Q4 2023 Health Catalyst Inc Earnings Call
Operator: 23 EARNINGS CONFERENCE. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2.
<unk> placed on a listen only mode and the floor will be open for your questions. Following the presentation.
If you would like to ask a question at that time. Please press star one on your telephone keypad. If at any point. Your question has been answered you may remove yourself from the queue by pressing star to.
Operator: We get to as many questions as time permits. We kindly ask that you limit yourself to one question. If you have any follow-up, please re-enter the queue. So others can hear your questions clearly, we ask that you please pick up your headset for best sound quality.
To get to as many questions as time permits we kindly ask that you limit yourself to one question. If you have any follow up please reentered the queue.
So others can hear your questions clearly we ask that you. Please pick up your handset for best Sound quality. Lastly, if you should require operator assistance. Please press star Zero I will now turn the call over to Adam Brown Senior Vice President of F. PNA and Investor Relations. Please go ahead Sir.
Operator: Lastly, if you should require operator assistance, please press star zero. I will now turn the call over to Adam Brown, Senior Vice President of FP&A and Investor Relations. Please go ahead. Good afternoon, and welcome to Health Catalyst's Earnings Conference Call for the fourth quarter of 2023, which ended on December 31st, 2023. My name is Adam Brown.
Adam Brown: Good afternoon, and welcome to Health Catalyst earnings Conference call for the fourth quarter of 2023, which ended on December 31st 2023.
Adam Brown: My name is Adam Brown, I am a senior vice President of Investor Relations and financial planning and analysis for health catalyst.
Adam Brown: I am the 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 Hunt, 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 8K, filed with the SEC, both of which are available on the Investor Relations section of our website at ir.healthcatalyst.com. As a reminder, today's call is being recorded, and a replay will be available following the conclusion of the call.
Adam Brown: And with me on the call is Dan Burton R Chief Executive Officer, and Brian Hunt, our Chief Financial Officer.
Adam Brown: 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.
Adam Brown: Both of which are available on the Investor Relations section of our website at I R Dot health catalyst dotcom.
Adam Brown: As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call.
Adam Brown: 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 macroeconomic challenges, including the impact of inflation and the interest rate environment, the tight labor market, our pipeline conversion rates, and the general anticipated performance of our business. These forward-looking statements are based on management's current views and expectations as of today 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 outlooks. However, actual results may materially differ.
Adam Brown: 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.
Adam Brown: The impact of the macroeconomic challenges, including the impact of inflation and the interest rate environment.
Adam Brown: The tight labor market, our pipeline conversion rates and the general anticipated performance of our business.
Adam Brown: These forward looking statements are based on management's current views and expectations as of today and it should not be relied upon as representing our views as of any subsequent Dave.
Adam Brown: We disclaim any obligation to update any forward looking statements or outlook X.
Adam Brown: <unk> results may materially differ.
Adam Brown: Please refer to the risk factors in our Form 10-Q for Q3 2023 filed with the SEC on November 6, 2023, and our Form 10-K for the full year 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?
Adam Brown: Please refer to the risk factors in our Form 10-Q for Q3 2023 filed with the SEC on November 6th 2023, and our Form 10-K for the full year 2023 that will be filed with the SEC.
Adam Brown: We will also refer to certain non-GAAP financial measures to provide additional information to investors.
Adam Brown: A reconciliation of these non-GAAP financial measures to their most comparable GAAP measures is provided in our press release.
Adam Brown: With that I will turn the call over to Dan Dan.
Dan Burton: Thank you, Adam, and thank you to everyone who has joined us this afternoon. We're excited to share our fourth quarter and full year 2023 financial performance along with additional highlights from the fourth quarter. Furthermore, we look forward to sharing our perspective on 2024 as well as the mid and long-term outlook for our business. I will begin today's call with summary commentary on our full year 2023 results. We are pleased with our full year 2023 financial results, including total revenue of $295.9 million, with this result beating the midpoint of our most recent guidance, and Adjusted EBITDA of $11 million, with this result in line with the midpoint of our most recent guidance. For each of these metrics, the results also represent an outperformance relative to the full year guidance range we provided to begin the year 2023, which was a guidance range we subsequently Now, let me highlight some additional items from the quarter.
Dan Burton: Thank you Adam and thank you to everyone who is doing this this afternoon.
Dan Burton: We're excited to share our fourth quarter and full year 2000, twenty-three financial performance along with additional highlights from the fourth quarter.
Dan Burton: Furthermore, we look forward to sharing our perspective on 2024 as well as the mid and long term outlook for our business.
Speaker Change: I will begin today's call with summary commentary on a full year 20 twenty-three results.
Speaker Change: We are pleased with our full year 2023 financial results, including total revenue.
Speaker Change: $295.9 million with this result, beating the midpoint of our most recent guidance and adjusted EBITDA of $11 million.
Speaker Change: With this result in line with the midpoint of our most recent guidance.
Speaker Change: For each of these metrics. The results also represents an outperformance relative to the full year guidance range, we provided to begin the year 2023.
Speaker Change: Which was a guidance range. We subsequently raised later in 2023.
Speaker Change: Now, let me highlight some additional items from the quarter.
Dan Burton: 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'll 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 engagement. Let me begin by sharing an example of a client improvement from a recently published case study. The Queen's Health System recognized the need to improve its patient flow in order to increase its system's capacity, provide more cost-effective care, and maintain its financial stability. Prolonged length of stay was creating capacity constraints, impeding Queen's ability to meet patient demands for care and negatively impacting its patient experience, supported by our DAS data platform and a robust suite of analytics applications, including our patient flow explorer accelerator along with our tech-enabled managed Queens established a dedicated team focused on capacity management.
Speaker Change: 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.
Speaker Change: And we will discuss our quarterly results with you and each of these categories.
Speaker Change: 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 engagement.
Speaker Change: Let me begin by sharing an example of a client improvement from a recently published case study.
Speaker Change: The Queen's Health system recognize the need to improve its patient flow in order to increase its system's capacity provide more cost effective care and maintain its financial stability.
Speaker Change: Prolonged length of stay was creating capacity constraints impeding queens ability to meet patient demands for care.
Speaker Change: And negatively impacting it's patient experience.
Speaker Change: Supported by our Dos data platform.
Speaker Change: And a robust suite of analytics applications, including our patient flow explorer accelerator.
Speaker Change: Along with our Tech enabled managed services Queens established a dedicated team focused on capacity management.
Dan Burton: The team at Queen's then leveraged DAS and our Patient Flow Explorer technology to better understand its demand and capacity, identify patient flow improvement opportunities, and quantify the value of the improvement effort. Likewise, our tech-enabled managed services supported Queen's clinical quality improvement and advanced analytics initiatives. Through the use of our software and services, along with a widespread focus on process improvement, Queens has improved its capacity management effect, decreased its length of stay, increased its ability to serve more patients, and improved its overall patient experience. These improvements reduced Queens' costs by $22 million over the course of 15 months, the result of an 8.4% relative reduction in length of stay, while its patients were able to spend approximately 19,000 more days at home.
Speaker Change: The team at Queen's then leveraged dos and our patient flow explorer technology to better understand its demand and capacity.
Speaker Change: The entophyte patient flow improvement opportunities and quantify the value of the improvement efforts.
Speaker Change: Likewise, our tech enabled minutes services supported Queens clinical quality improvement in advance analytics adoption.
Speaker Change: Through the use of our software and services along with a widespread focus on process improvement.
Speaker Change: Queens has improved its system's capacity management effectiveness decreased at some length of stay.
Speaker Change: Increased its ability to serve more patients.
Speaker Change: An improved its overall patient experience.
Speaker Change: These improvements reduced queens costs by $22 million over the course of 15 months.
Speaker Change: The results of an 8.4% relative reduction in length of stay.
Speaker Change: While it's patients were able to spend approximately 19000 more days at home.
Dan Burton: Additionally, Queen's simultaneously increased its inpatient admissions, generating an additional $1.9 million in new revenue in under one year. This improvement case study is an important example of how our technology and tech-enabled managed services offerings work together. Queens and others benefit from the synergy of this integration, with Health Catalyst uniquely able to provide both options, delivering a clear ROI to our clients. Also, in the improvement category, we have been fortunate to receive several additional external recognitions related to our technology and to our team member engagement. First, we are excited that our VitalWare Charge Master Management Software Solution, a revenue cycle analytics technology we acquired in 2020, was recently ranked best in class for 2024. This marks the fifth year that the vital CDM solution has achieved this distinction for the class organization, validating our meaningful investment in this mission-critical technology that provides near-term, hard-dollar ROI. Next, we are pleased to share that we have recently been recognized for several team member engagement awards, including placement on Newsweek's America's Greatest Places to Work for Diversity in 2024 list and Fortune's Best Workplaces for Women 2023 list.
Speaker Change: Additionally, Queen simultaneously increased its inpatient admissions generating an additional $1.9 million and new revenue in under one year.
Speaker Change: This improvement case study is an important example of how our technology and Tech enabled managed services offerings work together.
Speaker Change: Queens and others benefit from the synergy of this integration withheld.
Speaker Change: Withheld catalysts uniquely able to provide both offerings, delivering a clear or Hawaii to our clients.
Speaker Change: Also in the improvement category, we have been fortunate to receive several additional external recognitions related to our technology and toward team member engagement.
Speaker Change: First we're excited that are vital where charge master management software solution a revenue cycle analytics technology, we acquired in 2020.
Speaker Change: Was recently ranked best in class for 2024.
Speaker Change: This marks the fifth year that the vital C. D. M solution has achieved this distinction for the class or organization validating are meaningful investment in this mission critical technology that provides near term hard dollar are alive.
Speaker Change: Next we are pleased to share that we have recently been recognized for several team member engagement awards, including placement on Newsweek's America's Greatest places to work for diversity in 2024 less.
Speaker Change: Fortune's best workplaces for women 20th twenty-three list.
Dan Burton: The National Association for Business Resources' 2023 Best and Brightest Companies to Work for in the Nation list and the Salt Lake Tribune's Top Workplaces list. Additionally, we were thrilled to have several Health Catalyst team members honored as part of the recent 2023 Women of Color STEM Awards. Our next strategic objective category is growth, which includes expanding existing client relationships and beginning new client relationships. First, let me provide some commentary on our 2023 bookings performance. At a summary level, we are encouraged to see continued progress relative to our growth-related performance, especially in the second half of 2023, as our end market began to see financial improvement. Our net new DAS subscription client additions in 2023 were 11, in line with our expectations, both in the number of net additions and the average ARR per new client. Our 2023 dollar-based retention rate was 100%.
Speaker Change: The National Association for business resources, 20, twenty-three best and brightest companies to work for in the nation list.
Speaker Change: And the Salt Lake Tribune is top workplaces list.
Speaker Change: Additionally, we were thrilled to have several health catalyst team members honored as part of the recent 20 twenty-three women of color stem Awards.
Speaker Change: Our next strategic objective category as growth.
Speaker Change: Which includes expanding existing client relationships and be getting new client relationships.
Speaker Change: Firstly provide some commentary on our 20th twenty-three bookings performance.
Speaker Change: At a summary level, we are encouraged to see continued progress relatives, who are growth related performance.
Speaker Change: Especially in the second half of 20 twenty-three as our end market began to see financial improvements.
Speaker Change: Our net new dos subscription client additions in 2023 was 11 in line with our expectations. Both a number of net additions and an average are are for new clients.
Speaker Change: Or 2023 dollar based retention rate was 100%.
Dan Burton: As previously shared, this performance was below our forecasted range of 102 percent to 110 percent, primarily due to the delay, with a few larger tech and new advantage services expansion opportunities. As a reminder, these tech-enabled managed services opportunities tend to be more challenging to precisely forecast the timing of deal signing, given the size of the relationships, the relatively small number of opportunities in a given quarter, and the complexities associated with rebadging health system team members, such as the need for client board-level approval. That said, despite the contract start date being more challenging to forecast as compared to our typical DOS contracts, once these relationships are contracted, we benefit meaningfully from long-term, locked-in, sizable contracts that strategically align us at the highest levels of our clients' leadership across both technology and managed services. Our clients are asking us to provide these tech-enabled bandit services because they recognize the clear, hard-dollar ROI that we provide by offering integrated technology and services.
Speaker Change: As previously shared this performance was below are forecasted range of 102% to 110% primarily due to the delay.
Speaker Change: With a few larger technical minutes services expansion opportunities.
Speaker Change: As a reminder, these <unk> services opportunities tend to be more challenging to precisely forecast the timing of deal signing given the size of the relationships the relatively small number of opportunities in a given quarter.
Speaker Change: And the complexities associated with Rebadging of health system team members, such as the need for client board level approvals.
Speaker Change: That said despite the contract start date being more challenging the forecast as compared to a typical dos contracts. Once these relationships are contracted we benefit meaningfully from longterm locked in sizable contracts that strategically align us at the highest levels of our clients leadership.
Speaker Change: Across both technology and managed services.
Speaker Change: Our clients are asking us to provide these tech enabled painted services because they recognize that clear hard dollar R. O Y that we provide by offering integrated technology and services.
Dan Burton: We are pleased to share that one of these tech-enabled managed services chart abstraction opportunities, originally protected to sign in late 2023, has just signed, though revenue recognition for this opportunity won't begin until mid-year. Likewise, we are encouraged to see continued progression in our pipeline, including tech-enabled managed services opportunities, and anticipate additional contract signings in the next few months. I will provide additional commentary on these opportunities when I share our 2024 bookings expectations. Next, related to our current growth operating environment, consistent with what we have shared recently. While health system operating margins continue to be challenged relative to longer-term historical levels, we are encouraged to see operating margins steadily improving in recent months.
Speaker Change: We are pleased to share that one of these tech enabled minutes services charter the Jackson opportunities originally protected to sign in late twenties twenty-three has just signed.
Speaker Change: Though the revenue recognition for this opportunity won't begin until mid year.
Speaker Change: Likewise, we are encouraged to see continued progression in our pipeline, including tech enabled minutes services opportunities and anticipate additional contract signings in the next few months.
Speaker Change: I will provide additional commentary on these opportunities when I sure are 2024 bookings expectations.
Speaker Change: Next related to our current growth operating environment consistent with what we have shared recently, while health system operating margins continue to be challenged relative to longer term historical levels. We are encouraged to see operating margins steadily improving in recent months.
Dan Burton: We anticipate this will be a tailwind related to our bookings metrics in 2024 and beyond. With this in mind, I will now share some perspectives on our anticipated 2024 bookings achievement level. Supported by the continued improvement in the operating environment of our end market, we anticipate meaningful improvement in both of our bookings metrics relative to our 2023 performance, first as it relates to our net new DAS subscription client edition. We anticipate achievement of the mid-teens Net New DOS Client Edition.
Speaker Change: We anticipate this will be a tailwind related to our bookings metrics in 2024 and beyond.
Speaker Change: With this backdrop I will now share some perspectives on our anticipated 2024 bookings achievement levels.
Speaker Change: Supported by the continued improvement in the operating environment and market, we anticipate meaningful improvement in both are both of our bookings metrics relatives, who are 2023 performance.
Speaker Change: First as it relates to our net <unk> subscription client additions.
Speaker Change: We anticipate achievement of mid teens, net new dos client additions as.
Dan Burton: As we have seen our end market improve, we have begun to strategically allocate more of our growth resources toward new client and cross-selling efforts with a focus on technology, especially with the benefit of our next-generation modular data platform. We anticipate this emphasis will support our focus on sustained, profitable growth as these higher-margin client relationships contribute more meaningfully to adjusted EBITDA starting in year one. We expect the average ARR per net new DAS subscription client added to increase in 2024 as compared to 2023, driven by a small portion of DAS-like client adds relative to 2023. Next, as it relates to our 2024 dollar-based retention rate, we anticipate achievement between 104% and 110%.
Speaker Change: As we have seen her and market improve we have begun to strategically allocate more of our growth resources toward new client and cross selling efforts with a focus on technology.
Speaker Change: Especially with the benefit of our next generation modular data platform.
Speaker Change: We anticipate this emphasis will support our focus on sustained profitable growth.
Speaker Change: As these higher margin client relationships contribute more meaningfully to adjusted EBITDA starting in your one.
Speaker Change: We expect the average error or per net new dos to.
Speaker Change: Description client added to increase in 2024 as compared to 20 twenty-three driven.
Speaker Change: Driven by a small portion of dos light client adds relative to 2023.
Speaker Change: Next as it relates to our 2024 dollar based retention rate, we anticipate achievement between 104% and 110%.
Dan Burton: For the tech-enabled managed services deals that moved from Q4 2023, as I just mentioned, one of those opportunities just recently signed, and others continue to be in our pipeline, and we assume these deals will contribute to our improved 2024 dollar base retention rate range I just shared. Likewise, consistent with 2023, we expect professional services dollar-based retention achievement to be higher than technology, driven by larger tech-enabled managed services expansion pipeline opportunities, in addition to our perspectives on 2024 booking. Brian will share our 2024 P&L guidance in our prepared remarks.
Speaker Change: For the Tech enabled managed services deals that moved from Q4 2000 twenty-three as I just mentioned one of those opportunities just recently signed and others continued to be in our pipeline and we assume these deals will contribute to our improved 2024 dollar base for attention right range I just shared.
Speaker Change: Likewise, consistent with 2023, we expect professional services dollar base for attention achievement to be higher than technology, driven by larger tech enabled minutes services expansion pipeline opportunities.
Speaker Change: In addition to our perspectives on Twenty-twenty for bookings.
Speaker Change: Ryan will share our 2024 P&L guidance later in our prepared remarks.
Dan Burton: I am encouraged by these projections, especially as they relate to our continued progress on profitability. We are also pleased to introduce a few new mid-term and longer-term financial targets, as well as to provide updates relative to our previously shared financial targets. First, as it relates to our 2025 revenue growth, we anticipate 10% to 15% year-over-year growth. This expectation is supported by our 2024 bookings expectation.
Speaker Change: I am encouraged by these projections, especially as they relate to a continued progress on profitability.
Speaker Change: We are also pleased to introduce a few new midterm and longer term financial targets.
Speaker Change: As well as to provide updates relative to our previously shared financial targets.
Speaker Change: First as it relates to our 2025 revenue growth, we anticipate 10% to 15% year over year growth.
Speaker Change: This expectation is supported by our 2024 bookings expectations next.
Dan Burton: Next, we now anticipate that our 2025 adjusted EBITDA margin will be between 10% and 12%, a positive update relative to our prior expectation. We are encouraged by our anticipated ability to meaningfully increase profitability while driving robust revenue growth across both technology and professional services. On a related note, as we have considered our mid- and long-term planning, one view that we find helpful is an estimated business unit adjusted EBITDA margin for each of our technology and professional services business units. Along these lines, we perform a high-level allocation of our operating expenses by business unit, assigning R&D to our technology segment and SG&A across our technology and professional services segments.
Speaker Change: Next we know anticipate that are 2025, adjusted EBITDA margin will be between 10% and 12% a positive update relatives, who are prior expectations.
Speaker Change: We are encouraged by your anticipated ability to meaningfully increase profitability, while driving robust revenue growth across both technology and professional services.
Speaker Change: On a related note.
Speaker Change: As we have considered our mid and long-term planning.
Speaker Change: One view that we find helpful is an estimated business unit adjusted EBITDA margin for each of our technology and professional services business units.
Speaker Change: Along these lines, we perform a high level allocation of our operating expenses by business unit assigning R&D to our technology segment and S. G N a across our technology and professional services segment.
Dan Burton: This view helps us in our planning process as we evaluate our relative investment in each business unit and the long-term drivers of shareholder value. In 2025, we expect our technology business unit to have an approximately 20% adjusted EBITDA margin and for our professional services business unit to have a slightly positive adjusted EBITDA margin. Lastly, related to 2025, we expect our adjusted free cash flow to be meaningfully positive, a testament to our growth, operating leverage, and financial discipline. Next, we are pleased to share a few updates relative to our longer-term financial targets. First, we anticipate annual revenue of $500 million-plus in 2028, with greater than 55% of this revenue coming from our technology business unit. Next, we expect our adjusted EBITDA will be $100 million-plus in 2028.
Speaker Change: This view helps us in our planning process as we evaluate a relative investment in each business unit and the longterm drivers of shareholder value.
Speaker Change: 2025, we expect our technology business unit to have in approximately 20% adjusted EBITDA margin.
Speaker Change: And for our professional services business unit to have a slightly positive adjusted EBITDA margin.
Speaker Change: Lastly related to 2025, we expect or adjusted free cash flow to be meaningfully positive a testament to our growth operating leverage and financial discipline.
Speaker Change: Next we are pleased to share a few updates relative to our longer term financial targets first we anticipate annual revenue.
Speaker Change: 500 million plus in 2028.
Speaker Change: With greater than 55 per cent of this revenue coming from our technology business unit.
Speaker Change: Next we expect our adjusted EBITDA will be 100 million plus in 2028.
Dan Burton: As we forecast the business unit margin of this 2028 adjusted EBITDA target, we expect our technology business unit to have an approximately 30% adjusted EBITDA margin, which, when combined with the expected annual revenue growth of our technology business unit of 10 plus percent per year, would make our technology business unit a Rule of 40 business. We expect our professional services business unit to have an approximately 10% adjusted EBITDA margin.
Speaker Change: As we forecast the business unit margin of this 2028 adjusted EBITDA target, we expect our technology business unit to have in approximately 30 per cent adjusted EBITDA margin, which when combined with the expected annual revenue growth of our technology business unit of 10 plus per cent per year.
Speaker Change: Would make our technology business unit, a rule of 40 business.
Speaker Change: We expect our professional services business unit to have in approximately 10% adjusted EBITDA margin.
Dan Burton: We are pleased to establish these meaningful milestones related to both total revenue and total adjusted EBITDA for 2028 and are encouraged by our team members' focus and dedication to achieving these targets. Lastly, in the growth category, I would like to highlight our upcoming 10th Annual Healthcare Analytics Summit, inclusive of our Annual User Conference. This year's conference, which will be held next week, represents a meaningful investment in new client and existing client relationship development. It also affords Health Catalyst another opportunity to provide thought leadership within the healthcare data and analytics ecosystem, while carefully listening to our clients and prospects as we further cultivate and deepen those relationships. We anticipate approximately 1,000 attendees this year, primarily composed of existing and prospective Health Catalyst clients and other healthcare industry leaders and innovators.
Speaker Change: We are pleased to establish these meaningful milestones related to both total revenue in total adjusted EBITDA for 2028 and are encouraged by our team members focus and dedication to achieving these targets.
Speaker Change: Lastly, and the growth category I would like to highlight our upcoming 10th annual healthcare analytics summit <unk>.
Speaker Change: Inclusive of our annual user confidence this year's conference, which will be held next week represent a meaningful investment and new client an existing client relationship development.
Speaker Change: It also affords help catalyst another opportunity to provide thought leadership within the health care data and analytics ecosystem, while carefully listening to our clients and prospects as we further cultivate and deepen those relationships.
Speaker Change: We anticipate approximately 1000 attendees this year, primarily composed of existing and prospective help catalyst clients and other health care industry leaders and innovators.
Dan Burton: I also wanted to take the opportunity to highlight our excitement related to our next-generation data platform. As we have shared previously, we have made a meaningful investment in the next generation of our data platform software, allowing for significant increases in its scalability and modularity enabled by cross-industry technologies such as Snowflake and Databricks. We anticipate this investment will enable best-in-class technology to support existing client relationships and prospective client sales processes, while also supporting technology gross margin expansion over the medium term. The initial deployments of our Next Generation platform are going as planned, and we anticipate migrations of the majority of our existing DAS subscription clients over the next two to three years. Likewise, we anticipate that moving forward, our new client deployments will be in this next-generation architecture.
Speaker Change: I also wanted to take the opportunity to highlight are excitement related to our next generation data platform.
Speaker Change: We have a shared previously we have made a meaningful investment in the next generation of our data platform software, allowing for significant increases in its scale the ability and modularity enabled by cross industry technology, such as Snowflake and date of bricks.
Speaker Change: We anticipate this investment will enable best in class technology to support existing client relationships and prospective client sales processes. While also supporting technology gross margin expansion over the medium term.
Speaker Change: The initial deployments of our next generation platform are going as planned and we anticipate migrations.
Speaker Change: Of the majority of our existing dos subscription clients over the next two to three years.
Speaker Change: Likewise, we anticipate that moving forward or new client deployments will be in this next generation architecture.
Dan Burton: Lastly, prior to turning the call over to Brian, and in connection with our annual planning process, I would like to share a few leadership and board member updates. First, Brian Hunt will be transitioning from CFO to a strategic advisor role, effective March 1. I would like to express my heartfelt gratitude to Brian for his countless contributions to help Catalyst's growth and success over the last 10 years, including his service as our CFO, helping us navigate through a global pandemic, record high inflation, and a period of tremendous financial pressure for our health system clients. Ryan has been an extraordinary leader and partner to me and to the board.
Speaker Change: Lastly, prior to turning the call over to Brian and in connection with our annual planning process I would like to share a few leadership and board member updates.
Speaker Change: First Brian Hunt will be transitioning from CFO to a strategic advisor role effective March 1st.
Speaker Change: I would like to express my heartfelt gratitude to Brian for.
Speaker Change: For his countless contributions to help catalyst growth and success over the last 10 years, including his service as our CFO.
Speaker Change: Helping us navigate through a global pandemic record high inflation and a period of tremendous financial pressure for our health system clients.
Speaker Change: Brian has been an extraordinary leader and partner to me and to the board and we are grateful for his dedication professionalism and commitment to the company and its mission.
Dan Burton: And we are grateful for his dedication, professionalism, and commitment to the company and its mission. I'm also pleased to share that Jason Auger will begin as Health Catalyst's CFO, effective March 1st. Jason has been with Health Catalyst for more than ten years, contributing significantly during that time, including most recently as our Chief Accounting Officer. Prior to joining Health Catalyst, Jason held various roles at Ernst & Young.
Speaker Change: I'm also pleased to share that Jason Augur will begin at health catalysts CFO effective March 1st.
Speaker Change: Jason has been withheld catalyst for more than 10 years, having contributed significantly during that time, including most recently as our chief accounting officer.
Speaker Change: Prior to joining help catalyst, Jason held various roles at Ernst and young.
Dan Burton: My fellow board members and I, along with our finance organization, have the utmost confidence in and respect for Jason, and we look forward to more widely introducing him across our research analysts and investor base in the coming weeks. Next, let me share that, effective March 1, Dan LaSueur is being promoted to Health Catalyst's Chief Operating Officer role, with responsibilities spanning both our technology and professional services business units. Dan brings a wealth of experience to this role, having had leadership responsibility across many functions during his 12 years at Health Catalyst, most recently as the Senior Vice President and General Manager of our Professional Services Business Unit. I am thrilled to have someone with Dan's breadth and depth of experience and expertise to lead this important strategic function as Health Catalyst continues on its maturation path, focusing on operational excellence to enable scalable growth and profitability.
Speaker Change: My Fellow board members and I, along with our financial organization had the utmost confidence in and respect for Jason and we look forward to more widely introducing him across our research analyst and investor base in the coming weeks.
Speaker Change: Next let me share that effective March 1st Dan. This weird is being promoted to help catalysts chief operating officer raw with responsibilities spanning both our technology and professional services business units.
Speaker Change: Dan brings a wealth of experience to this role having had leadership responsibility across many functions. During his 12 years at health catalyst. Most recently as the senior Vice President and General manager of our professional services business unit.
Speaker Change: I am thrilled to have someone with dan's breadth and depth of experience and expertise to lead this important strategic function as help catalyst continues on its maturation, Pat focusing on operational excellence to enable scalable growth and profitability.
Dan Burton: Lastly, I want to take a moment and share my sincere gratitude for Mark Templeton for his service on our Board of Directors as he completes his board service as of March 1. We were fortunate to have Mark extend his board service beyond his original commitment, and Health Catalyst has benefited meaningfully from his service over the last nearly four years, including his leadership role as Chair of our Transactions Committee. With that, let me turn the call over to Brian.
Speaker Change: Lastly, I wanted to take a moment to share my sincere gratitude, Vermont Templeton for his service on our board of directors as he completes his board service as of March 1st.
Speaker Change: We were fortunate.
Speaker Change: To have had mark extend his board service beyond his original commitment and.
Speaker Change: And health catalyst has benefited meaningfully from his service over the last nearly four years, including his leadership role as chair of our transactions Committee.
Speaker Change: With that let me turn the call over to Bryan Bryan.
Brian Hunt: Ryan, Thank you, Dan. Before diving into our quarterly financial results, I want to echo what Dan shared and say that I am pleased with our fourth quarter and full year 2023 performance. I will now comment on our strategic objective category of scale. For the fourth quarter of 2023, we generated $75.1 million in total revenue.
Bryan: Thank you Dan before diving into our quarterly financial results I want to Echo of Dan shared and say that I am pleased with our fourth quarter and full year of 2023 performance.
Bryan: I will now comment on our strategic objective category of scale.
Speaker Change: For the fourth quarter of 2023 <unk>.
Speaker Change: We generated $75.1 million in total revenue.
Brian Hunt: This total represents an outperformance relative to the midpoint of our quarterly guidance, and it is an increase of 9% year over year. For the full year 2023, our total revenue was $295.9 million, representing 7% growth year-over-year. Technology revenue for the fourth quarter of 2023 was $47.1 million, representing 5% growth year-over-year. This growth was driven primarily by recurring revenue from new client additions and from existing clients paying higher technology access fees as a result of contractual built-in escalators. For the full year 2023, technology revenue was $187.6 million, representing 6% year-over-year growth. Professional services revenue for Q4 2023 was $28 million, representing a 14% increase relative to the same period last year.
Speaker Change: This total represents an outperformance relative to the mid point of our quarterly guidance.
Speaker Change: And it is an increase of 9% year over year.
Speaker Change: For the full year 2023 are total revenue was $295.9 million.
Speaker Change: Representing seven per cent growth year over year.
Speaker Change: Technology revenue for the fourth quarter of 2023 was $47.1 million Rep.
Speaker Change: Representing five per cent growth year over year.
Speaker Change: This year over year growth was driven primarily by recurring revenue from new client additions and from existing clients paying higher technology access fees as a result of contractual built in escalators.
Speaker Change: For the full year 2023 technology revenue was 187 $6 million.
Speaker Change: Representing 6% year over year growth.
Speaker Change: Professional services revenue for Q4, 2023 was $28 million.
Speaker Change: Representing a 14% increase relative to the same period last year.
Brian Hunt: This year-over-year performance was primarily due to revenue recognition from the tech-enabled managed services contracts that were signed at the end of Q4 2022 and the beginning of 2023. For the full year 2023, our professional services revenue was $108.4 million, representing 8% year-over-year growth. For the fourth quarter of 2023, total adjusted gross margin was 46 percent, representing a decrease of approximately 450 basis points year over year. For the full year 2023, total adjusted gross margin was 49%, representing a decrease of approximately 410 basis points year-over-year.
Speaker Change: This year over year performance was primarily due to revenue recognition from the tech enabled managed services contracts that were signed at the end of Q4 2022.
Speaker Change: And the beginning of 2023.
Speaker Change: For the full year 2023 are professional services revenue was $108.4 million.
Speaker Change: Representing 8% year over year growth.
Speaker Change: For the fourth quarter of 2023 total adjusted gross margin was 46%.
Speaker Change: Representing a decrease of approximately 450 basis points year over year.
Speaker Change: For the full year 2023 total adjusted gross margin was 49% rep.
Speaker Change: Representing a decrease of approximately 410 basis points year over year.
Brian Hunt: In the technology segment, our Q4 2023 Adjusted Technology Gross Margin was 67%, a decrease of approximately 210 basis points relative to the same period last year. This year-over-year performance was mainly driven by costs associated with migrating an additional subset of our client base to our multi-tenant Snowflake and Databricks-enabled data platform environment. For the full year 2023, our adjusted technology gross margin was 68%, an approximately 130 basis point decrease year over year.
Speaker Change: And the technology segment R Q4, 2023, adjusted Technology gross margin was 67%.
Speaker Change: A decrease of approximately 210 basis points relative to the same period last year.
Speaker Change: This year over year performance was mainly driven by costs associated with migrating and an <unk> an additional subset of our client base to our Multitenant Snowflake and date of breaks enabled data platform environment.
Speaker Change: For the full year 2023 are adjusted technology gross margin was 68% and.
Speaker Change: And approximately 130 basis point decrease year over year.
Brian Hunt: In the professional services segment, our Q4 2023 adjusted professional services gross margin was 12%, representing a decrease of approximately 580 basis points year over year and an increase of approximately 30 basis points relative to Q3. This quarterly performance was in line with the expectations we shared on our last earnings call. And we continue to expect a several point increase to our adjusted professional services gross margin in Q1 2024, the result of our recent reduction in force that primarily occurred late in the fourth quarter of 2023. For the full year 2023, our adjusted professional services gross margin was 15%, an approximately 850 basis point decrease year-over-year. In Q4 2023, adjusted total operating expenses were $33.3 million. As a percentage of revenue, adjusted total operating expenses were 44%, which compares favorably to 52% in Q4 2022. For the full year 2023, adjusted total operating expenses were $133 million.
Speaker Change: And the professional services segment R. Q4, 2023, adjusted professional services gross margin was 12%.
Speaker Change: Representing a decrease of approximately 580 basis points you every year.
Speaker Change: And an increase of approximately 30 basis points relative to Q3 2023.
Speaker Change: This quarterly performance was in line with the expectations, we shared on our last earnings call.
Speaker Change: And we continue to expect a several point increase to our adjusted professional services gross margin in Q1 2024.
Speaker Change: The result of our recent reduction in force that primarily occurred late in the fourth quarter of 2023.
Speaker Change: For the full year 2023 are adjusted professional services gross margin was 15%.
Speaker Change: And approximately 850 basis point decrease year over year.
Speaker Change: In Q4 2023, adjusted total operating expenses were $33.3 million.
Speaker Change: As a percentage of revenue adjusted total operating expenses were 44%.
Speaker Change: Which compares favorably to 52% in Q4 2022.
Speaker Change: For the four year 2023, adjusted total operating expenses are $133 million.
Brian Hunt: As a percentage of revenue, adjusted total operating expenses were 45%, which compares favorably to 54% in the full year 2022. Estimated EBITDA in Q4 2023 was $1.4 million, in line with the midpoint of our guidance. For the full year 2023, our adjusted EBITDA was $11 million, which compared favorably to an adjusted EBITDA loss of $2.5 million in 2022. Our adjusted basic net income per share in Q4 2023 was $0.02. The weighted average number of shares used in calculating adjusted basic net income per share in Q4 was approximately 57.5 million shares.
Speaker Change: As a percentage of revenue adjusted total operating expenses were 45 per cent.
Speaker Change: Which compares favorably to 54% and the four year 2022.
Speaker Change: Justin EBITDA in Q4, 2023 was $1.4 million in.
Speaker Change: In line with the mid point of our guidance.
Speaker Change: For the full year 2023 are adjusted EBITDA was 11 million.
Speaker Change: Which compared favorably to an adjusted EBITDA loss of $2.5 million in 2022.
Speaker Change: Are adjusted basic net income per share in Q4 2023 was two cents.
Speaker Change: The weighted average number of shares used in calculating adjusted basic net income per share in Q4 was approximately 57.5 million shares.
Brian Hunt: For the full year 2023, our adjusted basic net income per share was $0.16, and the weighted average number of shares used in calculating adjusted basic net income per share was approximately 56.4 million shares. Turning to the balance sheet, we ended Q4 2023 with $317.7 million of cash, cash equivalents, and short-term investments, compared to $347.7 million as of Q3 2023. In terms of liabilities, the face value of our outstanding convertible notes is a principal amount of $230 million, due in 2025. As it relates to our financial guidance for the first quarter of 2024, we expect total revenue between $72.5 million and $76.5 million and adjusted EBITDA between $2 million and $4 million. And for the full year 2024, we expect total revenue between $304 million and $312 million, and Adjusted EBITDA between $24 million and $26 million.
Speaker Change: For the full year 2023 are adjusted basic net income per share with 16 cents.
Speaker Change: And the weighted average number of shares used in calculating adjusted basic net income per share was approximately 50.
Speaker Change: 56.4 million shares.
Speaker Change: Turning to the balance sheet. We ended Q4 2023 with $317.7 million of cash cash equivalents and short term investments compared to 347 $7 million as a Q3 2023.
Speaker Change: In terms of liabilities the face value of our outstanding convertible notes as a principal amount of 230 million due in 2025.
Speaker Change: As it relates to our financial guidance for the first quarter of 2024.
Speaker Change: We expect total revenue between $72.5 million and $76.5 million.
Speaker Change: And adjusted EBITDA between $2 million and $4 million.
Speaker Change: And for the full year 2024, we expect total revenue between $304 million and $312 million.
Speaker Change: And adjusted EBITDA between $24 million and $26 million.
Brian Hunt: Now, let me provide a few additional details related to our 2024 guidance. First, as it relates to our Q1 2024 expectations, we expect that our adjusted technology gross margin will be in the high 60s in the first quarter. In the professional services segment, we anticipate our Q1 2024 gross margin will be in the high teens, a several-point improvement relative to Q4 2023, consistent with our expectations shared last quarter. Lastly, we anticipate our adjusted operating expenses will be roughly flat to slightly up compared to Q4 2023, with our sales and marketing increasing by $2 to $3 million quarter over quarter, the results of our Healthcare Analytics Summit event, and our research and development decreasing by a couple million dollars sequentially, the result of our recent reduction in force.
Speaker Change: Now let me provide a few additional details related to our 2024 guidance.
Speaker Change: First as it relates to our Q1 2024 expectations. We expect that are adjusted technology gross margin will be in the high sixties in the first quarter.
Speaker Change: And the professional services segment, we anticipate R. Q1, 2024 gross margin will be in the high teens.
Speaker Change: Ah Ah several point improvement relative to Q4 2023, consistent with our expectations shared last quarter.
Speaker Change: Lastly, we anticipate are adjusted operating expenses will be roughly flat to slightly up compared to Q4 2023.
Speaker Change: With our sales and marketing increasing by $2 million to $3 million order over quarter.
Speaker Change: The results of our health care analytics summit event.
Speaker Change: And our research and development decreasing by a couple of million dollars sequentially.
Speaker Change: The result of a recent reduction in force.
Brian Hunt: Next, let me share a few additional details related to our full year 2024 guidance. First, our 2024 revenue growth expectations are impacted by our 2023 dollar-based retention rate achievement being lower than our prior expectations. Given the in-year 2024 revenue impact from the tech-enabled managed services deals that moved from Q4 2023 to 2024, we now anticipate our first half year-over-year total revenue growth to be lower and to ramp in the second half of 2024, as we benefit from these in-year 2024 bookings translating into second-half revenue. Next, in terms of our adjusted gross margin, we expect our adjusted technology gross margin will be in the high 60 We anticipate the built-in, client-level technology gross margin expansion, mainly driven by contractual escalators, will be mostly offset by the headwinds from costs associated with migrating an additional subset of our client base to our multi-tenant, Snowflake, and Databricks-enabled data platform environment.
Speaker Change: Next let me share a few additional details related to our full year 2024 guidance.
Speaker Change: First R 2024 revenue growth expectations are impacted by our 2023 dollar base retention rate achievement being lower than our prior expectations.
Speaker Change: Given the in year 2024 revenue impact from the Tech enabled managed services deals that moved from Q4 2023 to 2024 <unk>.
Speaker Change: We know anticipate our first have you ever year total revenue growth to be lower and to ramp and the second half of 2024 as.
Speaker Change: As we benefit from these in Euro 2024, buckings translating into second half revenue.
Speaker Change: Next in terms of our adjusted gross margin.
Speaker Change: We expect our adjusted technology gross margin will be in the high sixties through 2024.
Speaker Change: We anticipate the built in client level of technology gross margin expansion mainly.
Speaker Change: Driven by contractual escalators will be mostly offset by the headwinds from costs associated with migrating and additional subset of our client base to our Multitenant Snowflake and data <unk> enabled data platform environment.
Brian Hunt: Next, we anticipate our adjusted professional services gross margin will be in the high teens for the year, primarily driven by the mix of professional services, which will be comprised of a larger percentage of tech-enabled managed services, which start out at a low gross margin but ramp up meaningfully over time. Finally, we continue to anticipate material year-over-year operating leverage. This includes the expectation that our 2024 R&D expense will be lower on an absolute dollar basis relative to 2023.
Speaker Change: Next we anticipate are adjusted professional services gross margin will be in the high teens for the year for.
Speaker Change: Primarily driven by the mix of professional services, which will be comprised of a larger percentage of tech enabled minutes services.
Speaker Change: Which start out at a low gross margin, but ramp up meaningfully overtime.
Speaker Change: Next we continued to anticipate material year over year operating leverage.
Speaker Change: This includes the expectation that are 2024, R&D expense will be lower on an absolute dollar basis relative to 2023.
Brian Hunt: As we conclude a large portion of the investment we have been making in our next generation Snowflake and Databricks-enabled data platform, and additionally, we anticipate continuing to see operating leverage as a percentage of revenue across SG&A. Next, we anticipate we will see a reduction in our stock-based compensation expense as a percentage of revenue by approximately 350 to 450 basis points in 2024, on our way to stock-based compensation expense as a percentage of revenue in the mid to high single digits in 2028. And lastly, we anticipate our adjusted free cash flow in 2024 will be approximately breakeven. With that, I will conclude my prepared remarks. Dan?
Speaker Change: As we conclude a large portion of the investment we have been making in our next generation Snowflake and date of breaks enabled data platform.
Speaker Change: Additionally, we anticipate continuing to see operating leverage as a percentage of revenue across SG&A.
Speaker Change: Next we anticipate we will see a reduction in our stock based compensation expense as a percentage of revenue.
Speaker Change: By approximately 350 to 450 basis points in 2024.
Speaker Change: On our way to stock based compensation expense as a percentage of revenue.
Speaker Change: In the mid to high single digits in 2028.
Speaker Change: And lastly, we anticipate are adjusted free cash flow and 2024 will be approximately breakeven.
Speaker Change: With that I will conclude my prepared remarks, Dan.
Dan Burton: Thanks, Brian. In conclusion, I would like to recognize and thank our committed and mission-aligned clients and our highly engaged team members, as well as express my excitement and optimism for the future. And with that, I will turn the call back to the operator for questions. Thank you.
Dan Burton: Thanks, Brian.
Dan Burton: In conclusion, I would like to recognize and think are committed and mission aligned clients and are highly engaged team members as well as express my excitement and optimism for the future.
Speaker Change: And with that I will turn the call back to the operator for questions.
Operator: The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star 2.
Dan Burton: Thank you 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 too.
Operator: Again, we kindly ask that you limit yourself to one question and that you pick up your handset when posing your question to provide optimal sound quality. Our first question comes from Stephanie Davis of Barclays. Hello, Stephanie. Your line is live. If your phone is on mute, please unmute.
Dan Burton: Again, we currently ask that you limit yourself to one question and that you pick up your handset when posing your question to provide optimal sound quality. Thank you.
Dan Burton: Our first question comes from Stephanie Davis Barclays.
Stephanie Davis: Hello, Stephanie your line is laugh if your phone is on mute please on mute it.
Dan Burton: Moving on, our next question comes from Anne Samuel, JP Morgan. Hi, thanks for taking the question. Your dollar base retention the past two years has been, you know, through the bridge, maybe how you'll get to your 104 to 110% target for next year. How much of that is that 10s contract that shifted, and then you've cited potential for 120% of our time. So what needs to happen for you to get there?
Speaker Change: Okay moving on our next question comes from and Sammy J P. Morgan.
Speaker Change: Hi, Thanks for taking the question.
Speaker Change: You don't need your attention the past two years has been you know 100.
Speaker Change: Two per cent.
Speaker Change: Bridge, maybe how you'll get to your 100 and poured 110% target for next year, how much of that is that contract that shifted and then you know you've cited potential for 120 per cent of our time, so what needs to happen for you to get there.
Dan Burton: Thanks. Yeah, thanks for the question, Annie. So in terms of the building blocks for our dollar-based retention in 2024, one of the elements that we did mention in our prepared remarks was that there had been a few of those larger tech-enabled managed services opportunities that we had originally forecasted for late 2023 signings that took a little bit longer. We were pleased to announce and share that one of those just signed, and that's a good example of some of the learnings that we' There are specific examples where it makes sense to take a little bit more time, as was the case with this most recent tech-enabled managed services chart abstraction opportunity signing, to make sure that across the C-suite and at every level in the organization, there's really strong support. And so we took a little bit more time to make sure that that occurred, and we're still pleased to see that that opportunity closed.
Speaker Change: Yeah. Thanks for the question any so.
Bridge: In terms of the building blocks for a dollar base for attention in 2024, one of the elements that we did mentioned and are prepared remarks was there there had been a few of those larger tech enabled been of services opportunities that we had originally forecasted for late.
Bridge: Late twenties twenty-three signings that took a little bit longer we're pleased to announce ensure that one of those just site and that's a good example of some of the learning that we've had recently and over the last year or so with regards to these large tech enabled minutes services opportunities that they are challenging to precisely.
Bridge: Forecast and there are specific examples where it makes sense to take a little bit more time as was the case with this most recent tech enabled minutes services chart attraction opportunity signing to to make sure that across the C suite and at every level in the organization, they're stay strong support and so we took a little bit more time.
Bridge: <unk> to make sure that that occurred and we're still pleased to see that that that opportunity converted as we are gathering more data and more information about these larger technical services opportunities.
Dan Burton: As we are gathering more data and more information about these larger tech-enabled managed services opportunities, I think we're trying to be good students of the data. And one of the elements we're trying to better understand is, what is the typical sales cycle for these larger tech-enabled managed services opportunities? And we've shared previously that we estimated around a one-year sales cycle, and that still has been the case for a number of opportunities. But we are observing there can be some cases where it takes a little longer than a year.
Bridge: We're trying to be good students of the data and what are the elements. We're trying to better understand is what is a typical sales cycle for these larger technical services opportunities and we've shared previously that we estimated around one year sales cycle and that's still has been the case for for a number of opportunities. We are observing there can.
Bridge: Can be some cases, where it takes a little longer than a year and so we're trying to be data informed as we learn more and more but we are early in the process of really growing that tech any more minutes services opportunity and that is one of the components that does offer meaningful expansion to the Tam expansion opportunities longterm for the Cup.
Dan Burton: And so we're trying to be data-informed as we learn more and more. But we are early in the process of really growing that tech-enabled managed services opportunity, and that is one of the components that does offer meaningful expansion to the TAM, expansion opportunities long-term for the company. One other thing that I would share is, as we mentioned in the prior earnings call back in November, we noted some opportunities that were that were strengthening within the tech side of our portfolio with our end market operating margins improving there was more of an openness late last year to have more conversations as it relates to the tech growth opportunity and as we mentioned in the last earnings call we we did begin to shift some growth resources towards those opportunities as they they not only represent meaningful growth opportunity but very profitable growth given the higher gross margin profile of that tech we've continued to do that this year and we believe that will create meaningful shareholder value as we continue to realize that that profitable growth that comes from from a little bit more of that focus on on selling the technology so those are a couple of the components anything you'd add Brian?
Bridge: <unk>.
Bridge: One other thing that I would share is as we mentioned in the prior earnings call back in November.
Bridge: We noted some opportunities that were that were strengthening within the tech side of our portfolio with our end market operating margins improving there was more of an openness late last year to have more conversations as it relates to the tech growth opportunity.
Bridge: And as we mentioned in the last earnings call. We we did begin to shift some growth resources towards those opportunities as they they not only represent meaningful growth opportunity, but very profitable growth given the higher gross margin profile of that tech. We've continued to do that this year and we believe.
Bridge: That will create meaningful shareholder value as we continued to realize that that profitable growth that comes from from a little bit more of that focus on on selling the technology. So those are a couple of the components anything you'd add Brian I.
Dan Burton: I agree Dan in terms of what's driving the improved outlook for our 2024 dollar-based retention rate range is the component that you mentioned anywhere we will have a few points of contribution from these TEMS expansion deals that have moved into 2024 the other piece of that is to what Dan said around our end market financial environment is improving for hospitals and health systems and that will lead to a broader portfolio of what we can offer outside of TEMS in terms of upselling additional technology and other services to our clients so that's the near-term kind of outlook that we see and then as we've put forward some new targets for 2025 and 2028, I think what Dan said is right, where we are assuming improvement in dollar-based retention rate for both technology and services at a similar level into the future. And we like that model in that it drives a more profitable growth rate and a higher CAGR on our EBITDA expansion through 2028. Our next question comes from Stephanie Davis, Barclays, Ash, thank you for dealing with me. I am at an airport again. I started to feel like damn. Don't!
Brian Hunt: I agree Dan in terms of what's driving the improved outlook for our 2024 dollar base retention rate range is that component that you mentioned anywhere we will have a few points of contribution from these terms expansion deals that have moved into 2024.
Brian Hunt: The other piece of that as to what Dan said around our end market financial environment is improving for hospitals and health systems and that will lead to.
Bridge: Broader portfolio of what we can offer outside of terms in terms of Upselling additional technology and other services to our clients. So that's the near term kind of.
Bridge: Outlook that we see and then as we've put forward some new targets for 2025 and 2028.
Bridge: I think what Dan said is right, where we are assuming improvement in dollar based retention rate for both technology and services at a similar level into the future and we like that model in that it drives a more profitable growth rate and a higher <unk> on our EBITDA expansion through 2028.
Bridge: Our next question comes from Stephanie Davis Barclays.
Stephanie Davis: Thank you for gang with me I'm I'm, an airport again I tell you that like that.
Dan Burton: Look, given some of the changes we're seeing in the management team, as well as the new 2028 targets, it sounds like potentially your philosophy and what Health Catalyst wants to be when it grows up, or maybe the path to adulthood in order to get there may have shifted a little bit. So can you talk to me about where you've been and kind of where you see yourself? as you pop in or just merge and focus.
Stephanie Davis: No problem.
Stephanie Davis: Let's give it give me some of the changes receiving or management team as well as the new 2028 target.
Stephanie Davis: It sounds like potentially your philosophy about health panelists wants to be when it grows up or maybe the path to adulthood in order to get there may have shipped into a little bit.
Stephanie Davis: Can you talk to me about where you say any kind of.
Stephanie Davis: Kelly.
Magenta: This is magenta okay.
Kelly: Absolutely Stephanie thanks to the question. So we are <unk>.
Dan Burton: Absolutely, Stephanie. Thanks for the question. So we are paying attention to what our clients need most and what the end market is asking for in terms of what will be most helpful for health system clients to be successful. As you know, we've just gotten through a period of really significant financial pressure. For a period of time, the pressure was so significant, and so many health systems were underwater from an operating margin perspective, that really, the only thing that they had the ability to think about doing with us had to offer a very clear near-term hard dollar ROI and often actual guaranteed cost savings.
Kelly: Paying attention to what our clients need most and what the end market is is asking for in terms of what will be most helpful for health system clients to be successful as you know, we've just gotten through a period, a really significant financial pressure.
Kelly: For a period of time the pressure was so significant in so many health systems were underwater from an operating margin perspective that really the only thing that they had the the ability to think about doing with us had to offer a very clear near term heart dollar R. A Y had often actual guaranteed cause.
Dan Burton: And that's where I think a lot of our focus, as we have discussed in the past, has shifted more towards those parts of our portfolio that have that near-term hard dollar ROI and, particularly, those areas that offer cost savings like tech-enabled managed services. We're really grateful that we had those elements of the portfolio to focus on when that was really what was needed most significantly and in the near term with our end markets. Over the last number of months, as we mentioned in our prepared remarks, we have observed an improvement in that end market and a little less financial pressure. As operating margins have improved, we found that there is more openness both with our existing clients and with new clients to talk about more of the full portfolio, including more opportunities to talk about the technology components of our solution. And we've wanted to be responsive to that.
Kelly: Savings and that's where I think a lot of our focus as we have discussed in the past shifted more towards those parts of our portfolio that had that near term hard dollar Roy and particularly those are areas that offered cost savings like technical been of services. We're really grateful that we had those elements of the portfolio to focus on when that was really what.
Kelly: Was needed most significantly in in the near term with our end markets over the last number of months. Since we mentioned our prepared remarks, we have observed an improvement and that and market and a little less financial pressure as operating margins have improved we found that there's more of an openness both with our existing client.
Kelly: And with new clients to talk about more the full portfolio inclusive of more opportunities to talk about the technology components of our solution and we wanted to be responsive to that we still fundamentally see ourselves very much the way that we describe ourselves nearly five years ago public that law.
Dan Burton: We still fundamentally see ourselves very much the way that we described ourselves nearly five years ago when we went public, that long-term, we believe there will always be a meaningful technology component to what we do, a meaningful services component to what we do, and informed by the experience of the last 18 months or so, much of what we do on the professional services side moving forward will take the form of tech-enabled managed services where our clients ask us to take on more I think what you're seeing in our perspective over the next few years is that we do see the end market coming back to more of a normalized level where we can have a balanced set of conversations that include meaningful conversations around our technology offerings as well as meaningful conversations around the services that we can provide, the managed services that we can provide.
Kelly: Longterm, we believe there will always be a meaningful technology component of what we do a meaningful services component to what we do and and informed by the experience of the last 18 months or so <unk>.
Kelly: Much of what we do on the professional services side moving forward. We believe we will take the form of a tech enabled managed services, where our clients ask us to take on more direct responsibility for certain functions because that offer such a strong hard dollar are alive I think what what you're seeing in our perspective over the next few years.
Kelly: Is that we do see the end market coming back to more of a normalised level, where we can have a balance set of conversations that include a meaningful conversations are at our technology offerings as well as meaningful conversations around the services that we can provide the managed services that we provide we think this affords us the opportunity.
Dan Burton: We think this affords us the opportunity for balanced growth, and we do appreciate and recognize the importance from a shareholder value perspective of profitable growth and increasing profitability over time. And when we grow in a fairly balanced and similar way with regard to our tech and our services, that proportionate growth in tech, where tech continues to be a majority of our revenue streams, for example, over the next four years enables more and more profitable growth and a really significant growth rate in our EBITDA, as we see that play out between now and 2028 with an average growth rate of over 40%. We do believe that that is a model that we can execute well against with our clients and provide them with tremendous value, and it creates a lot of shareholder value for our investors, and that's a priority for us. Our next question comes from Jared Haas, William Blair. Yeah, good evening, guys. Thanks for taking the questions. This is Jared on for Ryan.
Kelly: Unity for balance growth and we do appreciate it and.
Kelly: And we recognize the importance from a shareholder value perspective of profitable growth and increasing profitability over time, and when we would grow at a fairly balanced and and similar way with regards to attack and our services.
Kelly: That that proportionate growth and tech where the tech continues to be a majority of our revenue streams. For example over the next four years enables more and more profitable growth and it really significant growth.
Kelly: Growth rate in our EBITDA I as as we see that play out between now and 2028 of of an average growth over the next four years of over 40%. We do believe that that is a model that we can execute well against with our clients and provide them with tremendous value and it.
Kelly: That's a lot of shareholder value for our investors and that's a priority for us.
Kelly: Our next question comes from Jared Hot William Blair.
Kelly: [noise] Yeah. Good evening guys. Thanks for taking the questions. This is Jared on for Brian Daniels.
Dan Burton: Appreciate all the detailed commentary, especially regarding the model targets over the next few years. I wanted to double check on the expected ramp in the tech segment EBITDA margins for your 2028 targets. Just would love to hear a little bit more context as to what is essentially driving that EBITDA margin over the next 4 or 5 years, and is any of that tied to some incremental pricing leverage associated with the next-gen platform? I know you've historically had some solid pricing leverage in that tech segment, but I'm wondering if there's anything incremental given some of the, Yeah, great question, Jared. Thank you.
Jared Hot: I appreciate it all the detailed commentary, especially regarding the model targets over the next few years you wanted to double click on the expected ramp and the Tech segment EBITDA margins figure 20th 28 targets, just would love to hear a little bit more context as to what is essentially driving that EBITDA.
Kelly: <unk> over the next four or five years, and if any of that tied into some incremental pricing leverage associated with the next gen platform I know, you've historically had some solid pricing leverage and that checks stagnant, but I'm wondering if there's anything incremental given some other recent investments.
Speaker Change: Yeah, Great question Jared. Thank you. So if you think about our tech business from a margin profile perspective, there is the data platform component of what we offer and then there's the App Slayer component of what we've offered and we see some meaningful tailwinds over the next four years that will add to that progression that <unk>.
Dan Burton: So if you think about our tech business from a margin profile perspective, there is the data platform component of what we offer, and then there's the app player component of what we have offered. And we see some meaningful tailwinds over the next four years that will add to that progression that we're projecting and that we're targeting in the EBITDA profile for the tech business. So at the data platform level, to your earlier comment, Jared, we are excited to roll out the next generation data platform, and it has many benefits to offer to our clients in terms of its scalability, modularity, and flexibility. It also has an improved margin profile once we get through the migration process, which will take a couple of years.
Speaker Change: We're projecting and we're targeting.
Speaker Change: In the EBITDA profile for the Tech business. So at the data platform level to your earlier comment Jared we are excited to roll out. The next generation data platform and it has many benefits to offer to our clients in terms of its scalability modularity flexibility. It also has it improved margin profile once we get through.
Speaker Change: Migration process, which will take a couple of years, but the fundamental barge in profile is better that our current dos data platform profile and as such it offers some combination of you know a better value to clients that we choose to pass some of that along to them.
Dan Burton: But the fundamental margin profile is better than our current DOS data platform profile, and as such, it offers some combination of better value to clients if we choose to pass some of that along to them, as well as an increased gross margin profile that can then drop to the bottom line. On the apps layer, we see some tailwinds as it relates to the cross-selling opportunities that we see to enable more of our clients to adopt more at the apps layer. The average DOS subscription client has only between one and two of our applications fully deployed, and so there's a great deal of cross-sell opportunity. And as you may recall from prior conversations that we've had, the apps layer gross margin is in that 80-plus percent range.
Speaker Change: As well as an increase gross margin profile, but then could drop to the bottom line.
Speaker Change: On the App Slayer, we see some tailwind as it relates to the cross selling opportunities that we see to enable more of our clients to adopt more at the App Slayer. The average dos subscription client has only between one and two of our applications are fully deployed and so there's a great deal of cross-sell operas.
Speaker Change: <unk> as you may recall from prior conversations that we've had the absolutely gross margin is in that 80 plus percent range and so the higher the proportion of our technology revenues coming from the App Slayer, the more upward momentum that will see in that in that gross margin profile and there's a lot that we have two two.
Dan Burton: And so the higher the proportion of our technology revenue that's coming from the apps layer, the more upward momentum that we'll see in that gross margin profile. And there's a lot that we have to sell and cross-sell to our clients. And so we are excited and encouraged to see those opportunities.
Speaker Change: Sell in to cross sell to our clients and so we are excited and encouraged to see those opportunities. The last thing that I'll share from a technology EBITDA margin perspective is the operating leverage that we believe will see over the next four four years continue within the tech business and that's that's true overall at the company.
Dan Burton: The last thing that I'll share from a technology EBITDA margin perspective is the operating leverage that we believe we'll see over the next four years continue within the tech business, and that's true overall at the company as well. Specific to the tech business, our R&D operating leverage, we believe, will continue to progress over the next four years. One of the reasons for that is we've largely completed the investment that was significant in the next-generation data platform, and so that's really behind us, and that's creating some near-term operating leverage in R&D. We continue to also be focused on efficiency as it relates to R&D and focus as it relates to R&D.
Speaker Change: As well, but specific to the tech business are R&D operating leverage we believe will continue to progress over the next four years one of the reasons for that is largely completed the investment that was significant in the next generation data platform and so that's really behind us.
Speaker Change: Creating some of the near term operating leverage in R&D. We continue to also be focused on efficiency as it relates to R&D and focus as it relates to R&D, we're moving more and more towards global delivery in certain aspects of our R&D and we see the opportunity as we simplify and focus on key.
Dan Burton: We're moving more and more towards global delivery in certain aspects of our R&D, and we see the opportunity as we simplify and focus on key differentiated elements of our value proposition that allow us to achieve more R&D leverage. Lastly, as it relates to the other OPEX categories, we continue to see efficient sales and marketing efforts, especially as it relates to existing client expansion and cross-sell opportunities where we benefit from the fact that we have hundreds and hundreds of existing client relationships, and we can cross-sell many aspects of our technology to those clients. And that provides a more efficient sales process, which will show up in additional operating leverage in the sales and marketing space.
Speaker Change: He differentiated elements of our value proposition that allow us to achieve more R&D leverage lastly, as it relates to the other opex categories. We continue to see an efficient sales and marketing motion, especially as it relates to existing client expansion in cross-sell opportunities, where we benefit for.
Speaker Change: The fact that we have hundreds and hundreds of existing client relationships and we can cross sell many aspects of our technology into those clients and that provides a more efficient sales motion, which will show up in additional operating leverage in the sales and marketing space just to add to the identity to your last point on some of the cross selling.
Dan Burton: Just to add to that, Dan, to your last point on some of the cross-sell and up-sell opportunities, Jared, as we shared, we do anticipate our dollar-based retention rate improving meaningfully in 2024 as well as into the future. What that leads to is a top-line growth level as well for the technology business that, when coupled with the EBITDA margin that we have in 2024, 2025, and then the long-term target for 2028, leads to a financial profile for the tech business unit that looks like a Rule of 40 profile. To Dan's point, we do believe that that will be one of the primary ways of driving additional shareholder value creation over time. Our next question comes from Elizabeth Anderson with Evercore ISI. Hi guys, this is Samir Patel on behalf of Elizabeth Anderson. Congratulations, Brian, as well as Dan and Jason.
Speaker Change: <unk> opportunity Jared as we shared we do anticipate our dollar base retention rate improving meaningfully in 2024 as well as into the into the future what that leads to as a.
Speaker Change: <unk> Uhm top line growth level as well for the technology business that when coupled with the EBITDA margin that we have in 2024 2025, and then longterm target for 2028 leads to a financial profile for the Tech business unit that looks like a rule of 40 profile and we we do to dance point believe that that.
Speaker Change: Will be one of the primary ways of driving additional shareholder value creation overtime.
Speaker Change: Our next question comes from Elizabeth Anderson with Evercore ISI.
Speaker Change: Hi, guys. This is Samantha Gal on for Elizabeth Anderson, and congrats Brian as well as Dan and Jason add a quick question on the and the next Gen platform you know understanding that the tech side of your business has a bit of a longer sales cycle cause you know 2024 guidance.
Brian Hunt: I had a quick question on the next-gen platform. You know, understanding that the tech side of your business has a bit of a longer sales cycle. Does your 2024 guidance contemplate any benefit from the rollout of this next-gen platform, or is that pretty strictly isolated to 2025 and beyond? I do think there will be some benefit in 2024, Samir.
Speaker Change: Kind of play any benefit.
Speaker Change: From the roll out of this next gen platform or is that pretty strictly isolated to 2025 and beyond.
Speaker Change: [noise] I do think there will be some benefit in 2024, Samir part of what we mentioned in our earnings call transcript prepared remarks.
Dan Burton: Part of what we mentioned in our earnings call transcript prepared remarks was that from now on, with regard to new clients, we are planning to roll out the NextGen data platform as these new clients sign with Health Catalyst. And the value proposition, the strength, and the differentiation of that data platform with new clients and the fact that we're avoiding any future migrations that would be needed, I think is a real positive that will show up some in 2024, especially from a bookings perspective. To your point, much of the P&L impact will roll into 2025 with regard to new clients. I think with existing clients, we're encouraged and excited to see so many of our existing clients really excited and interested in migrating to the NextGeneration data platform. There are some one-time migration costs associated with that transition that we'll have to work through over the next couple of years.
Speaker Change: Was that from now on with regards to new clients. We are planning to roll out. The next Gen data platform as these new client sign withheld catalyst and and the value proposition the strength and the differentiation of that data platform with new clients and the fact that we're avoiding any future migrations.
Speaker Change: That would be needed I think is a real positive that will show up some in 2024, especially from a bookings perspective to your point much of the P&L impact will roll into 2025 with regards to new clients I think with existing clients were encouraged and excited to see so much.
Speaker Change: Any of our existing clients really excited and interested in migrating to the to the next generation data platform. There are some one time migration costs associated with that might with that that transition that will have to work through over the next couple of years, which is one of the reasons why we're projecting our our.
Dan Burton: Which is one of the reasons why we're projecting our technology gross margins to stay in a similar place. But as we get through those migrations, then I think that improved gross margin profile will accrue to the benefit of the company. And I do think to add to that, Samir, in addition to what Dan said on the margin dynamics with the new data platform, another benefit of the NextGeneration data platform is that it continues to be flexible in terms of modular sales, as well as enterprise platform sales, and in particular cross-sell opportunities as we market to our non-DAS client base, which is over 500 other clients who do not use our platform. We found that the Next Generation platform, with its Our next question comes from Daniel Grosslight. City?
Speaker Change: Technology gross margins to kind of stay in a similar place.
Speaker Change: But as we get through those migrations, then I think that improved gross margin profile will will accrue to the benefit of the company and I do think that to add to that Samir Uhm. In addition to what dance at on the margin kind of dynamics with the new data platform. Another benefit of the next generation data platform is continues to be.
Samir: Flexible in terms of modular sales as well as enterprise platform sales.
Samir: And in particular with cross sell opportunities as we market to our non dos client base.
Samir: Which is over 500 other clients, who do not use our platform. We found that the next generation platform with its modularity.
Samir: Is that is a really good starting point to be able to market into that client base as well as a part of why.
Samir: Why we anticipate improved dos.
Samir: <unk> customer additions in 2024 relative to prior years.
Samir: Our next question comes from Daniel <unk>.
Dan Burton: Hi, thanks for taking the question. I want to go back to the longer-term targets, particularly revenue growth. If I look at some of your long-term targets given, I think it was about a month and a half ago now, you were thinking about revenue growth in kind of a 20% plus range. These new 2020 targets imply around 13% revenue growth, and the EBITDA margin is similar at around 20% plus. So I'm curious what's driving the more conservative stance now and if there was some change in the market or your approach to the market that would lead to a bit of a slowdown in top-line growth.
Samir: City.
Daniel: Hi, Thanks for taking the question, let me go back to the longer term targets, particularly eye on revenue growth. If I look at some of your long term targets give in I think it was about a month and a half ago. Now you were thinking about revenue growth in kind of a 20 per cent plus range. These new 2028 targets.
Samir: Apply around 13% revenue growth and EBITDA margin is similar at around 20 per cent plus so I'm curious, what's driving the more conservative stance now and if there was some change in the market or your approach to the market that would lead to a a bit of a slowdown in top line growth.
Dan Burton: Yes, thank you for the question, Daniel, and we have wanted to make sure that we are carefully following what our clients and what the end market is needing and demanding and be reflective and responsive to that. We have found, as we mentioned previously, over the last few months, late last year and into this year, that while there is significant financial pressure still in our end market, it is starting to subside and it is improving, and there is more of an openness to talk about our full portfolio and more of a discussion around our technology offerings, and I think we have wanted to be responsive to that, and we have shifted some of our growth resources both now and as we think about the future, we see more of those opportunities for balanced growth, and I think we want to prioritize the technology growth as more profitable growth, which can lead to a really meaningful EBITDA growth over the next four years as a company, and so we are prioritizing that profitable growth as what we feel is very important to drive shareholder value at a primary level.
Speaker Change: Yeah. Thank you for the question Daniel and we have wanted to make sure that we are we're carefully following what our clients and what the end market is needing and demanding and and be reflective in response to that we have found as we mentioned previously.
Speaker Change: Over the last few months late last year and into this year that that while there is significant financial pressures still and market. It is starting to society is improving and there's more of an openness to talk about our full portfolio and more a discussion around our technology offerings and I think we've we.
Speaker Change: Wanted to to be responsive to that and we have shifted some of our growth resources, both now and as we think about the future. We see more of those opportunities for balanced growth and I think we want to prioritise the technology growth as more profitable growth, which can can lead to a really meaningful.
Samir: EBITDA growth over the next four years as a company and so we are prioritizing that profitable growth is what we feel is is very important to drive shareholder value at a primary level. We continue to be really excited about the other opportunities for growth and we will continue in a balanced way to pursue <unk>.
Dan Burton: We continue to be really excited about the other opportunities for growth, and we will continue in a balanced way to pursue opportunities like tech-enabled managed services, but I think as the end market is improving, and there is more of an openness to talk about the technology components of our portfolio a little bit more than what we have been able to do over the last 18 months, and that coupled with the fact that we have confidence in and we are excited about our next generation data platform, I think we have shifted some resources and we are planning on continuing to focus on that tech component of our value proposition in a balanced way such that we would project forward more balanced growth that is similar between our technology revenue growth and our services growth. The last thing I will share and then see if Brian would like to add anything is we do take these targets very seriously as we have in the past.
Samir: Opportunities like Tech any boat managed services, but I think as the end market is improving and there's more of an openness to talk about the technology components of our portfolio a little bit more than what we've been able to do over the last 18 months and that coupled with the fact that we have confidence in and we're excited about our next generation data platform I think.
Samir: We've shifted some resources and and we're planning on continuing to focus on that tech component of our value proposition in a balanced way such that we would project forward more balanced growth that is similar between our technology revenue growth and our services growth.
Samir: The last thing I'll share and then <unk> would like to add anything is we do take these targets very seriously as we have in the past when we when we share profitability target. For example, we've striven to to meet or exceed that timeline that we've shared and we've done that recently in multiple regards I think as we <unk>.
Dan Burton: When we share a profitability target, for example, we have striven to meet or exceed that timeline that we have shared, and we have done that recently in multiple respects. I think as we think towards those targets for 2028, we want to have confidence that we can meet or exceed those targets, including from a top-line revenue growth perspective.
Samir: <unk> towards those targets for 2028, we want to have confidence that we can meet or exceed those targets, including from a top line revenue growth perspective, <unk>, yeah, and I I need that last point is important around as we think about from a financial guidance standpoint. These targets, we do think of them as threshold level targets.
Brian Hunt: Yes, and I think that last point is important as we think about, from a financial guidance standpoint, these targets. We do think of them as threshold-level targets, and they are a little bit different from the long-term profiles that we had shared previously in that these targets are more specific. So they're for 2025 specifically, and 2028, real meaningful milestones with levels of both revenue and EBITDA that we think are threshold levels that we will strive to meet and exceed. So to Dan's point, we take those things very seriously.
Brian Hunt: A little bit a little bit different from longterm.
Samir: Profiles that we insured previously and that these targets are more specific so therefore of 2025, specifically in 2028, uhm real meaningful milestones with uhm levels of both revenue and EBITDA that we think are threshold level that will strive to to <unk> to dance point, we'd take those I'm very seriously.
Dan Burton: Our next question comes from David Larson with BTIG. Hi, can you talk a little bit more about these TEMS deals that have been pushed? It sounds like you signed one of them.
Samir: Our next question comes from David Larsen with B T I G.
David Larsen: Hi, can you talk a little bit more about these terms deals that have pushed it sounds like you signed one of them is there any color on like how many more times deals there may be what the incremental revenue contribution could be for each of those and then it sounds like you're you're pretty calm.
Dan Burton: Is there any color on how many more TEMS deals there may be? And what the incremental revenue contribution could be for each of those? And then it sounds like you're pretty confident with your 2025 revenue growth guide of, I think, 10 to 15 percent. Is that really going to be driven by these PEMS deals that you expect to kind of sign in the near term? Yeah, great questions, David.
David Larsen: Funny with your 2025 revenue growth guide of I think 10% to 15%.
David Larsen: Is that really going to be driven by these these times deals you expect to kind of sign in the near term. Thanks.
Speaker Change: Yeah, great questions David So.
Dan Burton: So, first, as it relates to the TEMS deals that we were originally projecting to close by the end of the year, we were encouraged to see one of those just a few days ago come through and sign. That was a meaningful TEMS chart abstraction opportunity for us with an existing client that already had some meaningful TEMS activity going on. So, it was encouraging to see that there continues to be an opportunity for expansion. However, the size of that particular deal was a little below the average for a TEMS contract that we've seen over the last little while.
Speaker Change: First as it relates to the tens deals that we were originally projecting too too close by the end of the year. We were encouraged to see one of those just just a few days ago to come through and sign that was a meaningful terms chart abstraction opportunity for us with an existing client that <unk>.
David Larsen: Already had some meaningful terms activity going on so it was encouraging to see that there continues to be expansion opportunity. The size of that particular deal was a little below the average for attempts contract that we've seen over the last little while and we do have other thames opportunities in the pipeline that.
Dan Burton: And we do have other TEMS opportunities in the pipeline that will continue to progress. Now, importantly, over the last few months, as we've seen improvement in the end market and more of an openness to talk about more of our portfolio, not just TEMS or, you know, those elements of the portfolio that offer cost savings, we have proactively shifted some of our growth resources towards more of those tech-oriented conversations, both with existing clients as well as more new client discussions. And we've started to see the positive results of that in that our pipeline is growing.
Dan Burton: Continue to progress and importantly over the last few months as we've seen improvement in the end market and more of an openness to talk about more of our portfolio not just terms or not just.
David Larsen: Those elements of the portfolio that offer cost savings, we have proactively shifted some of our growth resources towards more of those tech oriented conversations both with existing clients as well as more new client discussions and we've we've started to see the positive results of that in that our our pipeline is growing.
Dan Burton: We saw a very active Q4, a very strong Q4 in terms of our new client conversions, and we move in with momentum to 2024 along those lines. That is, we believe, the result of the end market improving as well as our shift of resources towards those other opportunities. And what I would share as it relates to thinking forward to what that means for 2025, we believe that 10% to 15% growth will be pretty balanced between tech and services, and it won't heavily skew towards TEMS. It will meaningfully have TEMS contributing to that overall growth, but there will be meaningful tech growth as well.
Dan Burton: We saw a very active Q for very strong Q4 in terms of our new client conversions and we move in with momentum to 2024, along those lines that is we believe the result of the end market improving as well as our our shift of resources towards those other opportunities.
Speaker Change: And what I would sure as it relates to thinking forward to to what that means for 2025 <unk>.
David Larsen: We believe that 10% to 15% growth will be pretty balance between tech and services and and it won't heavily skewed towards times it will.
Dan Burton: It'll meaningfully have terms contributing to that overall growth, but there will be meaningful tech growth as well as part of that balance theme that I think we're we're excited about were encouraged by that we see in our pipeline that there are meaningful tech growth opportunities and meaningful terms growth opportunities. We are shifting some groceries sources.
Dan Burton: And that's part of that balanced theme that I think we're excited about, and we're encouraged by, that we see in our pipeline that there are meaningful tech growth opportunities and meaningful TEMS growth opportunities. We are shifting some growth resources a little bit more towards those tech opportunities because that represents really meaningful profitable growth. And we do believe that profitability will be the primary way we can create shareholder value from a shareholder return perspective.
Dan Burton: A little bit more towards those tech opportunities because that represents really meaningful profitable growth and we do believe that profitability will be the primary way, we can create shareholder value from it shareholder return perspective. So we are prioritizing that how 'bout will still continue to have a mix of meaningful tech opportunity.
Dan Burton: So we are prioritizing that, but we'll still continue to have a mix of meaningful tech opportunities and meaningful services opportunities that we pursue, and a large proportion of those services opportunities are proving to be those TEMS opportunities. Your question, Dave, around kind of in-year P&L contribution dynamics. What we're anticipating for revenue in 2024 is just given the bookings results in 2023 with that 100% dollar-based retention rate, as well as a little bit heavier weighting toward Q4 2023 bookings for new client additions. We'll see a little lower revenue growth in the first half of 2024 as those new deals do take a couple of months to start ramping onto the P&L. And then with the deal that we just recently signed, the TEMS expansion, we mentioned that that'll start ramping up towards mid-year.
Dan Burton: <unk> full services opportunities that we that we pursue and and a large proportion of those services opportunities are proving to be those terms opportunities.
Dan Burton: To your question, Dave around kind of in your P&L contribution dynamics, what we're anticipating for revenue in 2024 has just given the bookings results in 2023 with that 100 per cent dollar base retention rate as.
David Larsen: As well as a little bit heavier weighting towards Q4 of 2023 bookings for new client additions.
Dan Burton: We'll see a little lower revenue growth in the first half of 2024 as does need your new deals do take a couple a few months to start ramping under the piano.
Dan Burton: And then what the deal that we just recently signed the times expansion, we mentioned and that will start ramping towards mid year and so we do anticipate to what Dan shared that both technology and services will ramp from a revenue graff standpoint, and the second half of 2024.
Dan Burton: And so we do anticipate, as Dan shared, that both technology and services will ramp from a revenue growth standpoint in the second half of 2024. As we ramp toward that 10 to 15 percent growth rate in 2025, we likely won't be at that 10 to 15 percent growth rate in the second half of 2024, but we'll be ramping toward that. And then we'll have a meaningful, as you'd expect, bookings season in the back half of 2024 as well that will lead to that confidence in that revenue trajectory for 2025. Our next question comes from Scott Schooner. KeyBank: Hey guys, this is Steve on for Scott.
David Larsen: Uhm as we ramp toward that 10% to 15% growth rate in 2025, we likely won't be at the the 10% to 15% growth rate in the second half of 2024, but we'll be ramping toward that and then we'll have a meaningful as you would expect bookings season in the back half of 2024 as well that will lead to.
David Larsen: That uhm confidence in that revenue trajectory for 2025.
Steve: Our next question comes from Scott Schoenhof's Keybanc.
Dan Burton: Hey, guys with Steve on for Scott Uhm, I'm, just gonna ask you about the margin Caden contact enabled name services Uhm. So we continue to expect no margin contribution in the first year or something.
Dan Burton: I just want to ask about the margin cadence on tech-enabled managed services. Should we continue to expect no margin contribution in the first year, or has technology helped augment this? Thank you.
Speaker Change: Allergy helped on Memphis. Thanks.
Speaker Change: Yeah, Great question, Steve. So we continue to see the tech anybody been of services client relationships and margin profile, though.
Dan Burton: So, we continue to see the tech-enabled managed services client relationships and margin profile that is actually occurring consistent with what we've seen in the past. And we do have optimism about the impact that some of our technology investments, both in terms of technology that we've acquired recently with the ERS acquisition, as well as some of our AI pilots, where generative AI is providing us, for example, a chart of traction with some meaningful efficiency gains, that will be a tailwind for us as we think about the gross margin profile evolution. That has helped us to kind of stay on track, and we hope in the future, but we're early, to have some tailwind as it relates to that progression. But we continue to see consistency of margin expansion and improvement in those tech-enabled managed services opportunities, like what we've seen in the past. Our next question comes from Sarah James of Cantor Fitzgerald. Thank you.
Dan Burton: That is actually occurring consistent with what we've seen in the past and we do have optimism about the impact that some of our technology investments. Both in terms of technology that we've acquired recently with U P. E. R. S acquisition, what they arbus acquisition as well as some of our AI pilots where generative.
Sarah James: I I is providing us for example, a chart attraction with some meaningful efficiency gains that that will be a tailwind for us as we think about the the gross margin profile evolution that has helped us to kind of stay on track and we hope in the future, but but we're early to have some tailwind.
Sarah James: As it relates to that progression, but we continue to see consistency of of margin expansion and improvement in those tech enabled minutes services opportunities like <unk>, what we've seen in the past.
Dan Burton: Our next question comes from Sarah James Cantor Fitzgerald.
Dan Burton: And congratulations to Brian, Jason, and Dan on your new positions. Can you talk about your assumptions on cross-selling embedded in your 2025 and 28 guide? Does that assume that dollar-based retention stays in the 104 to 110 range? And how much of the top-line growth is coming from cross-selling? And where do you think penetration into your existing book will be when you hit the 28 numbers? Yeah, great questions, Sarah. Thank you for them.
Sarah James: Thank you and congratulations to Brian Jason, Indiana, you need positions can you talk about your assumption on cross selling embedded in your 2025 and 28 guide does that assume that the diabase retention say isn't that 104 to 110 range huh.
Dan Burton: How much of the top line growth is coming from cross selling and where do you think penetration into your existing Doc well, we'll be when you hit the 20th numbers.
Speaker Change: Yeah, great questions. Sir Thank you for them I'll share a few thoughts then Brian please add as well so when we think about the cross selling motion first of all one of the things that were encouraged by US is the fact that over the last several years, we've dramatically expanded the number of clients, where we have some form of existing client relations.
Dan Burton: I'll share a few thoughts, and then Brian, please add as well. So when we think about the cross-selling motion, first of all, one of the things that we're encouraged by is the fact that, over the last several years, we've dramatically expanded the number of clients where we have some form of existing client relationship. We're now over 600 health care organizations where we have an existing client relationship. Now, 109 of those are a more full enterprise-level DOS kind of client relationship, but that does offer us more than 500 existing clients that are more of the applications layer that provide us with a meaningful opportunity for cross-sell of DOS or data platform into that base. And then, in the other direction as well, meaningful opportunities with our DOS subscription base to sell into more applications and see expansion there.
Brian Hunt: Yep, we're now over 600 health care organizations, where we have an existing client relationship now 190 of those are a more full enterprise level dos kind of client relationship, but that does offer US you know more than 500 existing clients that are more of the app slayer that that provide us with a meaningful opera <unk>.
Dan Burton: Unity for cross sell a dos or a data platform into that base and then in the other direction as well meaningful opportunities with our dos subscription based to sell into uhm more applications N C expansion there.
Dan Burton: Now, in that first motion, that really shows up when we sell an app layer client on the data platform. That contributes to our ability to add more and more net new DOS subscription clients over time. As a note, last year, a majority of the net new DOS subscription clients that we added came from that pool of existing clients at the app layer that hadn't yet adopted the data platform.
Brian Hunt: That first motion.
Brian Hunt: That really shows up when we when we sell an app layer client on the data platform that contributes to our ability to add more and more <unk> subscription clients over time as a as a note last year a majority of the <unk> subscription clients. So we added came from that pool of existing clients at.
Dan Burton: The App Slayer that hadn't yet adopted the data platform. So we're encouraged to see that cross selling motion, adding to our confidence level in 2024, and beyond and adding more and more data platform clients and then going the other direction. We are also encouraged to see meaningful interest.
Dan Burton: So we're encouraged to see that cross-selling motion adding to our confidence level in 2024 and beyond in adding more and more data platform clients. And then, going the other way, we are also encouraged to see meaningful interest, and meaningful opportunity within our DOS subscription client base to cross-sell new application capabilities that we've either built or we've recently acquired. And I think we're building more and more capabilities, and there's more and more of an openness now with the end market improving to talk about those tech cross-sell opportunities. And that's become more of a focus for our growth organization. It also has the benefit in both cross-selling motions of being a little bit more efficient from a sales and marketing operating leverage perspective.
Dan Burton: Meaningful opportunity within our dos subscription client base to cross sell a new application capabilities that we have either built or we've recently acquired and I think we're we're building more and more capabilities and there's more and more of an openness now at the end market improving to talk about those tech cross-sell opportunities in that.
Dan Burton: It's become more of a focus for growth organization. It also has the benefit in both cross selling motions are being a little bit more efficient motion from a sales and marketing operating leverage perspective, and and that also informs the way. We think about the next few years that we can see meaningful growth balance growth between <unk>.
Dan Burton: And that also informs the way we think about the next few years, that we can see meaningful growth, balance growth between tech and services, and that that can be growth with operating leverage so that it's very profitable growth. And I think that informs the meaningful improvement that you see us projecting by 2028 in terms of our EBITDA expansion. Yeah, I do think about what Dan's saying, as we look to the 2025 and 2028 targets, we do anticipate our dollar-based retention rate, which is that once a DAS client has landed either net new to the company or been cross-sold onto the platform, we anticipate that being in the high single-digit rate range above 100 percent, so somewhat similar to 2024, a little higher than what we've got it to.
Dan Burton: <unk> services and that that can be a growth with operating leverage so that it's it's very profitable growth and I think that informs that meaningful improvement that you see is projecting by 2028 in terms of our EBITDA expansion just add to that yeah, I do think to what dancing as we look to the 2025 and <unk>.
Dan Burton: 2028 targets, we do anticipate our dollar based retention rate, which is that once a dos client has landed either net needed the company or have been crossword onto the platform, we anticipate that being in that.
Speaker Change: High single digit right range above 100 per cent, so somewhat similar to 2024 potentially a little a little higher than what we've got it too that that's kind of the anticipation.
Dan Burton: That's kind of the anticipation that we see moving forward. And I would add that part of what we're encouraged by is that we think that the tech dollar-based retention opportunities are quite similar to the services dollar-based retention opportunities, that they're both significant at that high single-digit per year level, which contributes to that balanced growth over the next four years between tech and services. Just a reminder, to ask a question, please press star 1. Our next question comes from Vishal Patel, Piper. Hi, this is Vishal. I'm for Jeff Tassin.
Dan Burton: That we we see modem for it.
Vishal Patel: And I would add that part of what we're encouraged by as we think that the the tech dollar base for attention opportunity is quite similar to the services darvish attention opportunity that they're both significant at at that high single digit per year level, which contributes to that balance growth over the next four years between <unk>.
Dan Burton: Services.
Vishal Patel: Just a reminder to ask a question. Please press star one.
Vishal Patel: Our next question comes from Misha Patel Piper Sandler.
Vishal Patel: Hi, This is vishal <unk>, thanks for taking the question.
Dan Burton: Thanks for taking the question. On TEMS, could you remind us what percent of technology customers have a TEMS contract today and what percent do you expect in 2024? And then could you also remind us what's the long-term gross margin target for those TEMS contracts? Thank you. Yeah, absolutely.
Vishal Patel: <unk> could you remind us what percent of technology customers have it comes contract today and what per cent do you expect in 2024.
Dan Burton: And then could you also remind us what's the longterm gross margin target for those times contacts. Thank you.
Speaker Change: Yeah, absolutely the sure. Thanks for the questions. So as it relates to the per cent of our daughters subscription clients that have at times component to their relationship or a little over 10%. So it's still very early stages in terms of the opportunities and even within those little over 10%.
Dan Burton: Thanks for the question. As it relates to the percent of our DAS subscription clients that have a TEMS component to their relationship, we're a little over 10%, so still very early stage in terms of the opportunities. And even within those little over 10% of our clients that have one form or another of a TEMS relationship, there are often multiple TEMS opportunities. And the most recent deal that we signed is a good example of that.
Dan Burton: Of our clients that have one form or another of terms relationship. There are often multiple times opportunities in the most recent deal that we signed is a good example of that just a few days ago with an existing client that was already in that that 10% group that had had attempts component to their relationship chose that.
Dan Burton: Just a few days ago, with an existing client that was already in that 10% group that had a TEMS component to their relationship, chose to expand the TEMS component, and add some new TEMS capabilities to that relationship. So we're not just limited to the 90 or so percent or just under 90% that haven't yet entered into a TEMS relationship. So we see meaningful opportunities in the pipeline today, specific opportunities both with the 10-plus percent that already have a TEMS relationship as well as the other just under 90% that haven't yet entered into a TEMS relationship. Because TEMS has gone so well with our existing client base, we do see a little bit of a difference in the timeline that's often manifested when a client has had success in one TEMS area. There's often a little bit more openness to other TEMS areas and expansion opportunities there. The first time a client goes from a more traditional DOSH relationship to that first TEMS relationship, that can take a little bit more time.
Dan Burton: Expand attempts component add some new temps capabilities. So that relationship. So we're not even just limited to the 90 or so per cent or just under 90 per cent that haven't yet entered into attempts relationship. So we see meaningful opportunities in the pipeline today specific opportunities both with.
Dan Burton: With the 10 plus percent that already have attempter relationship as well as the other you know just under 90% that haven't yet entered into attempts relationship because tim's has gone so well with our existing client base, we do see a little bit of a difference in the the the time.
Dan Burton: <unk>, that's often manifest when when a client is has access and one temporary there's off it a little bit more openness to other times areas an expansion opportunities. There. The first time Ah client goes from a more traditional dos relationship to that first tim's relationship that can take a.
Dan Burton: But we believe that it will continue to be a meaningful opportunity. And we're trying to balance that as it relates to our overall growth to make sure that we're also prioritizing the tech cross-sell opportunities with our existing clients. And as the end market has improved and operating margins have improved, there's a little bit more of an opportunity to talk about that as part of the expansion profile. And as I mentioned earlier, we have shifted some of our focus and some of our resources more towards those tech cross-sell opportunities. And so that's also informing our 2024 and beyond projections to enable us to have that balanced growth perspective where we're seeing both tech and services grow at about the same rate. Just on the margin profile side of the TEMS contracts, the services margin, we expect it to be similar to what we've shared in the past around unit economics where services margin, gross margin, begins at 0% to 10% in year one and then migrates over four or five years to that 25% service gross margin.
Dan Burton: A bit more time, but but we believe that will continue to be a meaningful opportunity and we're trying to balance that as it relates to our overall growth to make sure that we're also prioritizing the tech cross-sell opportunities with our existing clients and as the end market has improved and operating margins of it.
Dan Burton: There's there's a little bit more of an opportunity to talk about that as part of the expansion profile and as I mentioned earlier, we have shifted some of our focus at some of our resources more towards those tech cross-sell opportunities and so that's also informing our 2024 and and and beyond <unk>.
Dan Burton: <unk> to enable us to have that balance growth perspective, where we're seeing both tech and services grow at about the same rate.
Dan Burton: On the margin profile side of the Thames contracts.
Dan Burton: The services margin, we expect to be similar to what we shared in the past around and unit economics were services' margin gross margin begins at zero to 10% in your one and then migrates over four or five years to that 25 per cent services gross margin the technology component of those relationships, which typically <unk>.
Dan Burton: The technology component of those relationships, which typically expands with the TEMS deal, is, as you'd expect, a little higher than our overall technology gross margins, so call it in that 70% to 80% range for those contracts. And the great benefit about locking in these TEMS relationships is they're typically five-year locked-in contracts, which gives us a very high level of visibility and stickiness for the technology contract over that term as well as the services contract.
Dan Burton: <unk> with the terms deal is is is you'd expect a little higher than our overall technology gross margins I'm, calling in that Uhm 70 to 80 per cent range for those contracts and the great. The great benefit about locking in these times relationships is there typically five you're locked in contracts, which gives us.
Dan Burton: A very high level of visibility and stickiness for the technology contract over that term as well as the services contract. So while they can be a little bit hard to precisely forecast, we really love the long term strategic relationships and the visibility gives us uhm in the out years.
Brian Hunt: So while they can be a little bit hard to precisely forecast, we really love the long-term strategic relationships and the visibility it gives us in the out years. Our next question comes from John Penney with Kennec, Oregon News. Hi, John Penneon for Richard Close.
John Penney: Our next question comes from John Penny Mechanical Joni.
John Penney: Oh, Hi, John Penny on for Richard close Thanks for the questions.
Dan Burton: Thanks for the questions. So with Databricks and Snowflakes, it took two to three years to get the entire client base transitioned over. Can you, I guess, give some color on whether, like, is that an easy transition? Is it difficult?
John Penney: With the the the database date of breaks and like Snowflakes infrastructure two to three years to get the entire client base like transitioned over can you I guess give some color of weather like is that an easy transition transaction as a difficulty you expect any pushback on getting those transition and like approximately how much of a client basis transition.
Dan Burton: Do you expect any pushback on getting those transitions? And, like, approximately how much of the client base has transitioned or is on the platform already? Yeah, thanks for the questions, John. So, we have a few clients that are already utilizing the Next Generation Data Platform, and as Brian mentioned in our prepared remarks, we're pleased with how that performance is going and pleased to see clients really satisfied with the Next Generation Data Platform capabilities. We do think migrating our existing client base will take the next two to three years to get the vast majority of them migrated over. And what we have seen is more demand than supply in terms of a timeline perspective.
Dan Burton: Or on the platform already.
Speaker Change: Thank you.
Speaker Change: Yeah. Thanks for the questions. John So we have a few clients that are already utilizing the next generation data platform and as Brian mentioned in our prepared remarks were pleased with how that performance is going in and pleased to see clients really satisfied with the next generation data apart from capabilities would you <unk>.
Dan Burton: Inc. Migrating our existing client base will take the next two to three years to get the vast majority of them migrated over and what we have seen is is more demand then supply of Ah Ah Ah in terms of from a timeline perspective, there's a lot of excitement among our existing client base to move to these new capable.
Dan Burton: There's a lot of excitement among our existing client base to move to these new capabilities, so we're working to accommodate those migrations as quickly as we can, but we make sure that we can do that in a very orderly way so that it is a meaningful migration. This is a migration that involves new technology capabilities, and so we want to be thoughtful and careful in the way that we approach this. This isn't the first or the second or the third migration that we've managed before, so we have experience in how to manage this, so we're confident that we'll be able to manage this migration in a similar way that we've successfully managed prior migrations.
Dan Burton: <unk>. So we're working to accommodate those migrations as quickly as we can but make sure that we can do that in a in a very orderly way. It is you know a meaningful migration. It is on migration that involves new technology capabilities, and so we want to be thoughtful and <unk>.
Dan Burton: And careful in the way that we approach. This this isn't the first or the second or the third migration that we've managed before so we have experience in how to manage this so we're confident that we'll be able to manage this migration similar way that we've successfully minutes prior migrations.
Dan Burton: We have no further questions in the queue. I would now like to turn the call back over to Dan Burton for any additional or closing remarks. All right, thank you so much for your investment of time and interest in Health Catalyst, and we look forward to staying in touch in the future. Thank you. This concludes today's Health Catalyst fourth quarter and full year 2023 earnings conference call. Please disconnect your line at this time and have a wonderful day. Thank you for watching, and more. Thanks for watching. I'm Dr. Daniels. Transcribed by https://otter.ai, ass Jeajejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejejeje
Dan Burton: We have no further questions in the queue, Oh now like to turn the call back over to Dan Burton for any additional are closing remarks.
Dan Burton: Alright. Thank you so much for your investment of time and interest in health catalyst and we look forward to staying in touch in the future. Thank you.
Dan Burton: Thank you. This concludes today's health countless fourth quarter and full year 2023 earnings Conference call. Please disconnect. Your line at this time and have a wonderful day.
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