Health Catalyst, Inc. Q4 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the Health Catalyst Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentations, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I’d now like to hand the conference over to your speaker today, Adam Brown, Senior Vice President of Investor Relations, Financial Planning and Analysis for Health Catalyst. Please go ahead.

Good afternoon and welcome to Health Catalyst’s earnings conference call for the fourth quarter of 2021, which ended on December 31, 2021. My name is Adam Brown. I am the Senior Vice President of Investor Relations and Financial Planning and Analysis for Health Catalyst. And with me on the call is Dan Burton, our Chief Executive Officer, and Bryan Hunt, our Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website at ir.healthcatalyst.com. As a reminder, today’s call is being recorded and a replay will be available following the conclusion of the call. During the call, we will make forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding trends, strategies, the impact of the COVID-19 pandemic on our business and results of operations, our pipeline conversion rates and our general anticipated performance of the business. These forward-looking statements are based on management’s current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may materially differ. Please refer to the risk factors in our Form 10-Q for the third quarter of 2021 filed with the SEC on November 9, 2021 and our Form 10-K for the year ended December 2021 that will be filed with the SEC today. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of these non-GAAP financial measures to their most comparable GAAP measures is provided in our press release. With that, let me turn the call over to Dan for his prepared remarks and then Bryan will subsequently provide his prepared remarks. Dan and Bryan will then take your questions. Dan?

Thank you, Adam, and thank you to everyone who has joined us this afternoon. Before we begin, we at Health Catalyst wanted to express that our thoughts, prayers and support are with the people of Ukraine as they respond to the invasion of their country. Now, let me transition back to sharing our fourth quarter and full year 2021 financial performance, along with additional highlights from the fourth quarter. I will begin today's call with some commentary on our fourth quarter and full year 2021 financial results. Reflecting back on 2021, I am extremely pleased with all that we accomplished during the year, especially in light of the continued challenging macro environment. For the full year 2021, our total revenue was $241.9 million. This represents 28% year-over-year revenue growth, and it represents an outperformance of over $12 million relative to the midpoint of the guidance that we shared at the beginning of 2021, after investing for our Twistle acquisition. Likewise for the full year 2021, our total adjusted EBITDA was a loss of $11.2 million. This represents an improvement of $10 million relative to 2020, and it represents an outperformance of over $6 million relative to the midpoint of the guidance that we shared at the beginning of 2021, after adjusting for our Twistle acquisition. Looking at the fourth quarter of 2021, total revenue was $64.7 million and our adjusted EBITDA was a loss of $6.3 million, with these results beating the midpoint of our quarterly guidance on each metric. Stepping back to comment more broadly, I want to acknowledge how seriously we strive to keep the financial commitments that we make to our investors. We have now reported as a public company for 11 quarters following our IPO in July of 2019. As I reflect on this experience, I'm extremely proud of the track record we have demonstrated related to our actual quarterly revenue and adjusted EBITDA performance over this time period, relative to the guidance that we have provided. This consistency of performance was something that we as a management team set as an objective years before going public and we're pleased to have delivered this level of consistency during our first three years as a public company. Now let me highlight some additional items from the quarter. You will recall from our previous earnings calls that we measure our company's performance in the three strategic objective categories of improvement, growth and scale, and we'll discuss our quarterly results with you in each of these three categories. The first category, improvement, is focused on evaluating our ability to enable our customers to achieve massive, measurable improvements while also maintaining industry-leading customer and team member satisfaction and engagement. Let me begin by sharing a couple of examples of customer improvements from recently published case studies. In the U.S., claims denials are a major revenue issue for healthcare providers with roughly 8.5% of claims denied in the year 2020. Albany Med, Northeastern New York's only academic medical center, suffered from significant annual revenue loss resulting from claims denials. Exacerbating this issue, Albany Med lacked a single source of truth for denials data resulting in limited access to aggregated data, variations in reporting and siloed workflows between the various departments. In response, Albany Med leveraged our DOS data platform and a robust suite of analytics applications to centralize payer denial data from multiple disparate software systems, including case management, patient billing and physician practice data at both the hospital visit and practice service levels. Our data and analytics software enabled Albany Med to materially improve their denials management process and establish a single source of truth resulting in the ability to visualize and analyze the relevant data, conduct deep-dive analyses and identify opportunities for improvement. This contributed to $3 million in revenue recovery for Albany Med in just one year. Next, as healthcare providers seek to optimize their cost structure and focus on their core competencies, outsourcing specific functions has emerged as a cost-effective consideration. Along these lines, Banner Health partnered with Health Catalyst to successfully outsource its clinical chart abstraction needs. Leveraging our software to automate many of the manual tasks previously performed by registered nurse data abstractors, we enabled Banner Health to avoid $650,000 in abstraction labor costs and save $100,000 in registry costs in one year. Additionally, clinical chart abstraction resources can now perform higher-complexity work as demonstrated by a 46% improvement in submission accuracy for electronic clinical quality measures reporting and a 30% relative improvement in team member engagement. Also within the improvement category, I'd like to highlight our team member engagement. Approximately every six months, we utilize the Gallup organization to measure our team members' engagement levels. In our most recent results, we achieved an overall team member engagement score in the 96th percentile. This latest engagement level continues a pattern that has been in place for many years of industry-leading team member engagement, consistently ranking between the 95th and 99th percentile in overall team member engagement scores. This latest result is of particular significance given that it comes during a period where we were required to sustain a remote-centric work environment necessitated by the ongoing global pandemic. We welcomed greater than 150 new teammates during the last six months of 2021, including those who came to us through our Twistle acquisition, and we responded to an increasingly tight labor market. We as a leadership team continue to maintain a prioritized focus on team member engagement, the center of our strategic flywheel, because we recognize the central and foundational contributions that our team members make in building the software and providing the services expertise that enable our customers to achieve massive, measurable improvement. These Gallup results, coupled with our customers' high satisfaction levels throughout the pandemic, are encouraging confirmation of our prioritization and focus. On a related note, I would highlight that we have been fortunate to receive multiple other recent external recognitions relative to team member engagement, including being named to Great Place to Work's Best Workplaces for Parents list, as well as the National Association for Business Resources 2021 list of Best and Brightest Companies to Work For in the Nation. And on the product front, we were very pleased with our continued high customer satisfaction rates throughout 2021. To share a recent highlight on this front, we were excited to have received the news that our Charge Master Management software solution, a revenue analytics product that came to us through the Vitalware acquisition, was recently ranked best in KLAS for 2022. This marks the fourth year in a row that Vital's CDM product has achieved this distinction from the KLAS organization. Additionally, we were also pleased to see several of our other products achieve a score that was greater than 90 on a 100-point scale as measured by KLAS, including Twistle, healthcare.ai and our value-based care managed services. Our next strategic objective category is growth, which includes beginning new customer relationships while also expanding existing customer relationships. First, let me provide some commentary on our 2021 bookings performance. At a summary level, I was very pleased with our growth-related performance, which included bookings results at or above our historic performance levels across existing customer growth and new customer additions. First, our dollar-based retention achievement for 2021 was 112%, meaningfully higher than our prior years' achievement levels on this metric and higher than the expectations that we shared at the beginning of 2021. As was the case in pre-pandemic years, our achievement levels on this metric were relatively similar between our technology and professional services segments. Driving this same customer growth performance in the technology segment was primarily our built-in contractual escalators along with increased customer demand for our acquired technologies. And in the professional services segment, we were pleased to see a rebound relative to 2020 in customer demand for our recurring professional services offerings, including our analytics services, domain expertise services and outsourced services. The positive performance on our overall dollar-based retention rate in 2021 was partially offset by the continued decline of our Medicity-acquired revenue base, which, as we have shared previously, is not included in our dollar-based retention metric. Next, our net new DOS subscription customer additions for 2021 were 16. This result is meaningfully higher than our 2020 performance and is towards the high end of our mid-teens expectations set at the beginning of the year. This strong performance was largely driven by new customer demand for our enterprise analytics, population health and revenue and cost optimization offerings. We were pleased to see these results included the cross-sell of DOS to a few customers from our acquired companies. Additionally, we were excited to see our DOS Light offerings contribute a modest amount to this total. As one recent highlight of our 2021 net new DOS subscription customer additions, we are excited to have publicly shared our partnership with Temple University Health System, a large Philadelphia-based academic health system, recognized for its work driving medical advances through clinical innovation, pioneering research and world-class education. Temple selected our data platform and Power Costing application suite to strengthen its financial performance and optimize its risk-based contracting performance within its value-based care arrangement. Next, let me share that as we begin 2022, we encounter a sales environment that is largely consistent with what we experienced throughout 2021. While we are hopeful that our end markets' operating environment will improve as the year progresses, we anticipate that that will be largely driven by the path of the COVID-19 pandemic. Currently, we have observed that the Omicron wave has had a similar impact on our pipeline as the Delta wave, whereby we have experienced some end-market distraction, but have generally found healthcare organizations better prepared to respond to regional spikes and operating in a more normal course. Given all this, we anticipate that the COVID-19 pandemic will continue to result in both headwinds and tailwinds as it relates to our growth in 2022. In terms of headwinds, our provider end market will likely continue to be under some amount of financial strain while also experiencing operational distraction, especially with the Omicron variant alongside vaccination logistics. As it relates to tailwinds, we continue to see meaningful evidence that the healthcare provider ecosystem is much better equipped and better prepared to respond to the ongoing pandemic in areas including treatment efficacy, supply chain logistics, capacity planning and broader operational optimization. And as we've shared previously, we continue to believe that the COVID pandemic will serve as an overall tailwind in the industry's adoption of data and analytics, significantly highlighting the need for a commercial-grade data and analytics solution to replace patchwork, homegrown systems. With this backdrop, I will now share some perspectives on our anticipated 2022 bookings achievement levels. First, as it relates to our 2021 dollar-based retention, we anticipate achieving results between 108% and 111%. In the technologies segment, we expect this same customer growth will be primarily driven by existing customer contractual expansions and increased demand for our new technology offerings, including our recently acquired technologies. And in the professional services segment, we expect the same customer growth to be driven by increased demand for our recurring professional services such as analytics services, domain expertise services, and outsourced services, though I would caveat that our performance on this metric can be more variable depending on the demand mix of recurring versus non-recurring services. Next, as it relates to our DOS subscription customer additions, we expect to add high-teens net new DOS subscription customers in 2022. We are pleased to see our year-over-year pipeline grow to a size that we anticipate will support this level of customer growth. As we look at our pipeline, we anticipate this new customer growth will be driven by several factors, including: one, our end markets' continued focus on enterprise analytics, population health and revenue and cost optimization solutions; two, our broader portfolio of technology and services as a result of our recent acquisitions and product development efforts; three, our continued execution on our cross-selling efforts; four, our DOS Light offering; and five, growing industry recognition of the need for data and analytics capabilities partially brought to light by the ongoing pandemic. In terms of bookings cadence in 2021, we experienced some outsized bookings earlier in the year than is typical, particularly in the professional services segment. For 2022, we anticipate a bookings cadence more aligned with historical years, which has been roughly 50% of bookings in the first half weighted towards Q2, and roughly 50% of bookings in the second half weighted towards Q4. Next, let me share that we have officially closed the KPI Ninja acquisition that we announced last week. We're very excited by this tuck-in acquisition, with KPI Ninja bringing important technology capabilities that will help accelerate our existing product development roadmap. Specifically, KPI Ninja offers real-time streaming capabilities and enhances our data processing and orchestration capabilities through standardized data ingestion, data normalization and data sharing. This software will help strengthen our real-time capabilities at the data platform layer as well as meaningfully enhance our population health product capabilities. We also anticipate that KPI Ninja's technology will provide some secondary benefits within our payer and life sciences markets. The total acquisition consideration for this tuck-in transaction is $33 million and the impact on our 2022 financials will be immaterial. We are thrilled to welcome KPI Ninja's talented team members, and we look forward to working together with them in support of our shared mission to improve healthcare. Lastly, prior to turning the call over to Bryan, I wanted to share a couple of additional updates related to new leadership promotions connected with our annual planning process and in response to the company's continued growth and expansion. First, Jason Jones has been named as our new Senior Vice President and General Manager of our Data Platform business unit. Jason is currently a member of our executive leadership team and will also continue in his role as Chief Analytics and Data Science Officer. Over the last few years, Jason and his team have successfully led our company in the introduction of healthcare.ai to the market, a differentiated and industry-leading AI offering. To his expanded responsibilities, Jason brings over 25 years of deep healthcare experience in analytics, data science, decision support, research, product development, consulting and information systems, working at some of the most renowned healthcare organizations in the world, including Kaiser Permanente, Intermountain Healthcare, Bayer and UnitedHealth. Next I'm excited to announce that Maxine Liu will join our executive leadership team as our Senior Vice President of M&A Integration. This position was first contemplated following our recent equity fundraise, and it will enable our continued long-term success as we look to further enhance our offering through future acquisitions. Maxine joined Health Catalyst over three years ago, most recently successfully building out and leading the Health Catalyst partner program. Prior to Health Catalyst, Maxine held positions across technical and business development functions within healthcare, including time spent at Siemens Healthcare, Varian Medical Systems and others. With that, let me turn the call over to Bryan. Bryan?

Thank you, Dan. Before diving into our quarterly and annual financial results, I want to echo what Dan shared and say that I am pleased with our overall 2021 financial performance. I will now comment on our strategic objective category of scale. For the fourth quarter of 2021, we generated $64.7 million in total revenue. This total represents an outperformance relative to the midpoint of our guidance, and it represents an increase of 21% year-over-year. For the full year 2021, our total revenue was $241.9 million representing 28% growth year-over-year. As Dan mentioned, we are pleased with this full year total revenue performance, which represents a significant outperformance relative to the guidance we shared to begin the year. Technology revenue for the fourth quarter of 2021 was $40.1 million representing 24% growth year-over-year. This year-over-year growth was driven primarily by recurring revenue from new customer additions and existing customers paying higher technology access fees as a result of contractual built-in escalators as well as from our Twistle acquisition that closed on July 1, 2021. In Q4 Twistle contributed $1.8 million of technology revenue, inclusive of a purchase accounting related deferred revenue write-down, which was in line with our expectations. For the full year 2021, technology revenue was $147.7 million representing 34% year-over-year growth. Professional services revenue for Q4 2021 was $24.6 million representing 17% growth relative to the same period last year. This year-over-year performance was primarily due to our professional services being provided to new DOS subscription customers, as well as a modest amount of unforecasted non-recurring revenue that was recognized in the quarter. For the full year 2021, our professional services revenue was $94.2 million representing 20% year-over-year growth. This professional services full-year revenue growth represents a meaningful outperformance relative to the expectations we shared at the beginning of the year, mostly driven by a few million dollars of outsized one-time non-recurring revenue along with bookings achievement that occurred earlier in the year as compared to our initial expectation. For the fourth quarter 2021, total adjusted gross margin was 52.1% representing an increase of approximately 15 basis points year-over-year. For the full year 2021, total adjusted gross margin was 52.9% representing an increase of approximately 255 basis points year-over-year. In the Technology segment, our Q4 2021 adjusted technology gross margin was 69.7%, an increase of approximately 135 basis points relative to the same period last year. This year-over-year performance was mainly driven by existing customers paying higher technology access fees from contractual built-in escalators without a commensurate increase in hosting costs, partially offset by headwinds due to the continued costs associated with transitioning a portion of our customer base to third-party cloud-hosted data centers in Microsoft Azure, which increases our hosting costs. For the full year 2021, our adjusted technology gross margin was 69.3%, an approximately 75 basis point increase year-over-year. In the professional services segment, our Q4 2021 adjusted professional services gross margin was 23.3% representing a decrease of approximately 400 basis points year-over-year and an increase of approximately 330 basis points relative to Q3 2021. This quarterly performance was at the high end of the expectations we shared on our last earnings call, with these results being driven by the mix of professional services delivered, a more normalized utilization rate as compared to the first half of 2021, as well as the one-time bonuses that we mentioned last quarter would be distributed to team members given the tight labor market and strong 2021 performance. For the full year of 2021, our adjusted professional services gross margin was 27.1% and approximately a 240 basis point increase year-over-year. In Q4 2021, adjusted total operating expenses were $40 million. As a percentage of revenue, adjusted total operating expenses were 61.8%, which is roughly similar to Q4 2020. For the full year 2021, adjusted total operating expenses were $139.1 million. As a percentage of revenue, adjusted total operating expenses were 57.5%, which compares favorably to 61.6% in full year 2020. Adjusted EBITDA in Q4 2021 was a loss of $6.3 million, which slightly outperformed the midpoint of our guidance, mainly driven by the strong quarterly revenue performance mentioned previously. As a reminder, our Q4 2021 adjusted EBITDA performance included certain operating expense non-headcount items that had been pushed out until the fourth quarter: the one-time investment in acquisition-related integration expenses that we described in our previous earnings calls, as well as the one-time bonuses that we mentioned last quarter would be distributed to team members given the tight labor market and strong 2021 performance. For the full year 2021, our adjusted EBITDA was a loss of $11.2 million, which compared favorably to an adjusted EBITDA loss of $21.3 million in 2020. Similar to our revenue performance, we are pleased that this full year adjusted EBITDA result represents significant outperformance relative to the guidance numbers we shared at the beginning of 2021. Our adjusted net loss per share in Q4 2021 was $0.19. The weighted average number of shares used in calculating adjusted net loss per share in Q4 was approximately 52.1 million shares. For the full year 2021, our adjusted net loss per share was $0.45 and the weighted average number of shares used in calculating adjusted net loss per share in 2021 was approximately 47.5 million shares. Turning to the balance sheet, we ended the fourth quarter of 2021 with $445 million of cash, cash equivalents and short-term investments compared to $271 million at year-end 2020. As a reminder, we conducted an equity follow-on offering in August 2021, which raised $245 million in net proceeds for general corporate purposes, including potential acquisitions. Also, as a reminder, in April 2020, we issued a private placement of convertible notes with a principal amount of $230 million. The net carrying amount of the liability component is currently $180.9 million. As it relates to our financial guidance, for the first quarter of 2022, we expect total revenue between $64 million and $67 million and adjusted EBITDA losses between $2.5 million and $0.5 million. And for the full year 2022, we expect total revenue between $287.8 million and $292.8 million and adjusted EBITDA losses between $4 million and $2 million. Now let me provide a few additional details related to our 2022 guidance. First, as it relates to our Q1 2022 revenue, we anticipate that our professional services revenue will be slightly down as compared to Q4 2021, with the remainder of the quarterly revenue contribution coming from our technology segment. As a general reminder, while we had strong Q4 2021 bookings performance, we don't get the benefit of most of those sales converting to revenue in Q1 2022, given that our revenue recognition is typically dependent on technology environment go-lives and professional services staffing, which can begin a couple of months after contract signing. On professional services Q1 2022 revenue specifically, there is a larger milestone-based contract which we anticipate will be completed in the first few months of 2022. If it is achieved in Q1, then we would anticipate coming in around the top end of our Q1 guidance range. Additionally, I would mention that the Twistle revenue contribution, which is primarily in the technology segment, will be more backend-weighted in 2022, given the purchase accounting related deferred revenue write-down that persists through Q1 2022. Next, let me share a few additional details related to our full year 2022 guidance. First, as it relates to our total revenue at the midpoint of our guidance, this represents 20% growth, which we are pleased is in line with our long-term revenue growth targets. In terms of the 2022 year-over-year revenue growth by segment, we expect the technology segment to grow a little above 20% and the professional services segment to grow a little below 20%. From a mix standpoint, this implies that the technology segment will be roughly 62.5% of total revenue for the year, which in comparison to the last several years represents continued meaningful progress as it relates to our technology revenue as a percentage of total revenue. As a reference in 2019, our technology revenue was 54% of total revenue. As a reminder of what Dan shared, our anticipated technology revenue growth is bolstered by the strong dollar-based retention performance in 2021, along with our Twistle acquisition partially offset by the continued decline of our Medicity revenue base. Likewise, our anticipated professional services revenue growth is supported by our strong dollar-based retention performance in 2021, partially offset by a headwind resulting from the outsized one-time non-recurring professional services revenue realized in 2021 along with a more normalized in-year bookings timing anticipated in 2022 as compared to 2021. Next in terms of our adjusted gross margin, we anticipate our adjusted technology gross margins will be in the high 60s for the next several quarters and our adjusted professional services gross margin will be in the mid-20s. Our adjusted professional services gross margin expectations are driven by the mix of professional services we anticipate will be delivered, our forecast utilization rates as well as some wage pressure resulting from the tight labor market. Lastly, as it relates to adjusted EBITDA at the midpoint of our guidance, we anticipate our core business to be breakeven for the year and for Twistle and its related integration costs to add approximately $3 million in burn, mostly in the first half of the year in line with the expectations we shared at the time of the Twistle acquisition. We are pleased to forecast achieving this adjusted EBITDA breakeven milestone in our core business, consistent with what we shared at the time of our IPO nearly three years ago, despite experiencing a global pandemic and realizing meaningful wage pressure within a tightening labor market. As it relates to the quarterly cadence of our adjusted EBITDA, you will recall that we typically experience some seasonality in our operating expenses, especially in the third quarter related to our Healthcare Analytics Summit, as well as the timing of certain other non-headcount operating expenses throughout the year. With that, I will conclude my prepared remarks. Dan?

Thanks, Bryan. In conclusion, I would like to recognize and thank our highly engaged team members for all they have done to further our mission and growth in 2021. I have never been more energized by the opportunity I see in front of us heading into 2022. And with that, I will turn the call back to the operator for questions.

Our first question will come from the line of Ryan Daniels from William Blair. Your line is open.

Yeah, guys, thanks for taking the questions and thanks for all the detail and congrats on the strong year. I wanted to go into the net new client additions. Obviously a nice metric and solid rebound from what the organization saw in the prior year. And I'm curious if you can go into a little bit more detail on any nuances there, either geographically or by end market. Were most of those still within the core health systems, or were you able to branch out internationally with some of those sales or into other areas like life sciences?

Thanks for the question, Ryan. Most of those net DOS subscription clients did come from our core market, but we did see a modest contribution from adjacent markets as well.

And just to add additional detail, Ryan, the DOS additions last year did include a modest contribution from some cross-sell initiatives as well as our DOS Light offering.

Okay, perfect. And then in one of your case studies, Dan, you mentioned reducing a form of manual labor on chart abstraction, which helped improve employee satisfaction and push more value-added activities. I'm curious if you're seeing more demand across the board for solutions like that, given the provider burnout we're seeing and workforce pressures, especially in the nurse, practitioner and physician markets. Is that something that you see as a growth opportunity or solution set that you can actively sell into your customer base?

We do. We are seeing that general trend. Labor and staffing issues, particularly among nurses and other clinical professionals, are a real problem for most healthcare organizations today and burnout is a significant contributor. One of the strengths of Health Catalyst long term is that focus on team member engagement, and part of what we saw in that case study example with Banner Health was an ability to not only deliver those outsourced chart abstraction services through a technology-enabled service solution that was better, faster and cheaper, but it was also delivered in a way that the engagement of those team members actually increased at the same time as that delivery of a better, faster and cheaper solution. We're really excited about that offering. It fits right in the center of our mission as a company to help healthcare become more efficient and better. So we're excited to see that continue to grow.

Okay, perfect. I'll hop back in the queue. Thank you.

Our next question will come from the line of Jessica Tassan from Piper Sandler. You may begin.

Hi, thank you so much for taking the question. I was hoping to circle back on the milestone-based contract that you referenced for Q1. Are you seeing customers increasingly move in the direction of contingency-based contracting? And is that only on the app side or is that within the DOS all-access base as well?

It's not all that common. Most of our contracts are still in that more common recurring revenue-based long-term arrangement both on the tech side and on the services side, but occasionally we do have a milestone-based contract and that can be both on the tech and on the services side, though it's a little bit more common in those non-recurring services-type relationships. Those are harder to project, as you might imagine, than the standard contracts, but the vast majority of our contracts are still in the normal recurring revenue model.

And just to add to that, Jessica, we do aim to provide our customers with some flexibility, especially as it relates to services engagements with us. We want that contract model not to be a barrier to customers adopting more technology and continuing to use our platform. So that flexibility is important to us as we focus on driving improvements for customers.

Got it. That makes sense. And then I think we were expecting that some of the acquired capabilities would be able to drive incremental subscription revenue at DOS all-access customers. Is that still the case? And can you give us a sense of how penetrated the DOS all-access customers are with your acquired capabilities? Basically, an update on the cross-sell effort. Thank you.

Absolutely. We were pleased to see the impact of those acquired capabilities driving some of the performance that we reported for 2021 in terms of our dollar-based retention; for example, that certainly contributed to the 112% dollar-based retention, which was meaningfully higher than any other year in the company's history. We're excited about the cross-sell opportunity within our DOS client base. When we bring a newly acquired technology that falls outside of the contractual definition of what's included in that all-access subscription, that does represent meaningful upside. Each time we add a new capability, that provides incremental upside. We're excited about that, and at the same time cross-sell takes time to develop and iterate on the right approach. There are still long sales cycles and we're still early in that process.

Our next question will come from the line of Cindy Motz from Goldman Sachs. You may begin.

Thank you. Very nice quarter. So in general it looked like you're ahead of where we were thinking for next year. I wanted to delve into this retention rate that's very, very strong here. Is there a reason why it might not stay at that high level? If customers are very happy and the results keep coming in, why wouldn't more sign up for additional services? Also, on the EBITDA cadence, it looks like you probably will hit breakeven maybe in the second quarter, maybe go negative in the third quarter, then positive in the fourth quarter and exit the year with positive EBITDA. Am I thinking about that correctly? And if you'd like to give any color beyond that, that would be great, then we'll stop there. Thanks.

Great question, Cindy. On the first question around retention and how to think about that in 2022, we were pleased to see really robust dollar-based retention overall at 112%. There were some factors that were one-time in nature that impacted that 2021 performance. For example, on the services side there were some specific contracts that came through that are a little bit harder to project moving into 2022, and so we want a bit more data before we feel fully data-informed in updating that perspective. We felt comfortable updating for 2022 to a higher level than what we've typically guided towards for dollar-based net retention based on the amount of data we've seen thus far. We're encouraged by more cross-sell within the DOS client base, which is encouraging, but we do like to be data-informed and need a bit more time to gather more data before providing any additional updates.

Cindy, if you think about the segments of technology and services, the majority of the technology expansion is still driven by those annual built-in escalators that are ramping up for existing customers each year, as well as the upsell or cross-sell of our acquired applications, which provides more visibility and consistency on the technology side. On the services side, we don't have those same large built-in escalators, so it is more variable and truly dependent on the services mix. Regarding EBITDA cadence, as Dan mentioned in the prepared remarks, for both Q1 2022 and the full year, we expect the core business to be adjusted EBITDA breakeven, with Twistle contributing roughly $3 million of additional burn largely in the first half. There is seasonality, particularly the Healthcare Analytics Summit in Q3, so you'll see some quarterly movement up and down, but we're pleased to forecast our core business at breakeven.

Sure. That makes sense. As a follow-up, could we see more tuck-ins like KPI Ninja? How do you think about those kinds of acquisitions going forward?

Sure. On acquisitions, we are focused on both financial and strategic components. We prefer tuck-ins that are neutral to positive from an EBITDA perspective, but sometimes there's a strategic rationale that justifies it even if not immediately EBITDA-accretive. KPI Ninja is a small tuck-in; the financial contribution is immaterial, but strategically we're excited. KPI Ninja's technology will be integrated into our data platform to accelerate our product roadmap, especially around real-time streaming, standardized data ingestion and normalization (HL7, CCD, etc.), data sharing and orchestration. It helps with the long tail of EMRs and is an NCQA-certified data aggregator vendor. We see primary benefits in population health and secondary benefits in payer, life sciences and HIE markets. KPI Ninja also has a small team in the U.S. and a presence in India, which helps expand our global footprint and gives us a foundation to build in India.

Excellent. Thank you for taking my question. Sounds good.

Our next question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open.

Hi, good evening. Thanks so much. My first question is around the dollar-based retention rate. That had a nice step-out from 2020 to 2021. Should we think of 112% as a potential long-term run rate, or was 2021 an unusual year? How are you thinking about that over the longer term?

Thanks, Elizabeth. We view 2021 as very strong relative to historical performance. There were elements in 2021 that informed our decision to raise our 2022 guidance to the 108% to 111% range. We wanted to be cautious because there may have been one-time elements in 2021, so we plan to gather more data before concluding whether 112% is a sustainable long-term run rate. For 2022, we set guidance in that 108% to 111% range based on the data we have so far.

Got it, that's helpful. On professional services gross margin, you pointed to the mid-20s for the full year despite wage pressure and mix. Should we think of more pressure in the beginning of the year and expansion as you lap some items from the back half of 2021?

Good question. As we think about the impact of wage pressure on professional services, we would identify a couple of points of margin pressure attributable to the need to be competitive on base salary increases for our services team members. We keep team member engagement at the center of our flywheel, so it is important to be competitive on compensation. We also leaned into equity compensation as a long-term incentive, which has helped with engagement and retention; our Gallup engagement score and lower turnover reflect that. Moving forward, it's hard to predict exactly which inflationary elements will be permanent versus transitory and how they will impact gross margins. Over the next year or so, we expect the market to remain competitive and we intend to stay competitive on compensation and retention.

To add, it takes time to work through price changes on the services side for existing customers, because most have long-term contracts. We have more flexibility on new customers. We're working on addressing margin dynamics, but professional services gross margin can fluctuate based on wage dynamics, mix of services and utilization, so you may see movement on a quarterly basis.

That really helped. Thanks.

Your next question comes from the line of Stephanie Davis from SVB Leerink. You may begin.

Hey guys, thank you for taking my question. As we look at your DOS additions, it becomes reflective of the mix of DOS, DOS Light and a broader number of adjacent add-ons. How should we think about the puts and takes to the contribution math and visibility versus your historical model?

Great question. There is a modest impact from DOS Light since it can come in at a lower price point, but the vast majority of the net DOS subscription clients were in line with our historical price points. The vast majority of the high-teens net new DOS subscription customers we project for 2022 will fall within the more traditional price point, with a modest contribution from DOS Light. Those smaller offerings start at a lower price point, but they also offer more expansion opportunity over time compared to a typical contract.

To add, when we think about our long-term revenue growth target of 20%+, the increase in dollar-based retention contributed meaningfully in 2021. The balance of the 20% long-term target comes from new customer additions. We are thinking through how DOS Light and enterprise contributions, plus retention dynamics, will play out over time. We're not ready to make a long-term shift in our retention rate guidance yet; we need more data.

Understood. Following up, how should we think about converting a DOS Light client to a full DOS client — timeline, strategy and impact?

It's an important question. We have experience bringing app-layer customers into broader engagements, but conversion is a longer sales cycle and more complex. Often we need to move up within the organization to the C-suite to make that transition. The upside is significant expansion opportunity when starting from DOS Light or an app-sell relationship, but the downside is we have to pursue that expansion — it is not already contractually built in.

At a foundational level, expansion opportunity follows our strategic flywheel: start with an initial use case, bring in data in a department, apply an application, identify insights, apply expertise and execute improvements. That enables expansion beyond the initial department. We're gaining more experience executing these conversions quickly across initial use cases.

Looking forward to hearing about some of these announcements and conversions. Thank you.

Our next question will come from the line of Richard Close from Canaccord Genuity. You may begin.

Thanks a lot. Congratulations on a great year and the positive pipeline. Dan, I'm curious how you factored in the current environment for your customers from a labor perspective and how that got factored into the guidance?

Great question. We're sensitive to the fact our customers face labor shortages, burnout and staffing difficulties, especially among nurses and clinical professionals. Our Power Labor application suite, introduced mid-last year, has helped customers improve utilization and staffing effectiveness. Also, our outsourced, tech-enabled services have helped clients dealing with staff strain and recruiting difficulty. At the same time, the strain can be a headwind for new work, but our depth of empathy and relationships with clients helps us meet them where they are and focus on initiatives that provide immediate value and then open bandwidth for expansion.

As a follow-up, since we're at the beginning of the year, could you comment on the competitive environment right now, how you're thinking about market share performance and the main reasons you might lose deals?

We see a competitive landscape similar to the past. At the platform layer, the biggest competitor is homegrown analytics plus some cross-industry tech vendors and, secondarily, EMR vendors expanding into analytics. We've consistently had strong win rates. At the apps layer, we compete with hundreds of point-solution providers with deep capabilities in one area. Some app vendors try to broaden into horizontal platforms, but it's hard to do. Our strength is offering a full solution — platform, app capabilities and services expertise — which helps us win across a broader set of use cases. Those are the dynamics we see driving wins and losses.

Our next question comes from the line of John Ransom from Raymond James. Your line is open.

Hey, good afternoon. You're approaching EBITDA breakeven and have about $400 million in cash. There are a lot of potential acquisition targets. How do you sift through opportunities and what guidance do you give to potential sellers so you don't get shown too many non-strategic assets?

Great question, John. We believe long-term we can be a consolidator, especially at the apps layer where there are hundreds of companies with interesting technologies. We try to be disciplined strategically and financially. We often instigate proprietary processes rather than banker-led processes; we cultivate long-term relationships through our partner program. When we see a great strategic fit that aligns with what clients need, we narrow the funnel and focus. We prefer acquisitions that are strategic and accretive in the medium term. KPI Ninja is an example where we instigated a proprietary process; there was no formal auction. We aim to be a preferred destination for startup teams because we take care of their people and clients. We'll use our balance sheet strength to continue being a consolidator.

To add, another dynamic is the public market valuation shift we've seen in recent quarters, which takes time to roll through the private market. We're disciplined from an evaluation standpoint and expect private market prices to adjust over time.

As your customers exit the COVID emergency and hopefully get back to normal, what solutions do you think they will demand versus what you've been delivering the past couple of years, and how might that inform strategy?

We see early signs already. Population health demand increased as organizations became more capable of responding to the pandemic. Financial empowerment solutions — revenue and cost optimization — continue to be critical. Clinical improvement areas paused during COVID are seeing upticks as organizations gain more bandwidth. So we expect continued demand in population health, financial optimization, and a return to clinical improvement initiatives as organizations stabilize.

Do you think the movement to value-based care has been overstated? Most clients are still fee-for-service with a small portion of revenue in true risk-based models. Do you see not-for-profits moving more quickly into meaningful risk?

I have a quick anecdote: my early consulting days trying to model how long it would take to move to value-based care — decades later we're still only roughly 10% of revenue in true risk-based models among providers. So it's a long journey. That said, more contracts have some component of risk now, and providers are learning to operate in a risk-based world. There's appetite and strategic need to learn to manage risk effectively, and that's why we've seen a steady uptick in population health work that I expect to continue.

I'll remind you, electric cars are only 3% of cars sold too.

Kind of the same thing — these transitions take time.

Our next question comes from the line of David Grossman from Stifel. You may begin.

Thank you. Maybe limited to one question: it sounds like the services segment has become less predictable, impacting retention and margins. First, am I interpreting that correctly? If so, is that an artifact of the pandemic, tight labor markets and customer financial distress, or are you preparing for a more fundamental secular shift in how clients consume services?

Good question. There are components of variability in our services business that have been consistent for many years. The mix of services demanded can shift over time, and we optimize for client success. If the mix shifts toward lower-margin or non-recurring projects, that's acceptable because our priority is measurable improvement for customers. Historically, pro services gross margin has ranged from about 20% up to the high 30s, and that's a known characteristic. In the near term, things we watch include the tight labor market and wage inflation. We need to understand which inflationary pressures are long-lived versus transitory. Also, the pandemic may have caused temporary mix shifts. Before making long-term guidance changes, we want to observe how things evolve as the environment normalizes. We're giving ourselves time to gather data before drawing conclusions.

I agree. The variability in services provided some upside in 2021 with outperformance on that revenue segment. We want to see how things play out through 2022 to assess the ongoing profile.

So if we think about the dynamics impacting that business today — wage inflation, margin pressure, variability in mix — is it fair to say we're in an uncertain environment for that segment relative to history?

It could be. At the same time, it has pushed us to think about how to deliver services more efficiently and broaden how we deliver them. KPI Ninja's global presence, including a small team in India, offers ways to make service delivery more efficient, and we're building on that foundation. We'll see how it plays out, and if your characterization is correct, there may be future upside, but we need more data.

Our next question comes from the line of Daniel Grosslight from Citi. You may begin.

Hi guys, this is Anna Hazinski on Daniel's line. Thanks for taking my question. I wanted to go back and ask about the higher hosting cost headwinds associated with transitioning a portion of your customers to the Azure platform. Do you anticipate that customers paying higher access fees and the built-in price escalators will continue to offset these headwinds in 2022 as your technology gross margins continue to expand?

We do anticipate finishing that transition, which has been a multi-year headwind, by the end of this year. Once completed, some of those hosting headwinds should be behind us, and you'll see meaningful positive expansion over time. That said, we expect the data platform business gross-margin profile will be lower relative to the apps layer over the long term, so as the mix shifts toward more apps revenue, overall gross margin should improve toward our longer-term targets.

Thanks. One more: you mentioned a modest contribution from DOS Light customers in 2021. What types of clients have been most receptive to this pricing model?

We haven't modified our target client profile. The most telling factor is where we can get traction within the organization — often a single department with a specific issue. DOS Light helps us be more competitive on price versus point-solution players for a single department use case. So the typical receptive client is a department-level buyer or an organization with a specific, contained use case where DOS Light is a good fit and can later expand.

To add, demand continues in revenue and financial optimization as well as population health and value-based care. We have targeted DOS Light use cases where we're now more competitive.

Our next question comes from the line of David Larsen from BTIG. You may begin.

Congrats on the quarter. I thought I heard mention of a denials management solution in the prepared comments. Do you have that module built? How new is it? Denials are a big challenge for hospitals, and if you can address that effectively it accelerates cash quickly. Any color around that would be helpful.

Absolutely. As with many of our offerings, DOS is the foundation for gathering the right information to understand opportunities. Above DOS we offer an app layer that includes a library of analytics accelerators and visualizations that can be customized to an organization's needs. In Albany Med's case, we used an analytics accelerator at the app layer to visualize denials and identify improvement opportunities, then acted on those insights to recover revenue. We can replicate that approach across other systems.

To highlight differentiation, DOS is open and self-service, and customers build their own reports and customize starter dashboards in a self-service way. That self-service capability is a market differentiator for healthcare.

Great. Was there a deferred revenue drag in the quarter that you did not add back, and will there be a drag in 2022 you are adding back? Can you quantify it?

There are a few elements. The primary drag going into 2022 is the continued decline of the Medicity legacy revenue base, which is technology revenue and will impact revenue performance. There is also a small remaining purchase accounting deferred revenue write-down impact from Twistle that persists into Q1 2022.

Okay, so it's primarily Medicity and a small Twistle write-down in Q1. Thanks very much, that's all I had.

Yes, that's correct. Thanks, David.

Our next question will come from the line of Glen Santangelo from Jefferies. You may begin.

Thanks for taking my questions. You have momentum, finished the year strong on DOS Light and had record dollar-based retention, plus acquisitions and cross-sell opportunities. Yet your fiscal '22 revenue guidance implies a deceleration of revenue growth by six to seven hundred basis points. Can you frame that inconsistency?

Good question. We were pleased with 2021's strength. For 2022, we considered several items in setting guidance. On the technology side, Medicity decline is a headwind. On the services side, 2021 included some non-recurring services revenue and timing where a particularly large services contract booked earlier in the year than typical. We normalized for those factors in our guidance. Also, at the midpoint our 2022 guidance represents roughly 20% growth, which is consistent with our long-term targets.

Also note that 2021 included more of the Vitalware contribution for much of the year, since that acquisition closed in Q3 2020. When you compare annual growth rates, you should consider the timing of that contribution.

Thanks. One modeling question: what level of stock-based compensation are you assuming in fiscal '22 so we can think about operating cash and the balance sheet?

In 2021, there's a nuance where certain re-vested acquisition consideration counts as stock-based compensation for accounting, but it's really acquisition-related. Excluding that, stock-based comp as a percentage of revenue was in the mid-20% range in 2021. For 2022, we expect to be in a similar mid-20% range as a percentage of revenue because we're being thoughtful about long-term incentive and retention in a tight labor market. Over time, we expect to drive operating leverage and reduce that percentage, but for 2022 we anticipate a similar range around the mid-20s percent of revenue.

I'm not showing any further questions in the queue. I'll turn the call back to Dan for any closing remarks.

Thank you all again for your interest in Health Catalyst. We appreciate your questions and we look forward to continued discussions. Have a good evening.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a good night.