Q3 2023 Health Catalyst Inc Earnings Call

Welcome to the health catalyst third quarter 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 E and Investor Relations.

Good afternoon, and welcome to Health Catalyst's earnings Conference call for the third quarter of 2023.

Which ended on September 32023.

My name is Adam Brown, Senior Vice President of Investor Relations and financial planning and analysis for health catalyst.

And with me on the call is Dan Burton, our Chief Executive Officer, and Brian Hahn, Our Chief Financial Officer.

A complete disclosure of our results can be found in our press release issued today as well as in our related form 8-K furnished to the SEC.

Both of which are available on the Investor Relations section of our website at IR that health catalyst Dot com.

As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call.

Yeah.

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 macroeconomic challenges, including high levels of inflation and high interest rates.

Labor market, our pipeline conversion rates and the general anticipated performance of our business.

These forward looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date.

We disclaim any obligation to update any forward looking statements or outlook.

Actual results may materially differ please refer to the risk factors in our Form 10-Q for Q2 2023 filed with the SEC on August nine 2023, and our Form 10-Q for the third quarter 2023 that will be filed with the SEC.

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 to Dan Dan.

Thank you Adam.

Thank you to everyone who has joined US this afternoon.

We are excited to share our third quarter 2023 financial performance along with additional highlights from the quarter.

I will begin today's call with some summary commentary on our third quarter results and outlook. We are pleased with our third quarter 2023 financial results.

Including total revenue of $73 8 million and adjusted.

<unk> EBITDA of $2 million with these results, beating the midpoint of our quarterly guidance on each metric.

Additionally, we are tracking slightly ahead of our previous full year revenue guidance and as a result, we are raising our 2023 revenue guidance range.

Likewise.

We are pleased with our strong bookings performance through Q3, 2023, and we are reiterating our full year 2023 bookings expectation inclusive of net new dos subscription client additions and dollar based 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 we will discuss our quarterly results with you in each of these categories.

The first category improvement is focused on evaluating our ability to enable our clients to realize massive measurable improvements 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 a case study.

Wakemed health lack the data and analytics infrastructure to enable widespread clinical improvement work across its system.

After evaluating its options Wakemed decided to both establish internal clinical transformation teams.

As well as implement our daas data platform, along with a robust suite of our analytics applications.

Wakemed now integrates data from numerous source systems within our data platform.

And has employed the resultant high value data and analytics to execute on its clinical transformation strategy.

Inclusive of improving the consistency of care provided to its patient populations streamlining its clinical workflows and improving health equity in care quality.

As a result of these initiatives in just one year wakemed achieved $10 million in direct variable cost reductions.

An improved care processes for 'twenty three distinct patient populations.

Within the improvement category I'd also like to highlight our team member engagement.

For many years, we have utilized the Gallup organization to help measure our team members' engagement levels.

Most recent results we achieved in the overall team member engagement score in the 94th percentile.

Latest engagement level continues a pattern that has been in place for many years of industry, leading team member engagement consistently ranking at or above this percentile level in terms of overall team member engagement scores.

As a leadership team continue to maintain a primary prioritized focus on team member engagement.

The center of our strategic flywheel, because we recognize the central and foundational contributions that our team members make in building the software and providing the services expertise that enable our clients to achieve massive measurable improvement.

Also in the improvement category, we have been fortunate to receive several additional external recognitions related to our team member engagement.

We were excited to be included in U S News and World reports inaugural best companies to work for in the health care industry.

Next we are pleased to be included in Fortune's list for best places to work in health care for 2023.

<unk> 10, among the top 40 health care companies in the large company category.

As well as fortunes best place to work for women in 2023 less.

Lastly, we are excited to have been included in top workplaces best workplaces in healthcare 2023 of that as.

As well as the Salt Lake Tribune top workplaces in Utah.

Our next strategic objective category is growth.

Which includes expanding existing client relationships and beginning new client relationships.

To summarize our operating environment continues to align with what we have shared in prior quarters with some slight improvement in recent months.

Yeah.

This has translated to strong bookings performance through Q3 of 2023 that was consistent with our expectations.

Entering the fourth quarter of 2023, our pipeline continues to grow and our anticipated Q4 bookings are also in line with our previously shared expectations.

As such we are reiterating our full year 2023 bookings expectations.

Inclusive of dollar based retention rate between 102% and 110% and net new dos subscription client additions in the low double digits.

As it relates to our current selling environment, we continued to experience similar tailwind and headwinds that are consistent with what we have described over the last few quarters.

While health system operating margins continued to be challenged relative to longer term historical levels. We are encouraged to see their operating margins improving in recent months.

Given the budgeting cycles that most health systems and the typical length of our sales cycle. We anticipate this will translate as a midterm bookings tailwind.

Related to our full year 2023 bookings expectations. Let me first share. A reminder, that Q4 2023 is anticipated to be a large bookings quarter consistent with our commentary since the beginning of the year and consistent with what we have experienced historically in terms of our <unk>.

Bookings cadence.

We anticipate the largest component of our Q4 2023 bookings will be from our tech enabled services offering.

Supported by a robust pipeline in this operating area that continues to grow.

Next we continue to anticipate 2023 professional services bookings achievement.

The higher than technology bookings achievement, driven by strong Tech enabled managed services bookings.

Next within the growth category I am excited to announce a meaningful new das client partnership with accountable health partners.

Clinically integrated network in the greater Rochester, New York area.

Accountable health partners will leverage our daas data platform.

Including health care Dot AI.

And a subset of our applications such as measurable.

Along with our professional services expertise.

In an effort to improve its operations across clinical financial and operational use cases, we are honored that accountable health partners has entrusted us to provide technology and professional services to support their mission and we look forward to supporting the realization of meaningful improvements that we.

I bet, they will achieve through our partnership.

Lastly, as it relates to growth.

We have continued to maintain a pipeline of tuck in acquisition opportunities.

That provides software <unk> services to support our clients and their improvement goals.

In that vein. We are excited to have closed the acquisition of electronic Registry systems, Inc. Also known as E. R. S. At the beginning of October.

This small tuck in acquisition provides us with an oncology registry development and data management technology solution to complement health catalyst's existing charter Jackson offering.

<unk> software solution provide similar capabilities within oncology as RMS provides within the cardiology domain.

As a reminder, we acquired our Miss in April 2022.

The combination of oncology registry technology from E. R S and cardiology registry technology from RMS.

Further strengthens our strategic differentiation within our tech enabled managed services offering area chart objection.

The purchase price for this tuck in transaction was $13 5 million and the impact of this acquisition on our 2023 financials will be immaterial.

We are thrilled to welcome Ers's talented team members and we look forward to working together with them in support of our shared mission.

Lastly, as you'll hear from Brian later in our prepared remarks, we are pleased to raise our revenue guidance for the full year.

We continue to track well towards our midterm targets, including a reacceleration of our revenue growth rate in 2024.

At 10% adjusted EBITDA margin in 2025.

And meaningful positive adjusted free cash flow in 2025.

Additionally, we continue to feel confident in our long term revenue growth target of 20 plus percent and our long term adjusted EBITDA margin target of 20%.

We continue to see material operating leverage in our financial model inclusive of significant tech enabled managed services expansion that require a little incremental operating expenses.

Likewise, we anticipate seeing more materially more material R&D operating leverage beginning in 2024, as we streamline and work to complete certain investments in our data platform.

With that let me turn the call over to Brian.

Ryan.

Thank you Dan.

Before diving into our quarterly financial results I want to Echo what Dan shared configured I'm pleased with our third quarter performance.

I will now comment on our strategic objective category of scale.

For the third quarter of 2023, we generated $73 8 million in total revenue.

This represents an outperformance relative to the midpoint of our guidance and.

And it represents an increase of 8% year over year.

Technology revenue for the third quarter of 2023 was $46 million.

Representing 4% growth year over year.

Professional services revenue for Q3, 2023 was $27 8 million.

Representing 14% growth relative to the same period last year.

For the third quarter of 2023 total adjusted gross margin was 47%.

Representing a decrease of approximately 430 basis points year over year.

In the technology segment, our Q3 2023 adjusted technology.

<unk> gross margin was 68%.

Increase of approximately five basis points relative to the same period last year.

And in line with previously shared expectations.

This year over year performance was mainly driven by headwinds due to the continued costs associated with transitioning a small subset of our client base from on premise to third party cloud hosted data centers in Microsoft Azure.

As well as from costs associated with migrating a subset of our client base to our multi tenant snowflake and data bricks enabled data platform environment.

Offset by existing clients paying higher technology access fees from contractual built in escalators without a commensurate increase in hosting cost.

In the professional services segment, our Q3 2023 adjusted professional services gross margin was 12%.

Representing a decrease of approximately 890 basis points year over year and.

And a decrease of roughly 540 basis points relative to the second quarter of 2023.

This quarterly performance was slightly below the expectations that we shared on our last earnings call.

Primarily driven by slightly lower utilization rates and anticipated.

As we move into 2024, our utilization rates will be positively impacted by a reduction in force starting in Q4, 2023, and I will describe when sharing guidance commentary.

In Q3 2023.

Adjusted total operating expenses were $32 6 million.

As a percentage of revenue adjusted total operating expenses were 44%.

Which compares favorably to 58% in Q3 2022.

Adjusted EBITDA in Q3, 2023 with $2 million.

With this performance exceeding the midpoint of our guidance.

And represents an improvement of $6 5 million relative to the same period last year.

This Q3 2023 adjusted EBITDA result 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 fourth quarter.

Our adjusted basic net income per share in Q3 2023 with <unk>.

The weighted average number of shares used in calculating adjusted basic net income per share in Q3 was approximately $56 7 million shares.

Turning to the balance sheet, we ended Q3 2023.

With $347 7 million of cash cash equivalents and short term investments.

Compared to $343 8 million.

As of Q2 2023.

In terms of liability abilities, the face value of our outstanding convertible notes is the principal amount of $230 million due in 2025.

As it relates to our financial guidance for the fourth quarter of 2023, we expect.

Total revenue between $71 million.

$75 1 million.

And adjusted EBITDA between <unk> 3 million.

And $2 3 million.

And for the full year 2023, we expect total revenue between $291 million.

And $296 million.

At their respective midpoint this represents an increase.

Zero point $5 million.

Compared to the full year revenue guidance, we provided last quarter.

We also continue to expect full year 2023, adjusted EBITDA between 10 million and $12 million.

Now let me provide a few additional details related to our Q4 2023 guidance in.

In terms of our adjusted gross margin, we continue to anticipate that our adjusted technology gross margin will be in the high <unk> in the fourth quarter.

And the professional services segment, we anticipate that our Q4 adjusted professional services gross margin.

We'll be roughly similar to Q3 2023.

Importantly in late Q4, 2023, we will affect a reduction of approximately 10%.

Our company wide team member base.

Which will optimize our cost structure and focus our investment of resources and key strategic priority areas.

While the reductions are taking place across our operating segments.

It is focused within professional services.

As we rightsize, our cost structure to the appropriate utilization levels.

And within research and development.

As we conclude a large portion of the spend we have been making in our next generation Snowflake and data bricks enabled data platform.

We also anticipate additional but smaller cost savings initiatives to be finalized in Q1 2024.

These cost reduction streamlining initiatives.

Will result in our Q1 2020 for professional services gross margin.

Being several points higher.

As well as us continuing to see material incremental operating leverage in 2024.

With that I will conclude my prepared remarks.

Thanks, Brian and.

In conclusion, I would like to recognize and thank our clients and team members for their high levels of engagement and consistent contributions to our shared mission.

And with that I will turn the call back to the operator for questions.

The floor is now open for questions.

At this time, if you have a question or comment please press star one on your telephone keypad.

If at any point. Your question is answered you may remove yourself from the queue by pressing star Q.

Again with time, we ask that you limit yourself to one question and that you. Please pickup your handset when posing your question to provide optimal sound quality.

Thank you.

Our first question will come from Elizabeth Anderson with Evercore ISI.

Okay.

Okay.

Elizabeth Please make sure that you're on muted on yours.

Okay.

Okay, We will move next to Vishal Patel with Piper Sandler.

Your line is now open.

Hi, Thanks for taking the question and congrats on the quarter. This is vishal Patel on for Jess Hassan.

My question revolves around the gross margins can you help us understand how you're thinking about the anticipated progression of gross margins in 2024.

Curious to the net impact of new Tech enabled managed services lunches and whether the gross margin impact of new 2024 launches would be offset by the greater maturity from the prior cohort all branches.

Yes.

Yes, great question Vishal.

So I'll speak to both the technology gross margins as well as the professional services gross margins on the technology side. So as I shared in the prepared remarks, we anticipate.

That to remain similar in Q4 as to what we've seen throughout the year in the high <unk> range.

Not yet give you an exact color on 2024 technology gross margins because there are some items that we're working through them, including.

Deploy deploying further some of the next generation Snowflake and data bricks enabled components of our data platform.

Which which.

Which could bring some migration cost, but also it could be offset by additional efficiencies that we're striving for on the technology side in terms of support and compute costs related to that new platform. So more to come down on the technology side on professional services side to your point. There are a couple of factors that will play into what that gross margin will look like next year.

One I mentioned in the prepared remarks relates to our.

Consulting professional services business, which as I mentioned is that a little bit lower than targeted utilization rate this year.

We are affecting a reduction in terms of cost moving forward in order to rebalance that team member base in.

In line with the demand and the targeted level of utilization for those team members moving forward and so that will positively impact our professional services gross margins beginning in Q1 2024, but it would be a benefit to us.

Your point the other the other piece was sure that we will see as we do anticipate some continued progression.

On our existing terms contracts as they mature into 2024 that'll be a benefit to that margin profile.

And offset will be that we do anticipate adding new terms contracts in Q4 as well as into next year, just given the strong demand that we're seeing from that offering area and so those will offset to some extent, but you will see a benefit from.

That consulting professional services business utilization rate improving into next year.

And I would just add Vishal, we do anticipate given some of those factors that Q1 of 2024 from our services gross margin perspective would be several points higher.

What we've seen in Q3, and what we anticipate in Q4.

Okay.

Thank you.

Our next question will come from Daniel <unk> with Citi. Your line is open.

Hi, guys. Thanks for taking the question.

I know youre not guiding to 'twenty four yet, but I'm wondering if you could just provide some high level thoughts on how youre thinking about the sales cycle for next year, Dan you mentioned that health systems financials are improving.

You listen to the quarterly reports this quarter they are still struggling, particularly with physician subsidies more recently, so I guess, it's two questions really one given what you know now do you still expect to see an acceleration in that Das adds next year and two are there any solutions in particular that you have or that you are developing that can help that.

Systems out with some of these physician staffing levels.

Yeah, great questions Daniel Thank you.

Yeah.

So as you referenced and as we referred to in our prepared remarks, we are seeing some improvement in our end market obviously.

Each health system is in their own journey towards improved operating margin and there still are meaningful financial pressures that.

Health systems are experiencing but we are seeing general improvement not quite to the to the pre pandemic level of operating margins in most cases with our clients, but generally speaking we are seeing some improvement.

As it relates to the areas of our pipeline, where we're seeing the most traction.

One of the dynamics for this year and from a bookings perspective that we do believe will influence next year has been more interest and more focus on those parts of our portfolio that do offer hard dollar savings and a hard dollar ROI and financial return that includes our tech enabled managed services segment for example, as well.

As some of our.

Applications like the financial empowerment suite.

The proportion of our pipeline that is represented by those elements of our portfolio is larger this year than it has been for example in prior years as a result of some of that financial pressure and that is one of the reasons why we do anticipate.

The professional services segment will likely outpace the technology segment in terms of the growth rate in the near term and in 2024, even see some of that.

The Reacceleration, which we're encouraged by and professional services in Q3. So we do anticipate that given some of those financial pressures on those elements of our portfolio that do help address those issues and we do have tens offerings that do help.

As it relates to tradition.

Subsidy issues inclusive of the work that we're doing and ambulatory operations for example, and we have seen growth in that part of our pipeline and some meaningful opportunities that we believe will expand.

The last thing I'll share is that depending on the year you know over the last several years, we've seen some years, where our tech growth has been higher than our services growth. This year in 2023, our tech and services will grow about the same pace.

Next year, we do anticipate based on our bookings performance, thus far is that.

For the reasons I mentioned, just a minute ago, the services will likely outpace the tegra.

But long term, we believe in that overall reacceleration that we shared in our prepared remarks. So those long term growth targets of 20 plus percent long term, we believe that both the tech components of our solution and the services component of our solution are each really important in delivering against our differentiated value too.

To enable massive measurable data informed of improvement and as such we do we do expect long term that both of those components of our solution will continue to to reaccelerate back towards those long term levels.

Okay.

Thank you.

Our next question will come from Elizabeth Anderson with Evercore ISI. Your line is open.

Hi, guys can you hear me.

Yes.

Hey, this is sameer on for Elizabeth Anderson.

I just wanted to quickly ask just in terms of like the summit and related cost of that is that part of whats maybe driving some of the expense on opex for <unk> or is that mainly kind of isolated to <unk> next year.

Yes, it's a good question Samir, it's mainly isolated to the first quarter of 2024, where the bulk of that that cost will be incurred but we are incurring some of that this year as well and there will be a portion that's recognized in Q4.

Most of that will be will be timed into Q1.

Got it thanks.

Okay.

Thank you.

Our next question comes from David Larsen with <unk>. Your line is open.

Hi, This is Jenny Chen on for Dave Larsen, Congrats on the quarter and thanks for taking my question I just wanted to.

Get some more color on your enterprise das versus your modular daas offering I know that more customers are choosing the modular one and the current macro landscape, which makes sense I'm wondering if you're seeing a shift a shift more towards the enterprise side now and also if you could just explain a bit more.

The two and the price differences between them.

Yes. Thank you for the question Jenny.

I'll make a few comments and then Brian please feel free to share.

Additional thoughts so.

In this particular year, thus far in 2023, I think due to some of the meaningful financial pressures that we just referenced a few minutes ago, we have seen more interest in the modular daas offering.

Relative to prior years and that hasn't been a surprise to us and so we do expect for 2023 that we will see a higher proportion of our total net new dos subscription clients to be more in that modular category than than we've seen in prior years. However, we are seeing commensurate.

With some of the improved financial situation that we referenced also as operating margins are improving a little bit we are seeing a little more interest on the new client side inclusive of more interest in a more broad enterprise dos.

Subscription offering now that will take time to play out through our our bookings pipeline and then some more time to play out through our P&L and revenue performance as a company, but we are already seeing some of that.

Increased interest that we think will will play into.

2024, and some of that overall reacceleration that we expect we're not providing specific guidance.

During today's earnings call, but we are seeing some of those green shoots that are that are encouraging.

Just to add you asked about some of the differences between the enterprise Dawson and more of our modular das or lighter components from a pricing standpoint, so an average kind of price point for enterprise dos of both technology and services historically has been around $1 5 million.

Annual recurring revenue for a typical new client.

For our more modular or our das light offerings.

Around 40% of that value in terms of the technology and services, starting point and can be a little lower than that even in certain cases, where clients are or are purchasing some of our dos modules, which include health care that AI pop analyzer those are horizontal dos Campos.

<unk> that enable data to be.

To be spread through the masters of an organization.

And then we can also deploy those in concert with our vertical application use case like our financial applications. For example, so those are the types of offerings and the differences in the price points and what that means for us. This year given the mix that Dan mentioned is <unk>.

Our average selling price for those new clients is lower than what we've seen historically and we will provide kind of more color on that for 2024 at the beginning of the year as we assess the mix between those two items within our pipeline.

Great. Thank you.

Our next question comes from Scott <unk> with Keybanc. Your line is open.

Yeah.

Hi team Thanks for taking my question.

And you talked about a lot of.

About in technology investments and you put the.

Release of the new acquisition to sort of bolster your tech enabled solution and then you also mentioned the head count reductions is there it's all meaning that structurally these gross margin profiles on year. One don't now start at zero and in fact, there is some EBITDA.

Sorry, gross margin contribution coming from these contracts that ramps up more quickly than you had previously outlined for professional services or tech enabled service offerings.

Yes. Thanks for the question Scott. So we are encouraged to see.

And we do anticipate.

Continued efficiency gains through the use of technology in these tech enabled managed services contracts and we're excited about the efficiency possibilities that we believe will realize through this recent acquisition of IRS very similar to what we've seen in terms of the benefits with with the <unk> acquisition from a year ago.

We do have some.

Some variation from contract to contract and client to client in terms of exactly where we start from a gross margin perspective as we've shared in the past.

That gross margin starting point could be around zero percent, sometimes its a little higher sometimes a little bit lower but we are encouraged to see continued consistent progress.

As we begin those relationships and as those relationships mature that we're able to achieve meaningful efficiencies, while also maintaining really meaningful timeliness and quality as well and we're certainly encouraged by that we're constantly looking for ways to be more efficient.

And yet also do that in ways that don't disrupt the quality or the timeliness of the solution.

That's right, Dan and Scott, what I would share is.

The unit economics for the terms relationships on the services side, we think is pretty similar to what we've shared in the past as Dan mentioned were those typically started.

Essentially neutral to up to 10% services gross margin.

And then ramp over time to that 25% services gross margin level and and we've shared some proof points for clients that are more mature that have ramp to that level, but what excites us more about.

The small tuck in acquisition that we did <unk>.

Little bit less related to the upfront gross margin profile and more related to the over a few year or longer term gross margin profile, where there could be some.

Just given the additional efficiency provided by that technology. Some additional upside in terms of the longer term gross margin profile.

Obviously, our early in the acquisition. So we wanna be want to be careful around seeing a lot of proof points of that but that's part of the rationale there I think I think just related to your question as well.

The reduction from a cost standpoint that we're doing is mostly.

Mostly related to that.

Consulting services professional services arm, where we are trying to increase utilization rates there to the appropriate level and a little bit less related to our tech enabled offerings and one of the things Scott that I would add to that is that we are we do continue to be encouraged from an opex perspective to continue to see really meaningful opera.

<unk> expense leverage as we enter into these tech enabled managed services contracts that that they're very efficient as it relates to any need for incremental opex. So that is also encouraging from an EBITDA perspective.

Thank you.

Our next question will come from Dan Bernstein with Wells Fargo. Your line is open.

Hi, Thanks for taking my questions Dan maybe one for you you've obviously been on the road all year meeting with clients.

Clearly clients want hard dollar savings, but if you think back to the conversations you have with clients a year ago and compare them to the conversations Youre, having now has anything changed as the sales funnel different in any way.

Yeah, Great question Stan so.

Yeah.

The conversations are a little different in two ways.

First the level of financial pressure from a year ago 16 months ago relative to today has generally.

Improved and so it allows our clients to think a little bit more broadly about what they can do or have a little bit more time and space to think through how to improve their cost structure to how to improve the quality of.

The delivery of health care. So that's one way in which things are gradually improving its incremental but it is incrementally positive.

Second.

Element is related to the first and that is 16 months ago. The openness of prospective clients to really seriously considering health catalyst, particularly on more enterprise wide basis from an enterprise dos subscription perspective was very very limited there was so much financial pressure that was just very.

Hard.

For prospective clients to think about incremental investments.

As I mentioned, a few minutes ago that is a second observation that we're having is there's more of an openness now and I think it is directly tied to the operating environment, improving a little bit and so I am starting to spend a little bit more time, our team is starting to spend a little bit more time.

Discussing meeting face to face with perspective clients and I think there is more of an opportunity to to explore.

And I think seen meaningful pipeline movement moving forward in the in the new client space that will take time to play out we're just starting to see some more of those opportunities emerging.

But we are encouraged to see that in and that will impact the way that we think about the proportion of our time that we spend with existing clients will still spend lots of time with existing clients, but we are starting to spend a little bit more time, proportionately and the new client space.

Okay.

Thank you.

As a reminder, that is star one to ask a question.

Our next question comes from Sarah James with Cantor Fitzgerald. Your line is open.

Thank you I.

I was hoping to get a little bit more color on.

What changed in your view around professional services or the consulting aspect.

Our professional services has there been a change in the view of.

The revenue potential or maybe the near term revenue.

That service line.

Yes. Thank you for the question Sarah So certainly.

In the back half of last year in the first half of this year.

We have seen that the the a little bit higher priced FTE.

FTE based professional services coaching model of consulting has been under pressure and we do believe that is directly tied to that financial pressure that our health system clients have faced.

Contractually, we have made it flexible for clients to choose to dial that up or down and have been supportive of clients that are facing meaningful financial pressure enabled us to press pause or reduce the kinds of projects that we're that we're pursuing.

As it relates to those those consulting type projects.

As financial pressure subsides, a little bit.

We do believe that we will see some incremental demand for that FTE based consulting model and some more of those projects get get prioritized moving forward at the same time, we continue to see lots of interest and lots of need.

Given that there is still a meaningful financial pressures for our tech enabled managed services offering where that has a lower price point and it does provide hard dollar cost savings, where we can perform certain functions better faster and cheaper than our clients. We believe that will continue long term, but we also believe that there will like.

B.

Some improvement in that part of our business the consulting part of our business that will take some time to play out on the P&L, but we are starting to see some signs of <unk>.

Some of that pressure subsiding.

Just one thing and one of the benefits of that.

The Tech enabled managed services model is from a contractual standpoint that those services are typically locked in over a five year term.

Which is which is different than our more consultative professional services model and so on.

We like that approach in terms of higher visibility for both technology and services under under that model.

It does create large deal sizes for those types of deals that.

Often required board approvals and a lot of work to put through and so that can make the timing of those kind of precise timing of those deals a little bit difficult to exactly forecast.

But we feel very confident in winning those deals and have a very high conversion rate there and as Dan mentioned in addition to the tech enabled option will be ready as to kind of adjust to client needs. If the consulting model continues to kind of improve moving forward with the macro environment.

Thank you.

And at this time there are no further questions in the queue. So I'd like to turn the floor back over to Dan Burton for additional or closing remarks.

Yeah.

Thank you everyone for your interest in health catalyst, we appreciate the opportunity to grow up by these updates and look forward to staying in touch in the future.

Okay.

Thank you ladies and gentlemen, this concludes today's health Catalyst's third quarter 2023 earnings Conference call. Please.

Please disconnect. Your line at this time and have a wonderful day.

Okay.

Yeah.

Yeah.

Yes.