Q2 2023 Health Catalyst Inc Earnings Call
[noise] Welcome City help catalyst second quarter of 2023 earnings conference call.
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I would now like to turn the call over to Adam Brown Senior Vice President of F. P N a an investor relations.
Sir.
Good afternoon, and welcome to help that or <unk>.
For the second quarter of 2023, which ended on June 30th 2023.
Her name is Adam Brown, and the senior Vice President of Investor Relations and financial planning and analysis.
And with me on the call is Dan Burton R, Chief Executive Officer, and Brian Our Chief Financial Officer.
A complete disclosure of our results can be found in our press release issued today as well as in a related form 8-K.
Furniture D I P P.
Both of which are available on the Investor Relations section of our web site and I are catalysts dot com.
As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call.
During today's call, we will make forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Regarding trends strategies, the impact of the macro economic challenges, including high level of inflation and high interest rates.
Tight labor market, our pipeline conversion rate and the general anticipated performance of our business.
These forward looking statements are based on management current views and expectations as of today.
Would not be relied upon as representing our views as of any subsequent days.
We disclaim any obligation to update any forward looking statements or outlook.
Actual results may materially differ.
Please refer to the risk factors in our Form 10-Q for Q1 2023 filed with the S. A C on may 10th 2023.
And our Form 10-Q for the second quarter of 2023 that will be filed with the I P. T.
We will also refer to certain non-GAAP financial measures to provide additional information to investors.
A reconciliation of these non-GAAP financial measures to their most comparable GAAP measures is provided in our press release.
With that I will turn the call over today.
Thank you Adam and thank you to everyone who has joined US this afternoon.
We are excited to share our second quarter 2023 financial performance.
Along with additional highlights from the quarter.
I will begin today's call with some summary commentary on our second quarter results and outlook.
We're pleased with our second quarter of 2023 financial results, including total revenue.
Eight 3.2 million and adjusted EBITDA, a $3.5 million with these results, beating the mid point of our quarterly guidance on each metric.
Additionally, we are tracking slightly ahead of our previous full year revenue and adjusted EBITDA guidance and as a result, we are raising our 20th 23 revenue and adjusted EBITDA guidance.
We are pleased with our strong first half bookings performance, but we are reiterating our full year 2023 bookings expectations inclusive of net new <unk> subscription client additions.
10 dollar base retention rate.
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.
And will discuss our quarterly results with you in each of these categories. The.
The first category improvement is focused on evaluating our ability to enable our clients to realise massive measurable improvements while also maintaining industry, leading client and team member satisfaction and engagement.
Let me begin by sharing an example of a client improvement from a recently published case study.
As women's hospital in Louisiana faced increasing cost consistent with the broader health system and market their leadership team understood that they needed a technology solution that would support strategic decision, making and provide them with a detailed comprehensive view of their costs.
To achieve this goal woman's hospital implemented our power costing analytics application part of our financial empowerment technology sweet to enable them to better manage their cost of care leading to improvement in their revenue performance and enhancements in their strategic decision making effectiveness.
Power costing application allowed the woman's hospital team to analyze detailed cost data and look at the contribution margin for each of their services.
And your leadership team to answer.
Important strategic questions ultimately utilization of the detailed cost data from our power costing application empowered that women's hospital team to be awarded $10 million in additional funding from the department of health for their Obgyn residency programme Likewise woman's identified to me.
Million dollars in labor cost savings opportunities. The result of decreasing contract labor costs, while providing market base salary adjustments for registered nurses and and improving retention of highly qualified nursing staff.
Also in the improvement category, we have been fortunate to receive additional external recognitions related to our team member engagement.
First for the 11th year in a row health catalyst has been named the best place to work in health care by modern health care.
Additionally, health catalysts has been included in this year's top work places in the health care industry list by inner gauge.
Likewise, we are pleased to be for the first time.
Great place to work certified in India, a recognition of our high team member engagement in this region.
Lastly, we are excited to share that health catalysts. Just the name is one of America's greatest workplaces for job starters in 2023 by Newsweek.
Our next strategic objective category is growth, which includes expanding existing client relationships and be getting new client relationships.
To summarize our operating environment continues to a line with what we've shared in prior quarters.
With some slight improvement in recent months.
This is translated to a strong first half bookings performance that was consistent with our expectations.
And during the second half of 2023, our pipeline continues to grow at our anticipated second half bookings are also in line with our previously shared expectations.
As such we are reiterating our full year 2023 bookings expectations inclusive of a dollar based retention rate between 102 per cent and 110%.
<unk> subscription client additions in the low double digits.
As it relates to our current selling environment, we continue to experience similar tailwinds and headwinds that are consistent with what we have described over the last couple of quarters.
Health system operating margins continue to be challenged relative to longer term historical levels. We are encouraged to see their operating margins improving slightly in recent months.
Given the budgeting cycles, most health systems and the typical length of our sales cycles. We anticipate this will translate as a midterm bookings tailwind.
Related to our full year 2023 bookings expectations.
A reminder, that we continue to anticipate professional services bookings grow to be higher than technology bookings growth driven by a tech enabled minutes services offering.
From July 1st of 2022.
Through June June 30th 2023.
Our tech enabled managed services are are grew by more than 80%.
And represents nearly 50% of our total professional services are are.
To date, roughly 10% of our <unk> subscription clients have entered into a tech enabled managed services relationship with help catalyst.
These longterm partnerships include multiyear contracts with on average more than $8 million, a total error or per client.
Which is about four times larger than the average are are <unk> subscription client.
Next time excited to announce two recent tech enabled minutes services contracts first we're pleased to have entered into an expanded relationship with a regional health system, who has been acquired of health catalyst for nearly a decade.
This five year 50 million dollar all access technology and services contract more than Quint quintupled the size of the client's relationship with health catalyst.
And includes an opportunity for an additional shared success bonus.
Based on improved client profitability.
At approximately $10 million in annual recurring revenue before any shared success bonus. This health system has become one of help catalyst 10 largest client.
This annual spend level also represents approximately 5%.
This client patient revenue highlighting the depth of this long term partnership.
Importantly, this relationship represents a new tech enabled minutes services offering area for us.
In which we are managing the vast majority of the non clinical staff across this health systems ambulatory clinics.
We anticipate this new <unk> service in ambulatory operations will provide us with another meaningful growth engine. In addition to our current tech enabled minutes services and analytics.
Charter distraction.
Additionally, I'm pleased to share another significant tech enabled minutes services expansion that was signed recently with another health system.
Who has been a client of health catalyst for nearly a decade.
This new five year contract sized at approximately $60 million.
And at roughly $12 million of annual recurring revenue. It represents approximately a doubling in the size of this client relationship relative to last year.
The expansion is inclusive of an all access technology subscription as well as an expansion to tech enabled managed services within the chart attraction and analytics domains with an emphasis on clinical quality improvement and help equity.
We're excited to deepen this longstanding partnership and we are encouraged that it represents another meaningful example that demonstrates the strong value proposition of our tech enabled minutes services offering.
December is from a growth perspective, we had a strong first half bookings performance are pipeline continues to grow.
And we anticipate our second half bookings performance will be in line with our prior expectations, Likewise, where you're excited to have announced multiple sizeable tech enabled minutes services expansion.
As further evidence of our meaningful traction with client.
Lastly, as you'll hear from Brian later in her prepared remarks, we're please to raise our revenue and adjusted EBITDA guidance for the full year.
And we continue to feel confident in our longterm revenue growth target of 20 plus per cent and our longterm adjusted EBITDA margin target of 20 plus per cent.
Additionally, we continued to track well towards our mid term targets, including 10% of adjusted EBITDA margin in 2025 and meaningful positive adjusted free cash flow in 2025.
We continue to see material operating leverage at our financial model inclusive of significant <unk> minutes services expansions that require little incremental operating expenses like.
Likewise, we anticipate seeing more material R&D operating leverage beginning in 2024, as we streamlined and work to complete certain investments enter data popcorn.
With that let me turn the call over to Bryan Bryan.
Brian .
Thank you Dan.
Before diving into our quarterly financial results I want to Echo at Dan shared and say that I'm pleased with our second quarter performance.
Oh, well now comment on our strategic objective category of scale for the second quarter of 2023, we generated 73.2 million in total revenue.
This represents an outperformance relative to the mid point of our guidance and.
And it represents an increase of 4% year over year.
Technology revenue for the second quarter of 2023.
Was $47.3 million representing.
Representing 4% growth year over year.
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 catsup occurring earlier than forecasted.
Professional services revenue for Q2, 2023 was $25.9 million.
Representing three per cent growth relative to the same period last year.
For the second quarter of 2023 total adjusted gross margin was 50 per cent representing.
Representing a decrease of approximately 500 basis points year over year.
And the technology segment R. Q2, 2023, adjusted Technology gross margin was 68 per cent.
A decrease of approximately 270 basis points relative to the same period last year.
And in line with previously shared expectations.
This year over your performance was mainly driven by headwinds due to the continued cost.
Located with transitioning a small subset of our client base from on premise to third party cloud hosted data centers and Microsoft Azure.
As well as from costs associated with migrating a subset of our client base Multitenant Snowflake and date of breaks enabled data platform environment.
Partially offset by existing client paying higher technology access fees from contractual bilton escalators.
Without a commensurate increase in hosting costs.
And the professional services segment R. Q2, 2023, adjusted professional services gross margin was 17 per cent.
Representing a decrease of approximately 960 basis points you over here and.
The decrease of roughly 330 basis points relative to the first quarter of 2023.
This quarterly performance was generally in line with the expectations, we shared on our last earnings call.
And primarily driven by new <unk> managed services relationships that start out at a lower at a low gross margin and expand over time.
And Q2 2023, adjusted total operating expenses were $32.9 million.
As a percentage of revenue adjusted total operating expenses were 45 per cent.
Which compares favorably to 52 per cent and Q2 2022.
Adjusted EBITDA and Q2 2023 was 3.5 million.
With this performance exceeding the mid point of our guidance.
And which represents an increase of $1.5 million relative to the same period last year.
<unk> Q2, 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 the second half of the year.
Alright, Justin basic net income per share and Q2 2023 was five cents.
The weighted average number of shares used in calculating adjusted basic net income for sharing to you too.
Was approximately 56 million shares.
Turning to the balance sheet. We ended Q2 2023 with $343.8 million of cash cash equivalents and short term investments.
Compared to 363.5 million at your in 2022.
Related to our cash balance.
And Q2 2023, we came to a settlement in regards to our previously disclosed litigation with Pascal metrics.
The total settlement amount was $18.8 million.
Which was within the anticipated range of outcomes were disclosed last quarter and our 10-Q.
In terms of liabilities the face value of our outstanding convertible notes as it is the principal amount of.
$230 million you in 2025.
As it relates to our financial guidance for the third quarter of 2023, we expect.
Total revenue between 70.2 million.
$74.2 million.
And adjusted EBITDA between zero and $2.5 million.
And for the full year 2023, we now expect total revenue between 290.5 million.
And $295.5 million.
At the respected bitcoin. This represents an increase of 0.5 million compared to the full year revenue guidance, we provided last quarter.
We also expect full year of 2023, adjusted EBITDA between $10 million and 12 million.
At their respective midpoint. This represents an increase of $1 million compared to the full your adjusted EBITDA guidance you provided last quarter.
Now let me provide a few additional details related to our 2023 guidance.
First as it relates to our Q3 2023 revenue expectations we.
We anticipate that our revenue will be slightly down quarter over quarter.
Primarily driven by the previously mentioned first half one time revenue items and go lives that generated a deferred revenue catsup.
As well as the timing of our revenue generation from that bookings in the first half.
Next in terms of our adjusted gross margin. We continue to anticipate that are adjusted technology gross margin will be in the high sixties in the third quarter.
And the professional services segment, we anticipate that R. Q3, adjusted professional services gross margin will be down a few points compared to Q2 2023.
The result of new Tech enabled managed services revenue, which.
Which begins at a low gross margin before expanding overtime.
Lastly, we anticipate our operating expenses will be slightly up relative to Q2 2023.
Mainly the result of some non head count expenses that we know anticipate will occur in Q3 as opposed to Q2 2023.
Lastly, let me share a few additional details related to our four year 2023 guidance.
As Dan mentioned, we are pleased to be in a position to increase the mid point of our guidance range for both revenue and adjusted EBITDA.
In terms of our adjusted gross margin. We continue to expect that are adjusted technology gross margin will be in the high sixties through 2023.
For our adjusted professional services gross margin, we anticipate that will be in the high teens for the year.
Primarily as a result of our mix of professional services being comprised of a larger percentage of tech enabled managed services.
Given the strong growth in that segment of our business.
But those relationships starting out at a lower gross margin and expanding over time.
Lastly, we anticipate are adjusted operating expenses as a percentage of revenue will be down more than 700 basis points year over year.
Largely the result of our restructuring efforts and meaningful continued operating leverage with the largest you over year reduction occurring is SG&A.
With that I will conclude my prepared remarks.
Yeah.
Thanks, Brian <unk>.
In conclusion, I would like to recognize and thank our clients and team members without their consistent engagement in and contributions to our shared mission.
None of this would be possible for with that I'll turn the call back to the operator quick questions.
Thank you.
Florida now open for questions. At this time, if you have a question or comment. Please press star one on your telephone keypad.
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Thank you and our first question will come from Elizabeth Anderson with Evercore ISI, you'll sign was open.
Thanks, Hi, guys. This is sitting there Patel on religious Anderson you know one question I just wanted to get some more color into is how do we read into this increased revenue guidance given the reiterated not retention rates at least that range does that imply like improving outlook on new customer wins or are you just.
Expecting to reach maybe slightly higher point within that not retention range that you've shared.
Yeah, Great question Samir Yeah. So the the primary drivers of the increase to our revenue guidance range. This year.
Are are mainly mainly timing. So we are a little bit ahead of schedule as it relates to as I mentioned, some client implementations and go lives.
And some of the the bookings that are rolled through for the year. So.
So that's the primary can a driver what what you're describing samir around kind of a new client environment as well as the dollar base retention rate.
For us as a as a little bit less impactful in year because of the kind of more back and waited nature of our bookings to share which is kind of what we expected coming into 2023, but that growth will will be <unk> more pronounced as we completely ear and drive towards 2024.
Got it Super helpful. Thanks.
Thank you. Thank you.
Our next question will come from the shop account with Piper Sandler Your line is open.
Hi, This is <unk>, thanks for taking my questions and congratulations on the corner.
Wanted to ask about the recently proposed lump sum 340, diva mediation payments to hospitals.
Conversations with customers are those payments shaping up to be a telling you guys health systems, perhaps further invest in data and analytics.
It certainly helps yes, and I think there are a couple of of modest tailwinds that we're observing across our client base. That's one of the Tailwinds I think there's some other tailwinds in terms of inflationary pressures coming down a little bit as it relates to labor and supplies all of which are are <unk>.
<unk> to a slightly better operating margin environment, which we believe will be a midterm tilman for us.
I just.
Thank you sure.
Next we have a question from Daniel Crosslight with city. Your line is open.
Hi, Thanks for taking the question.
How we should think about the services gross margins as we enter into a more normal environment in 24 M. Beyond given the shift to tech enabled managed services has this turned into like a high teens low twenties margin business going forward or do you think you'll eventually get up to the margins that you have achieved prior to the.
Recent downturn and then a as a part of that can you just maybe give us a little bit more detail around kind of how that contributes to EBITDA, because even though it's lower gross margin.
You don't really have any of this at a lot of the set up costs. So it might be quicker to add to to EBITDA, even though Chris margins are a bit lower than that product.
Yeah, well set Daniel I think both of those points are are important so on the first point.
We are continuing to gather data and obviously, we're excited to have seen you know as we mentioned the prepared remarks from July one of last year through June 30th of this year, a really significant growth in technical minutes services within our services segment. It's it's you.
You know growing very rapidly at more than 80%.
That is encouraging to us we see in our pipeline.
Further growth and that kind of opportunity and as we mentioned with the two examples that we went through these can be very large contracts and and they're also longstanding contracts typically five years locked in which is really helpful to your point. There are many positives isn't there a couple of challenges with regards to those kinds of contract.
<unk> one of the challenges is that is Brian mentioned early on gross margin is quite low sometimes starting as low as around zero percent within migrating over time up to the mid twenties as we've shared in the past that is different from you know what we talked about when we went public <unk> in terms of the longterm.
<unk> Pro services gross margin target more like in the mid thirties, we still do have other pro services that we continue to offer that summer, which do have a higher margin profile I think we're early in the process of understanding exactly how this all plays out overtime. We're definitely encouraged by the fact that to your second point those technical <unk>.
Services as we sign these large contracts, we're seeing over and over again that they do not require meaningful incremental operating expenses and as such even in that scenario, where we're getting to more like a mid twenties gross margin profile for the professional services. It also includes meaningful.
Tech subscriptions, usually migrate need the all access which is a much higher gross margin profile and the lack of a requirement of any incremental meaningful operating expenses leads us to have confidence even in scenarios, where <unk> services continues to be a real strong growth engine that.
We can maintain that long term EBITDA guidance of 20 plus per cent yeah.
And I've just add to the Danielle <unk>, we are encouraged to see a little bit more EBITDA progress this year than what we had expected coming into the year.
And then in terms of the longterm target commentary that Dan was referring to.
Well that is an area on the pro service decided that we're studying more and will likely have more to more to say as we learn more about the level of demand on the tech enabled side, but what we do continue to feel confident in related to our long term targets that we set at IPL are the longterm revenue growth rate of 20 per cent plus and the longterm EBITDA.
Profile 20 per cent plus.
Yup makes sense, thanks for the color.
Okay and hang up.
Our next question will come from David Barton B T. I G. Your line of cell phones.
Hi, Congrats on the good quarter. So you sign two very large deals one for 50 million one for 60 million yet.
<unk> you describe the hospital sort of environment as modest improvement in a slight improvement.
Just any more color there would be very helpful. I mean as far as I can tell if that's those are very significant contracts I'm, assuming that even at the end of the five years, probably renew again.
Just any more color would be very helpful. Thank you.
Absolutely. Thanks for the question David So we are definitely encouraged to see two more examples of really large technical managed services contracts and of course over the last nine months. We've seen several of these really meaningful experiences with our existing client base. We're very encouraged by that you know some of the reason for these large expansion.
Is because tech enabled managed services offers financial relief and offers help with regards to financial pressures and so certainly that hard dollar R. O Y that we're able to offer his help us to be part of the solution to health systems are facing financial pressure and as we know you know for decades now health system. So.
Had to operate with very low operating margins see that changing in the foreseeable future at a at a significant level. So we can tell you feel like that tech any more minutes services value proposition of being better faster and cheaper is very very compelling and will be a really nice growth engine for us for many years.
Ears at the same time, we're also encouraged anytime you know our client and markets financial condition improves a little bit it just becomes a little bit easier for us to to keep moving forward and expanding their relationship.
Both with tech any within a services, but also in other areas as well so that is nice to see some tailwinds and nice to see some improvements in their operating environment.
Okay, and then just one more quick one did I hear you say that you're gonna be managing nearly all of the nonclinical aspects of one of your hospital clients as part of the one of these deals.
You did hear that in the ambulatory space all the ambulatory clinics non clinical staff. The vast majority of them are now dual employed including a primary employment relationship without count as we're really excited about that we've talked in the in the last couple of earnings calls about.
How important ambulatory operations are to our health system clients. So many of them have made strategic moves into the ambulatory space purchasing clinics and physician practices, but so many are struggling from a financial and operational performance perspective, and we've for a number provided technology support to improve amethyst.
Three operations, but this is really a deeper step in that direction of getting right into the trenches and managing most of the staff add these clinics and we do view. This is a really exciting new tech enabled minutes services offering here for us.
Great Congrats on the corner.
Thanks, David.
Thank you.
Next we have Jack <unk> with a Guggenheim Securities. Your line is open.
[noise] Hey, congrats on the corner and thanks for taking my question you know it sounds like we've got four pretty substantial client expansion attempts.
Tens agreements so far this year <unk> and thinking about the <unk>. When we spoke earlier this year you talked about having some pretty good visibility into when these types of deals might be side about one to two quarters out as we're sitting here in August with the meat of the selling season in the in the back half of the.
Yeh.
Yeah, what kind of incremental visibility do you have into that 1021 10 dollar attention range and are we shading towards either end of that range at this point. Thank you.
Yeah. Thank you Jack I appreciate the the question is it's an important one.
So as you mentioned, we have signed several of these large check any more minutes services deals over the last nine months or been five inclusive of the Carl how steel which is right at the at the end of last year took effect at the beginning of this year. So across those a few patterns that we've that we have noticed have emerged one.
We do have good visibility as to the likelihood that we will win those contracts in each case, a number of months before the actual signing of the contract we had gotten really good indication that the client and decided that they're going to move forward with us. What we have also realized is is it continues.
To be hard to precisely predict exactly when that contract signature will occur and part of the reason for that is easier said large contracts and longstanding contracts in terms of being five years in nature that that often there's a need for us to to go through a couple of additional.
Uhm confirmatory steps and often those are really positive. It's it's led for example for me to have the opportunity with multiple clients to interface with board members of these clients and get to know and build a relationship with them long term, which is I think long term a wonderful thing, but those things take time. So we we have tried to to <unk>.
Showcase ensure that as we think about the back half of this year. We're excited that our pipeline is growing we have really meaningful opportunities and we have a sense that we're tracking well like we've seen in the past in terms of the likelihood that we will win those contracts and and as has been the case as we've shared in the past.
Almost all of these opportunities.
We are the sole source vendor that's being considered there's not an RFP processes. So it's really a matter of the client deciding we're gonna move from from managing these services in house too to partnering with health catalyst, but we've continued to see like we've seen these last five contracts that we signed it is difficult for.
<unk> two precisely predict the timing of exactly when the contract signs of exactly when the revenue began that is one of the reasons why we shared a wide range of database retention. Because these are big lumpy deals and as an example last year either the Carl help deal alone swelling or.
Our dollar race retention by about four points and so at that at that level, you can see pretty significant impact of one deal from a timing perspective.
Signing in December versus January or February and so we we have an updated that that range because that dynamic still exists and and and yet at the same time. We're so excited about the longterm benefit strategic benefits of these technical minutes services contracts as we keep the relationship in a really good place yeah, they're signing.
Five year contracts, where they're locked in on both the technology side animal the service items. So it's it's worth a little bit of near term uncertainty, which we can manage over time.
Gotcha. That's that's helpful. Thank you.
Yeah.
Thank you.
Our next question comes from Scott Schoenhof Keybanc. Your line is open.
I T. Thanks for all that updated color on the hospital and markets I thought that was.
Very nice color from where we talk 90 days ago, and very encouraging I I want to focus in on the margin. So you know you're talking about the banana head count headwind in the back half does not related to the third quarter internal marketing event that you guys do annually and then built within that is out.
Side of that none head count related item, you're seeing a lot of leverage operating leverage in sales and marketing how's.
How should we think about that going forward or we should we continue to see that as we continue to see strong demand for expansion services mean that you won't need a robust sales and marketing team. If your clients are just expanding their services. Thanks.
Thank you Scott I'll I'll, maybe address the second question Bryan if you want to address the first question. So as it relates to the to the second question. There are a few examples now that we've gathered quite a bit more data on tech name of minutes services contracts that are encouraging to us is or at least offered whoever's. The first certainly that you pointed out is there's meaningful sylvan.
Marketing leverage where like we have shared in the past.
One really effective account executive can cover the waterfront of even a very deep and multifaceted existing client relationship and and that was the case for example, with Carl Health. We we have one account executive before they expanded from 4 million to 60 million today, we still have one <unk>.
<unk> account executive and they're able to manage that relationship really effectively. So there is really meaningful sales and marketing operating leverage and we see that continuing through these other contracts that we signed an existing client relationships that are expanding that is one of the benefits of having the foundation of our growth longterm.
Be really focused on expanding existing client relationships. There's just a lot of leverage there and and it's generally a very high leverage high up high R. O Y kind of sales and marketing motion and that is our strategy longterm. So we're encouraged by that did you also mentioned in the in the.
Prepared remarks that isn't the only place where we see operating leverage we've already seen some meaningful G&A operating leverage as well, where we can take on these large contracts without needing to add a lot of genie infrastructure and we also anticipate starting in 2024, some really meaningful R&D leverage as we mentioned the prepared.
So there's there's multiple facets to what feel encouraging to us as we as we see terms as a growth engine.
I'm moving forward.
Yeah, that's what I said and then just on your first question Scott So related to our EBITDA margin kind of trends for the year, where we are encouraged to have been.
Been in a position to raise our EBITDA margin target for the year slightly and continue to make progress on as Dan mentioned operating expense efficiency and leverage.
There is a little bit of seasonality and are and are not head count spend we had some non head count it's been sent to your points got things like advertising spend some event spend things like you know contractor work on the R&D side.
That we think is just slipped to the back half of the your rather than in the first half of the year, but but less so related to the large marking event.
Thank you so much for all that color appreciate it.
Thanks Scott.
Thank you.
Our next question will come from Richard close with Ken According to anybody.
Your line is open.
Hi, This is John Penny onto Richard clothes, Thanks for the question and congrats on the corner.
Just a question again I'm going back to the technical managed services just exactly like what exactly is your expectation in terms of timing for like the figure out some margins to ramp like how long do you think.
Take to get to the 20 per cent from the low single digit zero that you're talking.
Thank you.
Yeah. Thank you John So [laughter] as as we discussed in the prepared remarks, and and as we've discussed in private quarters, often we begin these tech any more minutes services relationships around zero percent gross margin give or take in each contract is a little bit different but the tip of typically we start with quite a <unk>.
Low gross margin somewhere in that zero per cent plus range and then over the course of a typical five year contract. We see gross margin improvement in the technical minutes services part of that contract where that grows from zero percent early in in in that first year or.
To that 25 per cent longterm target towards the end of that five year contract term. It's important also to note that we also benefit from the fact that there's a technology subscription. That's also part of that client relationship and and in each of the cases that we've shared over the past nine months our clients of <unk>.
Migrated from a little bit more modular relationship to a more all access type of relationship and that often involve some meaningful tech expansion at a high gross margin.
So the combination of the tech and the technical minutes services is is also what really contributes to our confidence level that.
With those kinds of relationships, we can still produce a 20 plus per cent EBITDA margin and just just to add to that.
We do have a couple of data points of clients, who have been longer standing in terms of the tech enabled mad services relationship with us that have migrated toward that or two that 25 per cent.
Technical demand services gross margin level. So that's been encouraging while it's been more of a recent focus for us on some of these new ideas that does present a bit of a headwind in the second half and into 2024, but as Dan shared moving to these longterm very deep strategic relationships that are locked in for five years provides.
US with great visibility as compared to.
Kind of a more traditional model that we've seen which has been more of a month to month model.
Perfect. Thank you.
John .
Our next question will come from Stan Barrington with Wells Fargo Securities Nirvana's open.
Hi, Thanks, so much for taking my questions. It looks like your conference has shifted from a typical three Q2 one Q.
A couple of questions on that I guess, one how should we think about the timing in terms of the associated expenses here and then does that in any way shift your visibility into next years. Okay. Thank you.
Yeah. Thank you stay answer the question, Yes, we did decide to make a shift and the timing of the health care analytics stomach from September to the winter time. So February of next year will be when we hold that we do love that even as an opportunity for our.
And clients together for a user group experience and and for us to talk about ways in which we can expand and deepen those relationships and we also opened it up to others, who aren't clients of health catalyst to come and view it as an industry event and an opportunity to learn more about health care analytics. So that is an important and.
Enabling factor in our ability to continue to keep moving forward with regards to pipeline conversion in bookings, but we but we rather anticipate that that will be a nice tailwind in early 2024 that will help us to continue the momentum C.
It's a mixture of prepared remarks.
We feel.
Encouraged by the fact that or a pipeline is growing we feel encouraged by the fact that we have the coverage that we need to have reiterated our confidence in the in the full year bookings expectations, both with with existing clients from a dollar based retention rate perspective, and which were submitted <unk> dot subscription.
Clients and just in terms of the the timing of the expense stand. So uhm. So most of that expense for the summit will occur in the queue one time frame.
There is some as as you get kind of prepared for the summit. Some work that leads up to that there'll be some expense.
For us this year in the back half in particular in queue for but most of that what kind of change you know in terms of a different quarterly cadence.
And again one of the areas that we continue to be very focused on in terms of operating expense streamlining and leverage will continue to be sales and marketing.
Alright, thank you.
Thank you.
Thank you.
Our next question will come from <unk>, Let's Stevens your line is open.
Yeah. Good afternoon, thanks for taking the questions wanting to follow up on the earlier question on the Thames ambulatory when I would try to lump a few related questions. Together just curious what the <unk> core focus will be for that Nonclinical ambulatory staff that you'll be rebadging categories like data.
Management quality reporting intake of revenue cycle come to mind, but curious to hear more from you. There and then also looking to get some color on the shared success possibility.
Any detail on the K P I or type of K P. I is that could lead to earning a shared success bonus and and lastly, just any color you could add on on how the Rebadge staff can better leverage technology to create the efficiency as in hard dollar R Y that you talked about <unk>.
Excellent. Thank you Jeff. So we are very excited about this terms ambulatory operations opportunity and as I mentioned, a few minutes ago, we have been for a number of years, providing technology support and analytic support so that our clients can understand their ambulatory performance both financially operationally clinically.
And we've seen really meaningful opportunities for improvement that she.
<unk>, Okay, so our technology.
But it's been harder for us to help our clients actually realize the improvement that would lead to improved clinical outcomes financial and operational outcomes. So this is an opportunity for us to really go deeper and and to your point as we pinpoint opportunities with another there on the revenue in volume side.
Which you know there are some greatest hits there that you would typically see in terms of opportunities for productivity improvement or.
We're on the cost side in terms of efficient efficiency management, whether that's labor utilization.
Supplies utilization or other factors as well.
We have been aware of those specific opportunities we've highlighted those for clients, but now we're most of the team that can implement the changes necessary to see the improvement and that that leads to your second question as it relates to how's the shirts access bonus structured and in this first case, it's quite <unk>.
Simple it is focused on us improving me operating income.
Of those clinics and as we <unk>, we will share in the success of the improvement that we see in it and an operating profit. So that is a great focusing mechanism for all of us to.
To be a line in terms of seeing that operational financial performance, which also.
Can often be driven by clinical improvement in terms of the way that we treat patients. So that's how the shirt successful. This is is focus and then in terms of how we're managing the re bad stuff Uhm what are the things we love about technical line of services is it pleased with some of our natural differentiated <unk>.
<unk> is the best place to work with very very high team member engagement or last Gallup, Brazil put us in the 97 per cent tile in terms of our team member engagement relative to a very large benchmark set.
And we intend to leverage that engagement with these team members to enable them to really help drive <unk>.
Needed operational financial and clinical changes that will lead to that improved performance and so we have seen that work and really effective ways and our other tech enabled minutes services relationships.
Excited to see similar kinds of results.
As we move into this ambulatory operation space.
Alright.
Thank you.
As a reminder that is star one on your telephone keypad to ask a question.
And our next question will comes from Sarah Jane Smith Cantor Fitzgerald. Your line is open.
Thank you and congrats on the corner. It was really interesting earlier, you mentioned, having the opportunity to talk to some board members.
You provide our clients around their strategy.
Studying were you able to glean any chance of what might get congestion started looking for health and longevity of their.
Get the reference from the last margin expansion cycle that providers my thrill, what was instead of the lines that you saw between market conditions, changing and and I've taken appetite for a contract extension.
Yeah. Thank you for those questions Sarah so.
As you would expect my experience with interfacing with board members at Health system clients is that they are appropriately longterm focus strategically focused want to make sure that as you mentioned in the second part of your question that these health systems are well prepared to make it.
Through upward and downward cycles from it macroeconomic perspective, an inflationary perspective, it cetera, and so I think that's actually one of the really appealing elements of what we're offering as it relates to take any more minutes services, we're offering great visibility and great predictability.
For an extended period of time, it kind of works their way through some upward and downward cycle sent to one of the other comments made a few minutes ago, our experience thus far while while we're excited to to to structure. These contracts as five years.
Thus far we've we've experienced you know renewal for those clients that had been long standing with US is a very likely options. So these are these are we believe more like 10, or 15 20 year kinds of decisions that our clients are making that these boards are making that provides them with that predictability and visibility through upward and downward.
Cycles, so that they can manage really effectively important costs and know that they're they're receiving that cost efficiency from a partner who also cares deeply about those team members disease boards are also very community focused and they care about the impact of employment in there.
Local community and our ability to keep those individuals deploy locally.
Keep them part of the community Longterm is another really appealing element, while also helping the financial sustainability of these health systems and then the last thing that I think is really appealing to these boards is that that these team members become force multipliers did become catalysts unintended to enable improve.
<unk> throughout the broader health care ecosystem within that health system, and and that leads to even more sustainability by improving clinical outcomes improving patient outcomes, while also driving operational financial improvement.
Those are the elements that that these boards are looking for in in senior leaders are looking for and and I've heard that personally face to face over and over again now October 150 visits with with seafood executives and board members of our top 100 clients and that's really what they're looking for is how do we <unk> <unk>.
<unk> through difficult economic cycles, and and get to the other side of those with real predictability and and to your 0.1 of the benefits of health care is typically the highest aren't quite as high and the lows aren't quite as low through economic cycles, and and I think having predictability.
Through those cycles can be really helpful and as such even some small improvements in operating margins can.
Enable more investment in strategic longterm areas and so your last question I think we do see that the movement over the last several months as being positive and we see.
Some momentum in terms of the operating margin improvement, yielding a little bit more movement in our pipeline, but but it's usually a little bit more muted and health care in both directions than what you might typically see in other industries as a data point Oh, just sure Sir is that yeah as.
As you see some of that pipeline start to move for us traditionally our sales cycles do tend to be longer. So there are around a year on average and they typically kind of a line with fiscal years or budget cycles for health systems.
Are usually July one or January one so that certainly what will take time for some of that kind of improvement to roll through our pipeline and into kind of a booking scadian cadence over the medium term.
Thank you.
Thank you.
Our next question will come from Sean Dodge with RBC capital markets. Your line is open.
Good afternoon. This stomach color <unk>. Thanks for taking my question.
Follow up on the analytic stomach, let me make sure I'm clear on the dining so directly to three mind costs associated with some of that was already factored in the initial 2023 guidance or or is that a recent shift 2024.
Yeah, and it was a little hard to hear Ya Thomas but at the yeah. The summit event. We had we had been working on early in the year in terms of timing and so generally contemplated that in terms of our guidance for 2023.
And so that's kind of played out kind of in line with that expectation.
Okay, great. Thank you.
Alright, thank you.
At this time there are no further questions in the queue. So I would like to turn the floor back alright can Mr. Gambari for any additional or closing remark.
Thank you all for your time and for your interest in health catalyst. We appreciate it and we look forward to seeing in touch.
Ladies and gentlemen, thank you and that does conclude today's health <unk> second quarter 2023 earnings conference call.
Please disconnect. Your line at this time and have a wonderful day.
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