Definitive Healthcare Corp. Q4 FY2024 Earnings Call

Welcome to Definitive Healthcare's Q4 2024 Earnings Call. I would now like to turn the call over to your host. You may begin.

Good afternoon, and thank you for joining us today to review Definitive Healthcare's financial results. Joining me on the call today are Kevin Coop, our Chief Executive Officer; 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 and use of our solutions, customer growth, our financial guidance, our planned investments generating value for our customers and shareholders, the anticipated impacts of global macroeconomic conditions on our business results and customers and on the health care industry generally and on our ability to successfully transition executive leadership. 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 section 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 and investor presentation on the Investor Relations portion 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 Kevin.

Thanks, Matt, and thanks to all of you for joining us this afternoon to review Definitive Healthcare's Fourth Quarter 2024 financial results. We continue to make important progress on several fronts. On today's call, I'll provide an update on that progress and outline the areas where we have more work to do and share some content about how we are thinking about 2025. Let me begin by reviewing our financial results for the fourth quarter, which were above the high end of our guidance ranges for both top and bottom line. Our total revenue was $62.3 million, down 6% year-over-year. The decline in revenue reflects the cumulative impact of the customer retention challenges we experienced throughout the year. Adjusted EBITDA was $17.5 million, down 12% year-over-year and adjusted EBITDA margin was 28%, which remained strong as we effectively balance the need to invest in growth with the current decline in revenue. Unlevered free cash flow performance was also strong with 92% conversion from adjusted EBITDA up 6% year-over-year on a dollar basis. From an operational perspective, we are still experiencing mixed results but with signs of progress. Positively, we executed on securing new business in the quarter, both in terms of new logos and upsell/cross-sell activity with existing customers. We believe the ability to win new logos across each of our target end markets is an important validation of Definitive's value proposition and a reflection of the increased focus we have brought to bear on execution in this important area. We are committed to building upon the success throughout 2025. On the other hand, churn remained elevated and was unfavorable compared to Q4 2023 and after having shown improvement over the first 3 quarters of the year. It's important to note that much of the churn we experienced are downsells, not lost clients. While churn rates remained elevated, we continue to believe we can improve those over time. The fact that we are retaining many of these customers in some capacity demonstrates they continue to realize business value and that provides the opportunity to expand with them in the future. Improving our renewal rates remains the highest priority for the business and is essential to returning the company to growth, and therefore, we are aligning our operational and strategic focus on impacting this critical area. As mentioned, our continued focus on new logo growth in Q4 has produced some positive results, and I'd like to highlight a couple of new logo wins. First, a behavioral and mental health screening company is leveraging our reference affiliation and claims data to identify and build stronger relationships with the right doctors and practices. They've also helped create an AI-powered tool that uses our insights and data to compare physician prescribing habits, helping health systems improve both care and drive growth. Next, a leading U.S. supplier of industrial, medical and specialty gases chose Definitive to gain insights into complex IDN hierarchies, identify high-volume facilities, navigate the health care RFP process and expand into new markets like surgery centers and post-acute facilities. This partnership also helps them connect with key nursing, procurement and purchasing executives at both the facility and GPO distributor levels. Turning to the operational update. Last year, when I was new to the role, I told you that I had found our data to be of high quality and differentiated. I also observed that I found our team to be comprised of talented and dedicated individuals focused on our customers with solutions that address critical business needs. Now 6 months into the job and at the start of the new year, my confidence in those initial findings is reinforced, but I have now had the experience of the past several months on the job, which has improved my insight into our remaining gaps and a more informed perspective on the key operational priorities for 2025. Additional changes are needed to simplify and further align our efforts across both sales and customer success and continue to make it easier for our customers to access and leverage the full capabilities of the Definitive platform. To that end, several initiatives are underway, including combining our med device sales channel into our existing biopharma team for a more focused and coordinated life sciences distribution channel; integrating our customer success and value delivery teams and aligning their compensation incentives with sales, which we believe will improve our pre- and post-sales efforts and drive more effective customer onboarding; and given the criticality of our focus on retention, we have augmented our leadership team with a new chief customer officer reporting directly to me to oversee this combined functional team; and we have centralized our analytics and data science capabilities into a center of excellence to provide more robust customer support, onboarding and attached services for improved customer intimacy. Taken together, we believe these changes will make us more responsive to customer needs and increase the value we deliver. The net result is that while we are making steady progress, it will take longer than originally anticipated for the business to start realizing the positive benefits of all of the changes being made across the business. While we have accomplished much in a short time, more remains to be done. Our focus going forward will be to build upon this initial success and develop a repeatable, predictable cadence in our go-to-market and product development efforts in each of our core customer verticals. I will continue to update you on our progress and how this will impact on our value proposition and our customer needs as we progress throughout the year. We are focused on 4 key pillars of our platform and value proposition: differentiated data, data delivery and integrations, driving customer success and enabling our customers' digital engagement with providers and consumers. How we manage the business and make investment decisions must orient around how something will positively impact the business across one of these four dimensions. Our core value proposition is built upon differentiated data. This is our foundational strength, and we are widely recognized for having the best data in the market. We are always investing in ways to expand and strengthen our data sets. As we look ahead, in addition to continuing to invest in and strengthen our foundational data set, a big part of our focus is on helping our customers leverage and act upon this highly valuable data by investing in the other three core pillars.

Thanks, Kevin. Before I get into the quarterly results, I'd like to congratulate Casey on her promotion to CFO. We hired her over a year ago with the view that she would be a successor candidate, and she's been an incredible partner during that time. I'll miss Definitive, but I'm also looking forward to some time off, and I know that I will be leaving you in good hands. Turning to business, I'll start with a detailed review of our Q4 results before finishing with our guidance for Q1 and the full year 2025. In all my remarks, I will be discussing our results on a non-GAAP basis, unless otherwise noted. In Q4, we are pleased to deliver above the high end of our guided ranges for the quarter and for the year. We remain focused on what we can control, and we continue to advance our efforts to operate more efficiently while also delivering innovation for clients. In the fourth quarter, we delivered $62.3 million of revenue, down 6% compared to Q4 2023; $17.5 million of adjusted EBITDA in the period, down 12% from the same period in the prior year. But adjusted net income and non-GAAP earnings per share each grew by 18% and 19%, respectively, over Q4 2023. And we generated $72.5 million of unlevered free cash flow on a trailing 12-month basis, which is up 6% versus the prior year. And for the full year, this resulted in 0.3% revenue growth and a 170 basis point expansion in adjusted EBITDA margin, thanks to cost controls implemented early in the year. Turning to our results in more detail. Revenue for the fourth quarter was $62.3 million, above the high end of our guided range and down 6% from the same period of the prior year. As expected, subscription revenue for the fourth quarter decreased by 4% from the same period of the prior year, while professional services revenue declined more significantly. The key driver of the revenue decrease is that renewal rates are not yet back to our desired levels, especially for our life science customers. We ended the quarter with 519 enterprise customers defined as those customers with more than $100,000 in ARR. This was a decrease of 21 enterprise customers year-over-year and a decrease of 11 quarter-over-quarter. These customers represent 68% of our ARR and are a key focus of our go-to-market programs. Our total customer count, which includes smaller customers, was approximately 2,500 at the end of Q4 2024, down about 250 from Q4 of 2023 and down about 70 from the previous quarter as current conditions have disproportionately impacted smaller customers. Net dollar retention for 2024 was 90% for enterprise customers and 85% overall. Adjusted gross profit was $50.3 million, down 10% from Q4 2023. As a percentage of revenue, the adjusted gross profit margin of 80.7% decreased approximately 400 basis points from Q4 2023. This reflects the decline in revenue and the largely fixed nature of most of our costs. Adjusted sales and marketing expenses were $18.9 million, down 7% from Q4 2023. As a percentage of revenue, sales and marketing expenses were 30.4%, about 60 basis points lower than the prior year. For 2025, we expect sales and marketing as a percentage of revenue to increase approximately 150 basis points relative to the full year 2024 as a result of the revenue pressure. Adjusted product development expense was $7.3 million, down 8% from Q4 of 2023. As a percentage of revenue, product development expense was 11.8%, down from 12.1% in Q4 2023. We believe investing in our platform and using both existing and new data sets to launch or enhance multiple products is an efficient and effective way to increase the value we deliver for customers. We intend to continue prudently investing in the highest ROI opportunities on our long-term product roadmap, and we expect full year 2025 product development as a percentage of revenue to be up approximately 100 basis points compared to the full year 2024. Adjusted G&A expense was $7.7 million, down 10% from Q4 2023. As a percentage of revenue, G&A expenses were 12.4% of revenue, which is an improvement of 60 basis points compared to Q4 2023. We expect G&A expense as a percentage of revenue in 2025 to increase by approximately 100 to 150 basis points year-over-year. Adjusted operating income of $15.8 million was down 14% from Q4 2023. And as a percentage of revenue, adjusted operating income was 25%, down 250 basis points from Q4 2023 due to the revenue pressure in the period. Adjusted EBITDA was $17.5 million, a 12% decrease from Q4 2023. As a percentage of revenue, adjusted EBITDA was 28% of revenue down 190 basis points from Q4 2023, also reflecting our declining revenue. Adjusted net income was $12.6 million or $0.08 per diluted share based on 154.4 million weighted average shares outstanding in the fourth quarter of 2024. Turning to cash flow. Definitive Healthcare's high margins, upfront billing and low CapEx requirements provide substantial free cash flow generation. We focus on trailing 12-month cash flow due to seasonality. Operating cash flows were $58.2 million on a trailing 12-month basis, up 41% from $41.2 million in the comparable period a year ago as we benefited from strong collections and lower deferred commission costs. Unlevered free cash flow was negative $1.6 million in the quarter. This was due primarily to a onetime $10 million CapEx investment made in the fourth quarter related to the strategic data partnership that Kevin mentioned. On a trailing 12-month basis, unlevered free cash flow was $72.5 million, up 6% from the comparable period a year ago, and this is 92% of our TTM adjusted EBITDA of $79.1 million over the same time period. Within the fourth quarter, we repurchased approximately 1.6 million shares at an average price per share of $4.46 for a total of $7.3 million. This leaves $98 million remaining under the existing authorization. At year-end, current revenue performance obligations of $188 million were flat year-over-year as reported, and total revenue performance obligations were up 6% year-over-year. Deferred revenue of $93.4 million was down 4% year-over-year. Subsequent to quarter end, we amended and extended our existing credit facilities. To improve balance sheet efficiency, we reduced the term loan to $175 million and the revolving credit facility to $50 million, and we extended the tenor through January 16, 2030. After completing the transaction, as of January 31, we held $220 million of cash and investments and $175 million in total debt. Additionally, we executed an interest rate cap, protecting us against rate increases if SOFR rises above 4.5% on 80% of the balance of the term loan. If the SOFR rate drops below 4.5%, we would benefit from the lower rate. Full details are available in the 10-K. And then one final bit of accounting before guidance. The recent stock price decline caused us to book a further $97 million goodwill impairment charge as of December 31. And that write-down also generated approximately $11 million of gain on the remeasurement of the TRA liability and a $6 million deferred income tax benefit. As a reminder, these are noncash accounting charges, have no impact on our debt covenants and all impacts are excluded from our adjusted earnings. Moving now to guidance for Q1. After observing the continued pressure on renewals, we now expect total Q1 revenue of $55.5 million to $57 million, a decrease of 10% to 13% year-over-year compared to Q1 of 2024. One important note is that Q1 revenue includes only a partial quarter of revenue from our new data partnership. Although the deal was signed before year-end, the customers' access began mid-quarter. In contrast, we will benefit from the full quarterly run rate for the remainder of the year, which we anticipate will improve the revenue trajectory in Q2 relative to Q1. From a non-GAAP profitability perspective, we expect Q1 to be the low point of the year for two reasons: first, because we expect to incur a full quarter of the data partnership costs despite only a partial quarter of revenue; and second, as in each Q1, we expect to experience an increase in payroll tax and other benefit costs associated with the start of the year. Taking these factors into account, in Q1, we expect adjusted operating income of $7.5 million to $8.5 million; adjusted EBITDA of $10.5 million to $11.5 million or a 19% to 20% adjusted EBITDA margin in Q1, adjusted net income of $3 million to $4 million or approximately $0.02 per diluted share on 153.3 million weighted average shares outstanding. For the full year 2025, we expect revenue of $230 million to $240 million for a 5% to 9% decline year-over-year. And within the year, we see Q1 as a low point and we expect that year-over-year decreases in revenue will moderate as we move through the year. For the full year, we expect revenue to increase in Q2 relative to Q1, in part due to having a full quarter of the partnership revenue mentioned previously and to increase further before the end of the year due to the seasonality of our professional services business. The high end of our guidance range assumes modest improvements in both renewal rates and sales productivity, thanks to our new data sources and enhanced service approach. While the low end of the revenue guidance reflects a scenario in which renewal rates continue to worsen from the low rates observed in the second half of 2024 while sales productivity trends are similar to those observed in 2024. The total revenue guidance decreases by more than cRPO, primarily because we have taken our recent renewal results into account. Both Q4 and January renewal rates were down year-over-year, and therefore, we assume an NDR in the low to mid-80s in 2025. From a non-GAAP profitability perspective, the largely fixed nature of our cost means that most of that revenue decrease will flow through and create negative operating leverage. So we expect sales and marketing expense of 32% to 33% of revenue, development expense of 11.5% to 12.5% of revenue and G&A expense of 12% to 13% of revenue. Translating that into dollars. In 2025, we expect adjusted operating income of $49 million to $53 million, adjusted EBITDA of $61 million to $65 million for a full year margin of 26% to 28%. Adjusted net income is expected to be between $30 million and $34 million. Earnings per share are expected to be between $0.19 and $0.22 on 153.9 million weighted average shares outstanding. This estimate does not contemplate additional purchases under the existing share repurchase program, but full execution against the remaining authorization would impact 2025 EPS by approximately $0.01. I'd like to reiterate that despite the top-line pressures, we remain committed to non-GAAP profitability improvement through the year. We expect Q2 adjusted EBITDA margins to be stronger than Q1 and for adjusted EBITDA margins in the second half to be stronger than in the first half. So in conclusion, we're pleased to have delivered revenue and adjusted EBITDA above the top end of our guidance and increased operating and unlevered free cash flow generation versus the prior year. We remain confident that we're participating in a large and attractive market, and our strategy is designed to improve retention, return us to growth and to increase long-term shareholder value. And with that, I'll turn the call back to Kevin for a few thoughts before we take questions.

In tonight's call, we've tried to present a balanced view of the current conditions and our strategic intent in navigating those conditions. We are focused on 4 key pillars of our platform and value proposition that of continuing to strengthen our differentiated data, streamlining our data delivery and integrations, driving customer success in the way that customers want to engage with us and enabling our customers' digital engagement with providers and consumers. At the same time, we acknowledge that these efforts will take longer than I initially anticipated to implement and achieve their full effect. Throughout 2025, we intend to keep you updated on our progress in these key strategic pillars. And with that, I would like to open it up for questions.

And our first question comes from Jared Haase of William Blair.

Jared, you there?

Yes. Can you hear me okay now?

Yes, we can, thank you.

Okay. Perfect, perfect. Great. So just wanted to double-click, I guess, first, on the churn dynamics that you experience into year-end. I guess just any more color you can share, maybe sizing or any directional commentary in terms of the magnitude of how that compared to the prior quarters in 2024? And then anything incremental in terms of what's really driving the downsells in particular? Is that still just the broader macro? Anything new in terms of those decisions? And then also, is that still concentrated to life sciences?

This is Rick. I will provide a high-level overview and then Kevin will discuss the root causes of churn and our responses. First, it is clear that the challenge lies more within life sciences than in other areas. Our churn in the fourth quarter was similar to that of the third quarter but less favorable compared to the fourth quarter of 2024. We reported an 85% net dollar retention rate and we are forecasting a low to mid-80s net dollar retention rate for the next year because, despite our efforts, we are not assuming that they will be successful in our guidance. Kevin will delve deeper into the root causes and our responses.

Yes. So as Rick said, while generally challenging, it was definitely more pronounced in life sciences. I would also add that it was heavily impacted by downsells, not outright churn. So we do have some comfort in that our customers are still seeing value, which offers future ability to come back to them. And our efforts around that are really evolving as while our GTM has always been segmented based on product and end user, other areas were not. And different end markets have certainly different needs. Data and solutions need to reflect that and the reality with both pricing, packaging and how we support those customers. So the expectation here is as we are allocating our focus and resources with configurability in those end markets, we expect our consolidation around value delivery, the master data management, which I'm sure we're going to talk a little bit more about here in digital activation, and really increasing our integrations which enhances our customer intimacy, will improve our retention rates and will lead to success over time.

Okay. That's great. Appreciate that color. And then the follow-up that I had, just wanted to also clarify. I think recently, you've talked a little bit about seeing some elongation in the sales cycle. I guess in terms of the 2025 outlook that you provided here, are you assuming that, that elongation kind of persists? And is there any possibility of upside of seeing sort of quicker realization of deals if you see any favorable developments there?

Thanks for the question. This is Rick, and I'll provide some details. The seasonality for 2025 is more noticeable than usual. We expect Q1 to be the lowest revenue point of the year for several reasons. The volume of renewals in Q4 and early 2025 means churn dynamics will heavily impact Q1 revenue, and we only recognized part of the revenue from our new data deal while incurring full costs. As you build your models, expect Q1 to be challenging. However, we anticipate that revenue declines will slow down through the year for three specific reasons. First, Q2 will benefit from a full quarter of revenue from the new data partnership, leading to sequential growth. We expect Q2 revenue declines to be in the high single-digit range and mid-single-digit in the second half. This is partly because Q2 and Q3 have fewer maturing contracts, reducing churn's effects and allowing new business and upselling to have a greater impact. Additionally, comparisons will ease in the second half, so we expect mid-single-digit revenue declines then. In Q4, we typically see an increase in services revenue, and churn's impact is lessened by December renewals. Lastly, while we believe we are taking the right actions for improvement, these will take time to show results, and our guidance reflects a range of outcomes. The higher end of our revenue guidance indicates slight improvements in renewal rates and sales productivity due to new data sources and an enhanced service approach. The lower end reflects a scenario where renewal rates worsen from the low rates seen in the latter half of 2024, with sales productivity following similar trends as in 2024. I know that was a lengthy response, but did it address your questions, Jared?

Our next question is from Allen Lutz of Bank of America.

This is Hanna Lee on for Allen Lutz. Could you share what's embedded in the outlook as it relates to new customers versus cross-sell and upsell opportunities? And are there any end markets or type of customers where you expect to see a faster recovery or opportunity for win backs?

We don't generally break out our guidance between new logo versus upsell. I would say that we've experienced recently stronger performance with new logos and a little bit more pricing pressure that's been impacting upsells. Anything you'd add to that, Kevin?

No, I think that's probably pretty accurate there.

And our next question is from David Larsen of BTIG.

Jenny Shen on for Dave. So we've heard some large pharma brand managers say that they plan to allocate more of their marketing dollars to physical in-person channels like sales reps again and away from digital channels now that COVID is largely over. Have you seen that dynamic at all? And just that's really asking more about the downsells. Is that pharma companies moving their budgets to other channels? Or are you hearing your discussions with clients as it being more of a not-now issue? And once they recover, they expect to bring those dollars back?

So I would characterize the question on shifting of dollars from digital to in person, in life sciences, for us, it's really primarily concentrated in there's a macro environment, which has remained relatively unchanged over the last 90 days. There is funding dynamics in place in general in biopharma and life sciences. And then our positioning in life sciences, in particular, and biopharma is we're more of a lagging indicator because our stage in market is really more around second stage. So that takes a little longer for that to show up. I think it's less pronounced for us in any kind of shift in budgeting and where they're positioning it around digital, although we do have plans and we're seeing it with our current digital activation customers, we are getting some traction there. And we have plans for that in other verticals as well. So I don't think that particular situation is impacting us in our life sciences business, but that's probably as best as I can answer that question.

Okay. Great. And if I could ask a quick follow-up. So a lot of the large CROs have come under significant pressure. Are the CROs your clients? And is your own performance related to theirs at all? There's been some pressure for, we've heard, earlier stage clinical trials. Has that impacted Definitive at all?

Again, we're not as oriented to first stage. So I think the short answer to that would be no.

Our next question comes from David Grossman of Stifel.

Kevin, I know we've already kind of hit the churn question a couple of times here already, but I'm wondering if you could maybe just provide a little more specificity around why clients are downselling. And then maybe you could relate that to some of the specific operational changes that you're making that, again, specifically address what you're seeing in the customer base and why they're either downselling or leaving?

Sure, David. I would categorize our approach into two main areas. First, there are aspects we can control that are independent of macroeconomic factors or funding conditions. This includes initiatives like our centers of excellence that we have already established with the go-to-market strategies. We've successfully integrated value delivery into one cohesive organization. Additionally, we've restructured our sellers' compensation plans to align more closely with post-sales customer onboarding and success teams. Our centralized data science team now consolidates our advanced analytics teams, along with professional services and post-sales implementation, all working under the new customer success officer. By combining these efforts, we aim to create a comprehensive understanding of the customer, ensuring we deliver on our promises in a manner they expect. If we achieve this, we increase the likelihood of satisfied customers who are pleased with our services, which can enhance renewals and help reduce the number of downgrades. The first area we're concentrating on is operational execution, which continues regardless of external economic conditions. The second area involves assessing our pricing and packaging strategies. As I mentioned briefly earlier, different end markets have unique requirements. Historically, while we've segmented our go-to-market organization by vertical, we haven't consistently aligned our support for those verticals. The goal now is to ensure we have appropriate pricing, packaging, and resource allocation, particularly for customers who require a higher level of service. This approach is how we will allocate our resources for both existing customers and those who are onboarding.

So, can we conclude that the product itself wasn't the main issue regarding customer losses or downselling? Rather, it seems that the way the product was delivered and the level of customer care may not have fully enabled customers to experience all the benefits it offers. Is this an accurate summary of the situation?

David, I appreciate your question. In my prepared remarks, I aimed to provide a more detailed description of the sophisticated solutions we offer. We are genuinely assisting our customers in addressing complex challenges. For instance, with our master data management solution after a sale, we're supporting activities such as data mapping, mastering data, creating master files, and developing data relationship hierarchies across intricate delivery mechanisms like ETL, which stands for extract, transform, and load. It’s crucial that we deliver these services in a manner that fulfills our commitments while also being intentional and coordinated. This approach not only extends our customer relationships but also opens up opportunities for upselling and exploring additional avenues, which we are actively pursuing. I know your question was straightforward, but the optimistic takeaway here is that our current engagements with customers concerning master data management and digital activation reflect our progress. I wanted to emphasize that regarding new sales strategies and customer interactions, we already have the foundation in place. Our focus now is to execute it with greater intention and improved organizational design, which is exactly what we are working on.

Got it. Great. And then I just have one follow-up maybe for you, Rick, that I'm not sure I heard you right, but it sounds like G&A as a percentage of revenue is going to increase more than product development and sales and marketing. And if I did get that right, what's the underlying driver of that?

Yes, you did hear that correctly and it's some expansion of the senior leadership team as we get later in the year. You've already heard about some of the new additions and so you'll see that impact in 2025. And then more broadly, if I can take the opportunity, I wanted to speak to the margin profile of the year as well. So you saw that we put out a wider range on revenue for the full year guide than we historically have, which acknowledges the increased uncertainty that we're facing. But we've kept a narrower view on profitability. That was intentional, and it underscores our commitment to profitability, our culture of discipline and our willingness and ability to adjust as needed depending on revenue performance. Overall, that discipline means that for the full year, the midpoint of our guide holds OpEx approximately flat year-over-year. And Q1 suffers from a lower margin than the rest of the year for 3 specific reasons: first, the biggest driver, of course, is the change in revenue caused by the churn dynamics that we discussed in Q4 and early 2025; second, normal Q1 increases in payroll and benefits expense associated with the start of the year; and third, the fact that we absorbed a full quarter of the cost of the new data partnership with only a partial quarter of revenue. As we move toward the rest of the year, we expect to deliver improving margins. There's 4 reasons for this: first, the revenue benefits we discussed earlier in which the rest of the year benefits from the full run rate revenue of the partnership, along with later renewal volumes that should allow new business and upsell to show their impact; second, we're rationalizing some of our third-party costs and should see benefits as early as Q2 with more to come later in the year; and third, we intend to adjust as needed as we continue through the year and have plans for the full range of revenue guidance. Taking all this into account, by the time we're in Q3 and Q4, we expect to be delivering $18 million to $19 million of adjusted EBITDA per quarter with Q4 margins at or above Q4 of 2024. I hope that gives people enough color to help them in modeling out the year.

Our next question comes from George Hill of Deutsche Bank.

It's Maxi on for George. So we have been talking about the pressure from elongated sales cycles and elevated churn for a few quarters and you just mentioned some pricing pressure affecting upsell. Are you seeing any pressure on pricing among new prospects? And would you consider lowering prices as an option to drive growth in 2025?

I think you mentioned that price is always a factor, especially in a competitive environment. Interestingly, our average contract size has actually increased. While price is a consideration, we do not intend to be a low price leader. Our focus is on quality rather than competing on price. We believe we offer the best quality data and are dedicating more efforts to ensure that our data quality remains top-notch, while also enhancing our service.

And our next question comes from Brian Peterson of Raymond James.

This is actually Johnathan McCary on for Brian. So I wanted to ask on the macro trends outside pharma. We talked a lot about the retention dynamic in life sciences, but of course, Definitive caters to a broad swath of organizations that sell into health care. So just curious, how would you characterize the demand environment outside of pharma? And are some of those go-to-market initiatives applying across the customer base or is that primary in life sciences? Just kind of curious what you're seeing throughout other parts of the customer base.

Yes, Johnathan, we are definitely focusing on this area. While I touched on life sciences, our efforts also apply broadly. The two main initiatives we’re emphasizing, alongside ongoing execution improvements and value delivery, are centered around enhancing our master data management. I want to elaborate on this focus. The partnership we mentioned earlier is bringing in several new components that enhance our configurability. We now have an identity graph to map physicians to consumers, along with a significant increase in consumer data, contact data, and improved matching algorithms that support our Definitive ID. Additionally, we have integrated our consumer intelligence component into our master data strategy, which provides more detailed information on individuals. This improved data capability particularly enhances our digital activation efforts, as clients are turning to us for high-quality data and can now effectively utilize it for their digital strategies. At the same time, we are addressing the complex challenges in the life sciences sector as well as in the provider space. For instance, one of our provider customers needed to use the DHID along with our expertise to develop a centralized database for managing data purchases and processing all analytics and invoices through Databricks to provide a comprehensive view of claims. This approach enables them to regularly update that claims view without requiring any ETL processing, making the process much more effective and efficient without the need for human intervention. This example showcases our focus on enhancing efficiency and automation, which also applies to our traditional provider and diversified sectors. While we emphasize life sciences due to its significant challenges, successfully addressing these issues helps us expand our growth into other areas as well.

Our next question comes from Craig Hettenbach of Morgan Stanley.

Kevin, just building on the last comment around the provider market and then perhaps an update on Populi. Understanding that current conditions are difficult, what are you seeing in terms of opportunity set there? And anything else from Populi you're able to leverage more broadly across life sciences?

Yes. So Populi, Craig, is what is the new UI/UX, which we've talked about in the past, our single sign-on and the unification of our products through that front-end data visualization layer. And Populi is and remains that component in that small P platform strategy and that, that is our single sign-on, consolidated UI/UX visualization layer, which is absolutely critical, especially for people that are looking to do that through a direct interface. It's just that we're not expecting everybody to have to utilize that, and we've become more sophisticated in our ability to bring that in a configurable way. I hope that made sense.

Our next question comes from Jeff Garro of Stephens.

Yes. Maybe ask a little bit more about this new master data management deal and just that as a deal type in general to throw a few questions out there. Curious, how long that deal took to develop versus other deal types? How we should think about the pipeline for similar relationships? And how we should generally think about economics for these types of deals?

Yes. So Jeff, probably if I was going to give you, and I hadn't really thought about the length of time, it probably took about 90 days, I would say, give or take, from the beginning to the end. It is in line with something that we talked about earlier last year once I joined that in our go-to-market and product strategy that it was not always needs to be built here, that there is a way to accelerate your product strategy through strategic partnerships, especially in areas that you believe it's a radical acceleration in that. We were able to achieve this, particularly in support of both digital activation and MDM. I would think of it as a straightforward enhancement of customer workflows. One of the key assets that Definitive has is the Definitive Healthcare ID, which serves as a unique identifier that can link not only Definitive data but also first-party and third-party data. This represents the next phase in our evolution, allowing us to engage in more advanced data mastering. We see this as just the beginning, and we are actively exploring partnerships, especially with strategic partners.

And with that, I think we'll have to wrap this call in order to get on to our follow-ups. Thank you, everyone, for your time and attention. We look forward to seeing you in upcoming months as we travel.

This concludes today's conference call. Thank you for attending.