Good day, ladies and gentlemen, and welcome to the Health Catalyst, Inc. second quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. I would now like to introduce your host for today's conference, Mr. Adam Brown, Senior Vice President of Investor Relations for Health Catalyst. Sir, you may begin.
Good afternoon, and welcome to Health Catalyst's earnings conference call for the second quarter of 2019, which ended on June 30th 2019. My name is Adam Brown. I'm the Senior Vice President of Investor Relations for Health Catalyst. With me on the call is Dan Burton, Health Catalyst's Chief Executive Officer, and Patrick Nelli, Health Catalyst's Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC, both of which are available on the investor relations section of our website at ir.healthcatalyst.com. As a reminder, today's call is being recorded, and a replay will be available following the conclusion of the call.
During the 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, and anticipated performance of the business. These forward-looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may differ materially. Please refer to the risk factors in our most recent Form S-1 and Forms 10-K and 10-Qs to be filed with the SEC. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP measures is provided in our press release. During the call, we may offer incremental metrics to provide greater insights into the dynamics of our business.
These details may be one time in nature, and we may or may not provide updates in the future. With that, let me turn the call over to Dan for his prepared remarks, and then Patrick will provide prepared remarks as well as provide the outlook for Q3 and full year 2019. Dan and Patrick will then take your questions. Dan?
Thank you, Adam, and thank you to everyone who has joined us to discuss our second quarter 2019 performance. We're excited to hold our first earnings call as a public company. For those of you that Patrick and I had the opportunity to visit with during our IPO roadshow, let me express appreciation for your interest in our company. For those on this call who are new to Health Catalyst, welcome. Given that this is our first quarterly call as a public company, I'd like to make some introductory comments about Health Catalyst. We are a leading provider of data and analytics technology and services to healthcare organizations. Our solution is comprised of a cloud-based data platform, analytics software, and professional services expertise.
Our customers, who are primarily healthcare providers, use our solution to manage their data, derive analytical insights to operate their organizations, and produce measurable clinical, financial, and operational improvements. Health Catalyst was founded in 2008 by pioneers within the healthcare data and analytics industry. From the beginning, the Health Catalyst solution has been focused on enabling our mission to be the catalyst for massive, measurable, data-informed healthcare improvement. We accomplish our mission with each of our customers by delivering on the three components of our solution: the data platform, analytics applications, and services expertise, which together drive measurable improvements for our customers. We describe this process collectively as the Health Catalyst flywheel. At the center of our flywheel is the engagement of our team members. Team member engagement is foundational to everything we do at Health Catalyst and is the highest priority of our leadership team.
When team members feel connected to our mission and are listened to, cared for, and respected at an extraordinary level, they produce outstanding work, which enables our customers to measurably improve. As customers realize measurable improvements, the trust in Health Catalyst builds, their engagement in our shared work increases, and they choose to renew and expand their relationship with us while also referring Health Catalyst to key decision-makers at other potential customers. This customer renewal, expansion, and referral produces sustainable, scalable, and predictable financial performance. Transitioning to our second quarter financial results. I am pleased to report that relative to the preliminary unaudited financial result ranges we shared in our S-1, our total revenue exceeded the high end of the range, and our total adjusted gross profit and adjusted EBITDA came in at the high end of the range.
We achieved Q2 revenue of $36.8 million, which represents an increase of 60% year-over-year. On an organic basis, without the impact from our Medicity acquisition, represents an increase of 32% year-over-year. Total adjusted gross margin in the second quarter was 52%, which compares favorably to 47% in the second quarter last year. Adjusted EBITDA in the second quarter was a loss of $5.7 million, which shows improvement from a loss of $8.0 million in the prior year. For those familiar with the Health Catalyst story, you'll recall that we measure our company performance in the three primary strategic objective categories of improvement, growth, and scale. We'll discuss our second quarter results with you in each of these categories. The first category, improvement, is focused on evaluating our ability to enable massive measurable improvements for our customers while sustaining industry-leading satisfaction and engagement.
Let me spend a few moments reviewing some of the metrics and criteria that we use to evaluate our performance within the improvement category. As I mentioned earlier, team member engagement is at the center of the Health Catalyst flywheel. In the second quarter of 2019, we were pleased to have achieved a Gallup team member overall satisfaction score in the 98th percentile. This company satisfaction level is relative to nearly 700 U.S. companies. Our customer satisfaction is driven by the quality of our solution across data, analytics, and expertise. We have been recognized as an industry leader from numerous external industry organizations. During the first half of 2019, we received additional positive market validation.
As an example, Chilmark in its report titled "Provider Analytics: Solutions and Tools for Healthcare Delivery," recognized Health Catalyst as one of only two vendors to receive straight A grades in both product capabilities and market execution. Through our solution, which combines a data platform, analytics applications, and services expertise, our customers realize measurable clinical, financial, and operational improvements. This process builds trust and customer engagement increases as the relationship matures. That gives you a sense of how we think about improvement. From a measurability standpoint, I'm pleased to report that we achieved a record number of documented improvements in the first half of 2019. With the first half of 2019 totaling more documented improvements than we achieved in all of 2018. In our view, this strong performance in customer-verified improvements is evidence of the Health Catalyst flywheel accelerating.
In a documented improvement from a recently published Allina Health case study, our solution was used to create a predictive model that could successfully support a propensity-to-pay strategy. This initiative resulted in an increase of $2 million in overall collections in just one year and a 37.5% improvement in the number of outbound calls. In another example of a documented improvement from a recently published case study, Community Health Network recognized its improvement efforts were often siloed and not widespread across the organization. They used our solution to develop a new system-wide improvement strategy, resulting in more than $15 million of savings, including $8 million in sepsis cost savings and a 35% reduction in mortality for patients with sepsis prior to admission, saving 124 lives. We'd encourage you to please visit our website to view hundreds of documented customer case studies.
The next category in which we measure our results is growth, which we define as adding new customers while also deepening existing customer relationships. Let me spend a few moments reviewing some of the metrics and criteria we use to evaluate our performance within the growth category. In terms of our overall market, we are in the early innings of healthcare organizations' adoption of robust analytics capabilities. While we continue to believe that the adoption of technology in the healthcare industry moves more slowly than most other industries, we feel that the under-penetration will provide us with long-term sustainable growth. As we shared during our roadshow, we anticipate greater than 20% revenue growth on an annual basis over the long term. We see that the market demand for our solution is strong, and the problem Health Catalyst is helping to solve is only intensifying.
We are encouraged to see that healthcare organizations are increasingly recognizing that making investments in data, analytics, and expertise are essential to success in this challenging environment. Additionally, these investment decisions are increasingly being made by multiple constituents in the C-suite, including the CFO, which we believe is indicative of the mission-critical nature of our solution to healthcare organizations. Likewise, in Q2 2019, we conducted our semiannual company-wide market and business assessment, which highlighted to our leadership team the strength and criticality of our offering in our core market, as well as in adjacencies where our solution is a natural fit, but we are currently under-penetrated. In terms of driving long-term growth, we think about five strategic levers. First, expansion within our existing customer base. Second, growth of our overall customer base. Third, the addition of new applications and services. Fourth, the growth of our addressable market through adjacencies.
Fifth, partnerships and mergers and acquisitions. We started the first half of 2019 with strong sales performance, and we are well-positioned to deliver on the growth that we discussed on our IPO roadshow. In terms of highlights, we saw continued success in our core market in the second quarter. As one example, after an extensive review of multiple vendors, Integris Health, Oklahoma's largest not-for-profit health system with more than 1,800 licensed beds and 1,400 physicians, selected Health Catalyst as its data and analytics partner. Integris sought to leverage our data platform, along with our analytics applications and services expertise, to deliver a comprehensive solution that will equip their providers with analytics to fuel improvements that will drive value for their patients and their communities. We also saw early evidence of receptivity to our solution outside of our core market, including signing contracts internationally and in the life sciences market.
While we are extremely early in these areas, these data points reinforce our belief that there is broad applicability of our solution across the healthcare landscape, which should enable sustainable growth for many, many years to come. Lastly, our pipeline of potential growth opportunities supports our guidance for the second half of the year. Under the category of growth, we'd like to highlight the introduction of one of our recently generally available analytics applications. As a reminder, the second part of our solution is our suite of analytics software applications, which are built on top of our data platform. These analytics applications allow our customers to pinpoint opportunities for measurable improvements across their entire enterprise. These analytics applications have been developed during the last few years and represent a meaningful growth opportunity for our existing customers and an attractive value proposition for prospective customers.
Five of these analytics applications are generally available, with the remainder becoming generally available in the next year or so. In June, we introduced our Population Health Foundation solution to support healthcare organizations who are increasingly assuming a greater share of the financial risk for the health of populations, all while healthcare costs continue to grow meaningfully. This is an important enhancement to the company's existing population health technology, delivering the insights and comprehensive cross-continuum views that healthcare organizations need to succeed within value-based care. The Population Health Foundation solution's data and analytics first approach draws on a wealth of data sources, domain knowledge, and adaptable analytic tools to meet the dual imperatives of high-quality care and cost containment. Risk-bearing arrangements require intelligent tools to help identify and stratify patient populations, and financial performance analytics to ensure clinical operations align with contract targets.
The Population Health Foundation's analytics application delivers these capabilities in a form designed to grow with organizations as they take on risk, and with a knowledgeable, experienced partner to drive optimization of the technology and a greater number of improvements. In the first half of 2019, we also released our Rapid Response Analytics solution. Our Rapid Response Analytics solution addresses three fundamental needs of a healthcare organization. First, dramatically increasing the efficiency and productivity of data analysts and data scientists so they can operate at the top of their skillset. Second, improving analytic consistency and data governance. Third, reducing the total cost of ownership for data platforms and enterprise data warehouses.
Informal Health Catalyst surveys of healthcare data analysts and data scientists reveals that they spend 80%-90% of their time moving, organizing, and curating data, and only 10%-20% of their time on analytics that benefit their organization. The Rapid Response Analytics solution consists of two primary elements: curated modular data kits called DOS Marts and Population Builder, a powerful self-service tool that lets any type of user, from physician executive to frontline nurse, explore their data and quickly build cohorts of patients without relying on IT staff or the need for customized coding. The result, confirmed by early deployment at customer sites, is a 90% reduction in the time required to develop new analytic insights, which can translate into up to a 10x efficiency multiplier in developing analytics.
We are pleased with early market receptivity to this new solution. We believe this will be a powerful value proposition within our market. Also, in the context of our growth efforts, I'll mention that we are looking forward to hosting our sixth annual Healthcare Analytics Summit in September, with more than 1,400 healthcare professionals expected to attend. This conference represents a meaningful opportunity for Health Catalyst to continue to provide thought leadership within the healthcare data and analytics industry while carefully listening to our customers and the broader industry's needs. Now I'll turn the call over to Patrick, who will review our performance in the category of scale, including providing a detailed view of our second quarter financial results. Patrick?
Thank you, Dan. As Dan mentioned, I will be discussing our company's performance in the strategic objective category of scale. Our scale performance category is focused on enabling greater contribution to our mission by sustainably scaling our organization. Before diving into our second quarter financial results, I want to echo Dan's sentiment and say that I am pleased with our second quarter results and the momentum we are seeing across our business. Given that this is our first public earnings release, I'm going to provide some explanatory remarks for significant components of our operating results prior to providing the detailed numbers for the quarter in order to highlight some of our key income statement drivers and trends. In terms of revenue, the vast majority is recurring in nature, and we segment our reporting by technology and professional services revenue.
Technology revenue consists primarily of subscription fees related to our data platform and analytics applications. Professional services revenue includes access to analytics and domain expertise services, typically provided on a recurring FTE basis. We expect professional services to continue to be a meaningful portion of our revenue over the long run because such professional services are critical in enabling our customers to drive to data-informed improvement. In terms of revenue growth, we primarily grow through, one, the addition of new DaaS subscription customers, two, technology revenue expansion as a result of annual built-in contractual escalators, and three, professional services revenue expansion as customers choose to access additional services experts under a recurring FTE model. Lastly, as it relates to revenue, we acquired Medicity in June 2018 for immaterial consideration.
Current Medicity customers represent approximately $25 million of flat to declining annual revenue, and thus starting in Q3, we will have a negative impact on overall revenue growth compared to our historical organic revenue growth. Importantly, over the long run, we believe we have the opportunity to cross-sell our solution to more than 60 Medicity customers, providing us with the possibility of additional long-term DaaS subscription customer growth. For Q2 2019, we generated $36.8 million in total revenue, representing a year-over-year increase of 60%. On an organic basis, excluding the contribution from our acquisition of Medicity, we saw revenue growth of 32%. Technology revenue was $20.1 million, an increase of 87% compared to a year ago. On an organic basis, technology revenue increased 33% year-over-year. Professional services revenue was $16.7 million, an increase 36% year-over-year.
On an organic basis, professional services revenue increased 32% year-over-year. As mentioned above, total organic growth was driven primarily by recurring revenue from new customer additions, from existing customers paying higher technology access fees from contractual built-in escalators, and from existing customers expanding their services relationship with us. As background on our adjusted gross margin, we also break this out by technology and professional services. We deploy our data platform at all DaaS subscription customers, and because our applications are deployed on top of our data platform with little incremental cost to Health Catalyst, our technology gross margin at a customer typically expands as we grow our technology revenue with that customer. Since our technology DaaS subscription contracts typically have built-in annual contractual escalators, we have predictable technology gross margin expansion as a customer matures with us.
Our professional services gross margin has benefited from the fact that our overhead relative to the total size of the business has decreased as we have grown. Importantly, we expect our overall near-term gross margins to remain roughly flat due to increased costs associated with the continued transition of customers from on-premise and our managed data center to Microsoft Azure. However, we expect gross margins to increase over the long run, primarily from technology scalability due to the platform benefits of our offering. Specifically, we expect our long-term total adjusted gross margin to be in the high 50s with our long-term adjusted technology gross margin in the mid 70s and our long-term adjusted professional services gross margin in the mid 30s. For Q2 2019, we achieved total adjusted gross margin of 52%, an improvement of over 490 basis points year-over-year.
On the technology side, our adjusted gross margin was 65%, which was in line with management's expectations. While our overall gross profit grew, our adjusted technology gross margin was down 460 basis points year-over-year, pressured primarily due to costs associated with transitioning customers to third-party hosted data centers with Microsoft Azure. On the professional services side, our adjusted gross margin was 37%, which represents an increase of 910 basis points year-over-year. This increase was primarily from new customer contract pricing and continued strides in driving utilization efficiencies in our professional services organization. However, it was also partially attributed to slower hiring than anticipated, we anticipate adjusted professional services margin could decline slightly in the near term quarters as hiring catches up with expectations. Our adjusted operating expenses include sales and marketing, research and development, and general and administrative costs.
These adjusted figures exclude stock-based compensation expense, depreciation and amortization, and tender offer payments deemed compensation. Adjusted operating expenses can fluctuate on a quarterly basis, especially as we expense certain sales and marketing events in a given quarter, such as our Healthcare Analytics Summit. As a percentage of revenue, total operating expenses in Q2 2019 were 68%, which compares favorably to 82% in Q2 2018. As background, our adjusted EBITDA can have some variability on a quarterly basis, generally as a result of quarterly fluctuations in our operating expenses that I just mentioned. As we communicated on our roadshow, we anticipate we will begin 2022 on an adjusted EBITDA run rate breakeven basis. Adjusted EBITDA in Q2 2019 was a loss of $5.7 million, which compares favorably to an adjusted EBITDA loss of $8 million in the second quarter of 2018.
Adjusted EBITDA improvement was driven by the higher gross margins mentioned previously, as well as the more efficient deployment of our operating expenses. As Dan mentioned previously, we are pleased to report that relative to preliminary unaudited financial results ranges we shared in our S-1, our total revenue exceeded the high end of the range, and our total adjusted gross profit and adjusted EBITDA came in at the high end of the range. Lastly, our adjusted net loss per share, including a pro forma adjustment to share count for the IPO shares, was $0.21. Turning to the balance sheet, we ended the second quarter with $54.1 million of cash and short-term investments, compared to $33.2 million at year-end 2018.
Additionally, on July 29, 2019, we closed our initial public offering, which resulted in $194.6 million of net cash proceeds after deducting total underwriter discounts and commissions, and before deducting estimated offering cost. Pro forma for our net cash proceeds from the IPO, our cash and short-term investments at the end of Q2 2019 would have totaled $248.7 million. As of June 30, 2019, we had $47.6 million in long-term debt, an increase of $29 million over the end of 2018. The increase in our cash balance and long-term debt are the result of a financing event in Q1 2019 and our IPO that took place subsequent to Q2 2019. As it relates to our financial guidance for the third quarter 2019, we expect total revenue between $36.8 million and $38.8 million, and adjusted EBITDA losses between $11.2 million and $9.2 million.
The midpoint of this guidance is above management's modeled expectations used during our IPO roadshow process. In terms of our Q3 2019 guidance, I wanted to reiterate that our annual Healthcare Analytics Summit that occurs in Q3 results in material sales and marketing expense that will impact our adjusted EBITDA performance for the quarter. Additionally, Q3 2019 is the first quarter we will not break out Medicity revenue as inorganic since the acquisition closed in June 2018, and thus it is expected to impact our overall growth rate for the quarter. For the full year 2019, we are providing guidance as follows. Total revenue between $149.8 million and $151.8 million, and adjusted EBITDA losses between $31.7 million and $29.7 million. The midpoint of this full year guidance is above management's modeled expectations used during the IPO roadshow process.
We would also note that our revenue in the second half of 2018 included certain performance-based revenue arrangements where performance was measured and achieved in that quarter. Moving forward, we expect performance-based revenue arrangements to become a smaller portion of our overall revenue base, and thus have less of an impact on our second half 2019 results. Our second quarter represents a promising continuation to 2019, and we look forward to keeping you updated on our progress throughout the remainder of the year. That concludes my review of our financial results, and I'd now like to turn the call back to Dan for his closing remarks. Dan?
Thanks, Patrick. In summary, we are pleased with the performance of the company. We could not have made this progress, including the successful execution of our IPO, without all the hard work, commitment and dedication of our Health Catalyst team members who work each day to enable our customers to realize improvement and success. We're looking forward to keeping you updated on our progress. With that, let's open it up for questions.
Ladies and gentlemen, if you have a question at this time, please press the star, then the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star then 1 to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Robert Jones with Goldman Sachs. Your line is now open.
Hi, this is Jack on for Bob. Thanks for taking the question. Any chance you can update us on your view of net new DaaS subscription customer adds for the year, versus a few months ago? Generally, do you guys feel like things are better or worse since we last spoke?
Yeah, happy to address that, Jack. We are going to be disclosing the number of net new DaaS subscription clients on an annual basis. We will not be providing that update on a quarterly basis. What I would share is we feel comfortable that we are on track, with regards to our guidance and with regards to the discussions we've had with research analysts for the year.
That's helpful. Thanks, guys. I'll hop back in the queue.
Thanks, Jack.
Thank you. Our next question comes from Anne Samuel with J.P. Morgan. Your line is now open.
Hi, guys. Thanks for taking the question. Could you speak to the Medicity conversion opportunity? How many have you converted to DaaS so far? What's in your pipeline? How should we be thinking about the longer-term opportunity? Thanks.
Happy to address that, Anne. As we have previously discussed, when we thought about the strategic benefits of acquiring Medicity, one of the primary benefits that we focused on was the cross-sell opportunity, where Medicity had an existing client relationship with 60 health systems that we considered to be right in the bull's eye of the kind of health system that we would target as a customer. That was an important part of the decision to move forward with the acquisition of Medicity in the first half of 2018. At the same time, we recognized that there would be significant operational items that we would need to address.
We focused first on getting those operational items addressed, which we knew would take six to nine months in order for us to be in a position to go to those customers with a stable core product in the HIE space that we could then have demonstrated that stability and that commitment to them to bridge then to a cross-sell discussion. As we've also discussed, in prior meetings and in the IPO roadshow, our average sales cycle is around one year. We also knew that it would take time for that cross-sell message to develop through our pipeline and for us to see actual results. As a result, we've just really begun, in the second quarter in earnest, that process of significant cross-sell discussions. As a result, we would expect more of the cross-sell results to show up within the next 12 to 18 months in particular.
We have signed earlier this year our first cross-sell deal with a Medicity customer. We're excited about the momentum that we see in the pipeline, and we feel good about how we believe that pipeline will materialize over time, but we do feel that it will take a meaningful amount of time given the sales cycle.
That's very helpful. Thanks. Maybe just one for Patrick. Can you speak to some of the moving pieces in the gross margin? You've had two quarters now of pretty substantial expansion in professional services. Just how should we think about the dynamics in the back half longer term, where should that level out at?
Yeah, of course. We break it up between technology and professional services. On the technology side, as we mentioned in the prepared remarks, because we deploy DaaS at all DaaS subscription customers and our applications very scalably plug on top of DaaS, as our technology access fees increase with the customer as they mature, most of that increased revenue drops to the bottom line, and those are technology access fees expand as a customer matures with us. That means in the long run, we would expect technology growth margins to get into the mid-70s. However, we still have a few remaining on-premise and private cloud data center customers that we need to move to the Microsoft Azure environment, and thus we'd expect technology gross margins to remain roughly flat over the next couple years. Really that increase starts a couple of years out.
On the professional services side, we would expect our long-term professional services gross margins to be in the mid-30s. As you pointed out, it has fluctuated over the past, and we would expect it to continue to fluctuate some based on hiring patterns and some one-time professional services revenue. Over the next several quarters, we would expect it to be getting close to that 35% or mid-30s long-term professional services gross margin target. When you take those two combined, over the long term, we would expect overall gross margins to get into the high 50s.
Can I make one comment? Also, I agree with everything Patrick shared. Just on the professional services gross margin, I would note that we are concerned, and we want to ensure the sustainability of the pace of the delivery of our professional services organization. As such, we're focused on making sure we're balanced in the utilization metrics that we track so that our team members can sustain the work that they do over long periods of time. We got a little ahead of ourselves in Q2, as Patrick mentioned earlier, that our hiring took a little bit longer than what we had projected, which means that our existing team members needed to stretch a little bit beyond what we would view as sustainable.
We're working to get that balanced out, and that's one of the reasons why we want to make sure we're clear about that long-term expectation that is in the mid-30s.
Very helpful. Thank you.
Thank you. Our next question comes from Ryan Daniels with William Blair. Your line is now open.
Gentlemen. Thank you for taking the question. I want to start with something about the addressable market. I know you highlighted both an inaugural pharmaceutical manufacturer and international sale. Can you speak a little bit more beyond the $8 billion core addressable market you laid out on the roadshow to what those novel avenues of growth could mean for the organization over the next three to five years?
Yeah, happy to address that, Ryan. As we discussed on the IPO roadshow, we take an approach to forecasting, which includes the way that we forecast our total addressable market to be very data informed. We try to be disciplined in waiting until we have enough data points to be data informed. That's why we chose the $8 billion addressable market to be a U.S.-based market and focused on the core markets where we have significant traction already demonstrated. As a result, we excluded international and we excluded life sciences. While we have been excited to see some early momentum and our first few contracts being signed, both internationally as well as in the life sciences space, we are certainly too early from our perspective to project forward how that might change the total addressable market.
We would need to see quite a few more data points, before updating a TAM calculation or having an informed perspective there. We are continuing to invest in those adjacencies as we see early momentum and some specific areas where we feel that there is differentiation, as a hypothesis that we're excited to pursue.
Okay. Very helpful call. Dan, another one for you, and I'll hop off. I know that culture is really of the utmost importance for the organization, and you provided a nice data point about the 98% engagement of the Gallup poll. I'm curious if you've noticed any changes since the IPO and your status as a public company, given all the press and kind of eminence you've seen since the successful offering. Thanks.
Thank you for the question, Ryan. I appreciate it. This has been an area of focus for our company for many, many years and a particular focus as we have gone through the process of transitioning from a private to a public company. As all of you, no doubt, are aware, a number of companies do change materially from a culture perspective as they make that transition from private company to public company. We've been aware of this. We try to be good learners, good students of what has happened in the past, and as such, we felt as a management team, it was important to put counterbalances in place to reassure our team members first, that we would continue to be mission-focused, mission-centered, and focused on the execution of the flywheel as our primary company strategy, which has team member engagement at the center of our flywheel.
We've taken a few actions to try to reinforce to team members that those areas of commitment will continue. One example of this is in the past, I've had a personal goal of having 100 skip-level one-on-one discussions with team members per year. We doubled that goal for 2019 and beyond to 200 skip-level discussions with team members. We've also continued practices that we've held for a long period of time, like the practice of having all team member meetings every two weeks, where we share detailed information with our teammates, and continuing the practice of making every team member an owner and treating them like owners in the company. We're trying to make sure that we can consistently reinforce that focus on team member engagement as it is my number one priority, and we believe it's part of the long-term differentiation of the company moving forward.
Guys, I really appreciate your color, Dan. Thank you.
Thank you. Our next question comes from Sean Wieland with Piper Jaffray. Your line is now open.
Hi. Thanks, guys. A little of a different twist on Ryan's question. What have been the effects of the IPO as it relates to your discussions with clients and in particular prospects as you continue to build your pipeline?
Yeah, good question, Sean. What I would share is we've also tried to be thoughtful in our discussions with clients and prospects about why Health Catalyst's decision to remain an independent company is beneficial to our customers. Part of the way that we try to frame all of the activities surrounding the move from being a private company to being a public company is that this is a demonstration of Health Catalyst earning the right to stay independent as a company. That independence allows us to keep the flywheel at the center of everything that we do, to keep the mission at the center of everything that we do, and that flywheel is all focused on enabling our clients to measurably improve.
The message to our clients and even the prospects has been, this is the path that has enabled us to maintain our independence, which also enables us, as leaders and as team members, to make and then keep commitments to our customers and have the authority to keep those commitments. That isn't always the case in other scenarios, like when a company becomes acquired. We are pleased with the receptivity of our clients to understanding the value of Health Catalyst maintaining its independence as a means of continuing to make and then keep commitments.
The other item I would add is, we oftentimes have fairly large either customers or prospects, and they're curious about our current financial situation. Actually, I've had calls recently with potential prospect CFOs and the added transparency, and actually, CFOs who read the S-1 and noticed the flywheel and our core principles and that we're mission-focused. That added transparency, at least I've seen in the last couple of weeks, has been helpful.
That's great. Thanks so much.
Thank you. Our next question comes from Ross Majumdar with Evercore. Your line is now open.
Hey, guys. This is Susie on for Ross. Congrats on the quarter. Thanks very much for the questions. I've got a couple if that's okay. On the tech side of DaaS subscription customers, how much of the growth is coming from contractual escalators versus expansion of new apps? When we think about modeling forward, how should we think about the churn rate?
Good question, Susie. I'll address a couple of components, Patrick, if you have anything to add, please feel free. One of the other metrics that we will be disclosing on an annual basis is the dollar-based net retention rate. We won't be disclosing that on a quarterly basis, we will update at the end of this year. As we think about how we're tracking as a company relative to where we have been historically, we disclosed in the IPO roadshow process that our 2018 dollar-based net retention rate was 107%. Our 2017 dollar-based retention rate was 108%. We feel comfortable that we're tracking well against that kind of performance from a dollar-based net retention rate, which is net of churn. It is a good way to think about the expansion within our existing client base.
A reasonable way of thinking about the other aspects of growth that are produced from an organic perspective would be the addition of new clients, in both our core markets and our adjacent markets. Anything you would add, Patrick?
Of course, Dan. The only couple items I'd add is most of that expansion on the technology side to your question, Susie, is from the annual built-in escalators. That's because greater than 70% of our customers are under that all-access model, where customers are adopting new and additional analytics applications as they mature with us. The way we charge them for that are through those annual contractual escalators. The other item I'd add in regards to churn is another good way to think about the businesses is services. That 107% that Dan mentioned in 2018, our dollar-based retention rate, includes both technology as well as services. Services can have some more ups as well as downs. We can have more meaningful expansion potential with the customer, but we can also have churn potential on the services side.
Just a note on that last point, we try to make it simple and easy for our customers to interact with us from a contractual perspective. That includes both the technology subscription contract, which is simple and straightforward, as well as the services contract, which is an FTE-based contract that's also simple and straightforward. We make it straightforward for clients to choose to dial up or down the number of FTEs that they would like to access, and that's what drives those fluctuations. We still see that clients choose to dial up more than they choose to dial down, but we do make it easy for them to choose the right level of FTE assistance for them.
Got it. That's extremely helpful. I'd like to dig a little bit more on the TAM. You've talked about the $8 billion TAM and also an assumed price per customer for fully penetrated customer for your different product lines. Can you talk about the assumptions behind a fully penetrated customer? For example, in the data platform, you assume $1.7 million for the data platform. What are you assuming there in terms of contract life, type of contract?
Yeah, good questions. I'll offer a couple thoughts, and then Patrick, feel free to offer some additional thoughts. First I would mention we try to be data informed and careful in the way that we think about TAM and all other forecasting. As we think about a fully penetrated customer, a couple of data points that may be of use. When a customer begins their relationship with Health Catalyst, they typically begin their total relationship, which is inclusive of both tech and services, at under $2 million a year from a recurring revenue basis. Our longest-standing client cohort spends more than twice that amount with us. The fully penetrated client perspective, you could think of roughly correlated to a client cohort that's much more mature with us, like those longest-standing clients. We understand how that progression works over a number of years.
Importantly, our longest-standing client, for example, is Allina Health. We are in year 11 of that relationship, and they just recently signed a five-year extension to that relationship. Likewise, as Patrick mentioned a few minutes ago, for the 70% of our clients that choose the all-access-Technology subscription model, we've never lost an all-access-Technology subscription client. When we think about the duration of the relationship, we certainly hope that that duration is forever. Obviously, when you think about modeling, you'd have to choose a number less than forever. We do see that those clients that have been with us the longest are also the clients that are choosing to spend the most with us.
The only other item I'd add in regards to TAM is noting that at the analytics application layer of the stack in particular, we are relatively newer there. We just started building those analytics applications a few years ago. Most of them went generally available over the last couple of years or so, and there's still a few more to go generally available. We're still relatively early on the analytics application side. On the associated services side, we just actually got into the services business around five years ago, and there are specialty services that are coupled with those analytics applications that were still earlier in their maturity.
Okay. I'll just squeeze one more in there. I know you're relatively new in the apps layer. When you think about the competitive landscape in that market, what does your market look like? I think we could call out a few competitors that on the surface have apps that look somewhat similar or sound somewhat similar. What are some competitors you can call out there?
Yeah, good question, Susie. It really depends on the specific application category that you're talking about. Overall, we keep a very close watch in the apps layer, and there are over 1,000 companies that have some form of analytical application that cuts across the clinical, financial, and operational categories. We believe that highly fragmented space will represent a meaningful M&A opportunity for us in the future. A couple of examples to your question. In the benchmarking space, for example, you could think of Truven as a good example. Another example, physician performance and reporting, would be the Crimson product, for example. There are many others as well. Like I said, there are over 1,000, and we do track this space carefully along with the specialty services space, because we do believe there will be some important M&A opportunities for us moving forward.
Partly because the company is a best place to work and has industry-leading customer satisfaction. We believe many of those companies will actually want to be acquired by Health Catalyst in the future.
Okay, that's very helpful. Thank you, and congrats.
Thank you.
Thank you.
Thank you. As a reminder, ladies and gentlemen, that's star then one to ask a question. Our next question comes from Daniel Grosslight with SVB Leerink. Your line is now open.
Hi, guys. Thanks for taking the question, and congrats on hitting the top end and exceeding your IPO flash numbers. It's great to see. We've heard from one of your competitors that they've had a little trouble selling into the health system market because of some provider margin pressure. Obviously, this makes your solutions more powerful, but you're also trying to convince the C-suite to invest $2 million in your solution. I just want to get a better sense of how you have that initial conversation with the C-suite and how you convince them to take that leap of faith with you.
Yeah, good question, Daniel. That's been a dynamic of the provider space for many years, where when you look at the economics across the healthcare delivery ecosystem, providers have been operating with thin margins for many years, and often find themselves strategically being squeezed across the value chain. This is a topic we've discussed with providers for many years. I would characterize our current discussions as not different from what we've been experiencing in the past. Neither better nor worse, just very similar, the kinds of discussions that we have. Part of the benefit of our solution, as you pointed out, is that we actually help with cost savings.
Because we're built from the ground up, as a company, to enable measurable improvements, including measurable financial and operational improvements, we are often in a great position to help the CFO in particular to understand the value and the return on the investment. One near-term element that helps us as well at the data platform layer is our own internal analysis of the fact that our commercial-grade data platform really is better, faster, and cheaper than the homegrown alternative that's by far the most common competitor that we face at the data platform layer. Our internal estimates come to about a 2 to 4x ROI from a cost savings perspective by transitioning from that homegrown solution to our commercial-grade solution. That initial ROI often helps CFOs, CIOs, and other C-suite executives feel really good about the initial investment.
That also provides us the time to get the flywheel spinning with regards to the measurable improvement projects across clinical, financial, operational domain areas that then help our clients continue to feel good about renewing and expanding their relationship with us over time. The last thing I would share is we do try to maintain balance, however, between those three categories, clinical, financial, and operational. It's important for us to maintain the engagement of each of those C-suite categories and functional areas. The chief quality officer, the chief medical officer, the chief nursing officer on the clinical side to be very motivated to continue to improve. We advocate a balance between those clinical projects as well as financial and operational projects over the course of our relationship with our clients every year.
We found that that balance really helps the entire organization feel great about being mission-driven and improvement focused.
Got it. Just one more on the professional services hiring that was pushed out about a quarter. Obviously, it's a very competitive market for these folks. Are you having any trouble recruiting, or are you seeing any wage pressure on the services side?
It is a tight labor market. Absolutely. One of the benefits of our focus on team member engagement and our focus on enabling team members to work at a best place to work is that there is a significant demand to come and work at Health Catalyst. Typically, on average, based on our internal estimates, when we post a position, we average about 50 applicants per position. When we extend an offer to a team member to join Health Catalyst, over 90% of the time, they accept that offer, even relative to other offers with other companies. We do benefit greatly from the fact that our engagement levels are very high, and team members often refer their friends and their colleagues, who are also very talented, to Health Catalyst.
That said, it is still a tight labor market, and when we experience significant growth, it is challenging to keep up with that growth. From a forecasting perspective, especially on the services side, as we discussed earlier, we do make it easy for clients to dial up and down the level at which they want to access our FTEs. Clients love that. One of the challenging elements for us is we don't always have a lot of lead time in understanding when clients are going to dial that up. We do have to manage the hiring process in a pretty quick-turned environment and situation. It's something that we're constantly focused on, and I feel good about where we are, but we did get a little bit behind in Q2.
Operationally, the other thing we've been doing to help with that dynamic is building a bigger bench so that we can be flexible with client needs.
Got it. Thanks again, guys.
Thank you.
Thank you. Our next question comes from Sandy Draper with SunTrust. Your line is now open.
Thank you very much. Most of my questions have been asked, so I'll limit mine to one for time. Maybe on the Medicity side, this is probably for you, Patrick. Just to make sure I've got it right. The Medicity flat to declining revenue, there's no tie to, as you sign up the cross-sell Medicity customers, that when they switch over, that you necessarily lose any Medicity revenue. I guess the follow-up to that is, it seems like it's been declining, but Dan, you talked about, I think you feel better about the product now. Should we read into that you think you can stabilize the Medicity revenue base? Thanks.
Let me take the second question first, then Patrick, we'll go to you for the first question. Good question, Sandy. As it relates to how we feel about the core product from a Medicity HIE perspective, we do feel good that it is stable and we're working to ensure that our customers are satisfied and delighted with the experience that they're having with that core product. I think as it relates to that core market, the general macroeconomic environment as it relates to the HIE market is one that is flat to slightly declining. We expect those market conditions to continue. We do want and are striving to keep stable that client base, but we do recognize the broader market trends that we're operating within as it relates to the core HIE offering.
However, one of the elements strategically that was exciting to us about the potential of an acquisition was that many of those same customers are asking for more help with regards to analytics. They want to understand what all the data that's being passed from one place to another really means and can tell those organizations and how they can make better decisions and improve. That's at the core of what we do as a company. We continue to believe that that adjacent opportunity with a complementary solution will generate meaningful growth for the company.
Just to build on that from a financial perspective, since we are aiming to provide incremental value to the Medicity customers by providing them analytics, then we expect that to result in incremental revenue as opposed to cannibalization when we cross-sell.
Okay, great. That's really helpful. Thanks, and congrats on the quarter.
Thanks, Sandy.
Thanks, Sandy.
Thank you. Ladies and gentlemen, this concludes our question and answer session. I would now like to turn the call back over to Dan Burton for any closing remarks.
Thank you, Daniel, and thank you to all of you for your interest in Health Catalyst. We appreciate the opportunity to provide you an update as to our performance, and we look forward to continuing this discussion in the months and years ahead. Take care.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.