All right, welcome, everybody. My name is Dave Bernstein. I cover Digital Health at Wells Fargo. With me today is a team from Health Catalyst. We have Dan Burton, CEO. Oh, I was gonna-
Yeah.
Okay, so we have Chief Operating Officer, Dan LeSueur, and Jason Alger, CFO. Stand over here. Okay, well, there's a lot of interesting developments. I think you had a very interesting quarter, so maybe we can start on the second quarter. You had a bookings announcement where you're essentially guiding for the record amount of new client wins in the quarter. What's changed? Company-specific, macro, give us the details.
Yeah, I think a couple of positive developments, starting most broadly with macro. Certainly, we're seeing the operating environment improving. And really, since late 2023, we've seen steadily improving end market health within our client base. So that's certainly helping us. I think another element's really been positive for us on the new client side, as you mentioned. We announced that we'd already, through the first half, signed more new clients than we had all of last year. And that feels like more of a series of activities that was like pre-pandemic levels in terms of the kind of discussions that we're able to have. And then even a little bit better than that, the third dynamic, I think that's really helping us, is the new Ignite platform. So it's our next generation.
It's the fourth migration of a data platform in our company's 16-year history. But it's a much more modular and flexible platform that makes it a lot easier for a client to get started with Health Catalyst. And, particularly for those existing clients of ours that have come to us through acquisitions, we have over 500 existing clients now that don't yet have the Ignite platform. It's so much easier to cross-sell them on a more modular, more flexible platform than our old platform, which we loved, which was DOS, but it was a lot heavier and a lot more expensive.
With this new Ignite platform, we can kinda meet clients where they are, with the use case or two that matter most to them, and a lower price point that allows them to then get started using more of what Health Catalyst has to offer and expand from there. So it's been a few tailwinds, a few really positive developments. We're excited for the future. That did inform us updating our guidance for the new logo adds for this year to low twenties from where we were in the past at the mid-teens. And at the low twenties level, that would be the best year in the company's history.
Interesting, so maybe if we go a step back here, your DOS platform used to sell, primarily focus on all-in sales-
Yeah.
Right? You said it's expensive, you wanna sell it upfront, and you used to give a discount, right? When, because it would take time for them to scale into that platform. So now that you're selling this new Ignite platform on a modular basis, what's? I mean, clearly, the discussions are maybe a little bit different. Is there lower hurdles to get these sales because of that, and is it any way impacting the sales cycle?
Yeah, I'll share a few comments, and then Dan LeSueur is here. He's our Chief Operating Officer, and he really leads all of our Ignite work, so he's the real expert. But I'll share a few thoughts. There are some meaningful differences now, selling Ignite versus what we used to do in selling DOS. When we built out DOS, we had to build out ourselves a number of the components that were needed to build out a data platform for healthcare. Cross-industry capabilities just didn't exist four, five, six years ago, in order for us to kinda complete the suite of technology needed. Today, that cross-industry tech does exist, and it's better, faster, and cheaper than a proprietary system that we would have to keep maintaining.
So it's better for us, it's better for our clients to tap into that lower in the tech stack, cross-industry tech from Snowflake, Databricks, Microsoft and others. And Ignite just does a really nice job with that. What that also allows is some future-proofing in the architecture of our data platform, where whatever the next great cross-industry tech that's coming in, we're already seeing AI use cases as great examples. It's much easier to plug that into the Ignite platform, or we almost even think of Ignite as a little bit more middleware now, that sits on top of great cross-industry tech, and applies it to specific healthcare use cases. And that's a motion that's just. It's a lot easier, and it's a lot better suited to meet a client with the use case that matters most to them.
Focus on that use case, have a little slimmer version of the infrastructure needed to address that use case, and then build from there. So instead of the old DOS selling motion, where you kinda had to sell them on everything upfront, and they really had to buy in, now we make it easier to get started. And that does then present us with more opportunities to expand over time, and that is incumbent upon us then to be really good at describing that next adjacent opportunity. When we have success in one financial area, like with Vitalware, what's the next adjacent use case? Maybe on the cost side with Power Costing. And let's make sure we have the Ignite modules ready, we have Power Costing ready, we know how to sell that adjacency, and we're seeing really meaningful early success doing that.
We're measuring our conversion rates in the cross-sell motion with this more modular Ignite, and we're averaging about a 2X or a little over a 2X conversion rate when we cross-sell using this new infrastructure to those existing clients. So it's certainly encouraging. What would you add, Dan?
I'd just share that we have been quite acquisitive over the last several years, and so the breadth of our offerings has really expanded, and the ability for those offerings to be integrated in that middleware technology has also increased with the introduction of Ignite. And so these technologies have been very targeted towards our four areas of differentiated focus, strategic areas of focus: clinical improvement, financial improvement, our measures and registry space, and our data and analytics platform, and they're also technologies that our clients are already invested in. They're already invested in those types of use cases, so the decision for them becomes: Can I consolidate on a single vendor with Health Catalyst versus having a bunch of disparate relationships with a, you know, whole portfolio of vendors? Where it's actually cost saving for them to go more with a tech consolidation partner like Health Catalyst.
And so there definitely is an inverse relationship with those smaller, more modular purchases and a sales cycle timeline. And it's, it's early, but we do believe that hypothesis, that that will help with our long sales cycle as well.
Okay, and Jason, maybe, you can put some numbers on this. So DOS gross margins, if I remember correctly, 60%-ish. I think Ignite, maybe you get 1,000 more basis points on that?
Yeah.
Um-
Yeah, that's right. That's something that we're really excited about. Health Catalyst Ignite does have a more favorable gross margin profile. It is running at around a 70% gross margin profile compared to DOS, which is around a 60% profile. Our apps, they run at 80% plus. So right now, as a total company, I mean, we're in the high sixties from a gross margin perspective. We do expect Ignite to... Or on the technology side, we're in the high sixties. We do expect Ignite to elevate our technology gross margin up into the seventies over time.
Okay. And then I think you mentioned you already have a record amount of clients that you already booked. Historically, 2Q and 4Q are your seasonal strong bookings numbers or quarters, I would say. We're now sitting in 3Q, any color on where your bookings are progressing? How comfortable are you on your guidance?
Yeah, we feel really good about where we are. So we shared at the most recent earnings call, just, I guess about a month ago, a little less than a month ago, that, through that first half, including that heavy Q2 selling season, we're really pleased with the way that the new client and the existing client performance came in. On the new client side, more new logos than all of last year. On the existing client side, we saw outperformance relative to our forecast in the most profitable areas. So on the tech side, we saw tech expansion outpace our forecast. And on the services side, we saw the higher margin, non-recurring pro services outpace our forecast. So we're pleased to see strong overall growth and really profitable growth as well.
And now we're eight months in to the year, and we do benefit from a business model with a lot of visibility into what next year looks like. And we have a robust pipeline, lots of wood to chop, as always. Q4 will be a really important selling season for us, but we've got a robust and growing pipeline to support that. And all of that informed our perspective a few weeks ago that we shared. We are confident in returning to that double-digit top line growth next year. And we're confident in 50-plus% EBITDA growth next year. And we don't believe our stock is priced that way today.
My view of the most rational explanation of the stock price, although it's going up some today, which is good to see, is that we're being valued more as a low-growth or a no-growth company. That's fair in the sense that this year we're only guiding to 4% growth year over year. So we're not being valued as a double-digit grower. We're excited to demonstrate that that's exactly where we're headed for twenty twenty-five and beyond. As that occurs, when we look at the benchmark data, that should justify about a doubling of our EBITDA multiple relative to where we've been. So we're working hard to demonstrate that.
We have confidence from a pipeline perspective that we've got what we need to get back to that double-digit top line growth for 2025 and beyond as well.
Okay. And then if we think about the last maybe twelve to twenty-four months, you did have that slowdown, the market kind of slowed down in general with health systems cutting back on spend. There was a shift towards TEMS-
Yeah
deals. Maybe you can talk about that. But would love to kinda get your thoughts on now. You're really de-emphasizing that. You have a lot more opportunity on the technology side. Just give us your philosophy now, today, in terms of TEMS, where the focus is, where it's being de-emphasized, what that means for you.
Yeah, absolutely. It's been an interesting time to be a public company these last five years. We just celebrated our five-year anniversary of going public, and we came onto the public markets before the pandemic in 2019, and as a high-growth company. For those first few years, we were a high-growth company, growing, you know, well north of 20% per year. Then 2022 really hit, where, you know, after getting through the pandemic and all the government subsidies that really helped our end market survive, inflation just devastated the end market. In 2022, you know, most of 2023, most of our clients, and you see this in external data, like from Kaufman Hall, were underwater from an operating margin perspective. Most were negative. Really, really tough environment to operate within.
What we found that we needed to do was shift our focus towards those parts of our portfolio, like tech-enabled managed services, that offered, you know, hard dollar guaranteed cost savings. And thank goodness we had portions of our portfolio that could deliver that in the near term, 'cause that's the only thing that our clients were looking for at that point in time, and we saw that part of our business really grow. There are great parts of that business, and there are really challenging parts of that business. It's a very low margin business for us, which is challenging. It's very sticky, and it's very valuable to clients, which is positive, and we could sign very long-term contracts with clients. So that was another positive.
But as soon as we saw those operating margins start to improve, which we started seeing in late 2023, we also saw this opening up of both existing clients and prospective clients being willing to talk about our full portfolio again, or all of our tech, not just TEMS. And for a variety of reasons, we were excited to move towards the more profitable parts of our portfolio and open up to talk about all of the portfolio. And in that sense, from late 2023 through today, the operating environment has felt much more like pre-pandemic, very normal, relative to kind of what we were experiencing before. And that has allowed us to focus more on, you know, the full portfolio and also those parts of our portfolio that are more profitable and that enable us to profitably grow.
And that's where we've seen that overperformance. We still have a pipeline of opportunity in tech-enabled managed services, but I will say we're being careful and selective about what kinds of tech-enabled managed services we pursue. And if there are, you know, finite dollars that a client can invest, and they're interested in a couple of things, we'll probably skew towards the more profitable parts of our portfolio to talk with them and prioritize. And I think that bodes well for us in terms of not only top line growth, but profitable growth.
Okay, and you don't really do TEMS if they're not a client on your technology side, right?
Much more typical for us to have a good, solid existing client relationship and then move into TEMS than to go there initially.
Okay, and then part of your... If we go back to bookings guidance, you know, you talk about dollar-based retention. I think you said a couple of percentage points of growth is coming from one-off projects or-
Yeah
- something that's not necessarily repeatable. Can you just tell us what that is?
Yeah, so one of the areas that outperformed, that is a higher profit margin area for us in the services space, is these project-based or initiative-based, non-recurring professional services. And that could be implementation of technology, where there's a starting point and an end point, and it makes more sense to sign a contract that's six months in duration or nine months in duration. Likewise, if we're working on an improvement initiative, like a sepsis mortality rate improvement, that's usually a finite project, six months, nine months, and clients prefer to sign a non-recurring contract that has a starting and an ending point. Those are easier to get approved from a budget perspective. But what we're also finding is those kinds of projects are recurring at our clients, that they keep signing more and more of these, and that's part of the overperformance that we saw.
It's higher gross margin, and it is a recurring part of the relationship. But today, it is excluded definitionally from our dollar-based retention metric that we shared. And it overperformed enough that we felt like at the last earnings call, we should share, there's another three or four points of existing client expansion growth, that's gonna come through these non-recurring, but recurring, professional services contracts, so that you could model appropriately kind of what that existing client expansion looks like with both of those components included as one building block, and then add to that the new client building block. And both of those, when you model it out, you can see why we're confident we're headed back towards that top line, double-digit growth in 2025.
Okay, and I do wanna open up the floor a little bit here. So when we're talking about the migration onto the new platform, this is year one, right, of moving to Ignite. A couple questions here. One, as it pertains to technology and development, you're expecting to actually recognize absolute dollar cost savings. Can you just walk us through the expectations on what happens on the operating expense line here over the next couple of years in terms of your temporary investments? And then, as you're migrating clients, how should we expect gross profit to kinda evolve as more and more clients get onto Ignite?
Should I talk about it operationally, and then you-
Sure.
address the finances? So we have about 120 DOS customers, and we forecasted about three years of time to migrate them all from DOS to Ignite. And we're about a year into that, and we're on track to have those migrated within that.
... timeline. All of our new customers, by the way, are coming in the door directly to Ignite, so that pipeline of migrations isn't growing. We're just, you know, chipping through that. We have a dedicated team oriented towards those migrations. We're leveraging offshore capabilities to help us go through that, migration process. As far as the financial profile and what that looks like, Jason, you wanna share?
Yeah. Yeah, as Dan mentioned, we are winding down that investment in Health Catalyst Ignite. We are seeing improvement in the R&D line and expect to continue to see improvement. It has improved year over year in absolute dollars. Expect to continue to see operating leverage there. Couple of the levers, like Dan mentioned, one lever is through better utilization of our office in India, which is a lever that we are pulling and plan to continue to pull on in the future on the R&D line, as we continue to wind down this investment. Also from a support standpoint, as we're supporting Ignite in the future, we plan for a function of that support to be driven by offshore resourcing, which does help that margin profile improvement that I mentioned previously.
Okay, that's helpful. And then maybe a little bit on the competitive landscape. So whenever I get that question, it's like, Well, who are your competitors? It's always very fragmented, competitive landscape. I think historically, you've said the primary competition is the health systems themselves, or just doing all of this work on their own. Can you just walk us through right now, as we sit here today, what is the competitive landscape? Who are you competing against? Any thoughts there?
Yeah, absolutely. So it does continue to be, primarily a health system, often with some help from a cross-industry tech vendor, deciding, you know, can I just stand up a data lake on my own, maybe with some help from AWS or Google or Microsoft? And the way that we answer that at the platform level is, of course, absolutely, you want to have partnerships with these incredible cross-industry technologies. That's what we do, and that's what we enable to happen really seamlessly and in an integrated way, and that's why we have partnerships with Microsoft, Snowflake, and Databricks, and why Ignite is built on top of that cross-industry tech.
I think the piece that you'll never get, we don't believe you'll ever get from a cross-industry tech vendor, is the healthcare-specific data models, the healthcare-specific data relationships and content that are necessary to take great raw cross-industry tech and translate it into healthcare-specific use cases. It's wonderful to dump a whole bunch of data into a data lake, and you can absolutely do that. If you're a health system, and you wanna partner with one of those cross-industry vendors or a couple of them, making sense of what's in that data lake and using the data in the data lake to actually improve clinically or financially, requires someone to make sense of that data.
If you're not gonna get it from the cross-industry tech companies, and it doesn't make economic sense for them to invest and do that, when they have so much growth that's cross-industry and much higher margin, and if you're not gonna get it from Health Catalyst, then you have to do that yourself as the IT shop. And we can do that better, faster, and cheaper by virtue of the fact that we support hundreds of clients in this space, and we have a commercial-grade version of that layer of the tech stack that's just better, faster, and cheaper. So that's the value proposition. It really isn't either/or, it is and. And our Ignite platform takes advantage of that cross-industry tech, but then complements it really meaningfully with that healthcare-specific, use case-specific investment.
Then the last competitive front is at the use case layer. So at the vertical layer above, once you've gotten the data in the data lake, and you've organized it, and you've made sense of it, then if you want to improve something clinically, you wanna improve something operationally or financially, there's over a thousand startups in that point solution, you know, use case-specific realm. And there, it's a different competitive dynamic, right? There, we have to meet that point solution where they are and match up well against solving that one use case. We try to stay focused on, like what Dan shared, our four areas of focus, two horizontals and two verticals. But within those areas of focus, we've got to match the tech that is available by the point solution.
Where we usually win is below and above it. Below it, we've got an infrastructure in Ignite that enables them. If they ask a slightly different question, you might need different data sets, and the point solution doesn't have a data infrastructure to support that. We do, and then above that, you may need expertise. If you're working on a clinical problem, and you've discovered that your sepsis mortality rate is way too high, great! What are you gonna do about it? We have national experts on our professional services side that know how to fix the Pareto list of most common causes for an increased sepsis mortality rate. These point solution startups don't have that.
And that's where we win. Look, we'll bring in our services expertise in one of those non-recurring project-based, you know, professional services projects, and we'll help you get better at the treatment of sepsis patients. It's that combination of the full tech stack and the right expertise that really differentiates us, whether it's lower in the tech stack, you know, versus build your own, or higher in the tech stack, if it's use case specific.
Okay. And maybe just to build on that quickly by adding one phrase in here, AI. Does that, I mean, clearly, it helps, it empowers, lowers hurdles for you in certain development processes. But does that also help health systems do it themselves and do a lot of the heavy lifting that they otherwise would not do? So if you kinda weigh what AI impact might have, is it a tailwind? Is it a headwind? Is it net neutral? What are your thoughts?
We believe it's a tailwind, and we believe it's a great next example of how a cross-industry technology can be harnessed if there's enough healthcare-specific understanding of how to apply that cross-industry tech. So AI, GenAI, is a great example of amazing cross-industry tech. But for it to matter in healthcare, it needs to be applied to healthcare-specific use cases. So we have three areas of focus with AI, and I think all three of them demonstrate why Health Catalyst is a really useful partner to our clients.
And in many cases, we're giving our clients these use case examples, so they can go to their board and say, "Yeah, we're doing stuff with AI, and here's examples of it." So the first use case example is, in all the visualizations of data that can occur at a health system, it turns out that the human eye is not particularly good at interpreting data in a chart, even a basic chart. We've studied it, we're an analytics and a data company, and doesn't matter how deeply trained you are, what level in the organization you are, you've got about a fifty-fifty chance of correctly interpreting basic tenets of any chart with just the benefit of the human eye and your training.
When you layer on healthcare.ai, which is a Health Catalyst property that we've maintained for a number of years, that uses AI to help you interpret the data, it layers on visualization elements that help you see when a trend line has changed. What's the average? What are inliers? What are outliers? And has there been a fundamental change in performance? And if nothing changes, where will we be in six months? With the benefit of that overlay of AI, you go from fifty-fifty to about 95% accuracy, and that's something that we can layer on to every visualization that our clients are looking at every day.
On average, about 10,000 times a day, our clients are using that AI, and many of them have taken that to their board to show them, "Look, we're using AI, and we're making better decisions as a result." That's one example. A second example, quickly, is in the area of measures and registries. AI is the latest technology example that makes it better, faster, and cheaper through the use of technology. We've done that a few other times with other technologies, where AI now is able to correctly predict about 91% of the time where the data is in a particular registry, where it can be found within the EMR, typically, where it needs to be populated within the registry, and within the submission process, and it yields another 25% efficiency gain.
We're typically a lot faster at adopting new technology than our clients, and that's where I think one of the advantages that we bring, and this has always been Health Catalyst area of focus, is to study and understand great cross-industry tech and apply it to healthcare-specific use cases. In the area of chart abstraction, for example, when we are the ones managing the chart abstraction, so we've signed a terms arrangement where we manage the team, the adoption of AI, GenAI, is much faster than when we offer that same technology, that same GenAI to our clients for them to implement within their client setting.
We're just more fundamentally, I think, built around healthcare technology, and so the adoption of the technology we see as faster when we have more of a control over it, and we help our clients in that way to adopt new technologies. So that's where I think we will help our clients to embrace new technologies, including AI, moving forward, and that's a role that we're excited to play. It's something that we've been doing with technology since our founding sixteen years ago. Anything, Dan or Jason, to add?
I don't think so. You covered it well.
Okay, well, maybe somewhat of a lead-in here: You've been pretty acquisitive, you said historically. You had a couple of acquisitions recently, tuck-in acquisitions. It seems like you have a pretty active pipeline. Can you just talk about holistically why tuck-ins is the way to go? How you expect to generate shareholder value by going at it this way, and I think kind of layers into what you were just saying, but-
Yeah.
I'd love some more thoughts on that.
Yeah. We do believe that there is a tuck-in tech acquisition opportunity in our four areas of focus, so we're gonna stay focused. We're not. I don't think we'll veer beyond that. But within those four areas of focus, there is a large ecosystem of point solutions of startups that aren't likely gonna make it long-term on their own. They don't have a big enough TAM. And there are enough barriers that they face that are really, really difficult for them to overcome, that are easier for us to overcome. And our clients love it when we act as a consolidation platform. They would like us to do that, again, just in our areas of focus. But when we do that, we take away headaches for them, so they no longer have to manage this small relationship with a vendor.
We take away the headache of worrying, "Is that vendor gonna be around next year," right? We take away the security headache of, "Am I gonna have a data breach because of this tiny startup that just didn't invest in the right security infrastructure?" And none of them really have the size or scale to invest properly, where we have to make those infrastructure investments. So we take away a number of headaches. We also have financial leverage advantages versus a startup. We find consistently that these startups have overinvested in R&D and overinvested in sales and marketing. That's not necessarily a bad thing. We're the beneficiaries of that. They've often, with that extra R&D spend, built great tech.
It's not sustainable at their burn rate, but there's this great tech that they built that we can then leverage, and we get a ton of operating leverage on the R&D line after they come in to Health Catalyst. And likewise, on sales and marketing, they've often way overspent on sales and marketing. They're burning like crazy, but it's allowed them to break into twelve or fifteen or twenty clients, many of whom we often don't yet have a relationship with. And so we're acquiring new client relationships when we acquire these companies, and then we're able to leverage our sales and marketing infrastructure to use this cross-sell motion in both directions. That's a very efficient sales and marketing motion. So there's really meaningful sales and marketing leverage.
We're acquiring at the apps layer, which, as Jason mentioned, is the highest growth margin part of our portfolio, at that 80%+. We're making it more profitable by realizing that operating leverage in R&D and sales and marketing, and we can leverage that cross-sell motion that has been so effective with twice the conversion rate. So there's a lot of ways of creating value. There's a lot of ways of ensuring that the growth that comes when we acquire these tuck-in tech companies is very profitable growth. And it reinforces that four-year view that we shared earlier this year of getting to $500 million of top-line revenue, with, you know, the next four years growing in that 10%-15% range, and $100 million of EBITDA.
I will say, maybe just as a closing thought, as you know, I have personally been very acquisitive of shares of Health Catalyst stock over the last couple of years. A couple of reasons for that is I do fundamentally believe that today, Health Catalyst is valued as a low or no growth company. I don't believe that's where we're headed, and that's not what we've stated. We believe the next four years we'll be growing our top line by double digits and our bottom line by 40+% . If those things are true, as soon as we've demonstrated that top-line growth, our EBITDA multiple should double. From there, as we grow our bottom line by 40% per year, that should be a fantastic stock to own. I fundamentally believe that's where we're headed.
I think we've got the right technology to do that, we've got the right business model to do that, we've got great momentum, and we know what we need to do to execute, so we're excited about the future.
Awesome. Well, thank you so much for joining us, and thank you, everybody.
Thanks, Dan.