Good afternoon, everyone, and welcome to the Health Catalyst First Quarter 2024 Earnings Conference Call. I would now like to turn the conference over to Jack Knight, Vice President of Investor Relations. Please proceed, sir.

Good afternoon, and welcome to Health Catalyst's earnings conference call for the first quarter of 2024, which ended on March 31, 2024. My name is Jack Knight. I'm the Vice President of Investor Relations for Health Catalyst. And with me on the call is Dan Burton, our Chief Executive Officer, and Jason Alger, 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 our future growth and our financial outlook for the second quarter and full year of 2024. Our ability to attract new clients and retain and expand our relationships with existing clients, trends, strategies, the impact of the macroeconomic challenges, including the impact of inflation and the interest rate environment, the tight labor market, bookings, our pipeline conversion rates, the demand for deployment and development of our data and analytics platform and the general anticipated performance of our 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 full year 2023 filed with the SEC on February 22, 2024, and our Form 10-Q for the first quarter 2024 that will be filed with the SEC. We will also refer to certain non-GAAP financial measures to provide additional information to investors. Non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. A reconciliation of non-GAAP financial measures for the first quarters of 2024 and 2023 to their most comparable GAAP measures is provided in our press release. However, we have not provided forward-looking guidance for professional services gross margin, the most directly comparable GAAP measure to adjusted professional services gross margin we will discuss later. Technology gross margin, the most directly comparable GAAP measure to our adjusted technology gross margin we will discuss later or net cash from operating activities, the most comparable GAAP measure to adjusted free cash flow we will discuss later. And therefore, not provided related reconciliations of these non-GAAP measures to their most comparable GAAP measures because there are items that are not within our control or cannot be reasonably forecasted. With that, I will turn the call over to Dan. Dan?

Thank you, Jack, and thank you to everyone who has joined us this afternoon. We are pleased to share our first quarter 2024 financial performance, along with additional highlights from the quarter. I will begin today's call with summary commentary on our first quarter 2024 results. We are encouraged by our first quarter 2024 financial results, including total revenue of $74.7 million and adjusted EBITDA of $3.4 million, with these results above the midpoint of our most recent guidance on each metric. Additional financial highlights from the first quarter include our adjusted gross margin of 68% for technology and 22% for professional services. Both of these metrics represent improvement compared to Q4 2023. 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 categories. The first category: improvement, is focused on evaluating our ability to enable our clients to realize massive, measurable improvements while also maintaining industry-leading client and team member engagement. Let me begin by sharing a couple of examples of improvements from recently published success stories. First, many healthcare organizations grapple with the challenges of labor-intensive chart abstraction and registry submission. These processes are costly and time-consuming and demand expertise in clinical and electronic health record systems, compounded by the industry's imperative to reduce expenses, these burdens underscore the need for innovative solutions. Our tech-enabled managed services solution for chart abstraction leverages our technology and expertise, inclusive of Generative AI and process improvement methodologies to establish substantially more efficient abstraction. Our solution enables improved timeliness, accuracy, and quality of submission, all at a meaningfully lower cost. Data exists in structured and unstructured formats within EHRs, requiring clinical interpretation and posing obstacles to chart abstraction automation. Our chart abstraction Generative AI solution extracts pertinent evidence from EHR notes and note segments, learns from previously completed registry data and recommends answers and then presents relevant patient data to abstractors in their abstraction and validation workflows. This significantly streamlines the abstraction process by automating the laborious task of finding, interpreting, and gathering data. Additionally, its adaptive learning capabilities continually refine results through user interactions, enhancing accuracy over time. Our initial findings have demonstrated a 24% reduction in abstraction time, accompanied by heightened confidence in responses due to the inclusion of evidence within the chart abstraction Generative AI platform. As a result, we are driving chart abstraction efficiencies with significant accuracy and quality, fulfilling our commitment to deliver cost savings to clients while reducing Health Catalyst labor costs. Next, UnityPoint Health was presented with the Flywheel Award at our 2024 Healthcare Analytics Summit for its outstanding achievements in transforming healthcare and enhancing the lives of those it serves. UnityPoint recognized the need for advanced analytics to support clinical decision-making while addressing population health priorities and effectively managing costs. Their leadership's goal was to gain a deeper understanding of their extensive collection of clinical and claims data. UnityPoint sought consistent data definitions for measuring outcomes and care quality that it was lacking in its current state. This limitation hindered their ability to leverage valuable data insights and analytics to succeed in risk-based contracts like shared savings agreements. To address these challenges, the Iowa-based health system network adopted the Health Catalyst data and analytics platform and a suite of analytics applications to establish a single source of truth across various systems. This enabled the conversion of raw data into insights that were consistent and accessible across all settings, providing actionable information on patient characteristics and healthcare utilization patterns. They also built a better predictive model to tackle population health and financial trends. As a result, UnityPoint has been recognized for consistently delivering significant improvements throughout its organization and accomplishing considerable milestones, including over $100 million in cost savings and revenue enhancements over the past several years. These accomplishments encompass dozens of improvement initiatives, such as reducing healthcare costs by $41 million through shorter hospital stays and saving $32 million in healthcare expenditures in a single year through improved care management practices. Additionally, they achieved a 39% relative decrease in emergency department visits and a 54% relative decrease in hospital admissions. Finally, in addition to UnityPoint receiving our Flywheel Award, Health Catalyst publicly recognized seven other recipients of the Catalyst Awards, an annual awards program recognizing hospitals and health systems that have led the way in data-informed healthcare improvement. These other winners included Baylor Scott & White Health, Providence, The Queens Health System, WakeMed Health and Hospitals, Carle Health, Community Health Network, and INTEGRIS Health. Also in the improvement category, we have been fortunate to receive additional recent external recognition related to our team member engagement. For the seventh year in a row, the Women Tech Council named Health Catalyst to its annual shatter list, the council's list of companies with active programs, leading and accelerating progress towards breaking the glass ceiling for women in technology. Our next strategic objective category is growth, which includes expanding existing client relationships and beginning new client relationships. In this category, let me first share that at the end of February, we hosted our tenth Healthcare Analytics Summit. We were excited to host nearly 1,000 attendees, representing more than 200 organizations, including participation from many existing and prospective clients, providing us with meaningful opportunities to deepen these relationships. Our growth organization hosted 115 scheduled face-to-face client and prospective client meetings in addition to a far greater number of impromptu ad hoc meetings. Other Health Catalyst senior leaders and I personally attended most of these face-to-face clients and prospective client meetings during the summit. And we feel encouraged by the momentum we are seeing in our pipeline following this year's conference. In addition, there were more than 100 presenters between keynote presentations, breakout sessions, showcases at our user conference, and over 50% of these presentations were from clients. Lastly, based on the post-summit survey, overall satisfaction from attendees was 98%, reinforcing and confirming the value that attendees realize from the summit. One key discussion topic during our Healthcare Analytics Summit related to our next-generation data and analytics platform. As a reminder, we've made a meaningful investment in the next generation of our data and analytics platform, allowing for significant increases in its scalability and modularity by integrating cross-industry technology from partners such as Databricks, Microsoft, and Snowflake, while also benefiting from Health Catalyst differentiated capabilities in areas of healthcare-specific data models and data content, healthcare-specific analytics, AI and data science, and healthcare improvement expertise. We are excited to announce this next-generation data and analytics platform will be branded as Health Catalyst Ignite. The initial deployments of Ignite are going as planned, and we anticipate that all new client deployments will be on this platform. Additionally, we expect the vast majority of our current data platform subscription clients that utilize DAS will be migrated to Health Catalyst Ignite over the next two to three years. Following our Healthcare Analytics Summit, we are encouraged to see strong demand from existing clients and new clients to move to Ignite. Next, related to our current growth operating environment. Consistent with what we have shared recently, we are encouraged to see health system operating margins steadily improving in recent months, specifically compared to 2022 and most of 2023. We anticipate this will be a tailwind for our bookings metrics in 2024 and for our top line growth in 2025. Related to our full year 2024 bookings expectations, let me share some additional commentary, which is consistent with what we shared a few months ago on our Q4 2023 earnings call. Our pipeline continues to support our 2024 bookings expectations, inclusive of a dollar-based retention rate between 104% and 110% and net new DOS subscription client additions in the mid-teens. Our pipeline continues to grow, which gives us additional confidence in achieving our 2024 bookings expectations. As a reminder, we typically experience seasonality in our bookings activity with Q2 and Q4 normally representing the majority of our sales, aligned with healthcare organizations' fiscal years and budget cycles. Next, I am excited to announce a meaningful expansion with one of our international clients. We are pleased to have expanded our relationship with Saudi German Health to elevate the health outcomes at Bait Al Batterjee medical companies hospitals in the United Arab Emirates. Saudi German Health is a leading private healthcare provider across the Middle East and North Africa, with 18 medical facilities, caring for more than 2.5 million patients. Health Catalyst first announced our partnership with Saudi German in 2020 when we entered a multiyear strategic partnership to service nine Saudi German Hospitals in the Kingdom of Saudi Arabia. Bait Al Batterjee medical company implemented Health Catalyst's data and analytics platform as well as power costing and Twistle patient engagement, along with our professional services expertise. This expansion will equip the hospital staff and executives with accurate and actionable activity-based costing data. We are excited to deepen this strategic relationship. Lastly, as it relates to growth, let me share a few comments related to our M&A strategy. We continue to carefully assess potential acquisitions within our pipeline and are mindful of current market dynamics related to valuation. We will continue to be disciplined in our M&A evaluation process, requiring acquisitions to be both strategic and financially compelling for Health Catalyst. We will aim to be thoughtful about tuck-in acquisitions, and similar to the last few years, we anticipate any M&A would most likely come at the applications layer or in TEMs enablement. I'd also note that we consider M&A 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 towards creating long-term shareholder value.

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 performance. I will now comment on our strategic objective category of scale. For the first quarter of 2024, we generated $74.7 million in total revenue. This total represents a slight outperformance relative to the midpoint of our quarterly guidance and it is an increase of 1% year-over-year. Technology revenue for the first quarter of 2024 was $47 million, roughly flat compared to Q1 2023. Professional services revenue for Q1 2024 was $27.8 million, representing a 4% increase relative to the same period last year. This year-over-year performance was primarily due to revenue recognition ramping from the tech-enabled managed services contracts that were signed in the second half of 2023, partially offset by some downselling from our higher-margin consulting services. For the first quarter 2024, total adjusted gross margin was 51%, representing a decrease of approximately 70 basis points year-over-year. In the Technology segment, our Q1 2024 adjusted technology gross margin was 68%, a decrease of approximately 140 basis points relative to the same period last year. This year-over-year performance was expected and mainly driven by costs associated with migrating a subset of our client base to Health Catalyst Ignite, our next-generation multi-tenant, Snowflake and Databricks enabled data and analytics platform environment. In the Professional Services segment, our Q1 2024 adjusted professional services gross margin was 22%, representing an increase of approximately 190 basis points year-over-year and an increase of approximately 1,040 basis points relative to Q4 2023. This quarterly performance was ahead of the expectations we shared on our last earnings call, mainly driven by our recent reduction in force that primarily occurred late in the fourth quarter of 2023. In Q1 2024, adjusted total operating expenses were $34.9 million. Adjusted EBITDA in Q1 2024 was $3.4 million, exceeding the midpoint of our guidance. Our adjusted net income per share in Q1 2024 was $0.05. The weighted average number of shares used in calculating adjusted basic net income per share in Q1 was approximately 58.6 million shares. Turning to the balance sheet. We are pleased with the strength of our financial position, which provides us with meaningful financial and strategic flexibility. We ended Q1 2024 with $327.8 million of cash, cash equivalents, and short-term investments, up $10.1 million compared to year-end 2023. In terms of liabilities, the face value of our outstanding convertible notes is a principal amount of $230 million due in April 2025 and the net carrying amount of the liability component is currently $228.4 million. Along with our advisers, we consistently evaluate our optimal capital structure. We have more than sufficient cash to pay off the convertible notes, but are also confident that we have a range of options available to refinance our upcoming convert maturity, which we intend to address well in advance of the stated maturity. As it relates to our financial guidance, for the second quarter of 2024, we expect total revenue between $73.5 million and $76.5 million and adjusted EBITDA between $5 million and $7 million. And for the full year 2024, we continue to expect total revenue between $304 million and $312 million, and adjusted EBITDA between $24 million and $26 million. Now let me provide a few additional details related to our 2024 guidance. First, as it relates to our Q2 2024 expectations, we expect that our Technology segment revenue will be relatively flat quarter-over-quarter. For our Professional Services segment, we anticipate that our Q2 revenue will be roughly flat sequentially. Next, in terms of our adjusted gross margin, we continue to expect that our adjusted technology gross margin will be roughly flat to slightly down quarter-over-quarter. In the professional services segment, we anticipate our Q2 2024 adjusted gross margin will be slightly down compared to Q1 2024, however, expect it to still be several points higher than our professional services adjusted gross margin in 2023. Lastly, we anticipate that our operating expenses will be down in Q2 2024 relative to Q1 2024, mainly the result of the roll-off of expenses related to our Healthcare Analytics Summit. Next, let me share a few additional details related to our full year 2024 guidance, which is consistent with what we shared on our Q4 2023 earnings call. We continue to anticipate that our year-over-year total revenue growth will be lower in the first half and will ramp in the second half of 2024, as we benefit from in-year 2024 bookings naturally translating into second half revenue. Next, in terms of our adjusted gross margin, we continue to expect adjusted technology gross margin will be in the high 60s this year. This adjusted technology gross margin will benefit from built-in technology gross margin expansion driven mainly by contractual escalators. However, we anticipate that this will be mostly offset by the costs associated with migrating additional clients to Ignite from our legacy DAS platform. That said, over the longer term, we expect the migration to Ignite to drive technology gross margin expansion. Additionally, we continue to anticipate our adjusted professional services gross margin will be in the high teens for 2024. This will be primarily driven by the mix of professional services which we anticipate will be comprised of a larger proportion of tech-enabled managed services, which start out at a low gross margin before ramping meaningfully over time. Next, we expect to continue to see material operating leverage. For instance, we expect R&D expense to be lower in absolute dollars relative to 2023, as we ramp down the larger upfront investment made in Health Catalyst Ignite, our next-generation data and analytics platform. We also anticipate SG&A will decline as a percentage of revenue. Consistent with what we shared on our most recent earnings call, we anticipate we will see a reduction in our stock-based compensation in 2024 as a percentage of revenue relative to 2023 by approximately 350 to 450 basis points, while also noting that this estimate could be impacted by items such as M&A activity and fluctuation in the share price. Lastly, we anticipate that our adjusted free cash flow will be approximately breakeven in 2024. With that, I will conclude my prepared remarks. Dan?

Thanks, Jason. In conclusion, I would like to recognize and thank our committed and mission-aligned clients and our highly engaged team members for their dedication and contributions to these results and this progress as well as express my optimism for the future. And with that, I will turn the call back to the operator for questions.

We'll go first this afternoon to Jared Haase of William Blair.

This is Jared on for Ryan Daniels. Dan, maybe just since you mentioned in the prepared remarks, M&A, I'll ask one around that. I'm curious, could you just maybe remind us kind of any particular product areas or sort of value propositions that might make sense for you guys to look to do a deal around just in terms of that build versus buy question? And then I guess also related to that, could you kind of run through what you typically look for or how we should think about the type of deal size or financial profile?

Yes, definitely. When we consider mergers and acquisitions, our priority is to find a strong strategic fit, especially in five key areas. We have two horizontal focuses: the data and analytics platform and the measures and registries capability. We ensure we are strategically robust in these sectors. Most enhancements to our data and analytics platform are driven by R&D rather than M&A. However, in the measures and registry space and the three specific use case areas we're targeting, we are mindful of the opportunities available for buying, partnering, or building. Our recent acquisitions, such as ERS and ARMUS, exemplify how we've been able to enhance our capabilities in measures and registries. We plan to maintain our focus on those use cases and the applications layer, while also being financially disciplined. Moving forward, the acquisition opportunities we pursue will resemble our recent deals, leaning more towards tuck-in and tech-focused acquisitions that can expedite our product roadmap and enhance our client offerings, particularly in the use case areas and technology tuck-ins. Jason, would you like to add anything?

Yes. The only thing I would add is from a financial profile standpoint, profitability is extremely important to us. So we'll be focused on adjusted EBITDA that these deals are primarily adjusted EBITDA neutral to adjusted EBITDA positive. There could be trades that we might consider in certain deals, but profitability is very important.

I found it interesting to see the strong gross margin in professional services. If we consider separating the impact of the TEMs deals ramping from other factors, could you explain the non-TEMs ramping portion? I'd like to understand the various moving pieces involved.

Yes, absolutely. I'll share a few thoughts, Elizabeth and then, Jason, please feel free to add as well. So separating out the mix dynamic of TEMs deals where they ramp from a low gross margin to a little bit higher gross margin over time. I think the main factor that really helped us was really getting into greater balance from a supply/demand perspective through the workforce reduction that Jason had alluded to in the prepared remarks, that in those higher-margin consulting services, I think we now have rightsized the right size of staff and team with the right level of demand, and that had a meaningful positive gross margin impact.

Yes. I would like to add that we anticipate our revenue to increase in the second half of the year. Some of this increase will come from new TEMs bills, which may exert some pressure on our adjusted professional services gross margin. We are pleased with the progress we made in the first quarter and expect to continue advancing, but we do foresee some pressure in the second half. Our expectation for adjusted professional services gross margin for the year is set in the high teens.

Yes, absolutely. Thanks for the question, Elizabeth. So we started with a strong Q1, where our performance was consistent with our expectations, and that's always a good sign. As we mentioned in the prepared remarks, we do see some meaningful overall positive trends as it relates to our end market and operating margins. Now there's a spectrum of experiences across our client base and that still includes some on that spectrum really struggling. Many of you may have seen some of the recent announcements as it relates to Steward Health Care, which does include a part of our client base that still is struggling. But at an overarching level, I think we're encouraged to see those trend lines. Now specific to Steward Health, given their financial challenges and their announcement around the bankruptcy proceedings that they are working their way through, as you might expect from keeping a close eye on that situation, and this is recent information and the situation is continuing to evolve, and expect that we'll learn a lot more in the weeks and months ahead. We've been in active frequent and direct communication with senior leaders at the C-suite level at Steward, including even as recently as over the last few days. And as a reminder, even with the announcements that Steward has been sharing, each of the more than 30 hospitals, medical centers, and physician offices within Steward Health Care are open. They're caring for patients on a daily basis. And we're also actively providing our solutions in support of that care on a daily basis. Senior leaders at Steward have communicated with us that they view us and our solutions as critical to their ongoing operations, and the solutions that we provide are critical, and they have meaningful hard dollar financial benefits associated with those ongoing solutions. And as such, our default assumption in this specific scenario is that these solutions will continue in 2024 and beyond, including in various asset sales scenarios. We've been receiving regular payments from Steward, and we anticipate that during the bankruptcy proceedings, Steward will continue to pay for active contracts like those that we are continuing with them. We're actively seeking to collect all of the outstanding payments that are due to Health Catalyst. But of course, we acknowledge that there are challenges with respect to the collection of prepetition debt in any bankruptcy situation. And there's some uncertainty around collectibility of prepetition amounts. Therefore, we've made some meaningful provision for the possibility that we may not collect all of the prepetition amount owed.

This is Anna Kruszenski on for Stephanie. The first one I wanted to ask on is just if you could talk maybe a bit about the push-pull of the change outage, but then also the improving operating margins and how maybe that's impacting TEM decision-making?

Yes, absolutely. Overall, we are thankful that our business has not faced major disruptions due to the challenges arising from the changed healthcare situation. There was one instance where a significant tech-enabled managed services opportunity in our pipeline experienced a pause because an existing client needed time to handle immediate operational issues stemming from the changed healthcare situation. We are encouraged that there has been meaningful progress, and as recently as the past week, those systems are becoming operational again. This was the only major case of a specific pipeline delay related to that tech-enabled managed services opportunity. However, in other areas of our pipeline, both with new and existing clients, we have not seen any interruptions or challenges related to this issue. It is essential to understand that our business model and solution differ greatly from those provided by changed healthcare. Our solution remains in demand from our clients, and we are committed to maintaining a strong focus on information security at Health Catalyst, as demonstrated by our high trust certification, SOC2 certifications, and state ramp certifications. We will continue to prioritize vigilance in this critical area.

I think you covered it well, Dan. Thanks.

Awesome. And then just one other one. I was wondering if you could talk about the expansion with Saudi German Health. I'm just curious how much of that book is international.

Yes, absolutely. So that is all international opportunity for us. We're excited to see a meaningful expansion in that relationship. And I would say, this is a good example of something that we've talked a little bit about earlier which is, as we saw more and more technology-oriented growth opportunities, both with existing clients and new clients as the end market improved, we have proactively shifted more of our growth resources to focus on those technology opportunities. And Saudi German expansion is a good example of that where much of the expansion is technology expansion, which obviously is higher gross margin and contributes more to our profitable growth expectations and our forecast. So we're really excited to see that kind of meaningfully technology-heavy expansion, which is also encouraging to see in the international segment of our business.

Stepping back for a moment to consider a broader perspective, you've navigated the end of easy financing, the ups and downs of COVID, and made some strategic shifts. When you compare Health Catalyst in 2024 to the company that went public in 2019, what do you identify as the significant changes and key lessons learned? How should we view the company differently than how it was perceived a few years ago?

Yes, great question, John. The company is very different than what it was five years ago. I would characterize this as more of an adolescent five years ago as a company. We were about one-third of our current revenue size, and we had less than one-fifth of the total number of clients that we have today. We were also meaningfully unprofitable from an adjusted EBITDA perspective. And I think one of the anticipated benefits of the company going public was the discipline and the rigor that it would require of us and the consistency of performance that it would require of us. And as we approach our five-year anniversary here in just another two months or so, I really feel grateful for that discipline and that capacity for consistency that Health Catalyst has developed through that experience of being a publicly traded company. We're now 3x our size from a revenue perspective. We've shifted from meaningful negative EBITDA to meaningful positive EBITDA, and we're excited as we think forward to the next number of years that we'll continue to mature as more of a grown-up company that has meaningful predictability, has meaningful consistency. Now what we didn't anticipate in 2019 was that, within seven or eight months of going public, we would have a global once-in-a-century pandemic to deal with. So that was interesting. And it's massive and disproportionate impact on our end market in healthcare and healthcare providers, in particular, and that, that would be followed by a very brief respite in 2021 and then an incredibly disruptive and challenging financial environment due to the inflation impacts in 2022, 2023, that really hit our end market, our health system end market really, really hard. And for the vast majority of that time in 2022 and in most of 2023, the average health system operating income was negative. And so that was a very difficult time for our end market and by extension for us to work our way through. I'm really proud of the fact that we found a way to continue to support our clients through all of those difficulties over the past five years, the COVID difficulties, the inflation-related difficulties. And we're certainly encouraged, as we mentioned, in our prepared remarks to see some of that financial pressure subsiding, and the end market operating environment improving. We're also grateful to be at greater size and scale as a company with over $300 million of projected revenue at the midpoint of our guidance this year and meaningful and growing fast EBITDA margin expansion. And those are all difficult things to enable, and we're excited about that opportunity. Now through all of those difficulties, I think one of the difficulties that we also faced was the need to shift our mix in our portfolio of solutions, especially when the financial pressure was greatest to those parts of our portfolio that offer near-term cost savings in hard dollar terms. And that's where we found that in the back half of 2022 through much of 2023, a lot of our growth and expansion came through tech-enabled managed services, which are fantastic offerings for our clients, but they're lower margin as well. But during that time, there was less appetite for new technology opportunities and yet, we're grateful now, especially starting in the latter part of 2023, and in through Q1 to the present to see as that end market improves, more of an appetite, more of an openness to our full portfolio. And that does inform our expectation as we have shared that we will see a reacceleration in our growth back to double-digit growth from a bookings perspective this year and from a revenue perspective in 2025. And we're excited to develop that discipline and that consistency of execution to be able to do that while also continuing to execute well around our profitability expansion. Those are hard things to do. Those are grown-up things to do, and we'll have to work every day to enable that to occur. But I'm certainly encouraged to see that our clients remain loyal to Health Catalyst. They're excited about the next generation of our technology offerings. There's more of an openness and an appetite for the technology components of our solution now than there was, particularly during the financial pressures. And those are all reasons why I have personally been a meaningful buyer of shares, why I'm grateful to be one of the largest shareholders of the company, and why I'm really bullish and optimistic for the future.

Yes. The one thing that I would add, and this is reiterating some of what Dan mentioned is, one lesson learned is the importance of being able to be agile and really meet our clients where they are. We have went through some challenging macroeconomic times, and I'm grateful that we did have an offering that could support our clients through those times and allow for financial savings and hard dollar ROI identification. So we've seen some swings on the pendulum where, at times, we were tech-focused. At times, we were more service-focused. Moving into 2024, we are taking a bit more of a balanced approach. We're focused on profitable growth but also focused on our TEMs offering and being thoughtful around growing through TEMs as well.

I have another question regarding the recovery of the end market. When you look at companies operating in the hospital sector, they often experience a natural growth in revenue that aligns with the growth of that market. This is true for many established vendors in the hospital industry. Additionally, I’ve noticed that healthcare IT companies typically struggle to surpass $300 million in revenue, as noted by sources like McKinsey. Considering this, how do you plan to avoid the pitfalls of merely growing at the same rate as your market or hitting a revenue ceiling as a software company? I'm curious about your thoughts on why $300 million seems to be a critical threshold and how you intend to sidestep these challenges in the long run.

Thank you for the question, John. I'll keep this brief and reflect on the past five years. Your question touches on our confidence in transitioning from single-digit to double-digit growth, as we've forecasted in our recent earnings call. There are several factors at play. First, we offer both technology and services, which represent a significant portion of our portfolio. This structure presents substantial growth opportunities on both fronts. As our market demands increased efficiency, we also see a trend towards consolidation with fewer vendors, which allows those vendors to grow faster than the industry as they deepen relationships with existing clients. A case in point is EPIC, which, despite its $4 billion revenue, continues to grow at a double-digit rate due to clients consolidating their business with them. We see a similar trend with our clients choosing to expand their engagements with Health Catalyst. For example, those who opt for our tech-enabled managed services spend approximately four times more annually compared to the average subscription client. This pattern is expected to continue significantly. One silver lining from the challenges of 2022 and 2023 is the rising demand for our tech-enabled managed services, especially our hard dollar guaranteed savings, which has proven essential for our clients and remains a key component of our pipeline. We've established a playbook that allows us to build a profitable business in this domain, enhancing our strategic partnership with clients and creating tremendous growth opportunities. Notably, some clients are significantly increasing the size of their engagements with us through these managed services. The ongoing need for health systems to enhance efficiency will not diminish in the coming decades, and we are continually improving our ability to offer solutions that meet this demand. This reflects a long-term opportunity that aligns with our technology value proposition and our commitment to managed services. Ultimately, this positions us as one of the few truly strategic partners in the market, positioning us for many years of double-digit growth potential at Health Catalyst.

We'll go next now to Daniel Grosslight with Citi.

This is Louis asking for Daniel. I just had a question about how we should consider the timing of tech margins as you transition clients to the new system.

Yes, great question. I'll share a few thoughts and then, Jason, please add anything as well. So as in all things, there are puts and there are takes. In the near term, as Jason shared in the prepared remarks, there are some near-term migration expenses that we have incorporated into our 2024 operating plan, and that will be part of the next couple of years as we migrate the vast majority of our existing clients onto the Ignite platform. So that's a negative. However, that's offset and one of the reasons why even with some of those incremental migration costs, you've seen our technology gross margins essentially stay flat, is that the underlying profile from a gross margin perspective of our next-gen Ignite platform is a higher gross margin profile. It's a more efficient offering, a much more scalable offering as well. So we do anticipate over the longer term, after we get through those migrations over the next two to three years to see about a total of around a 10-point improvement in terms of the technology gross margin at the data and analytics platform layer. But that will take a few years to play out as we still have those migration-related costs that are pulling that increased gross margin down a little bit.

Yes. The only thing I would add is that with the wind down in our major investment in Health Catalyst Ignite, we do expect our R&D line to be down in absolute dollars compared to 2023. So we do expect to make some progress there as well.

This is Jenny Shen on for Dave Larsen. Congrats on the quarter. I just wanted to build off of an earlier question on selling into hospitals in that dynamic. And also another question on M&A to expand your solutions suite. So it's always made a lot of sense to us for you guys to expand your offerings and sell into like med tech companies, life sciences companies, even payers. Is that something that you're considering? And if so, what opportunity do you see there? And if you're not considering that, what are some reasons why?

Thank you, Jenny. We might have missed a little bit of your question, but I think you were focused on asking about adjacent markets like med tech or life sciences or payers and how do we evaluate that? Did I capture your question accurately?

Yes.

Okay. Wonderful. So we do recognize the strategic trades and the strategic importance of being focused as a company and simplifying our focus. And that has been an important part of the last few years of Health Catalyst's existence. And I think we benefited from that focus on those five key areas of opportunity. But we're also mindful that there are some meaningful and logical adjacent opportunities for us. And in fact, in many ways, the progress that we've made, for example, with our next-generation data and analytics platform, our Ignite platform, it may well open up not only great opportunities for our core market within the provider space, but the standardization of data elements that come with these updated data models in the NextGen Ignite platform, also may well be really useful and improved infrastructure as it relates to some adjacent market and use case opportunities. You may recall that a few years ago, we decided to press pause on some of our life sciences investments. And one of the reasons we pressed pause was we were lacking the infrastructure and the standardization of that infrastructure from a data perspective to really be well positioned to provide meaningful solutions for certain life sciences use cases. Now we're still early in the process, and our primary focus is absolutely on our core market. And I think that's really important for us to continue. But we're also mindful of the meaningful leverage and often, there can be profitable leverage of a core capability into an adjacent market. And that could include in the future us reevaluating and considering areas like life sciences use cases, though I think we would benefit from some of the learnings of the past by being very focused on just a very small subset of use cases where we were convinced we could have a differentiated offering, and we have the right infrastructure. Likewise, in the payer space, we still do provide solutions to some part of the payer market. But we've there, again, tried to be focused and really thoughtful and be convinced and persuaded that we have a truly differentiated offering before we make significant investments. International is one more example where that's an adjacency that we've tried to be thoughtful, focused, and opportunistic in targeting just a few areas where we were persuaded that we can leverage our existing strength, provide a differentiated offering. And I think the recent Saudi German announcement is a good example of us meaningfully tapping into and leveraging those core strengths in ways that they're, again, skew a little bit more towards technology growth, which obviously supports our overall goals for profitable growth moving forward.

We go next now to Jack Wallace with Guggenheim.

This is Mitchell on for Jack. So AI was a big topic. It has a few months ago. Do you have anything to share on that front and anything incremental on the progress with how you're utilizing AI over the past few months since then?

Thank you for the question, Mitchell. We are eager to discuss the significant advancements we shared at the Healthcare Analytics Summit. We are concentrating on three tangible use case areas. One of these is the success story I mentioned earlier regarding the use of Generative AI for chart abstraction. We are witnessing approximately a 24% improvement in efficiency by using Generative AI to automate the necessary data gathering for registry submission, while still keeping the clinically trained chart abstractor actively involved. Our AI demonstrates over 90% accuracy, continually improving and learning. As chart abstraction represents a substantial growth opportunity for Health Catalyst, we aim to enhance efficiency gains, which could benefit our clients and foster a more profitable, sustainable business model. The second focus area is version 2.0 of healthcare.ai, which significantly enriches our analytics capabilities. It supports thousands of dashboards and visualizations daily, allowing for more accurate data interpretation through AI assistance. Version 1.0 already improved human data interpretation, and version 2.0 adds more text-based summaries for charts and graphs. Over 8,000 dashboards currently utilize healthcare.ai, and users are significantly more likely to make informed decisions that enhance healthcare. The third area pertains to co-development within our next-gen data and analytics platform, Ignite. We are enhancing our capabilities to streamline the maintenance of the current platform and speed up the development of new features through AI, making the programming process more efficient and reducing potential errors. We are optimistic about these efficiency gains and anticipate many more developments. These are the three primary use cases we are focusing on.

And our final question will come from Stan Berenshteyn of Wells Fargo.

Maybe sticking on the tech side. So 2024 guidance reflects expectations for year-on-year improvement in both the number of DOS client wins as well as the size of the contracts. Can you just walk us through what's incremental this year that is yielding these improvement expectations within bookings?

Yes, absolutely, Stan. I'm pleased to share our thoughts on our 2024 bookings guidance and its implications for 2025. There are positive factors contributing to the significant reacceleration towards double-digit growth. Key elements include activity with both new clients and our existing clients in terms of retention and expansion. We are observing more activity and an increasing pipeline in the new client segment, having had a solid Q1 related to new client engagements. We're optimistic about the growth in the new client pipeline, particularly as it leans more toward technology, which is encouraging. This informs our guidance of an increase in net new DOS subscription clients to the mid-teens from 11 last year, along with an expectation of higher average ARR per new client addition in 2024 compared to 2023. The second integral component involves retention and expansion with our existing clients. We're seeing positive trends in client retention, which improved in Q1, and this boost in retention is encouraging. Additionally, we're identifying a growing pipeline of opportunities for both technology and services, especially in tech-enabled managed services, which start with lower gross margins but expand over time. These factors collectively are positive, and we see them reflected in our guidance of a 104% to 110% dollar-based retention, significantly above the 100% we achieved in 2023. While we remain positive, we must also consider specific challenges. One specific case is Steward Health, which represents less than 2% of our total revenue. We are maintaining active communication with them and closely monitoring the situation. Our historical experience with asset transfers suggests that our solutions are typically retained by new owners. We anticipate similar outcomes with Steward's assets, which informs our expectations for continued revenue and ARR related to our solutions there, including our guidance for revenue and dollar-based retention. Regarding our adjusted EBITDA guidance for 2024, we maintain our previous guidance, even with the inclusion of additional bad debt reserves related to updates from Steward Health. We recognize the dynamic nature of the situation, and we will stay in close contact with Steward's leadership, expecting to gain more insights in the upcoming weeks and months. As we work with a wide range of clients, we remain aware of various circumstances they face and strive to be responsive and supportive to clients in difficult positions. While this can impact bookings and growth, we are confident that our solutions remain critical, and that fuels our overall confidence in our growth reacceleration moving forward.

Appreciate the color. That's very helpful. Maybe just a quick follow-up. Tangentially speaking about the sales pipeline, you had your summit in February this year typically has been in the third quarter. Would just love to get your impressions of the calendar change had any impact on pipeline formation or on the sales cycle more broadly?

Yes. Great question. So one thing that has remained consistent, whether the summit was in February or in the fall like it's traditionally been is the help and the accelerant that it is to the developing and the deepening of our relationships, whether that's more on the developing side with new clients or prospective clients, whether they're deepening with existing clients. This was an extremely successful summit in that regard. As I mentioned in the prepared remarks, we had 115 face-to-face meetings of senior leaders at existing clients and prospective clients, and I and other senior leaders participated in almost all of those. That's just a tremendous concentrated opportunity. And that may have been the most meetings we've had at the Healthcare Analytics Summit ever. So in that regard, it was fantastic. I think it's also really helpful to have that earlier in the year so that we benefit from that acceleration throughout the year. There were some other challenges not related to the sales cycle, where logistically holding a summit in the wintertime where there can be all kinds of weather-related issues proved to be pretty darn challenging. And so we are planning to actually move back to the fall time frame. But from a sales enablement and a bookings enablement and a pipeline acceleration perspective, I was really pleased with the summit and we'll continue to find it a very, very helpful sales accelerant for the company.

And we have no further questions at this time. Mr. Burton, I'd like to turn things back to you for any closing comments.

Thank you again for your time, for your interest in Health Catalyst. And we look forward to staying in touch in the future. Take care, everyone.

Thank you, Mr. Burton. Ladies and gentlemen, this concludes today's Health Catalyst First Quarter 2024 Earnings Call. Please disconnect your lines at this time, and have a wonderful day.