Good day, and thank you for standing by. Welcome to the Health Catalyst First Quarter 2022 Earnings Conference Call. Please be advised today's conference may be recorded. I'd now like to hand the conference over to Adam Brown, Senior Vice President of Investor Relations and Financial Planning and Analysis.

Good afternoon, and welcome to Health Catalyst's earnings conference call for the first quarter of 2022, which ended on March 31, 2022. My name is Adam Brown. I'm 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 today's 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-K for the year ended December 31, 2021, filed with the SEC on March 1, 2022, and our Form 10-Q for the quarter ended March 31, 2022, which 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?

Thank you, Adam, and thank you to everyone who has joined us this afternoon. We're excited to share our first quarter 2022 financial performance along with additional highlights from the quarter. I will begin today's call with some commentary on our first quarter 2022 financial results by assuring that we are pleased with the company's overall financial performance. Our Q1 2022 total revenue was $68.1 million, representing 22% growth year-over-year, and we achieved positive adjusted EBITDA of approximately $700,000 with these results beating the midpoint of our quarterly guidance on each metric. Stepping back, I wanted to take a moment to reflect on how proud I am of our company for our Q1 2022 adjusted EBITDA performance. At the time of our IPO almost 3 years ago, we made a commitment to our investors to reach adjusted EBITDA breakeven entering the year 2022. Despite a global pandemic, and realizing meaningful wage pressure within a tightening labor market, we delivered on this milestone due to our team members' hard work and unrelenting commitment to our mission. Additional financial highlights from the first quarter that I would note include our technology revenue of $42.2 million, representing 25% growth year-over-year. and our adjusted technology gross margin of 70.1%, representing an increase of approximately 95 basis points year-over-year. 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 3 strategic objective categories of improvement, growth and scale. And we'll discuss our quarterly results with you in each of these categories. The first category improvement is focused on evaluating our ability to enable our customers to realize massive, measurable improvements while also maintaining industry-leading customer and team member satisfaction and engagement. Let me begin by sharing a few examples of customer improvements from recently published case studies. All the customer improvement vignettes that I will highlight today represent customers leveraging technology from the acquisitions that we have made over the last couple of years, a testament to the strategic nature of our M&A and the importance of the more comprehensive integrated value proposition now offered to our customer base. First, let me share that financial success in health care often hinges on a health system's ability to capture its charges effectively. One of our integrated health system customers with annual net operating revenues of more than $4 billion used a patient accounting system and charge capture tool to help ensure revenue integrity. Over time, however, they had seen improvement come to a halt. The aging technology could not provide the analytical insights that the systems leaders needed to identify opportunities to improve. In response, the organization replaced its previous charge capture tool with Vital Integrity, a new Health Catalyst analytic application that resides within our financial empowerment suite, and was in the early stages of development when we acquired VitalWare. Vital Integrity quickly delivered actionable insight and workflow support, enabling our customer to identify and address gaps in its charge capture processes and compliance issues, leading to a $7.8 million increase in annual revenue. Vital Integrity identified more than 23,000 unique accounts for review and improvement and in its first 45 days of installation, the analytics application identified 1.5x more missed charges than the previous charge capture tool. Next, Community Health Network in Indianapolis-based health system customer was committed to ensuring its patients received appropriate primary and preventative care, but burdensome, time-consuming documentation processes in the EMR made it difficult to improve performance and close care gaps. Leveraging our DOS data platform and our embedded care gaps application, which was acquired through our Healthfinch acquisition, our software-enabled community health networks providers to have visibility into care gaps within their workflow, decreasing the administrative burden on their care teams, and optimizing processes to use data and analytics to easily track and measure performance year-round. Providers using our embedded care gaps application closed greater than 370,000 more care gaps and generated more revenue than providers that weren't using the application, yielding a 4x benefit to cost ratio. Lastly, with the onset of the COVID-19 pandemic in 2020, leaders at one of our health system customers immediately recognized the need for robust telehealth-based efforts to meet their increased demand. Leveraging our Twistle by Health Catalyst application suite as their patient engagement technology platform, this health system rapidly expanded their care capacity supporting more than 38,000 patients through COVID-19 screening, testing, treatment and monitoring. 95.7% of patients adopted the Twistle technology and read or responded to 76.5% of all messages. Additionally, more than 64% of patients stated that the Twistle application reduced the need to contact a provider by phone. Also in the improvement category, we have been fortunate to receive multiple recent external recognitions. First, on the product side, I would highlight that our healthcare.AI product, after its official release in 2021, has achieved meaningful industry recognition and praise, recently scoring a 93.2 on a 100-point scale in KLAS' 2022 best-in-KLAS report. KLAS notes that Healthcare.AI received a 100% score in 4 categories, including Would Buy Again, part of long-term plans, keeps all promises and avoids nickel-and-diming. Additionally, KLAS' report noted that customer satisfaction with Health Catalyst has jumped sharply over the last years; we have improved at digging into customers' data and providing prescriptive guidance as to where they should focus their AI efforts. Customers report that this guidance enables them to focus on the right populations and problems. Additionally, the report noted that customers spoke very highly of Health Catalyst's expertise and willingness to help them achieve their goals. We view this external validation as important recognition of our product vision within the mission-critical AI product space. Next, as it relates to our team member engagement, I am proud to share that the Women Tech Council has named Health Catalyst to its 2022 Shatter List. This is the fifth year in a row that we have earned a spot on the Women Tech Council's list of technology companies with active programs that are leading and accelerating progress towards breaking the glass ceiling for women in the industry. Lastly, we are excited to also share that Health Catalyst has been named to Inc. Magazine's 2022 Annual Best Places to Work list, the sixth year in a row we have achieved this designation. Our next strategic objective category is growth, which includes beginning new customer relationships while also expanding existing customer relationships. First, in terms of the current selling environment, I would share that our outlook is in line with what we shared on our last earnings call a few months ago. As we shared then, we anticipate that the COVID-19 pandemic will continue to result in both tailwinds and headwinds as it relates to our growth in 2022. First, as it relates to tailwinds, following the Omicron wave, we are encouraged to see the recent trajectory of the pandemic, including meaningfully lower hospitalization rates. Likewise, we continue to see meaningful evidence that the health care provider ecosystem is well-equipped and prepared to respond to the ongoing pandemic in areas including treatment efficacy, supply chain logistics, capacity planning, and broader operational optimization. And as we have mentioned before, 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. As it relates to headwinds, while I mentioned the positives related to the trajectory of the pandemic, we do anticipate our provider end market will likely continue to be under some amount of financial strain while also experiencing ongoing operational distraction, especially with the BA2 subvariant alongside vaccine logistics. Likewise, our provider end market continues to experience some financial strain resulting from the tight labor market. With this backdrop, our Q1 2022 pipeline and conversion rates performed largely in line with expectations. And similar to what we shared a couple of months ago, our current pipeline continues to support the bookings expectations for 2022 shared at the beginning of the year, including net new DOS subscription customer additions in the high teens and a dollar-based retention rate between 108% and 111%. Likewise, we continue to expect our bookings cadence to be aligned with historical years, meaning that the second quarter and the fourth quarter of this year are forecasted to be our most significant bookings quarters, aligned with health care organization budget cycles. As such, as is the case every year, our forecast assumes a material amount of bookings achievement in the second quarter. Next, as it relates to growth, we are excited to have publicly announced one of our recent customer additions. Tallahassee Memorial Healthcare, a private, not-for-profit community healthcare system serving a 17-county region in North Florida and South Georgia, selected Health Catalyst as their data platform provider to power their clinical transformation journey, including enabling their ambitious quality and safety goals. We expect our comprehensive software solution, including our DOS data platform, self-service analytics, touchstone data, and clinical and quality analytics offering. We will enable a thorough, accessible, and accurate view of Tallahassee Memorial's patient data and provide them the necessary tools to scale and improve their analytic efficiency across their enterprise. We view this partnership as important recognition of the strength of our data platform and clinical and quality technology offering, strongly aligned with our focus on driving measurable improvements at each of our customers. Lastly, as it relates to growth, let me share a couple of comments related to our M&A efforts. First, we are excited to have closed the acquisition of ARMUS Corporation at the end of April. This tuck-in acquisition provides us with a clinical registry development and data management technology solution to complement Health Catalyst's existing data abstraction services business. We anticipate this integrated technology and services solution will be a compelling value proposition to drive tangible financial savings for our customers in the critical functional area of registry reporting. The purchase price for this tuck-in transaction is $15 million of mostly cash consideration. And the impact of this acquisition on our 2022 financials will be immaterial. We're thrilled to welcome ARMUS' talented team members, and we look forward to working together with them in support of our shared mission. Commenting more broadly on our M&A strategy, we continue to carefully assess potential acquisitions within our pipeline. Of course, we are mindful of current market dynamics, including, in some cases, a near-term disconnect in valuation expectations between the public and private markets. We will continue to be disciplined in our M&A evaluation process, requiring acquisitions to be both strategically and financially compelling for Health Catalyst. I'd also note that we consider M&A not in a vacuum, but rather as one tool in a broader capital allocation toolbox. We are fortunate to have a strong balance sheet, and we regularly assess all capital allocation alternatives, always with an eye to maximizing long-term shareholder value. With that, let me turn the call over to Bryan.

Thank you, Dan. Before diving into our quarterly financial results, I want to echo what Dan shared and say that I am pleased with our first quarter financial and operational performance. I will now comment on our strategic objective category of scale. For the first quarter of 2022, we generated $68.1 million in total revenue. This total represents an outperformance relative to the midpoint of our guidance, and it represents an increase of 22% year-over-year. Technology revenue for the first quarter of 2022 was $42.2 million, representing 25% growth year-over-year. This year-over-year growth was driven primarily by recurring revenue from new customer additions, from 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. This quarterly revenue performance was slightly higher than anticipated due to technology environment go-lives occurring, on average, faster than forecasted. Professional services revenue for Q1 2022 was $25.9 million, representing 17% growth relative to the same period last year. This amount outperformed the guidance expectations we shared last quarter, mostly the result of successfully achieving completion of a large milestone-based contract in March, an occurrence we had mentioned was a possibility on our last earnings call. For the first quarter 2022, total adjusted gross margin was 54.6%, representing an increase of approximately 30 basis points year-over-year. In the Technology segment, our Q1 2022 adjusted technology gross margin was 70.1%, an increase of approximately 95 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 cost, 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. In the Professional Services segment, our Q1 2022 adjusted professional services gross margin was 29.3%, representing a decrease of approximately 220 basis points year-over-year and an increase of approximately 600 basis points relative to the fourth quarter of 2021. This quarterly performance was higher than the expectations we shared on our last earnings call, mostly the result of the large milestone-based contract we achieved in Q1. In Q1 2022, adjusted total operating expenses were $36.5 million. As a percentage of revenue, adjusted total operating expenses were 53.6%, which compares favorably to 55.8% in Q1 2021. Adjusted EBITDA in Q1 2022 was positive $0.7 million, with this performance beating the midpoint of our guidance and comparing favorably to an adjusted EBITDA loss of $0.8 million in the first quarter of 2021. This Q1 2022 adjusted EBITDA result was mainly driven by the strong quarterly revenue performance mentioned previously, along with the timing of some non-headcount expenses that we anticipate will be pushed out to later in the year. Our adjusted net loss per share in Q1 2022 was approximately $0.06. The weighted average number of shares used in calculating adjusted net loss per share in Q1 was approximately 53 million shares. Turning to the balance sheet, we ended the first quarter of 2022 with $425 million of cash, cash equivalents, and short-term investments, compared to $445 million at year-end 2021. 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 $225.4 million. As it relates to our financial guidance for the second quarter of 2022, we expect total revenue between $68 million and $71 million. And adjusted EBITDA between a loss of $1.5 million and positive $0.5 million. And for the full year 2022, we continue to 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, in terms of our full year 2022 year-over-year revenue growth by segment, consistent with what we shared on our last earnings call, we continue to expect the Technology segment to grow a little above 20% and the Professional Services segment to grow a little below 20%. In terms of Q2, we anticipate that our technology revenue will grow a few percentage points sequentially and that our professional services revenue will be flat to slightly down quarter-over-quarter. This quarterly professional services revenue dynamic is mainly driven by the material outperformance in Q1 professional services revenue resulting from the large milestone-based contract achieved in March. Normalizing for a more ratable revenue recognition across quarters, our Q2 professional services revenue growth would be more aligned with our typical quarterly revenue growth cadence. Next, in terms of our adjusted gross margin, we continue to anticipate that our adjusted technology gross margin will be in the high 60s for the next few quarters and that our adjusted professional services gross margin will be in the mid-20s. Specifically for Q2, we anticipate our professional services adjusted gross margin will be a few percentage points lower than our Q1 2022 performance. Given that the Q1 2022 margin was boosted by the onetime large milestone-based contract achieved in Q1. Lastly, and consistent with what we shared on our last earnings call, we continue to expect 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, including the onetime Twistle integration 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. Without their consistent contributions to our mission and growth, none of this would be possible. And with that, I will turn the call back to the operator for questions.

Our first question comes from Anne Samuel with JPMorgan.

Your first quarter EBITDA was really nicely positive. And your second quarter guide implies you could potentially be positive again if you hit the high end. I'm just curious, one, what levers contributed to that improved profitability in the quarter? And two, what's incremental for expenses in the back half of the year that are causing you to maybe not hit EBITDA positive for the full year? Is that maybe some of those pushed out expenses that you talked about in the prepared remarks?

Yes. Thank you, Anne. This is Dan. I'll share a few thoughts and then Bryan, please feel free to add as well. So as it relates to the Q1 EBITDA, we were excited about that being positive. One of the items that Bryan highlighted in his prepared remarks was that milestone-based payment that had a material impact given that it came in Q1 and contributed certainly to that positive EBITDA. And then as it relates to the back half of the year, one element that I know you have direct experience with as a former attendee is our annual Health Analytics Summit that happens in Q3. There is a series of expenses that are one-time in nature associated with that summit that we host for many to attend hundreds to attend. And so that's one of a couple of examples of back half-weighted expenses that contribute to a little bit more burn in the second half than in the first half. Anything you'd add, Bryan?

Yes, I think that was well said, Dan. Yes, the milestone in Q1 was a little bit higher margin. Professional services milestone, and that we saw that margin tick up in Q1. Do expect that to tick down slightly through the remainder of the year. And then as Dan said, we've seen historically some seasonality in our operating expense and had a little bit of delay in some of the non-headcount expense that we thought we'd...

That's helpful. I was maybe hoping you could provide a little bit of color on how big that milestone contract was and how much that helped in the first quarter?

Yes, it was approximately $1.5 million of revenue that we incurred in Q1 and most of that was on the services side. And typically, we would have seen that revenue be recognized over a few quarter time period, but we are, as you know, trying to be flexible with current clients and prospects in terms of enabling different services contracting models with the real goal of being flexible on their adoption of new technologies and ensuring that we're driving outcomes and improvement for them.

Next question comes from Ryan Daniels with William Blair.

Yes. Congrats on the strong start to the year. Dan, one for you. You mentioned some of the pressures on your client base and one that stood out as the labor and workforce issues, which I know we've been seeing a lot of lately, both from a staffing capacity and the cost side. I'm curious if you could kind of look internally on that issue? And talk to us a little bit more about how you're managing hiring, retention of your workforce, especially on the services side, probably a lot of demand there and ensuring that the culture remains intact as I know that's very important to you.

Yes. Thank you for the question, Ryan. It is really important, and we have made that a priority focus for a long time now. And that included in the 2022 planning cycle, we prioritized ensuring that we made really meaningful progress as it relates to team member compensation, for example. And that has been something that we believe has helped us. We've been encouraged to see even in this really tight labor market that actually our turnover rates starting at the first of the year, which were already well below the industry averages, have ticked downward each subsequent month through the end of April. And that's encouraging for us when coupled with the fact that as we shared in our last earnings call, the most recent Gallup engagement survey data came in with team member engagement in the 96th percentile as that is such a central component of our differentiation as a company, we're really pleased to see some meaningful measures suggesting that things are going well. We don't take anything for granted. This is a very difficult environment, a hiring environment or a retention environment, we're going to continue to prioritize team member engagement, prioritize taking care of our team members so that, that key point of differentiation remains in place in the months and years ahead.

Our next question comes from Jessica Tassan with Piper Sandler.

Congratulations on achieving the profitability target. I would like to inquire further about the quarter-over-quarter decline in General and Administrative expenses, which decreased significantly compared to Q4. Can you explain what led to this operational expense efficiency? Also, what does the $10.6 million drop in the fair value of contingent consideration specifically refer to?

Yes. Thanks, Jess. So yes, when you're looking at G&A trends from Q4 to Q1, on the face of our financial statements, the vast majority of that decrease from a GAAP perspective is related to essentially a gain from an expense standpoint on the contingent consideration liability, which is the potential earn-out consideration that we would potentially issue for the Twistle acquisition that we did last year. So the measurement period on that earn-out is midway through 2022. And so as we kind of estimate that potential earnout during the year, the value of that liability does fluctuate on a quarterly basis. And the primary driver of the GAAP change in G&A, if you look at kind of non-GAAP G&A metrics, that also ticked down a little bit, but much on a much smaller basis. And most of that was just timing, some of the seasonality in our...

Can I just ask one quick follow-up on that? So just does the sequential decrease, what should we be inferring with respect to the performance of the Twistle acquisition then?

Yes. Good question. Yes, so as I mentioned, we are required to estimate that potential liability and value each quarter from an accounting standpoint. So that's the primary driver of that change. The good news for us is that we structured that earnout in that deal as essentially upside to the color that we provided that Twistle would contribute from an ARR and revenue standpoint at the time of the deal. So even though there can be fluctuations in that, it is a win-win if we're able to pay out some earn-out consideration, and that would be merited by higher growth than what we expected.

Our next question comes from Cindy Motz with Goldman Sachs.

Congratulations, the quarter looks pretty good, especially the EBITDA, congratulations on that. So following on that, though, directionally I know you don't give longer-term guidance, but it looks like you're teed up pretty well, though, for 2023 and beyond. You may make other acquisitions. But it looks like 2023 is looking pretty good with EBITDA. And maybe just from the cost lines, if you want to comment on that? And then I just also was curious if you had your net revenue retention rate for the quarter.

Yes. So on the second question first, we will share net dollar-based retention numbers once a year for the full year. We did share that we are reaffirming that guidance that we provided at the first of the year for dollar-based retention being in that 108% to 111%. And then once the year is over, we'll show what the actuals were. And then on the directionality of our EBITDA, we would agree, we're pleased with the trajectory that we've been on since we went public that we talked about being able to be on a trajectory where we would cross over to EBITDA-positive territory within this time frame, and pleased that that milestone was achieved. We're also excited to continue to see that trajectory go towards our long-term targets that we've shared EBITDA margins between the 20% and 25% range long term. That will take a number of years for us to achieve, but we anticipate that we will continue to make progress in that direction in 2023 and beyond.

Great. Can I sneak in one more about the acquisition of ARMUS? Could you just elaborate a little bit more on that? Does that have anything like will that position you well with your data and possibly life sciences, clinical trials? Any information there would be great.

Yes, absolutely. So we are excited about ARMUS. As I mentioned in my prepared remarks, it's a small tuck-in acquisition. It's the smallest acquisition in terms of consideration that the company has done since going public. So it is a small tuck-in acquisition, but we're excited about the strategic benefits that can accrue to one of our business lines, which is that outsourced chart abstraction business, where we provide charter protection services to a number of health system clients where we can do it better, faster, and cheaper. And ARMUS' technology automates even more of that process, specifically the submission of registries. And so we can offer even a stronger value proposition in terms of being better, faster, and cheaper. And so it's a very natural combination for us to pursue. And we anticipate that many of our clients will appreciate that additional efficiency advantage to that solution. That's one of our more popular higher growth segments of our business, and so excited to see that growth continue.

Our next question comes from Elizabeth Anderson with Evercore.

One of the questions we've been receiving frequently from investors is whether we have any plans to raise capital in any form over the next 12 months, considering the current state of the capital markets.

Thank you for the question, Elizabeth. As we noted in our prepared remarks, we have a strong balance sheet, which we appreciate. This positions us to make significant strategic moves, including potential mergers and acquisitions, which we have pursued in the past. However, the current M&A landscape and market environment present unique challenges due to substantial shifts in public market valuations. There is often a delay between valuations in the public and private markets, and we're aware of that. We plan to remain disciplined in our M&A approach, but we are grateful for our strong balance sheet, which allows us to pursue opportunities in the M&A space that align strategically and financially. Additionally, as stated in our prepared remarks, we recognize that M&A is just one of several options available to us regarding capital allocation. We are continuously assessing various ways to utilize our capital effectively to create long-term shareholder value, and this will remain a priority. Given our current position, we feel confident in our strong balance sheet and believe there are many scenarios where we have the necessary capital to effectively implement our strategy in the upcoming quarters.

It's important to note that recently, we have successfully utilized some of our capital for three acquisitions over the past year while maintaining a strong balance sheet. Having experience with acquisitions as a public company provides us ample opportunity to focus on integrations and pursue cross-sell opportunities, both from apps to DOS customers and from DOS to other areas. We are eager to continue concentrating on these internal opportunities.

Our next question comes from Stephanie Davis with SVB Securities.

I was hoping you could tell us more about the demand environment, given some of the cost headwinds you're seeing in the hospital end market. Is there still an appetite for large IT projects? Are you seeing greater relative preference for DOS light? How should we think about the backdrop?

Yes. Thanks for the question, Stephanie. So the backdrop is behaving very similar to what we shared in previous quarters. So there are always some headwinds and some tailwinds that we experienced on a regular basis, but we wouldn't characterize it as either better or worse than what we've been experiencing in the last several quarters. And that's one of the reasons why we felt comfortable affirming the full year guidance from a bookings perspective, both as it relates to the net new DOS subscription clients and as it relates to the dollar-based retention.

Just to add to that, Stephanie. In terms of what we expect regarding our net new DOS subscription goals this year, we continue to believe that most of those ads will come from our enterprise DOS sales efforts, while we will have some contribution from DOS light. We signed a few DOS light customers last year, and that pipeline continues to grow, but it still represents a minority of the ads we anticipate, which reflects our current pipeline as well.

It's great to see that the enterprise is still performing well. Are you noticing any changes in the ranking of your offerings' priorities in light of the current situation? Additionally, do you have plans to expand beyond your usual areas, such as exploring credentialing, which could utilize your data and assist in managing hospital staffing challenges?

Yes, that's a great question. As Bryan mentioned earlier, we have a lot of work to do with the acquisitions we've made. There are numerous markets available to us that we're very excited about. We're focused on the markets we have already entered and invested in. In terms of shifts in demand or popularity, we recognize the challenges related to staffing and labor shortages, which are significant concerns for our clients. Solutions such as Power Labor and Power Cost assist in managing these labor constraints that many of our healthcare clients are experiencing. Additionally, population health contributes to maintaining efficiencies in this environment and remains active within our pipeline. Lastly, chart abstraction, particularly with the ARMUS acquisition, is becoming increasingly important for us. This service helps address staffing shortages and offers a more efficient and cost-effective solution for health systems, allowing them to achieve real savings. Solutions that result in direct savings and those that enhance revenue, like Vitalware's Chargemaster management, are excellent examples of how we can support our clients in the current climate, and they are seeing considerable interest.

Our next question comes from Richard Close with Canaccord Genuity.

Congratulations as well. Maybe to just dive in deeper on the labor side. I'm curious Dan, if you think the labor situation at your clients is more of a headwind or a tailwind? And I'm curious how you think about the labor situation in terms of driving specifically the professional services business, if you can increasingly become and help on the professional services side for them supplying that talent?

Yes, that's a great question, Richard. The labor situation is both a challenge and an opportunity. On the challenge side, our health system clients are typically spending more on staffing, which puts pressure on their margins. When margins are under pressure, it’s crucial to be aware of that. However, we offer numerous solutions that help them optimize their existing staff and enhance efficiency, making it a relevant conversation for us and positioning us as part of the solution. Certain aspects of our offerings relate directly to your question about services. The mix of services can vary based on the expertise that our clients struggle to recruit, such as data scientists or specialized experts, which tends to be in high demand for us and generally comes with higher margins. Conversely, our outsourced chart abstraction has gained significant interest and growth because it is cost-effective. We excel in maintaining high engagement levels when clients outsource this to us, allowing us to provide tangible savings, even though it is a lower-margin service. Overall, these factors intertwine, and I would say the labor situation is likely a balance of both challenges and opportunities. We are fortunate to have a wide range of solutions that can assist health systems in navigating this tough labor landscape in the near term.

Okay. And as a follow-up on Bryan made some comments earlier, a couple of questions ago on the 3 acquisitions and focusing in on integrations. Can you just update us on how integrated are all the acquisitions at this point in terms of the functionality?

Yes, I'm happy to provide an update, Richard. We typically view the first 6 to 12 months after an acquisition as a crucial period for technology integration. Over the past year, we've acquired Twistle, which is our most advanced integration among the three acquisitions we've made this year. We're seeing promising results, particularly with how Twistle's patient engagement technology aligns with our other population health and clinical improvement initiatives. This integration complements our existing solutions for clients, leveraging our current applications. As we approach the one-year mark with Twistle, the integration is progressing as we had anticipated. The other two acquisitions, KPI Ninja and ARMUS, are relatively smaller and more of a tuck-in nature. We're satisfied with the integration of KPI Ninja, especially with its real-time streaming technology that enhances our platform and data services for clients. ARMUS was just finalized a few weeks ago, and while we’re at an early stage, we are optimistic about the initial signs. This acquisition will be incorporated into our outsourced services business unit, and we expect a smooth integration process.

Our next question comes from John Ransom with Raymond James.

I'm trying to think a bit deeper about the rapid reset in public valuations you've mentioned. In your experience, how long do you think the standoff between the public and private markets typically lasts? I'm considering both optimistic and pessimistic viewpoints. If you don’t need to raise capital, do you believe there are opportunities to acquire interesting assets at more favorable prices compared to a year or two ago? If so, how long does it usually take for the market to adjust to this new reality?

Yes, it's a good question. Hard to know. But in studying some of the past fluctuations in cycles, it isn't uncommon for it to take 6 to 12 months or even longer in some cases for a full kind of harmony to exist in terms of public and private valuations. And so as Bryan shared earlier, we've been active as a public company with 6 acquisitions since we went public, 3 in the last year. We've got plenty of meaningful work to do in terms of ensuring great integration, great cross-sell results, and we're really early on in that process. So we're excited to focus on really, really good execution against those acquisitions, while the public and private markets kind of work things through on their own. And to your point, in the meantime, we'll continue to have a very strong balance sheet. We'll continue to be disciplined, both strategically and financially. And then we anticipate that there will be more of a harmony in terms of the approach to valuations that will exist here over the next 6, 9, 12 months, in which case we want to be well-positioned to take advantage of the opportunities that exist.

In light of the current low stock price environment, I understand that your retention levels have improved, but what complexities do you foresee in relation to stock compensation or replacing cash with stock compensation? Are there any other factors we might not be considering that could require adjustments to your strategies due to the lower-than-desired stock price?

Yes, I appreciate the question, John. So I think for us as a company, one of the more significant challenges for us as you know and as we've discussed, we practiced being a public company for a couple of years before our IPO nearly 3 years ago. We take the commitments that we make really seriously, and that's one of the reasons why the company for 12 out of 12 quarters has beaten the midpoint of its guidance on every metric, and also reached each of the longer-term milestones that we shared when we went public. We talked a lot about that with our team members to say, this is what we need to do to keep our commitments to public shareholders so that we can be a successful publicly traded company. And I think one of the dynamics that we're having to manage now is we've delivered really well against those, but the stock price doesn't reflect that. And there are a lot of macroeconomic factors that factor into that obviously. And so part of what we have to do is some education with our team members to better understand some of those factors that are outside of our control. And then also, we've made a deliberate decision, including this last annual planning cycle to prioritize, to your point, John, cash compensation for our team members so that we make sure that we're very competitive on cash compensation, and that was embedded in operating plan and our 2022 guidance was meaningful progress on base salaries and on cash compensation in general, which makes it easier for team members is still challenging, but it makes it easier for them to think about the equity component as a longer-term component of their compensation. And the other piece that really helps us is, we focus a ton on engagement and on mission. And so many of our team members come to Health Catalyst for a multitude of reasons, including often at the center is this desire to make the world a better place. The fact that what we do saves lives and prevents injuries helps team members take a longer-term view, but we also have to realize that compensation matters a lot to them. So we're going to keep prioritizing cash compensation to team members. And as we prioritize that, as we've discussed in the past, we do expect over time that you'll see stock-based compensation come down over time, but that will take some time, but that's certainly the direction that we're headed.

Our next question comes from Daniel Grosslight with Citi.

Dan, all the improvements that you covered in the case studies that you highlighted in your prepared remarks were all from acquired assets, which I thought was interesting. Can you quantify the cross-sells that you've seen this year from those recently acquired assets, both from upselling acquired analytics to existing DOS clients? And then the other way around selling DOS into some of the plans that you acquired when you purchased these assets?

Yes, definitely. Thank you for the question, Daniel. We're thrilled about the cross-sell opportunity, which played a significant role in our 2021 dollar-based retention performance of 112%, significantly higher than what we’ve previously experienced. The cross-sell of newly acquired technologies has directly contributed to this improved retention rate. We were also pleased to see a substantial increase in net new DOS subscription clients in 2021 compared to 2020. This increase supported our confidence in raising our guidance regarding net new DOS subscription clients to the high teens and increasing expected dollar-based retention to a range of 108% to 111%, up from the previous range of 107% to 109%. As noted in our prepared remarks, we felt reassured in maintaining our full-year guidance for both metrics related to net new DOS subscription clients and dollar-based retention, which is supported by positive data regarding the cross-sell. I believe we are just starting to explore the cross-sell potential, and it requires time to fully understand how to implement it systematically. Each acquisition requires developing integrated messaging and refining our go-to-market strategy, but we anticipate this will become a significant growth driver for us over time, and we're excited about it.

Just to add to that, Dan? To your question, Daniel. The other kind of data point, shared is that our Q1 is typically smaller kind of bookings quarter for us relative to other quarters. So not a ton of new data in terms of what Dan showed relative to last year, the cross-sell success and achievement, but our first half is a big selling season for us. Our Q2 is a big season of selling for us as well as Q4. So we're encouraged by the pipeline that we have and working hard to execute against that in Q2.

Our next question comes from David Larsen with BTIG.

Congratulations on a strong quarter. What are your expectations for GAAP G&A costs for the rest of the year, specifically for the second, third, and fourth quarters? I noted the significant reduction in SG&A in the first quarter, dropping from $23 million a quarter to $8.8 million a quarter, representing a $15 million gain. Any additional insight on that would be appreciated.

Yes, thank you, David. The gain is detailed in our non-GAAP reconciliation, which shows that the majority of the acquisition-related non-GAAP expenses we outlined were due to changes in the fair value of the contingent consideration for the earn-out. This was the primary factor in Q1. Looking ahead, I don't anticipate significant changes on a quarterly basis for the rest of the year, particularly on a non-GAAP basis, which should remain relatively stable in the G&A category. There may be some seasonality in G&A as we discussed for the latter half of the year. However, as you mentioned, fluctuations may occur on a GAAP basis, mainly linked to the earn-out. The positive aspect is that this will be adjusted in the next quarter due to the timing of the earn-out as of June 30.

Okay. So it seems there was about a $4.8 million item in the first quarter. Will there be a similar adjustment in the second quarter, and then will that be resolved so that there’s no impact in the third and fourth quarters?

Right. Yes. The Q2 adjustment will depend on the actual achievement. So there could be net expense, there could be net reversal of expense or net gain, just depending on how that shakes out in Q2. And then yes, to your point, no other changes beyond Q2.

Our next question comes from Dev Weerasuriya with Berenberg.

I want to discuss the current inflation environment. There's been a lot of discussion about it in various calls. How are you evaluating the price escalators in your older contracts? Are you considering renegotiating them in light of the inflationary pressures, or are they already linked to a CPI index? How are you approaching pricing adjustments in both your technology and professional services sectors? Additionally, is any of this reflected in your guidance? Any insight on this would be appreciated.

Thanks, Dev, for the question. Yes, inflation is a significant concern for many people right now, and it's crucial to distinguish between long-term and transitory factors. Interestingly, in the health care sector, aside from issues like the nursing labor shortage, price increases have been lower compared to other sectors. We are aware of this and have contractual technology escalators that are typically in the low double-digit percentage range, making them quite substantial. While we have opportunities to reassess these every few years, we generally establish 3 to 7-year contracts, which include strong built-in escalators. Therefore, we do not expect major changes in how these are structured. On the professional services side, there's more flexibility, allowing us to adapt to market conditions. As mentioned earlier, in some cases, such as with domain expertise services, it might be justifiable to consider higher prices that clients would accept. In other situations, providing a lower-cost and efficient alternative will be key to our value proposition, especially as clients are currently facing their own labor cost increases, particularly in clinically oriented areas like chart abstraction. We recognize these dynamics and are attentive to the market; technology pricing is more stable with robust contractual terms, while services provide us with a bit more adaptability. However, we remain committed to ensuring our value proposition remains strong for our clients, aiming to keep prices reasonable except in select situations where significant price increases might be warranted.

In response to your second question, Dev, regarding what is included in our guidance, what we've outlined reflects the historical pricing embedded in our current customer contracts. As Dan mentioned, this will take some time to adjust and fully manifest. We anticipate this will impact our guidance for the year. On the cost front, our technology line is less reliant on headcount, making it less susceptible to inflationary or wage pressures, which positively affects our gross margin compared to the services segment, which is more affected by wage increases. This presents some challenges for us as we work towards adjustments.

I'm showing no further questions in queue. I'd like to turn the call back to Dan Burton for closing remarks.

All right. Thank you all for your continued interest in Health Catalyst. We appreciate your time and look forward to future conversations. Have a great evening.

This concludes today's conference call. Thank you for participating. You may now disconnect.