year while remaining within our initial guide, so thanks for pointing that out. I would expect that it will continue to be dilutive relative to where we would otherwise be in 2024. That's just the major of these small acquisitions. And it would be...

in mid to in strong performance, high single digits in 2024. I think the challenge is when you're dealing with a business that's young and small, there's a wide dispersion of potential outcomes. That's not the big driver of our growth for next year.

And Craig, just to add on to that, our plan is to really integrate that business with our provider business. And so going forward, it becomes pretty indistinguishable. I'm certainly hopeful that by 2024 we're working as a team and that there's not a clear line of demarcation between.

on that business and our overall business. Got it. And then Robert, just follow up on the job workforce reduction that's geared a little bit more towards the commercial team for this round. Can you just talk about that in the context of the environment you're seeing out there where there hasn't been an improvement in the macro and just how you're bouncing kind of revenue growth looking out versus...

particularly around new data sets and products.

the acquisition of popular offices, that's investment as well because it brings solutions. So we've really tried to focus on the right investments to drive future growth and expansion. And at the same time, we have a track record of delivering a good balance of growth and profitability.

know that we need to balance those investments with managing costs prudently. And so that means it's important for us to do number one, choose well with what we fund and what we don't, and make the right investments there. And then secondly, be prudent on costs and where we see places where we're not getting as much yield relative to what we expect. We need to be.

you know, prudent and pulling back on those. And so I think that's really what you're seeing. You know, we're still hearing very important investments in our sales organization that we made across the last year. I think if you look at our sales capacity still larger than it was at the end of 2021, even after the action. So I see it more as just being prudent and pulling back on places where we weren't seeing the same amount of yield in this environment.

And at this point, we felt like that was the right thing to do.

the right thing to do. Got it. Thank you.

The inter-nix question will come from Cash Rangan with Goldman Sachs.

Hey guys, this is Jacob on the cash. Thanks the most for taking the question. I wanted to touch on the selling environment and the layoffs real quick. I think you mentioned that the selling environment remains similar to what was seen in recent quarters.

So two parts here. From the sales productivity perspective, what are some KPIs that you're watching and maybe how are those trending relative to last quarter and the year ago quarter? And then also I just wanna confirm, where the layoffs focused on SNM and then it's so like where within the SNM?

framework where they're centered on. Sure, I want to answer your questions in reverse order.

So that was primarily where it went mostly across markets but probably a little more folks from markets where we've seen a little more difficulty in the market as we talked about before. And then circle back to the first part of your call. Remind me catch what sales KPI sales KPI sales KPI sales KPI sales KPI sales. So obviously in a world where we've kept a heavier investment in sales and not seeing the sales that we want your productivity is going down so no secret fit.

We've seen a sales product of the decline as sales performance has come in lower than we've expected. And that's been true probably across the last four quarters or so as we've seen the macro deteriorate. You know, with this move, we're hopeful and we plan to still finish the year according to where we plan to finish the year across the next several months, even with these actions.

such as number of demos, number of free trials coming in, how those convert, all the way down to dollars per rep, wins per rep, activity per rep. I mean, we manage it. We monitor all of that in an effort to be sure that we're staying ahead of controlling, decreasing control, getting things into the funnel.

Awesome. Thank you so much, guys. I appreciate the time.

Yeah, the other key driver tradition to expansion ARR, which really sets the table is turned. Taking a look at particularly those areas of the economy that have been most challenged, some of those that I think about are.

the smaller biotechs, software and IT, and providers. Keeping an eye on that, as I commented in my script, we are seeing an increased level of churn, so we now expect to end with the NDR in the mid to low 90s. So I want to make sure that people take those two things into account.

And the second half of the year will really set the table for the upcoming year. Thanks so much for it. I appreciate it.

Hey, good evening guys. Thanks for taking the questions. Rick, I'm hoping you can talk at a high level about how you're thinking about margins over the next few years, right? I mean the stock looks cheap, but I'm getting calls from clients that say, hey look, DFINITIVE has doubled its revenue base over the last three years, but EBITDA margins have gone from 45 to sub 30. And look, you've done a really nice job helping us strategically understand why that's happening, but where do we go from here, right? And help us think that through. I mean there's some moving parts with the restructuring and popularizing to the mix and more organic data coming online. And any color, just kind of how we should think about things over a three-year view would be super helpful.

Thanks, CJ. As you know, we're very proactive in thinking about balancing a mix of growth and profitability. We're proud that we've taken the cost actions that we did in advance of the need so that we can even in the bottom half of our guidance deliver strong adjusted EBITDA. As we look at 2024, the second half of this year is critical.

the investments that we need to in terms of continuing to deliver innovation. There's no part of me that believes that biotech and providers are going to be on pause.

So I remain confident that we can drive a trance of combinations of revenue and profitability in the long run. I think the pace of getting there I'm not quite ready to guide 2024.

Yeah, DJ? Just to main takin??w

to accelerate it and I still believe that over time growth is the best margin lever because our growth is extremely profitable. So we can continue to move the top line a little bit faster and faster. That's gonna help us a lot on the bottom line when you talk about two and three years out. Yep, that makes sense. And then Robert or Jason whoever wants to answer, maybe we could talk about one of those areas of investment that the tech install data sounds super interesting. But where does that incremental data come from? And just so I kind of understand your strategy, like how come it all comes online at once versus.

Kind of coming in on a rolling basis as you gain access to it. Just help me understand Why it works that way? Yeah, yeah, it's good crash again Thanks for joining me!

Thanks for the question, appreciate it. So we're very excited about the tech install data. It comes from actually multiple different sources as much of our data does. We have acquired some data from a third party. We've modified the way that we're collecting data through our first party research.

then we've done some really interesting data science on top of all of that that is new and fresh and looking at data in a different way to To really get more detail for our clients and more up-to-date information as well So, you know, it's coming out all at once because we've done a tremendous amount of work and we've done a lot of testing and we're-

and that's really what makes it so valuable for our clients is they can understand the changes that are happening with their clients and that helps them identify where the best opportunities that are for them to pick up new clients as well as to grow with existing clients. So hopefully that issues what you're looking for.

It sure does. Thank you guys. I appreciate it. We'll hear next from Ryan McDonald's with Needham and Company.

Hey, thanks for taking the question. This is Matt Shay on For Ryan. Wanted to start with the enterprise customer account. So quarterly declines in that metric again, wondering whether you would attribute this to more lower upsells or higher turn and then where that is kind of coming in relative to your expectations and then given the NRR.

commentary about where it could trend towards the back half of the year. Should we expect continued pressure in this enterprise customer account where we might continue to see quarterly declines as we work through the back half of the year?

I'm not going to get into guiding on a quarter by quarter basis, but we do see a combination of slower expansion and turn is still a factor even with certain segments of those enterprise customers. So unsurprising that we ended up in that. I think if you look across the industry, many

the second half of the year, even in these conditions.

So, you know, certainly there's some that are challenged, especially in some of the submarkets that we talked about. On the other hand, we had a lot of really big wins with enterprise clients and a lot of really good expansion. So, it's not as if across the board enterprise clients are turning away. She had some of our best stories come from that segment. It's just a rich point. Counterbalance with a little bit slower than usual migration of people into an enterprise level and higher levels of turnover on that segment. But we're still bullish about that segment and about our ability to continue to migrate our customers up to there over time. And that will still be a big growth engine for us. Yeah.

in the enterprise group. Yep, got it, that's a fair point. Okay, and then maybe switching gears to Populi, it sounds like this will help improve the provider go-to-market strategy, but curious in terms of the penetration in the provider groups that they claim as customers, how much overlap is there in their customer base relative to yours and...

What kind of cross sell or upsell opportunities does create on really either side of the house? Very little overlap. They're a small company with a few customers. I'll be it some really good customers and some strong relationships. But to your point, we're really excited about the cross dealt potential.

We certainly would expect to bring a lot of our reference affiliations data from the aloe data set as opportunities into their clients. And we're extremely excited about bringing their products and their solutions into our provider client base. We have a great go-to-market team set up.

We're going to go having good conversations with existing clients and a lot of good conversations with prospects and we're excited to use the really nifty product that popularized bills and the visualization that demonstrates with those prospects and clients To bring them on board. We're hoping that will be a big growth interest for us.

As you recall, our foundation was our strong data, but with no application layer that was specifically created for providers. And they were quite the opposite. They had put all of their attention into building out that vertical, but they did not yet have customers. So when we found these guys...

provider market is growing. They need this kind of support. And I think the fact that we had a business that was growing despite this tough environment and can now bring in a state-of-the-art product that we think is really going to drive the business forward to these clients gives us just an awesome opportunity to deliver more value to them and thereby grow faster. So despite the fact that they've had a little bit of a rough go lately, we feel really good about the medium and long-term prospects in this market. Thanks, guys.

Thank you. Our next question will come from Brian Peterson with Raymond James. Hi, thanks for taking the question. So I wanted to double-click on what you guys are seeing at the top of the funnel. I appreciate all the comments on the macro and everything else. But any color you can add in terms of the pipeline generation in what you're seeing there.

You know, we're not going to comment on specific pipeline gen metrics other than to say it's a big focus for us. The mantra we've had is control, we can control. It felt like the sort of ultimate win rate and budget decision making signing on the dot-on line has been a little bit less controllable than it's been in prior years, as we talked about.

But what we can do is get out there and talk about what we're doing. We can promote our product releases. We've had several this year. We can get out in front of clients, be showing them demos and talking about the value and get things into the pipeline. So if and when budget comes back and clients are ready to make decisions, we're right there. Even on some of those deals we go back a couple of quarters.

slipped because budget went away. We stay engaged with those clients, and those have become pipeline opportunities this year. I think pipeline generation feels good. Demand generation feels good. We have people who are interested in definitive healthcare. It just continues to be tough working those through the bottom of the funnel as we've seen for the past several quarters.

Understood. And maybe a follow-up on Populi and the M&A ambitions. I'm curious what you're saying in terms of private company valuations and how we should be thinking about the targeted cadence of M&A going forward. Thanks, guys.

Yeah, we're still optimistic we can do one to two per year in this environment. We see a lot of targets as we've commented before. We did feel like valuation still ran pretty hot through the end of last year and into the early part of this year. But I would say there are conversations to be had and we've been having them. So we're really thrilled.

as a really strong capability or data set that we don't have or don't have to build that accelerates our ability to pull that into our platform and bring it out to clients aggressively. And that creates a lot of revenue synergy and usually cost synergy, so we end up with a lot of value creation from those types of deals. So that's the hope. And I think if I look through our pipeline of deals, obviously a lot of them are early stage, but then...

Bank of America. Thanks for taking the questions. I guess one for Robert. In the past couple quarters you guys have grown about 15% you know through the beginning of 2023. I'm curious what you think the market growth rate is here. Obviously it's decelerated pretty materially over the past 24 months. I'm curious.

Do you think that you're gaining share in this market, staying steady, losing share? I'm curious if you have any comments on that. And then is there any changes in the pricing environment that you're seeing? Thanks.

Sure. I think from a shared game perspective, it feels like we still are. We've talked to our teams a lot about that. We look at win loss and when we lose, why we lose. It's been tougher to close deals this year, but I'd say it's a category that's spiked on where we haven't won and has been not doing things or pulling back on stand versus.

they're investing in sales, they're not pulling back on sales. In this market, you have a lot of people that are holding back on sales investments or pulling back on sales investments because they're concerned about what's around the corner and just are a bit more tentative. But we've seen every time this happened when people decide, okay, we're now ready to get back to selling into healthcare.

people by the day, but I think that hasn't changed. So I would say no, I think we're still getting share and still getting a lot of good clients if they'll be at as a slower rate than we've seen before. On pricing, we took our normal pricing crisis here and have seen reasonable price realization from that. So I think it's more...

Similar to historical pricing benefits. This year we'll continue to look for opportunities where price can be a lever for us to drive better performance and that can be both directions. I do think generally we're adding lots of the product and that can enable some higher price to trust in certain areas.

Great, that's helpful. One for Rick. Have you guys disclosed what percent of contracts come up for a renewal in a typical quarter? I know that you've been inquisitive, so some of the business models might be a little bit different. I'm curious what percent of contracts do come up for a renewal in a quarter, and then has that changed over the past 12 or 24 months? Thanks.

Yeah, we have not gone into any particular detail on that. We haven't seen a substantive shift. I think there's been a little bit more shifts now that we've got more customers renewing and the rate of expansion of new ones. A little bit more shift towards more frequent renewals.

because generally we'll make a three-year deal when we're signing a new customer and then when they renew they'll be in annual cycles thereafter. It's a little bit over-weighted in the first and fourth quarters. A little under-weighted in terms of Q2 and Q3.

Great, thank you both. Thanks. And our next question will come from David Grossman with Steeples.

Great, thank you. Just two quick ones, one for you, Rick and one for Robert and Jason. So, Rick, for you, I think someone was getting at this earlier. Can you give us some high level insight into what your expectations are for the rate of churn?

you know, in the back half of the year versus what you saw in the first half. Yeah, I think we expect to end the year with an NDR in the mid to low 90s, assuming the current conditions continue.

Right, but how would the second half look relative to the first half? Is churn going up or is it relatively just not getting better?

That would be relatively consistent. That's extension of the existing conditions.

Got it. Great, thanks. And Robert and Jason, I don't know maybe which one you want to answer this, but you really come out of these downturns the same way you went in. And I'm just curious based on what you've seen thus far, what do you think the biggest change is going to be both for you and your customers coming out of this when we eventually do?

Yeah, I'm happy to take a swag at that.

We have been incredibly focused during this tough macroeconomic environment and continuing to invest in product that we think is going to drive long-term growth. That's always obviously been our strategy, but we've really been intentional about making sure that we continue to do it during this period.

So we're excited about a lot of things that are going on. Obviously, we continue to expand the Atlas data sets, both the reference and affiliations and claims. We think that foundation is very important. We're continuing to acquire companies that add new capabilities to use that data in new and exciting ways.

And then we're also adding AI capabilities. So we're doing various bits of work throughout the company right now, both to use AI to become leaner and stronger internally, but also creating some really interesting prototypes of how we can put that on top of our product.

so that our clients can leverage the proprietary data that we have much faster than they've ever been able to before. So, if we continue to make the right investments, focus on doing what we always have, which is measure everything and make sure that we only are investing in areas that have the highest yield, as Robert talked about before.

We're going to be a lean, mean organization coming out of it. And as we continue to grow, we should see the fruits of all that work that we put in during this tough time.

All right, well, thank you very much for that and good luck.

Thank you. And we'll move next to Jonathan Young with Credit Suisse.

I'm just going back to the NDR. I appreciate the commentary about the function of elevated churn. Is there any way to break down or frame how many are kind of on the bubble of slipping into being a churn entity? And are these entities going bust, exiting the market or just any framework around there? Thanks.

Yeah, and we've talked about this on prior calls. I think we've seen, we've certainly seen a much higher level of two things. Number one is just pure financial distress, where a client is laying off people and not paying their bills, and they just come and say we can't renew.

Right now we're trying to stop live.

Sorry, is there a frame of how many are kind of on that bubble? Do you obviously have an assumption for the guidance or for your comments this year, but is there any that are kind of close to slipping into churn?

I'm sorry, I'm not trying to… What I tell you is if you look at what we sort of expected from a normal churn rate to what we're seeing now, I was going to say there are really kind of three buckets, and two are certainly larger drivers. That's one, what I just told you. If you go back a year and a half, we had virtually zero of those. We have more than we'd like. That happens right now.

I think the second is not pure financial distress, but financial strain. And those are places that are cutting cocks. And they're looking over a dollar, and they're pushing budgets out, and they're making higher approval levers. We're doing that with all our vendors. It's happened to us a lot out there. So that's the second one. And we win some of those, but that creates a lot of extra moves to jump through.

certainly jump through within the timing we'd normally expect a deal to go through. A lot of those deals end up taking longer than we'd want even if we didn't get them.

And then the third, I don't want to dull all responsibility. There's always clients that you haven't delivered exactly what they expected and you have to work to prove that you deserve their right again. And sometimes you lose a few of those. I don't think there's been an uptick in those per se, but certainly in a world where value really matters and is getting scrutinized, we get into more of those discussions as well.

I can't put percentages on all those and sort of forecast which of those drive forward, but those are the areas where we've definitely seen a difference from what we might have seen a year ago. Okay, appreciate that. And then just kind of on the pipeline, you know, you're talking about continuing to develop the pipeline, but our customers basically

I understand that they're delaying things, but are customers saying, we're kind of only going to look at one solution at this time, or are they still looking at multiple solutions? Just any color there, thanks. Yeah, I wouldn't say there's a trend to just looking at one solution. We are distinctive with our combination of reference and affiliations data, and the Red Thru Atlas data sets, and the way we organize it.

tend to be in a situation where it's either us or someone else, and they can just get exactly what they get from us from someone else. That just doesn't happen. There are times where they might prioritize spending in other areas over the use cases they would spend on with us. And again, I probably characterize that as places that are being more hesitant in their sales and growth activity.

and pulling back generally on sales into healthcare. When they do that, sometimes we get caught up in that. Sometimes we keep it, but sometimes that's the place where they put stuff on pause, and as soon as they feel better about the environment in front of them, we know they'll come back and invest again. So that's more we see. It's really not, hey, we're not doing definitive, we're doing company X.

any more than it used to be in the past.

any more than it used to be in the past. Great, thanks.

And we'll move next to George Hill with Deutsche Bank. Yeah, good afternoon, guys. Thanks for taking the question. And I have, like everybody else, I have one for Rick and kind of one for the rest of the team. So, Rick, I want to make sure I understand the mechanics of the NDR number correctly. So if you guys are tracking towards, if you guys have got to do about $250 million in revenue for this year, and you're tracking towards like a low 90s number, a mid 90s number, is the right way to think about kind of the jumping off point for next year's number, just kind of the 92, call it 92.5% or 93% times the 250? And if that's not the case, can you just explain to me mechanically why it's not?

No, I think if you think about your Q3 and Q4 tasks, which we've helpfully provided, then I think the right jumping off point is to roughly annualize the expected revenue run rate in Q4.

It's more simple and direct. That's an approximation of ARR.

Rick, I love a simple and direct answer. Thank you very much. And then for Jason and for Robert, as the world seems to have been consumed by people focused on ChatTBT and AI in the last six months, I guess do you guys feel like you are seeing a redirection of how customers are trying to allocate capital and make investments towards where you guys…

Do you guys feel like you might be losing share of wallet or losing share of looks because some of your clients are kind of looking at the shiny new bubble that's AI based solutions?

No, I think actually it will be exactly the opposite of that. So in order for these large language models to work well, you need proprietary and extremely high quality data. And that's what we provide and we continue to grow.

So I see this as a tremendous opportunity for us to take this vast amount of information that we have and use GPT types of models to enlarge language models just to make it more accessible for our clients. So happy to give you a quick example. So thanks again.

Just this is a kind of thinking that we're doing and this is still, you know, early stages. But, you know, if we have a client who has a device that is that reduces the recovery time after a joint replacement. What they might want to do with our data is say, hey, find me all the people that are doing a significant number of new replacements across the country. Now.

filter that down further to find the people that are having a quality issue and have a lot of readmissions on those knee replacements.

Now, okay, I take that list, I'm going to Boston, tell me who are the people in Boston that have that area, and now tell me the executives that I need to talk to at that. So who's the head of orthopedics, who's the chief financial officer that's being penalized. All of that you can do with our data today, but it's multiple different steps and it's harder and as a result people don't leverage it as much as they can.

to drive their business and grow their business quicker than they ever could. And that's really exciting. So as we're talking to clients about these types of things that we're working on, there's a tremendous amount of excitement to invest more in our data and to use data in new and exciting ways throughout the organization.

Very helpful. Thanks, guys. And there are no further questions at this time. I'd like to turn the conference back to Mr. Musselwhite for any additional or closing remarks.

Thanks everybody for attending the call. We appreciate your questions and we look forward to speaking with many of you across the coming weeks.