Definitive Healthcare Corp. Q4 FY2022 Earnings Call

Ladies and gentlemen, greetings, and welcome to the Definitive Healthcare Fourth Quarter 2022 Earnings Conference Call. At this time, all participant lines are in a listen only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Matt Ruderman, General Counsel. Please go ahead.

Good afternoon and thank you for joining us today to review Definitive Healthcare's fourth quarter 2022 financial results. Joining me on the call today are Robert Musslewhite, CEO; Jason Krantz, Founder and Executive Chairman; and Rick Booth, CFO. During this call, we will make forward-looking statements, including, but not limited to, statements related to our market and future performance and growth opportunities, the benefits of our health care commercial intelligence solutions, our competitive position, customer behaviors, our financial guidance, our planned investments, and the anticipated impacts of global macroeconomic conditions on our business results and clients and on the health care industry generally. Any forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the risk factors sections and elsewhere in our filings with the SEC. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement included in the earnings release that we have just posted to the Investor Relations portion of our website. Additionally, we will discuss non-GAAP financial measures on this conference call. Please refer to the tables in our earnings release on the Investor Relations portions of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I'd like to turn the call over to Robert.

Thanks Matt. I would like to thank all of you for joining us this afternoon to discuss Definitive Healthcare's fourth quarter results. On today's call, I will review our fourth quarter and full year results, offer some perspective on what we're seeing in the market, and highlight some of the key value drivers of Definitive Healthcare's differentiated data and platform, and then Jason will highlight some of our latest product innovations. We are pleased to have delivered strong fourth quarter results on both the top and bottom line, with revenue and adjusted EBITDA both exceeding the high end of our guidance range. Our total revenue was $60.6 million, which represents 31% year-over-year growth and our adjusted EBITDA was $17.0 million, which translates into a 28% margin. For the full year 2022, total revenue was $222.7 million, which represents 34% year-over-year growth, and our adjusted EBITDA was $63.7 million, which translates into a 29% margin. Taken together, we delivered a Rule of 63 performance in 2022, which we believe highlights our powerful combination of growth and profitability. Before diving into the fourth quarter in more detail, I would like to take a moment to highlight some of our key accomplishments across 2022. I'm proud of our success in what became a difficult macroeconomic environment. Our mission is to transform data, analytics, and expertise into health care commercial intelligence and we made significant progress against each element of that mission in 2022, which will position the business for sustainable growth over time. We started off 2022 by expanding our analytics capabilities with the acquisition of Analytical Wizards, and then we released Passport Express six months later. I'm particularly proud of the Passport Express release because it integrated the analytics from Analytical Wizards with Definitive Healthcare's industry-leading proprietary data set. The Passport product line extends our reach into both treatment pathway analytics and commercial marketing optimization, while significantly increasing the value that we can provide to life science customers across their entire lifecycle from research and development to product launch and commercial optimization. In the middle of the year, we released the next generation of our expert identification solution, Monocl ExpertInsight 2.0, which added a number of significant capabilities to the platform and expanded our data set to include more than 13 million key opinion leaders. Perhaps most importantly, throughout the year, we continued to make significant investments in our data assets, increasing the breadth, depth, and uniqueness of our data, which we recently repackaged as the new Atlas Dataset. Jason will provide some more detail on the Atlas Dataset and other fourth quarter innovations in a bit. We accomplished all this in the midst of an economic backdrop that got progressively more challenging during the year. Conditions in the fourth quarter continued to exhibit what we saw in the third quarter with longer sales cycles, more stringent approval processes, and a sizable number of deferred purchasing decisions. Also, like in the third quarter, we saw this dynamic in both new logos and upsell activity, and it remained more pronounced within the life sciences and provider markets. As we've discussed in the past, our commercial teams have been adapting to this new backdrop and those efforts are showing early signs of yielding benefits. We are particularly encouraged by the continued strength in demand generation. Our sales pipeline was at an all-time high entering January and we have seen meaningful growth across all stages of the pipeline and in each vertical market. The increasing interest in the Definitive Healthcare platform is a strong validation of how mission-critical we are to the success of our customers' operations. We also kicked off 2023 with a more vertically-aligned go-to-market function, which will help us do a better job of understanding and responding to client needs. I've been impressed with the team's early efforts to develop more in-depth account plans in the sales or upsell process, ensuring we understand and enfranchise all the key decision-makers who can impact the decision to avoid delays late in the cycle. These global account plans also enable us to pursue larger, more strategic customer engagements, and we are seeing early success with this strategy, with one life sciences customer now accounting for nearly $3 million of cumulative ARR across all of our product lines. All of these improvements will help us function more effectively against the more challenging backdrop. Overall, we are pleased with what we achieved in 2022. We have continued to effectively grow and scale the business, exceeding $200 million in revenue and generating $54 million in free cash flow. We have continued to manage the business with a clear focus on maximizing our long-term success and value creation for customers and shareholders and we enter 2023 having made some key improvements across data, analytics, expertise, and with a commercial focus that will serve us well. As we turn our attention forward to 2023 and beyond, we expect to continue to have success in the market, as the Definitive Healthcare platform is increasingly seen as a must-have for any business looking to efficiently and effectively sell into the complex, fragmented $4 trillion US health care market. This is not easy to do in the best of times, and it is even harder when the economy is weaker. The good news is that our platform is purpose-built to deliver this outcome to clients. We enable meaningful improvements in sales productivity by combining our proprietary affiliation data with claims data, so customers can develop more granular sales territories, identify the right decision-makers, and develop sales pitches that are targeted and effective. I would note that this is becoming even more important as life sciences and other companies increasingly leverage digital channels as part of their sales efforts. We also help customers maximize their R&D investments by helping them accurately assess and size market opportunities as well as to identify the most important experts in the field to increase the likelihood of a successful product launch. Part of what makes the Definitive Healthcare platform so powerful is its ability to take the vast amount of data we collect, ensure it's accurate with our proprietary data science capabilities and make it easily accessible to business users. In order to be truly useful to a customer, data has to be actionable, and we believe there is no other platform in the market that provides the breadth and depth of actionable intelligence that we do. To show why customers are choosing Definitive Healthcare to tackle some of their most pressing business challenges, I would like to highlight a few of our key wins from the fourth quarter. One of the world's largest and most renowned cancer treatment and research institutions purchased a multi-year enterprise subscription to inform their strategy for partnering with leading hospitals across the country. This client purchased subscriptions to HospitalView, PhysicianView, PhysicianGroupView, and our Atlas All-Payment Claims Dataset. A large biopharmaceutical company focused on the discovery, development, and commercialization of RNA interference therapeutics purchased a multi-year enterprise subscription to our HospitalView and Atlas All-Payer Claims to design and execute a strategy for selling into integrated delivery networks. One of the world's largest cloud computing service providers purchased a subscription to our HospitalView product as they recently decided to enter the health care market after seeing a rise in data breaches and ransom attacks in hospitals. As they look to build out a new sales and marketing team for health care, they chose to make Definitive Healthcare one of their first investments. Turning to upsell deals. The nation's oldest and largest association dedicated to fighting heart disease and stroke already use Definitive Healthcare Reference & Affiliation data to support their commercial efforts with hospitals and other facilities. In Q4, they added our Atlas All-Payer Claims product to monitor hospital heart failure, heart attacks, and stroke encounters by the number of procedures at each facility. Armed with this information, the association can better educate these facilities on how to improve care for patients facing severe heart ailments. We also had a significant upsell deal at one of the nation's largest health insurance and service companies. We originally sold to the healthcare services business, which was using our PhysicianView and PhysicianGroupView products to map physicians to provider organizations. In the fourth quarter, we expanded our contract to cover the entire organization and added multiple new products, including HospitalView, SurgeryCenterView, ImagingCenterView, and ConnectedCareView. The organization also purchased our integration services to import our data into their internal data environments. At the world's largest private global pharmaceutical company, we had a six-figure expansion of Passport promotional analytics into two new therapy areas where we previously did not have relationships. As a result, the combined Definitive Healthcare ARR across all product lines at this company is now in excess of $1 million. Finally, we more than doubled the size of our Monocl Expert Suite contract at one of the world's largest multinational pharmaceutical and biotechnology companies. This contract is now in excess of $1 million ARR, and our key opinion leader intelligence will be used by this company's entire global medical affairs team. Now, I would like to look ahead at 2023. From a macro perspective, we expect 2023 will be similar to what we saw in the second half of 2022. Our financial outlook does not anticipate an improvement in the selling, upselling or renewing environment, and Rick will cover this financial outlook in more detail later. That said, we are committed to focusing on the things we can control that will best position the company for the long term. We will accelerate investment in our data and platform to increase the insights we can provide to customers. Over the past 12 years, we have created unique and highly differentiated data sets and combined them with incredibly sophisticated analytics and decades of health care industry expertise. Part of the power of our platform is our ability to quickly apply AI and sophisticated data science to our growing data set to create new solutions that solve more of our customers' business challenges. These investments are foundational to our long-term growth strategy and generate strong returns for us. We will build upon the success I mentioned earlier with our verticalization and global account team strategies. As we continue to invest in the capabilities of the Definitive Healthcare platform, the opportunities we have to deliver value to customers will only get bigger. We are at the early stages of a $10 billion-plus market opportunity and believe we can dramatically expand our wallet share with customers over time. Investing to capitalize on this land-and-expand opportunity will continue to be our primary focus. Finally, we will continue to prudently manage our cost structure to fund these growth initiatives while maintaining our attractive margin profile. We have built a highly scalable and efficient business model that is highly cash generative. Prioritizing investments and rigorously measuring the returns we generate from a dollar spent is an important part of our success. Our ability to invest in our long-term priorities in a more challenging environment increases our competitive moat and long-term growth opportunity. Now, I'd like to turn the call over to Jason to talk about recent product innovation highlights.

Thanks Robert. I'd like to start by sharing some exciting news about the Atlas Dataset, which we announced to the market on February 2nd. Composed of multiple data sets, including Atlas Reference & Affiliations data, Atlas All-Payor Claims data, Atlas prescription claims data, and Atlas expert data, the Atlas Dataset provides a longitudinal comprehensive and complete picture of the health care market. Over the 12 years since I founded Definitive Healthcare, we've been recognized as a leader in Reference & Affiliations data, providing a complete view of the US health care ecosystem and have continued to build upon that foundation with our investment in new data types and data science, helping clients gain unique intelligence on health care entities. And we're excited to now package up all that data that our clients know and love into the Atlas Dataset. With the Atlas Dataset, we're empowering customers to make strategic enterprise-wide data-driven decisions based on comprehensive up-to-date intelligence on the complex and broad health care ecosystem. Combining multiple data sets on more than 15 million health care experts and professionals and 300,000 health care organizations, the Atlas Dataset has multiple components, including Atlas Reference & Affiliations, which provides clients with unique visibility into the operations of and connections between health care providers and health care organizations. This data set spans more than 30 reference categories, including executive contact information, physical locations, care quality, technology infrastructure, and more. Secondly, Atlas All-Payor Claims, previously known as our ClaimsMx product, contains billions of de-identified patient-level data points that enable longitudinal analysis of health care activity across all sites of care. This data includes claims for facilities and physicians across all payers, including commercial, Medicare, Medicaid, and other federal programs. We recently expanded our Atlas All-Payor Claims coverage significantly, including double-digit increases in key areas such as rare disease, oncology, and chronic conditions. Thirdly, Atlas Prescription Claims, formerly known as our ClaimsRx product, contains billions of all payer life cycle pharmacy and direct prescription claims so users can understand the volume of claims that are paid, rejected, and reversed. When coupled with the broader Atlas Dataset, our claims products provide Definitive Healthcare customers with industry-leading intelligence on provider behavior, providers' affiliation and referral patterns, patient care, and the activities taking place within a facility. As a result, clients can more easily find underdiagnosed patients, gain deeper insight into longitudinal patient journeys, leverage more accurate data in AGOR analytics, and access more precise commercial targeting. Finally, Atlas Expert, which contains information on more than 13 million global key opinion leaders, scientific researchers, and health care providers. The data set also includes millions of data points from publications, clinical trials, social media activity, and news outlets, so clients can get an accurate understanding of the scientific activity and key providers for virtually any therapy area or disease state. As part of the Atlas Dataset launch, not only did we significantly expand our coverage, but we also refined the methodology that we use to master payer and patient data, while implementing additional layers of data science to deliver more detailed and granular reporting and increased accuracy. Our plan is to continually expand and improve the Atlas Dataset by adding new data types as well as to continue to develop more sophisticated data science to help our customers instantly access the insight they need to drive the growth of their businesses. For example, just last week, our executive profiles crossed the 1 million threshold, thanks to the hard work from our data collection teams. Our in-depth industry-leading executive profiles cover executives and administrators at all levels of health care organizations. And when combined with our world-class Reference & Affiliations data, it allows our customers to not only find the right executive target, but to deliver a message that hits that mark every time. This is just one example of Definitive Healthcare's innovation flywheel, which allows us to quickly and continuously build out new data sets, new analytics, and new functionality to drive more value for our customers and continue to sell more use cases across our clients' organizations. This results in a higher ROI and the ability for our customers to reach that ROI more quickly, which in this market environment is absolutely critical. The impact that we are having on our customers is highlighted in the results of an independent market and customer research study that we completed in the fourth quarter. At a summary level, the Atlas Dataset ranked first or second in every single one of the top 10 use cases for health care Reference & Affiliation data. This shows up more specifically as follows; within life sciences, Definitive Healthcare ranked first or second out of nine companies as the best option in multiple categories, including comprehensive quality clinical and financial metrics, total addressable market analysis, and identifying new physicians or health care organizations. In fact, biotech and medical device respondents ranked Definitive Healthcare as having the best intelligence to understand parent-child relationships by a 2:1 margin over the competition. Even more importantly, Definitive Healthcare users, which includes current and previous customers, ranked Definitive Healthcare as having the best intelligence to understand these relationships by a 3:1 margin over competing solutions. Finally, more than 90% of life science respondents said that the completeness, accuracy, and ease of accessing Reference & Affiliation data are the most important evaluation criteria of health care data and analytics providers, which, of course, plays right into our unique strengths. Looking forward, the same survey showed that there is still plenty of opportunity for Definitive Healthcare to grow our business as nearly half of the respondents said their organizations are spending too much time managing and matching data across data sets. This is a problem we can help them with. As you can tell, I'm tremendously excited about what we learned in this survey as it shows the tremendous need for health care commercial intelligence and that Definitive Healthcare is perceived as a leader in that market, putting us in a perfect position to take advantage of the opportunity.

Thanks Jason. I'll start with a detailed review of our Q4 results before finishing with our guidance for Q1 and full year 2023. As always, in all my remarks, I will be discussing our results on a non-GAAP basis, unless otherwise noted. Our strong business model allowed us to deliver solid results in Q4, highlighted by strong revenue growth and profitability despite the continuing economic conditions. Highlights include 31% revenue growth compared to Q4 2021, 28% adjusted EBITDA margin, and a 24% unlevered free cash flow margin over the last 12 months, and revenue growth plus the trailing 12-month unlevered free cash flow margin was 55%, putting us well above the Rule of 40. Turning to our results in more detail. Revenue for the fourth quarter was $60.6 million, up 31% from prior year and 4% above the midpoint of our guidance. This performance was driven by strong organic innovation and execution. As in the fourth quarter, we demonstrated our deepening analytics capabilities by delivering some large projects for global pharmaceutical clients. Pro forma organic revenue growth was 21% in the quarter and 27% for the full year. We ended the quarter with 538 enterprise customers, which we define as customers with at least $100,000 in ARR. This was an increase of 121 enterprise customers or 29% year-over-year and an increase of 34 enterprise customers from the previous quarter. As a reminder, these customers represent the majority of our ARR and are a key focus of our go-to-market programs. Our total customer count, which includes smaller customers, was 3,047 at the end of Q4, up from 2,865 in Q4 of 2021. Overall, economic conditions continued to be challenging in Q4. Despite the continuing headwinds, we believe new business and expansion opportunities remain strong even if realization is slightly delayed in this environment. Gross profit was $53.4 million, up 31% from Q4 2021 and gross margin of 88.2% increased 31 basis points from Q4 2021 as our prior year investments in Prescription Claims data scaled. We invested in additional data sources earlier this year and we expect to see approximately 200 to 300 basis points of temporary gross margin compression for full year 2023 as these sources come online. Because two large data sources came online in January, the margin pressure is expected to be greatest in the first half of the year. Sales and marketing expense was $21.1 million, up 33% from Q4 2021. As a percentage of revenue, sales and marketing expense was 35% of revenue, up 44 basis points from Q4 2021. The year-over-year increase is a result of modest investment in our go-to-market organization, primarily focused on continued verticalization of our sales and marketing teams. Product development expense was $7.5 million, up 50% year-over-year. As a percentage of revenue, product development expense was 12% of revenue, up from 11% in Q4 2021. We believe that investing in our platform and using our existing data sets to launch or enhance multiple products is a highly effective and efficient way for us to increase the value we deliver to customers. Robert and Jason touched on some examples of these earlier and we expect to continue to invest in the multiple opportunities we have identified on our long-term product roadmap. G&A expense was $8.1 million, up 16% from Q4 2021. As a percentage of revenue, G&A expenses were 13% of revenue, down approximately 180 basis points from 15% in Q4 2021. We expect to see continued leverage from G&A, both because these costs are relatively fixed as well as due to ongoing efforts to lower administrative costs. Operating income was $16.3 million, up 33% from Q4 of 2021. As a percentage of revenue, operating income was 27% of revenue, up approximately 50 basis points versus Q4 2021. The year-over-year margin improvement was a result of favorable gross margin as noted as well as an approximately 180 basis point decline in G&A costs. These were partially offset by approximately 40 basis points of continued investment in sales and marketing and approximately 160 basis points of innovation investments in product and development. Adjusted EBITDA was $17 million, a 30% increase from Q4 2021. As a percentage of revenue, adjusted EBITDA was 28% of revenue, approximately the same as Q4 2021. As we move through 2023, we will continue to look for areas in which we can reallocate investments to optimize growth while delivering adjusted EBITDA margins consistent with the Q4 run rate despite the impact of gross margin pressures noted above. Net income in Q4 was $10.5 million or $0.07 per diluted share based on 154 million weighted average shares outstanding. Turning to cash flow. Definitive's high margins, upfront billing, and low CapEx requirements provide substantial free cash flow generation. We focus on trailing 12-month cash flows due to seasonality. Operating cash flows were $35.6 million on a trailing 12-month basis, up 41% from $25.5 million in the comparable period a year ago. Unlevered free cash flow was $54.2 million on a trailing 12-month basis, down 2% from the comparable period a year ago. Unlevered free cash flow was 24% of revenue on a TTM basis, effectively converting 85% of our adjusted EBITDA of $63.7 million for the same period into cash. Like any SaaS company, when bookings growth slows, so does deferred revenue, which is the biggest driver of unlevered free cash flows. As growth rates stabilize and recover, so should unlevered free cash flow. On the balance sheet, we ended the quarter with $332 million in cash and short-term investments, with only $266 million of debt and with our strong profitability, we are well positioned to fund both organic and inorganic growth initiatives. Current revenue performance obligations of $183.5 million were up 18% year-over-year, and total revenue performance obligations were up 11% year-over-year. Deferred revenue of $99.9 million was up 19% year-over-year. You will note that cRPO and deferred revenue grew more slowly than revenue, and you saw that show up in unlevered free cash flow as I mentioned before. Moving now to guidance for Q1, we believe it's prudent to assume that current conditions extend through the first quarter as well. Assuming this is the case, in Q1, we would expect total revenues of $56.5 million to $58.5 million for a growth rate between 13% and 17%. Adjusted operating income of $13.5 million to $14.5 million; adjusted EBITDA of $15 million to $16 million for a 27% adjusted EBITDA margin; and adjusted net income is expected to be between $6.5 million and $7.5 million or $0.03 to $0.05 per diluted share on 154.5 million weighted average shares outstanding. For the full year 2023, we expect revenue of $249 million to $255 million for a growth rate of 12% to 15%. This assumes current conditions continue throughout 2023 and this growth will be almost entirely organic as we owned Analytical Wizards for all but two months of the prior year, it will contribute less than 100 basis points to growth. As we move through 2023, we will keep a careful eye on costs and operating efficiency to ensure we drive growth in the most efficient way possible. When we see revenue upside, we will try to reinvest it to deliver efficient growth while also ensuring that we continue to deliver attractive margins. Following this strategy, adjusted operating profit is expected to be between $61.5 million and $65.5 million; adjusted EBITDA is expected to be between $67 million and $71 million for a full year margin of 27% to 28%; and adjusted net income is expected to be between $30 million and $34 million, providing earnings per share of $0.19 to $0.23 on 155.5 weighted average shares outstanding. Within this guidance, the key expected cost drivers are the gross margin impact of the new data sources coming online early in the first quarter, the annualization of expenses associated with people hired in 2022, the impact of cost of living expenses on employee wages, and selective investment in the very highest growth priorities. We expect these costs will be partially offset by continued efficiencies in costs not directly associated with revenue growth. So, to summarize, 2022 was a solid year for Definitive Healthcare despite economic headwinds and uncertainty. We're well-positioned for the long term because we've developed a clear leadership position in a large and attractive market that we believe will support high levels of predictable revenue growth, profitability, and capital efficiency. And with that, I'll hand it back to Robert for a few closing thoughts before we take questions.

Thanks Rick. Before opening the call for questions, I just wanted to share how proud I am of our employees and the culture and community they have created and continue to cultivate. It is a testament to them that we continue to receive important honors and recognition, including having been awarded the 2023 Best Places to Work in Boston Award from Built In, the Energage 2023 Top Workplaces Culture Excellence Award, the 2022 Stevie Award for Great Employers, and for the sixth consecutive year, the 2022 Top Place to Work by the Boston Globe. Another area of pride is our commitment to our community, where the volunteer work and generosity of our employees earned us recognition as a top charitable contributor in Massachusetts by the Boston Business Journal, and where last year, our employees had over 3,400 volunteer hours and we donated nearly $500,000 to charitable organizations. And to further our mission and action towards sustainability and transparency, we are proud to have joined the United Nations Global Compact, the largest corporate sustainability initiative in the world. As we look ahead to 2023, I expect our team to continue to do valuable work not only in their roles at Definitive Healthcare but also in sustaining our strong culture and in making a difference outside the office and in our communities. With that, we'll open the line for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. Our first question comes from the line of David Grossman from Stifel. Please go ahead.

Thank you. Good afternoon. I know it's a really difficult environment to forecast anything right now, but as you obviously had to come up with guidance for 2023. So, as you think about the assumptions that you're making that underlie that guidance, where do you think are the areas where you could have the most variability, whether it be kind of positively or negatively relative to the assumptions that you're using?

Well, we have an extremely predictable business model so we're very lucky in that. The new bookings is the most variable component. That's actually a little bit de-risked in the guidance that we've provided. And we expect that we'll see some uptick as we get into the second half of the year as the economy improves. But that's the widest variability that we have.

And I saw the deck that came out during the call. So, it looks like obviously, revenue retention went down consistent with the backdrop and everything you've been saying. So, as we think about 2023, should we think about retention, no improvement, meaning that the retention levels would look similar to 2022? Or should we expect to see some improvement in the back half of the year?

David, can you hear me? It's Robert. From a mathematical standpoint, we have reviewed another quarter of information on last year's performance. As Rick mentioned, it closely resembled Q3 from the previous year. We don’t expect significant differences from the recent quarter or the one before it, so we are predicting that this environment will persist for the remainder of the year. However, as Rick pointed out, there are factors that could change throughout the year. If the macroeconomic situation improves, we could see increased new sales and upsell opportunities, which would impact this year but mostly affect revenues in 2024, as our business model ties this year's commercial performance to next year's outcomes. Regarding retention, while changes can affect a given year, our retention rates have remained fairly stable year over year. We have observed a slight uptick in financial distress cases among small biotech firms recently, and we try to assist them as much as possible. Unfortunately, there are instances where we cannot reach an agreement, resulting in client losses, which is disappointing. However, we do not anticipate any significant changes in retention that would drastically alter our current projections. In summary, while there is substantial variability, we strive to make accurate predictions based on past information and our outlook going forward, and we feel confident about that.

All right, got it. Thanks very much for that. And just about the 1Q guidance, can you help us understand? It looks like we're going to be down sequentially. Is there some anomaly there? I know seasonally that's not typically the case. So, is that just kind of consistent with everything we've been saying? Or is there some anomaly in there that's taken the revenue down sequentially?

There's a seasonality effect, particularly in the small amount of professional services that we do have in our model. We completed a number of significant analytics projects for large pharma companies in the fourth quarter and we don't expect that to recur in the first quarter. That's a pretty consistent year-over-year trend within the Analytical Wizards business that we acquired last year.

Got it, okay. And then just one last thing, Rick. I didn't catch the cRPO number that you gave. Do you mind repeating that?

Yes, the cRPO number was $183.5 million, up 18% year-over-year.

Got it. All right, great. Thanks again.

Thank you.

Thank you. Our next question comes from the line of Craig Hettenbach from Morgan Stanley. Please go ahead.

Yes, thanks. Question for Robert. Just you talked about as some of the sales cycles have lengthened out, can you comment on if deals aren't closing in the quarter, are you seeing them in the subsequent quarter? And as part of that, you also mentioned sales is adapting to this environment. Anything in particular that you're finding successful in terms of their ability to manage through some of the macro?

Thank you for the question, Craig. Regarding your first question, I realize I overlooked the initial part. I was about to address the second part. Could you please remind me of the first part?

Yes, just the deals that have taken longer.

Yes, yes, the push deals. What salespeople always tell you is when it pushes, it's coming in next quarter and I think experience would show that sometimes that doesn't happen. So, when things push, we do get a lot of them back and we actually track a push deals list each month and each quarter that goes forward and then we re-project a month that it's supposed to close and we've done pretty well on those. So, what we've kind of seen is a lengthening of the sales cycle but still being able to pull some of those through when the decision really is a push. I think what ends up happening sometimes is you kind of hear back from your team that it's a push, but a push is a nice way of a client saying no, and so some of those don't come through. But in general, we have pipelines bigger than they've ever been. We do really look at those and apply consistent standards and take it out of the pipeline if it's not going to be something that closes. And even with that pipeline cleansing, we still feel really good. So, that's why we know we have the confidence that with a little bit of macro improvement, I'd expect the cycles to shorten again and to really start pulling that stuff through at the pace we had seen in the past before some of this macro impact. On the sales improvements, these are tactics that as the environment change, we've really pushed our teams to adopt across the board. And I'd highlight a couple of them. One is just deeper account planning. And that's been really helpful and we've seen it yield a lot of benefits where we've started to do a better job of, take life sciences, where we have a lot of different solutions for clients. The team that works on selling commercial data, working with the team that is talking to the client about analytics, working with the team who's talking to medical affairs about expert data, working much more closely together and coordinating on the opportunity to really expand those relationships. The other way it's helped is to really create a better map of who are the influencers for any given decision and be sure that we're getting ahead of talking to those clients about the ways we can help them. So, if down the line, there's a budget mandate or a CFO that steps in with something, we have a broader bench of support and potentially a broader bench of support across the organization even in other therapeutic areas or other departments. So, that's something that I think in this environment is going to be really helpful to us. The other thing that we've done a lot of is continue to verticalize. And by that, I mean really organizing our commercial efforts and our expertise that supports our commercial teams around each vertical. And what that lets us do is speak more the language of our clients. We've always done that really well and diversified because that's kind of the history of the company. But as we've gotten bigger in provider and life sciences, those are two places where we've really gotten much better at speaking about the use cases that we can generate. And we have a lot of the use cases based on acquisitions and new products that we've built over the last couple of years. And so really getting the teams able to articulate the value and the ROI of these solutions and how that fits into our clients can meaningfully inflect their business and that's going to help. So, in an environment like this, people want to know they're going to get ROI. They want to understand it on their terms. They want to hear confidence from our team about the value we're going to deliver and I think that will really help. Sorry for the long answer, but at the end of the day, when people start wanting to invest in growth and make the decision that they want to put dollars behind growing their business, we're still very favorably positioned because we can accelerate that and deliver a lot of value. So, again, I'd love a little help from the macro environment. We're not assuming it but when and if it comes, it will certainly speed things back up on the cycle front.

Got it. And then just my second question, a year into Analytical Wizards. Just would like to hear how it's performing versus the initial expectations. And I know Monocl was a deal that performed very well. And so if there's any similarities or differences between how those deals have kind of progressed.

Yes, both acquisitions have been quite similar. Each one introduced new capabilities. Monocl provided valuable key opinion leader and expert data that we incorporated into our broader Atlas Dataset, which our commercial teams can use to boost sales of Monocl products. Analytical Wizards offers a similar benefit with its quickly adaptable analytical capability that is not dependent on our data. While we would prefer clients to utilize our data, it allows us to serve those who may not yet have it, and enhances our analytical strength, especially in biopharma. Our biopharma teams can leverage this as they promote our offerings, such as when we launched Passport Express using data integrated into Wizards Analytics and packaged for sales. I'm very satisfied with the outcomes of both acquisitions. We view life sciences as a significant market with a large total addressable market and substantial growth potential. Despite some macroeconomic challenges, we are experiencing strong growth in this sector. Looking ahead five to seven years, we anticipate it will continue to be a major market for us, and these acquisitions serve as important foundations for the solutions we will provide in this area.

Got it. Thank you.

Thanks Craig.

Thank you. Our next question comes from the line of Kash Rangan from Goldman Sachs. Please go ahead.

Hi guys. This is Jacob Staffel on for Kash Rangan. Thank you for taking my question. I wanted to touch on the conversations that have been had around the Atlas Dataset thus far, namely, we are in a time where we are seeing customers be more disciplined on their spending. And so what's been the initial reception? I know it's only been three weeks or so, but any color we could get there would be really, really appreciated.

It's been great. It's very early, but we're very excited about it. It provides us with more comprehensive coverage in important areas and integrates our data under the Atlas umbrella, allowing us to showcase the strengths and uniqueness of the data to our clients. This has been fantastic as it refreshes our conversations and highlights how distinct our Reference & Affiliations data is. We are ranked number one or two for every relevant use case, and it's well-known that if you need that kind of data, you must go to Definitive. In just three weeks, I won’t claim we've made millions in sales from the Atlas Dataset yet, but it has certainly sparked invigorating discussions, and I believe it will bring significant value to our clients throughout the year.

Awesome. Thank you very much. No follow-up for me. Thanks guys.

Thank you. Our next question comes from the line of Ryan MacDonald from Needham. Please go ahead.

Hey guys. This is Matt Shea on for Ryan. Wanted to follow-up on the deal cycle elongation. And curious if you guys are starting to see any consistency in that elongation, meaning if you're able to quantify how much longer those deal cycles have become. And then to the extent you're starting to see some consistency in the lengthening, how that consistency or ability to predict the new normal increases your confidence or visibility into the 2023 outlook?

Yes, it's a really good question. I think traditionally, we would have said kind of before the second half of last year, deal cycles were three to six months with more complex deals being on the longer side of that and smaller single-product deals being on the shorter end of that. It's hard to say what the actual cycle is on stuff that closes. It's probably extended by two to three months. But when you ask about consistency and looking forward, what I would say is that our forecasting has gotten a lot better around the sort of new environment and how long deals take to come in. So, I do feel like we have better visibility this year, entering the year kind of assuming the market, kind of taking the market as a given and incorporating that into our forecast. So, while we might have gone back to September and say we were surprised by a lot of things that pushed off, I'd say now, we do know things are going to push off. We're not surprised by it, so at least that's progress. And what I'd hope that over time, and I mentioned earlier is that with a little bit of benefit from the macro, we have these large pipelines and you do have deals that are genuinely pushing. Once people decide to spend and put the budgets, we can start getting those sales cycles back down to levels we saw in the past and that would obviously accelerate ARR this year, if and when that happens.

Okay, got it. That is helpful. And then I wanted to touch on something that Jason mentioned, where you saw in your survey that half of life science organizations think that they're spending too much time matching data across data sets that's something you can help with. I'm curious relative to that demand, what modules you have today that can meet that demand head on, whether you would need to leverage some professional services to assist with that? And then to the extent that there's some gaps in completing that data matching strategy for those life science companies, how that might guide some of your investments over the next year or two to capitalize on that demand?

Yes, hi, It's Jason. Great question. So first of all, as you think about the Atlas Dataset, which we just rolled out, the whole point of that is to be able to provide an enterprise-wide view that's really the source of truth for these clients. By bringing together our Reference & Affiliations data with our claims and prescription drug and expert data, that really solves a lot of problems for our clients versus them trying to mix and match from lots of different places. So, that is super important. And it also provides us the foundation to where we want to invest in the future. So, as we continue to bring in new data sets through internal development, we're about to roll in, for example, a digital opinion leader data into the Atlas Dataset, so we can really give our clients a sense of who the influencers are online. And how is that important as they think about going to market with new drugs and therapies and medical devices? And then similarly, as we think about our M&A strategy, it's really about how do we continue to strengthen the Atlas Dataset and bring in more unique data sets to it. But then also how do we leverage that in new and unique ways for our clients, both through new capabilities like Analytical Wizards as well as internal development, where we're creating new use cases and new ways to allow our clients to solve as many business problems they can with our data. So, it's all related together and highly strategic in the way we're thinking about it.

Awesome. Thanks guys.

Thank you. Our next question comes from the line of DJ Hynes from Canaccord Genuity. Please go ahead.

Hey guys. This is Ryan Shanahan on for DJ. Congratulations on the quarter and the year. So, given these tighter sales environments, have you noticed, I guess, through RFPs or just word on the street, I guess, greater price competition between less specialized competitors? And is this affecting your win rates at all?

That's a great question. I would say we haven't really observed any significant changes in the pricing compared to what we usually experience. Typically, everyone seeks a discount to finalize a deal, which is standard. Business customers always strive for the best price, but there hasn’t been a shift in the pricing landscape. There’s always been more competition, particularly at the lower end, where some might consider alternatives like simple lists or telephone directories. When clients are not focused on health care, those options can be sufficient for them. However, in general, the emphasis is on succeeding and growing within health care, which leads them to purchase Definitive. Therefore, we haven’t experienced any substantial price erosion for the types of clients we aim to attract. So, there hasn't been any major change in that regard.

Okay, great. Thanks. Appreciate it.

Sure.

Thank you. Our next question comes from the line of Glen Santangelo from Jefferies. Please go ahead.

Yes, thanks for taking my question. Hey Robert, I just had two. The first is on the enterprise client side. I mean, you grew almost 7% sequentially in the quarter from 3Q. And I was kind of curious if you can give us some color on the split between what percentage of that growth came from like new customers versus organic growth within your existing base, just sort of given all the incremental modules and offerings you now have on the platform. Just trying to get a better sense for where the growth is coming from?

Thank you for your question. We experienced growth from both new business wins and upsell activities during the quarter. While I don't have the exact figures or whether we typically disclose this information, I can say that we had some significant new business wins that contributed directly to our enterprise growth. Additionally, the upsell performance met our expectations and generally represents about half, or possibly a bit more, of our enterprise client growth. While I can't provide the precise breakdown, we had strong performance on both fronts in terms of moving clients to enterprise.

That's helpful information. I wanted to follow up on your first-quarter comments. You mentioned that the conditions observed in the second half continued into at least the beginning of 2023. In our last conversation, it seemed that the outlook suggested a slight weakening through the third quarter. Can you provide some sequential insights on the fourth quarter and, given that we are two-thirds into the first quarter, how things have been progressing? We’re trying to understand whether the current environment has stabilized as we evaluate the conservatism or possible vulnerabilities in your 2023 revenue guidance based on the present situation. Thank you.

Yes. I understand this might seem like a mathematical response, but essentially, the fourth quarter resembled the third quarter in terms of overall performance. You could say that neither quarter was particularly strong, and Q4 didn't perform significantly worse than Q3; it simply didn't perform better. I'm not ready to comment on what we've observed so far this year, but generally speaking, we've projected that the performance from Q3 and Q4 will carry into this year, which is the basis for our model. Currently, we see no reason to think that the operational environment is different. We certainly hope for improvements in our operating conditions. This suggests that we have another period of results to consider. Our assumption, as we plan for this year, is that these conditions will persist longer than we initially anticipated. So, we expect this trend to extend throughout the year, which is our current perspective.

Okay. Thank you.

Sure.

Thank you. Our next question comes from the line of Brian Peterson from Raymond James. Please go ahead.

Hey gentlemen. Thanks for taking the question. And maybe another high-level one on the macro in budgets. But as you went through 2022, I guess I'd just love to understand how budget trends progressed. I mean based on our work, it sounds like they've been down. But maybe as we go into 2023, they've been set. So, I guess I'm curious if in your customer conversations, I know maybe it wasn't the close that you guys wanted in the back half of the year. But are we kind of through the worst of it in? And maybe customers with budgets and everything are a little bit more ready to play offense when they were playing defense in 2022. So, I know it's a lot of questioning but any thoughts there? Thanks guys.

It's a thoughtful question, and we remain optimistic that this could be the case. However, we did not factor it into our expectations for the year. Based on our past experience, budgets have become very tight and, in many situations, have not loosened. Our hope was that this year might show improvement in budgeting. Yet, we haven't assumed that budgets will significantly change from what we observed at the end of last year. This seems like a sensible approach given our current observations. For every client with whom we successfully closed a deal at the end of last year, there were others who were ready to sign but faced unforeseen spending mandates that forced them to delay. The frequency of such occurrences has been noticeably different in the second half of the year compared to the first half and the previous year. I don’t think this situation is permanent, but it certainly felt like we were still in the midst of it as we began the year. Additionally, we serve sectors that are currently experiencing financial strain, particularly in small biopharma and small life sciences, where many companies are struggling. These clients are closely examining every dollar, and many are scaling back on growth investments. Various segments within our provider vertical are also facing challenges, as indicated by recent spending cuts. These areas are often more challenging for us to engage with or upsell, especially when we don’t have control over the budget environments we’re working in. You might develop a strong relationship with a contact over a few months, only to have the budget situation change unexpectedly at the last minute. Overall, while I hope for an improvement in conditions, we have not included this assumption in our planning for the year.

Appreciate the color. Thank you.

Yes, thanks.

Thank you. Our next question comes from the line of Anne Samuel from JPMorgan. Please go ahead.

Hi, thanks for taking my question. This was maybe just a little bit of a follow-up on what you were just talking about. I was wondering if maybe you could talk about some of the differences between what you're seeing in the demand environment for life sciences versus provider, where the headwinds are more pronounced and maybe which one you expect to recover first?

Well, that's a good question. I guess I'll start with the end of your question, which is we haven't assumed any recovery in the plan that we've put out. So from an assuming and sort of looking forward, we've assumed that the environment we're in is the environment we're in, and we're going to function as best we can against that. In terms of just what we're seeing kind of life sciences versus provider, certainly, it's been more acute for us in the smaller life science, and that's been a strong point for us over the years. We have a great value proposition in that market. There's just a lot of financial strain there, where either really just come in with inability to continue to spend external money or at least just heavy budget scrutiny and both of those impact our ability to grow with those clients. Provider is a little different story. Providers tend to be okay over the long term, not necessarily super high margin but usually not low margin either. I think at the end of last year was tough and there were a lot of things working against provider economics. I'd expect that market over time to be a great market for us. I just don't know when things will open back up. So, hopefully, that gives you as much color as I can at this point. I wish I could look forward and tell you that one is going to recover sooner than the other and that they're both going to recover really quickly. But that's, again, not what we have in our outlook right now.

Very helpful. Thank you.

Thank you. Our next question comes from the line of Allen Lutz from Bank of America. Please go ahead.

Hi, thanks for taking the questions. I have one for Rick. Although you've mentioned the macro environment's impact on the business, enterprise customers are still growing, and total customers continue to increase nicely. To rephrase the sequential question, can you provide any estimate of the contribution from professional services in the fourth quarter? What changes should we expect in the first quarter? Additionally, how should we anticipate the growth of total customers, particularly in the first quarter or first half of the year? Is there a possibility that it might decline? I'm trying to understand what is driving the change in revenue from the fourth quarter to the first quarter. Thanks.

Yes, there's several million-dollar anticipated difference between Q4 professional services and Q1 professional services, which is normal and customary for the Analytical Wizards project work that they still do. Overall, professional services are only about 2% of our revenue but they do tend to be back-end loaded. And thank you, by the way, for acknowledging the underlying strength of the business.

No problem. And then one question for Jason. We've been trying to figure out, as I'm sure you have, just sort of life sciences when spend is going to inflect, and there's a lot of different data points that suggest that maybe it has. Some are saying that it hasn't. I guess, can you talk when exactly did life sciences start to pull back? And is there any kind of historical reference point that you can point to? I know the business was founded sort of after the last Great Recession. But is there anything historically that you can point to where you've seen something like this before and how long it took before things started to pick up? Thanks.

Yes, it's a good question. Jason. Go for it, Jason.

It's always difficult to predict when a turnaround will happen. However, in terms of the long-term outlook for this business, the strong factors that have driven remarkable growth over the past 12 years are still present. The amount of health care data is still increasing, and the market remains highly complex and is becoming even more so. It’s interconnected and distinct from any other market. There are also rapid changes in life sciences regarding drug reimbursement and identifying underdiagnosed patients with rare diseases. These positive trends are still active, and they will lead to continued growth for the company in the long run. We don't know when that will occur, but in the meantime, we are focused on building and innovating our business to ensure sustainable long-term growth. Our situation is strong; we have both growth and profitability, which enables us to invest while others may not be able to. We will use this opportunity to strengthen our position, and when the market improves, we will benefit from it.

Great. Thank you, both.

Thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the conference over to Robert Musslewhite, Chief Executive Officer, for closing comments.

Yes. Thank you all for the time tonight. We always appreciate it. We look forward to circling back with all of you and with our shareholders over the next several months and look forward to that. Thank you again for your time tonight and the questions. Bye, bye.

Thank you. The conference of Definitive Healthcare has now concluded. Thank you for your participation. You may now disconnect your lines.