Q3 2023 Definitive Healthcare Corp Earnings Call

Okay.

Welcome to the definitive health care Q3, 2023 earnings call.

Our hosts for todays call is Robert Musselwhite.

At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.

I would now like to turn the call over to your host Mr. Musselwhite, you may begin.

Good afternoon, and thank you for joining us today to review definitive healthcare's quarterly financial results.

Joining me on the call today are Robert Musselwhite, CEO, Jason <unk>, the founder and executive Chairman and Rick Booth, our CFO.

During this call we will make forward looking statements, including but not limited to statements related to our market and the future performance and growth opportunities.

Would either mitigate churn the benefits of our health care commercial intelligence solutions, our competitive position and customer behaviors and use of our solutions, our financial guidance, our planned investments generating value for our customers and shareholders and the anticipated impact from global macroeconomic conditions on our business results and clients and on the health care industry.

Generally.

Any forward looking statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 195.

Forward looking statements involve a number of risks and uncertainties, including those discussed in the risk factors section and elsewhere in our filings with the SEC.

Actual results may differ materially from any forward looking statements. 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 for.

For more information please refer to the cautionary statements included in the earnings release that we just posted to the Investor relations portion of our website.

Finally, we will discuss non-GAAP financial measures on this conference call. Please refer to the tables in our earnings release on the Investor Relations portions of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure.

That I would like to turn the call over to Robert.

Thanks, Matt.

Thanks to all of you for joining US this afternoon to review definitive healthcare's third quarter financial results.

On today's call I'll provide an overview of our third quarter results provide some perspective on business trends and what we're seeing in the market and review some of our key wins from the third quarter.

I'll turn it over to Jason to highlight some of our latest product innovations.

I'll begin by reviewing our third quarter financial results. Our total revenue was $65 3 million, which represents 14% year over year growth.

And our adjusted EBITDA was $21 7 million, which translates into a 33% margin.

Revenue and adjusted EBITDA for the quarter were both above the high end of our guidance ranges for the quarter.

We are pleased with our increased profitability in the quarter on a non-GAAP basis, we have been focused on becoming more efficient across all parts of the organization and it is nice to see that work yielding measurable results.

Revenue growth was consistent with what we have seen in recent quarters and continues to reflect the difficult macroeconomic conditions facing some of our key markets.

Looking at the quarter in more detail. The good news is that despite the challenging macro customers are continuing to engage with us in many different ways.

Importantly, we signed sizable new deals in each of our target markets with both new and existing customers.

Demand generation also remained solid as frontline go to market and product development professionals are actively planning for investments in growth when their business has began to improve.

For example, we are conducting a record number of product demos for our prospective customers interested in definitive healthcare's platform.

While this type of activity is a positive sign for future growth.

End markets still remain pressured by the macroeconomic environment.

The trends for new business, whether with new or existing customers were consistent with what we've seen over the past year budget scrutiny remains elevated client decision processes are slow in complex and getting transactions through the final buying stages is challenging.

This dynamic is true across the business at the moment, but it is most acute with smaller companies, particularly biotech firms that have been dealing with funding constraints for a number of quarters.

We also continue to see these dynamics play out in our renewals as the challenging market environment persists and customers scrutinize their budgets more tightly they not only have pulled back on new spending but have also in some cases start to reduce their existing spend and this has led to a modest increase in both downtown and churn in our most impacted end markets.

Yes.

In the midst of these conditions, we are very focused on being sure. We control what we can control and we are thus implementing a series of initiatives to try to minimize churn as much as possible. In this environment. These include internal data science analysis to help identify our accounts most at risk and focused the efforts of our account managers and customer success team.

Extra executive interaction and intervention with key clients.

And concerted value delivery initiatives from our products and professional services teams. Additionally.

Additionally, we have run a series of outreach campaigns to our customer base aimed at helping our clients utilize our data and solutions as effectively as possible to help their businesses. During this time.

The good news is that companies that have made larger investments in definitive healthcare generally continued to renew at higher rates than our smaller clients and while our efforts are in the early stages. We are seeing signs that the work is worthwhile and as a result expect to mitigate the incremental churn we have seen.

In addition, we are seeing some customers that churned in the past returned to us realizing the importance and value of leveraging our data and their efforts.

In a moment I will highlight one specific example of a customer like this.

Doors like these and the consistent expansion, we're seeing among many of our existing enterprise customers give us great confidence in the long term land and expand opportunity in our business.

It's important to remember that it remains early in the growth opportunity in the health care commercial intelligence market and there are numerous opportunities to expand our data sets and develop new solutions that enhance the value of definitive healthcare can deliver for customers.

We've always taken a balanced approach between growth and profitability and continued to invest in strategic areas to lay the foundation for faster growth when market conditions improve.

Our customers consistently tell us that they need high quality actionable data that helps them make more informed decisions about their business.

In a higher cost of capital World companies face constraints on a number of growth investments they can pursue.

This dynamic makes an unsuccessful clinical trial or a poorly designed go to market plan, even more costly.

We believe the combination of the Atlas dataset and our commercial intelligence platform as position definitive health care to be the partner of choice for any company looking to make more efficient and effective investments in the healthcare market.

And we are confident that this demand will drive strong growth for us into the future.

I would now like to spend a few minutes highlighting some of those customer wins from the third quarter that demonstrate the numerous ways customers are generating business value from the definitive healthcare platform.

In the life Sciences space, we had a significant win back at a leading diagnostic genomics vendor that offers a full spectrum of clinically relevant genetic testing.

This customer ended its prior definitive health care contract in December 2022.

And then reached out to us in the second quarter of 2023, ultimately signing a multiyear enterprise agreement in August for access to both our Atlas referenced an affiliation dataset and our outlets all payer claims this customer plans to integrate our data into its CRM system to improve targeted marketing outreach to clinicians.

In August we released a significant update to the Atlas technology install dataset.

That update contributed to multiple wins in the quarter, including one particular win at a patient engagement software vendor.

Within hours of receiving access to the dataset. The client ran a report to identify 225, new targets that had its top competitor software installed along with the name phone number and email address of the purchasing decision maker thrilled.

Thrilled with these quick results the client continues to use our data to shape its messaging and value proposition to those targets. In addition to identifying other prospects using its competition.

Also in August we announced our acquisition of popular a leading provider of health care commercial intelligence to the provider market.

Popular had multiple strong wins in the quarter, both before and after the acquisition, but it's most important win was an enterprise upsell at a large academic medical center in California.

This customer, which was already using Populus network intelligence and market intelligence products purchased our population of intelligence and campaign activation services.

With this expanded product suite, the customer will be able to hyper segment and target consumers based off clinical propensity and a wealth of other behavioral demographic and social determinants of health elements.

The customer plans to run Omnichannel digital marketing campaigns to recruit more patients in a highly competitive urban market.

Turning to our passport analytics suite, we had a multi year enterprise win at a commercial stage biopharmaceutical company focused on transformative medicines treating genetic diseases.

This firm plans to submit a new drug application to the FDA before the end of 2023 with regulatory filings and additional markets to follow in 2020 for.

This company will use the passport planning and performance modules to assist in the implementation of an evidence plan.

Assess the current standard of care diagnostic path health economics treatment paths and outcomes for patients with amyloid cardiomyopathy.

Finally, as you know by now I always like to include a unique customer from outside of the health care industry that sells its products or service into health care organizations.

Third quarter, we were chosen by the American division of the world's largest dairy and cheese manufacturer to help expand its presence in both hospitals and long term care facilities discussed.

This customer wants the target group purchasing organizations for integrated delivery networks and plans to use our Atlas referenced an affiliation dataset to understand the networks and relationships between different facilities.

In particular, it plans to integrate our proprietary data intuit Salesforce dot comments.

To better identify strategic accounts develop customized pricing proposals and reach out to the right individuals with purchasing authority for food services.

With that I'd like to turn it over to Jason to talk about what we're doing on the product and innovation front.

Thanks, Robert as.

As we've discussed we spent a lot of time energy and money this year improving our product.

I wanted to use my time today to share an update on the number of ways that we are innovating to help our customers commercialized more successfully within health care.

Definitive healthcare offers unique health care commercial intelligence to help companies of all types better understand compete and win and the complex U S health care market.

Our approach focuses on helping our clients conveniently identify the right health care providers to target and partner with as well as the right people within those organizations we.

We do this by providing our clients with detailed contextual data on the entire health care ecosystem automated with powerful analytics and data science.

Let's expand on each of these concepts a bit more.

Organizations and people we have.

Are the leading company covering providers across the entire health care ecosystem from acute care to skilled nursing facilities to clinics and to offer data on $4 5 million physicians and executives at these organizations.

Importantly, we provide interested details about how these organizations relate to and interact with each other which helps our clients understand buying authority and referral patterns.

Next convenience and integrations.

Customers can choose the method for <unk>, and our data and analytics that works best for them.

Whether they want to access our data through our SaaS platform through our powerful Apis are directly into their CRM or third party data hosting platform, we work hard to make it easy for them and to ensure that we can be that single source of data truth for their entire organization.

Analytics and data science are AI, driven proprietary analytics provides automated insight to hundreds of different complex areas across a wide variety of use cases, such as physician prescribing behaviors network referral and leakage analysis and proprietary clinical scores across a range of 23 unique metrics.

Our clients want insights that help them reach their healthcare targets more effectively and the work of our data science team provides them exactly the intelligence they need.

And finally context.

We deliver all of the above in the context of a cohesive and comprehensive view of what is most important to our clients to know about the health care ecosystem.

This includes more than $5 5 million technology installation records.

Quality of care and financial data.

<unk> of all payer claims and extensive data on social determinants of health.

But this market is evolving quickly and we are laser focused on continuing to innovate to meet our clients' complex demands.

As we've previously shared earlier this year, an independent third party research firm ranked definitive healthcare number one for each of the top 10 use cases for healthcare referenced an affiliation data among diversified customers.

However, we're not content to sit on our laurels. So we've made a number of enhancements to our data sets this year, including the <unk>.

21% increase in the number of health care professionals in our database.

A 43% increase in the number of practice locations and 120% increase in the number of pharmacy claims and a 21% increase in the number of pharmacy patients.

Additionally, we launched a new behavioral health dataset that Leverages AI and advanced data science to provide customers with a comprehensive view of behavioral health care settings across the provider landscape.

Customers can leverage the athletes behavioral health dataset to better identify segment and research the unique facilities and treatment locations that are part of a patient's care journey.

And as I shared on our last earnings call. We also made significant improvements to our Atlas technology installed dataset, we updated data on more than $1 5 million technology installations for hospitals health systems ambulatory surgery centers and physician groups by collecting data from multiple new sources, and then applying our proprietary cleansing and Lincoln allergy.

Rhythms to generate new intelligence.

As an example clients can now more accurately learn which clinical systems, our clients and prospects are using what electronic health record systems are installed and when that implementation took place.

In addition, we added a signaling strength scar that helps predict an insurer installations, where data may not be fully available.

And when combined with our referenced an affiliation data clients can now more confidently understand how health care providers are interconnected and how technology is deployed across multiple facilities locations and organizations.

We also heard from our clients the importance of continued investment and improvement in our platform and user experience I'm.

I'm proud to say that we delivered on that front this year.

Some of the improvements we made in 2023 included.

A new social media and news tab in our Monaco expert insight product to cover key opinion leader activity inventions across Youtube, Instagram and Facebook talbert clients understand which kols are influenced in the healthcare universe online.

In addition, we enhanced our search capabilities for lab durable medical equipment and medical supplies to give better visibility into physician ordering behavior.

And finally, we added a new cohort creation workflow to provide guidance on new medical code sets patient cohorts and reports.

As we emphasized in the past innovation is critical to our growth and even in a more difficult macro environment. We continue to invest in the people processes and data that we need to build even more effective solutions to help our clients succeed in a dynamic healthcare market.

I would now like to turn it over to our CFO Rick to walk through definitive health Care's second quarter financial performance in more detail.

Thank you Jason.

I'll start with a detailed review of our Q3 results before providing our guidance for Q4 and commenting on 2024.

In my remarks, I will be discussing our results on a non-GAAP basis, unless otherwise noted and all results for the third quarter of 2022 are as reflected in our most recent filings.

Our strong business model allowed us to deliver solid revenue results and very strong profitability in Q3 by focusing on what we can control despite economic conditions, which continue to be challenging.

Our focus on efficiency and continued innovation.

And position as well as the market recovers.

Our financial highlights in the quarter includes 14% revenue growth compared to Q3 2022.

33% adjusted EBITDA margin.

And a 22% unlevered free cash flow margin over the last 12 months.

Revenue growth plus the trailing 12 month adjusted EBITDA was 43%.

We're 36% using unlevered free cash flow margin.

Turning to our results in more detail.

Revenue for the third quarter was $65 $3 million up 14% from the same period in prior year and finished above our guidance.

This includes $2 8 million of professional services as large clients engage us to work on some of their most challenging issues.

We ended the quarter with 555 enterprise customers defined as customers with at least $100000 in the R. R.

This was an increase of 51 enterprise customers, where 10% year over year.

And an increase of 28 enterprise customers from the previous quarter.

As a reminder, <unk>.

Surprise customers represent the majority of our error and are a key focus of our go to market programs for.

Our total customer count, which includes smaller customers with 2922 at the end of Q3 down from 3023 in Q3 of 2022 and down 35 from the previous quarter as smaller customers have been disproportionately impacted by current conditions.

Gross profit was $56 million.

Up 10% from Q3, 2022, and our overall gross margin of 85, 7%.

Decreased 280 basis points from Q3 2020 to.

Due to both the addition of data sources from the Atlas dataset.

And popular relative to prior year. Both of these additions are intended to drive innovation and long term growth.

Sales and marketing expense was $20 million up 6% from Q3 2022.

A percentage of revenue sales and marketing expense was 31% of revenue.

Down 230 basis points from Q3 2022.

This results from the changes that we've made to drive efficiencies in sales and marketing.

By focusing on the markets and activities with the highest return on investment.

Perfect development expense was $7.5 million.

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Product development expenses were 11, 5% of revenue down 60 basis points from Q3 2022.

As we realized efficiencies by integrating required operations and further globalizing our talent pool.

Investing in our platform and using our existing datasets to launch or enhance multiple products is a highly effective and efficient way to increase the value we deliver to customers.

Robert and Jason touched on some examples of these earlier and we will continue to invest in the multiple opportunities we have identified in our long term product roadmap.

G&A expense was $7 $7 million down, 13% from Q3 2022 and <unk>.

As a percentage of revenue G&A expenses were 12% of revenue down from 15% in Q3 of 2022.

We expect to see continued leverage from G&A, both because these costs are relatively fixed.

And due to ongoing efforts to lower administrative costs as we improve efficiency.

Adjusted income was $24 million up 30% from Q3 2022.

As a percentage of revenue operating income was 31% of revenue up 390 basis points versus Q3 22.

The year over year margin increase was primarily due to efficiencies in sales and marketing and G&A.

Adjusted EBITDA was 21 7 million or 33% increase from Q3 2022 and above the upper end of our guidance range as a percentage of revenue adjusted EBITDA was 33% of revenue.

Compared to Q3 2022, adjusted EBITDA as a percentage of revenue was approximately 470 basis points higher due to the savings and investments described earlier.

Adjusted net income in Q3 was $14 6 million or nine cents per diluted share based on 155 million weighted average shares outstanding.

Turning to cash flow definitive health Care's high margins upfront billing and low capex requirements provide substantial free cash flow generation.

We focus on trailing 12 months cash flows due to seasonality.

Operating cash flows were $32 $3 million on a trailing 12 month basis.

Down 27% from $44 million in the comparable period a year ago.

Like any SaaS company when bookings growth slows sodas growth in deferred revenue, which is the biggest driver of cash flow.

Gross rates stabilize and recover.

Cash flows.

Unlevered free cash flow was $54 $1 million on a trailing 12 month basis.

Down 23% from the comparable period a year ago.

Unlevered free cash flow was 22% of revenue on a TTM basis, effectively converting 75% of our TTM adjusted EBITDA of $71 $7 million in cash.

On the balance sheet, we ended the quarter with $307 million in cash and short term investments.

Our strong adjusted EBITDA profitability, and only $260 million of debt. We believe that we are well positioned to fund both organic and inorganic growth initiatives.

Current revenue performance obligations of $178 million were up 7% year over year and.

In total revenue performance obligations were up 3% year over year.

Deferred revenue of $89 $8 million was up 6% year over year.

You will note that as we expected and have seen throughout the year CRP O and deferred revenue grew more slowly than revenue.

Subsequent to quarter end, we undertook our normally scheduled assessment of our equities book value versus our stock market value.

And that review identified to $287.4 million goodwill impairment as of September 30th.

That write them also generated a $29 $7 million gain on the TRA liability and a $17 $2 million tax benefit.

As a reminder, these are noncash accounting charges have no impact on our debt covenants and all impacts are excluded from our adjusted earnings.

Moving now to guidance for the fourth quarter, we believe it's prudent to assume the current conditions also extend through the remainder of the year.

Assuming this is the case in Q4, we would expect total revenue of 65.5 to $66 5 million for gross rate of 8% to 10%.

Adjusted operating income of $17 five to $18 $5 million.

Adjusted EBITDA of $19 million to $20 million.

29% to 30% adjusted EBITDA margin.

And adjusted net income of 11, five to $12 $5 million or.

<unk> <unk> to <unk> <unk> per diluted share.

On $155 6 million weighted average shares outstanding.

We will formally guide 2024, when we announce our Q4 results, but I can share some preliminary remarks as we approach year end.

As a reminder, due to our recurring revenue model 2023 bookings are the primary driver of 2020 for revenue.

The fourth quarter as an important sales and renewal quarter for us. So there's still a range of potential outcomes, but as it is today CRP Oh gross is our single best predictor of 2020 for revenue growth.

Q4 renewals and Upsells are also critical to net dollar retention.

We do not formally guide net dollar retention, but given our performance across 2023 to date, we would expect year end MBR in the low nineties on an overall basis.

From a profitability perspective, we're confident that we're making the right moves to align the business to today's conditions, while maintaining important long term growth drivers Q4 performance.

Performance will significantly impact 2020 for profitability levels, but we would expect to see improvements in our year over year adjusted EBITDAR margin.

To summarize Q3 was a solid quarter for definitive healthcare despite current economic headwinds.

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

We believe we are well positioned for the long term because we have developed a clear leadership position in a large and attractive market that we believe will support high levels of predictable revenue group's profitability.

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 want to take a moment and welcome Carrie allows <unk> to our executive leadership team as our new Chief revenue Officer.

Gary has a tremendous background from her time as the Chief revenue officer of similar web and SVP of worldwide sales at nuance and she brings a wealth of experience selling software as a service to both enterprise accounts and small and medium sized businesses across a range of verticals. Her passion for customer success is evident in everything she does and I'm absolutely delighted that he chose to join our.

Team.

In addition, I would like to welcome Craig Hazen field, as our new Chief people Officer.

Craig also has a very impressive background. Most recently he led HR clear and before that Craig was a senior HR leader at Google, where a partner directly with Google's ads in consumer hardware executive teams I'm excited to partner with Craig to grow and evolve our team as we grow our business.

I am excited about the additions of both Carrie and Craig there are great. Examples of the types of the fantastic and diverse people that we're adding at all levels of the organization and that will support definitive healthcare as we grow and evolve into the future.

I also want to acknowledge and thank all of our employees for their continued commitment to customer success and a challenging economy customers are routinely demanding excellence from their vendors and partners and I'm proud to say that the definitive healthcare team continually rise to that challenge.

Every day I see countless examples of passion and innovation all in service to our nearly 3000 customers.

As we look to close out 2023, I want to reiterate that we believe 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 have built an incredible business and 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.

Mers and shareholders.

With that we would now like to start the Q&A operator.

Thank you.

I would like to ask a question. Please press star one on your telephone keypad now you'll.

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And our first question today comes from Craig <unk> with Morgan Stanley.

Thanks, and appreciate the preliminary thoughts for 2020 for Robert You mentioned some actions to mitigate churn when do you think that could have an impact on customer count and for enterprise, specifically, which is growing do you still think you can continue to grow the enterprise head count.

Hey, Thanks, Craig look we're always growing enterprise will continue to grow the enterprise head count. So that's not a question. That's a huge part of our business strategy and you see that happening even in even in this more challenging macro side I wouldn't expect that to change and in fact, we would hope to continue to do better and better on that.

On the churn we're doing a time I think my comment is we feel like we're doing good work and we are starting to see the impact of some of that work. So I would hope that.

We continue to see that impact play out into next year.

Again.

Churn is always you never really know till it till its always in tilts and but I do feel like the work. We're doing is very positive and should yield some some impact as we get into the next year or so.

One thing we have looked at if you look at kind of go back to the beginning of when we saw the first challenging macro science, which is the second quarter of 'twenty two so back to April 22.

If you kind of do in a normal estimate looking forward through this coming March wed estimate that over 80% of our a R will have been worked through renewals between April 22, and March 24, So that should give you an idea of.

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The amount of our book that we've dealt with in this more challenging environment. So thats also an indicator that if we get our act together and the things that we're doing in those things start to really play out across the customer base, we would expect to see some improvement next year.

Got it and then as my follow up.

You guys have head count, 10% this year and as you mentioned, we're starting to see some benefits to EBITDA margins. If the environment stays the way. It is do you think you're okay in terms of organizational structure and head count or how are you managing that kind of going into next year.

I think Craig you know Theres a lot of quarter left here, so fourth quarter performance drives a lot of where we land for next year and we use that then to plan all of our investments I think what Youll see from US is we'll always be very careful about balancing growth and profitability as we make our investments.

So we want to be sure that we're funding the right growth investments and have the right staff on hand.

To run after those while also being prudent and being sure that we deliver strong profitability against against our revenues. So it's a little premature to have the perfect answer to that question, but it's something that we're always working on balancing.

Got it thank you.

And our next question will come from David Grossman with Stifel.

Thanks, I'm wondering if you could just help me just reconcile somewhat.

The disclosures in the quarter.

Yes, it looks like you had a pretty good new customer enterprise, that's right 28 after.

Seeing some negative.

<unk> experienced the last couple of quarters.

Despite the strong adds the CRP of the IPO.

Was decelerated sequentially and yes, we do have calculated bookings number it looks like that may also be down modestly as well as deferred revenue. So.

Doing the right math and if I am can you maybe help me kind of reconcile the strong new customer adds with some of these other data points that seem to be continuing to decelerate.

Yeah I think.

The churn that we're seeing is among smaller customers.

The enterprise group is it pretty broad group ranges from 100, 100, K up to multi millions of dollars per year, so depending on the mix in there that's that's what you'd see on the Max.

I think thats why youre, having trouble reconciling those two figures.

So is it that I mean, even though the couches go into enterprise accounts going up versus presumably the larger customers that you are getting the timing of when things are coming out.

Offsetting that I guess I'm still not clear on that.

Dynamic works.

Okay.

No I think what Youre seeing is less price expansion than the historically would have been the case some more down sell.

Got it.

Yes.

Give me your.

Your comments about 2024.

If we assume low nineties.

Retention.

Does that imply I mean, I know, there's a lot of other variables, including bookings but.

It seems to suggest you could be down year over year and revenue is that right or remind us again, just wondering if I could I have a quick back of the envelope math out right.

Yeah, No I don't see a scenario in which we're potentially down year over year David.

Okay great.

I can follow up with you offline thanks very much.

Yes.

And our next question will come from Glen Santangelo with Jefferies.

Oh, yes, thanks for taking my question and I apologize I just want to follow up on a couple of the previous questions.

Rob with respect to the.

The net dollar retention I think Rick said, we're sort of trending in the low 90% can you give us some comparisons over the past couple of years of what that number has looked like so we can gauge how big the incremental headwind is.

So we ended last year at 102.

I have one or two.

And so and so Rick I mean, just to sort of follow up on your comments on 'twenty. Four I mean, you talked about booking CRP old growth renewals Upsells and N N D R.

It's unclear I think exactly what you were trying to say so I don't know if you can elaborate.

It all a little bit more on 24 in terms of what you were trying to say because you know coming into this year, we talked about the current environment. You said in this current environment, we're kind of comfortable in that mid teens growth, but it sounds like things have shifted.

Have a little bit more clarity on what you are saying about next year.

Yes, I think consistent with the.

With our earlier commentary, we've always said that one of the better indicators of forward looking growth is CRP, oh growth and as we get closer and closer to the end of year.

It's appropriate to focus on that it's not a perfect indicator. Thanks.

Things could be slightly better slightly worse.

But that's how I'd think about it.

Yes, if I can add it sounds like a couple of the questions would assume that the CRP O effect and Rick's comment about N D. R.

Those cumulatively, but those would be incorporated in whatever number we put up next year.

So when Rick says that CRP O number that's the best indicator.

Okay. Thanks very much.

And we'll move next to Ryan Macdonald with Needham <unk> company.

Hey, this is Matt Shea on for Ryan Thanks for taking the questions.

Wanted to follow up on the commentary that you'll be through about 80% of your IRR by March of 2020 for next year and with Q4 being a big quarter for renewals and Upsells. How does this Q4, maybe compare to last year and working through that 80% of this and potentially more important Q4 than last year and as you kind of.

Head towards year end, what kind of signs are giving you optimism there are concerns around those Q4 sales activities.

So Q4 is always a big quarter for us commercially both in terms of new business and in terms of renewals.

I think our second biggest renewals quarter as Q1. So obviously, it's a very important period ahead of us.

I think what I'd say about that is you know our commentary is that the environment still feels kind of the same as we've seen it across this year. So there are definitely some challenges in getting deals closed.

Both new business Upsells and renewals.

That said, we've now been operating in this environment for a while and had a lot of execution I'll focus on how do you get what are really good top of funnel metrics down through the pipeline and closed four our new business and upsell deals.

And how do we really focus on getting clients to renew and even expand their relationship with us.

Even when their environments are challenged so I.

Yes, my optimism is not necessarily because the environment feels any different but it's because it feels like we've now had some time to really.

Run these tactics in this focus through a lot more clients, who are coming up for clothing sales or clothing renewals in the next two quarters.

And I'm hopeful that that work has been very good and I'm hopeful that work.

Yields yield some improvement.

Got it appreciate that and then I think the other sign of optimism really was the wind back in the quarter and so nice to see that went back curious if you could just comment on what drove that churn in the first place and then ultimately what drove them to come back and then as you look out across the broader book of maybe customers that have walked away do you see other went back.

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In the near to medium term pipeline.

Yes, we always look for win back I mean, thats the dynamic thats been going on in the market in general this is generalizing, but we generally have a business user who is very engaged with us and what we've seen over the past 18 or so months is in many cases.

Fire or a budget decision maker somewhere above that user has has really tightened the range and in some cases has prevented the spend.

So I think that's reflected in the fact, where we still have really good top of funnel activity. We're doing record number of demos people want people want to work with us.

In general they felt a lot more budget pressure and kind of organizational steps to get through to get things closed and that's what's been playing out in our commercial performance.

So for example every quarter, we have some clients that have to make tough budget decisions and cant stay with us as much as we try to keep them onboard in most cases, there's someone on the other side, who really wants to stick with us as being told no.

Just like Rick telling a bunch of people here know on external spend thats happening in other organizations. So when budget comes back or when they've been able to work the processes internally a lot of times, we will get the chance to get back in with those clients and that's what happened in that specific example on that we see a few of those every quarter and we certainly.

When someone churns and we know we have an engaged user.

We will stay after it we don't just forget about that client we stay after it knowing that we're going to have a chance to get back and win when things turn for a little bit further things turn in our favor.

Great. Thanks, guys.

And our next question will come from Joe <unk> with Baird.

Okay.

Great Hi, everyone I wanted to go quickly back to the commentary I think loud and clear that's the best indicator, that's growing 7% right now.

Just given the importance of <unk> and sales and renewals in <unk>.

Is it possible to put bounds around a 7% number and where you think CRP O ends up at year end and I don't know if this is.

A good analog or not but when I think about how you approach our revenue guide at the start of the year. There is normally a 300 basis point range around that so when you may be bound to 7% by 300 basis points or how would you think about that.

It's a great observation about how we guide next quarter.

More formally for 2024, it's really because.

Q4, it does matter and we've had we've had divergent experiences across industry segments. So I'm, most comfortable sticking with what I've already said.

Okay Fair enough and then.

I was interested in the pro services anecdotes because that was obviously a strong line item and it seems like it was this large client related.

I guess question, one does that have a subscription pull through associated with it at some future point and then part two of the question.

Is this type of services engagement something you could maybe look to do more of just in the context that it seems you are trying some new things you mentioned customers takes outs and engaging with our key clients.

Is this navy uncovering a potential opportunity that you could.

More broadly in your customer base.

I think our PFS engagements release speak to the strength of our relationships, especially with large large customers. They don't necessarily have direct follow on.

The more time that we spend with our customers the more we understand their cutting edge problems. The more we build that into the product and so in the long term I would certainly hope for that.

Yes, I had even build on that and say.

As we look to grow to multiple million dollars of value that we can deliver on a per therapeutic area or in a per drug brand name area.

Those services are a super valuable to expanding our relationship and pulling through you know a large data sales part of it. So early days on that but I would see it as a key component of those relationships and really strengthening our relationships with enterprise clients, along the way and just the balance that we're not seeking.

<unk> revenue as an end of.

Of itself, what we're really seeking is to become an incredibly important strategic partner to those large customers and ultimately we are product driven.

Driven company.

Sure.

Well as I said, thank you very much.

And we'll move next to Allen Lutz with Bank of America.

Thanks for taking the questions Rick I wanted to go after it.

Our PEO dynamic in a little bit of a different way. So if we look at past three quarters growth is 10%, 8%, 7% and obviously that trend has moderated a lot over the past eight quarters or so but it seems like it's stabilizing here if we take a step back enterprise customers are increasing and I will.

I assume that some of the smaller customers that churned off the platform or kind of.

Anniversarying as a headwind do you get a sense that those two things are the case and is it fair to assume that <unk> may be stabilizing from here just trying to get a sense of where you think that part of where that kpis moving over the next few quarters.

I'd say, it's a great question I think.

Many of the factors that you talked about resonate.

We're not in the habit of guiding CRP O.

Especially given the importance of the fourth quarter and the fact that we'll be issuing guidance after the fourth quarter. So.

I don't have much to add in terms of the specifics Arvind <unk>.

Got it thank you very much.

Your next question will come from Brian Peterson with Raymond James.

Hi, Thanks for taking the question this is Jonathan <unk>.

So kind of going in different directions.

Some of your health care software vendors still kind of referenced slower clinical trial starts and I realize that oftentimes you guys are further down the development pipeline, but.

Any sort of a leading a coincident with cable substantial maybe if not what are some of the other kpis you guys are tracking maybe see when you when you will see an inflection point in the macro here. Thanks.

Yes look we have really really good data for many stages of the drug commercialization process. So we have great kols data that helps early in the process.

Great market sizing data that helps early in the process and we certainly have all kinds of ways. We support drugs. Once the decision has been made to go ahead and commercialize and take it to market. So I'm not sure I understand the first understood stay on the first part of your question, but certainly.

Drug development continues it is important to us to have companies continued to develop drugs and we play a big role in helping support their success in doing so and we do not specifically look ahead to macroeconomic indicators are outside statistics in that way.

We're in the early days of a large market opportunity. We're focused we're focused on growth. We're always out there pitching and the more time that we spend with prospects and customers the faster that we will rebound as far as.

Conditions change.

Thanks.

As a reminder, if you would like to ask a question you may signal by pressing star one on your phone at this time.

And we'll move next to charities with William Blair.

Yeah, Hey, guys. Good afternoon. Thanks for taking the questions. Robert wanted to follow up on I think you mentioned in the prepared remarks that you associate with solid demand generation environment and I think you specifically mentioned seeing a record number of product demos would love to get a little more color I'm just curious if anything's changed in terms of.

Sort of your messaging to get demos in front of clients or beyond that if anything's changed in terms of how willing you guys are to offer free trials just to get the product in front of users, what's obviously a challenging environment.

Yeah. Good question we've.

Number one I'd say, our marketing team has done an incredible job on free trials its a huge inbound channel for us.

So that's been delivering record numbers of inbound leads as that team is really focused on lots of innovative ways to.

Find people and bring them to our siding and signing up for a free trial.

I'd say the sales team has also done a really nice job executing on outreach, where they self generate the demos that's both our inside sales and our outside sales reps, calling in setting up setting up demos with people on their prospect list.

And then we continue to be a really active at industry events.

Important ones, where a lot of our clients traffic I was at health and spoke and we have a lot of our team. There. That's a great conference for US there are several of those each quarter that are really important for us to get out in front of clients and we have the chance to be in person in and get them over to see what we're doing and understand the new end products investments that we've made.

And then I'd pile on top of that we have a lot of good things to talk about.

Yes, if you go back to Jason's remarks, we've done a ton this year to strengthen our data to strengthen our products strengthen our platform. So we have a lot of exciting messages and I think that really helps with inbound interest as well.

I'm really pleased with where we are on the top of the funnel.

Again, where the challenge has still been a little bit elusive is getting that stuff down through the bottom of the funnel, but we're working hard at that and Thats something that obviously with some macro improvement we can be in great shape on that front, but even in a tougher macro I hope we can we can move the needle on that as well.

Okay, Great and then maybe just a quick clarification on the clients that churned and then came back are you aware of any of these clients that where do they try another good data and analytics solution for a short period of time or do they have any other replacement that came back to you and then.

Also we'd love to hear.

Those clients that are coming back are they coming back as kind of a similar IRR scope.

Sure.

Yeah, So I mean I have to generalize a little bit because there's a lot we're talking about a lot of clients, both in and out but I'd say on the.

Question of have they gone to others generally not like most of what we're seeing in this environment as people with budget challenges. So they are opting to go without for a period of time.

And depending on how painful that is for people.

That's the stronger emphasis to get them back in.

So it's generally people feeling budget challenge they don't spend on somebody else when they get the budget back they come back and I say theres all kinds of ways of coming back but in general I would say they come back at the same or greater a R.

Realize what they miss when they come back and talk to US we have a chance to engage them around what did they miss about the product how can we tailor better to them by the way did they know that we're doing X Y and Z and you get a chance to really engage with them when they've come back with a positive buying signals.

Again.

Super Generalizing because.

There's a lot of activity that we have in the market, but I'd say, that's probably what I, that's probably how I'd answer the kind of average typical case.

Okay, Great I appreciate all the color. Thanks.

Sure.

Your next question will come from George Hill with Deutsche Bank.

Hey, good evening, guys and thanks for taking the question.

Rick I'm, probably going to ask you to parse some of your words, a little bit here and if I think about the last quarter versus this quarter I think the endear expectation went from the low to mid Ninety's to the low 90 years. So.

Am I reading it right that things have gotten a little bit incrementally worse or am I parsing your words, a little bit too much.

It's a great question I'm pausing to give it.

To give a consideration.

I think we've we've gotten more visibility as we've gone through another quarter.

Still within the same range just being more specific.

Okay and then.

I don't know if Mike I don't know if my follow up will then even make any sense, which is that if there is any change I guess last quarter versus this quarter is it driven more by new sales outlook or by churn like what it would have been the greater Delta they've moved 90 days forward.

It's really hard when you're comparing conditions in one quarter versus another.

Without getting into extreme operational detail.

I would say conditions have been tough and they've remained tough.

May not be quite as tough as I'm hearing for some other companies but.

Yes.

But much more information after Q4.

Yes, just on the and on the floor.

Go ahead.

Go ahead I'm sorry.

I was just gonna stay on a more qualitative commentary.

At the same.

We've kind of seen the same environment feels like across this year.

Okay.

Then the last one is kind of a strict numbers questions. As we think about that endear factor is that on a like for like basis or inclusive of kind of a pricing escalators for next year.

No what I was speaking to is the NDA already we expect on 12, 31, 23, which will be a backward looking trailing 12 months MBR and that would be that would be inclusive of.

Price increases and decreases okay. Okay. That's helpful. Thank you.

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.

Thank you all for the time and attention Tonight and for the good questions and we look forward to seeing some of you across the coming quarter and we'll be back on our next call at the end of February. Thank you.

And this concludes today's conference call. Thank you for attending.

The host has ended this call goodbye.