DH - NASDAQ

Welcome to the Definitive Healthcare Q3 2023 Earnings Call. Our host for today's call is Robert Musslewhite. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to your host, Mr. Musslewhite, you may begin.

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

Thanks Matt. And thanks to all of you for joining us this afternoon to review Definitive Healthcare's third quarter financial results. On today's call, I'll provide an overview of our third quarter results, provide some perspective on business trends and what we are seeing in the market, and review some of our key wins from the third quarter. Then I will turn it over to Jason to highlight some of our latest innovations. I'll begin by reviewing our third quarter financial results. Our total revenue was $65.3 million, which represents 14% year-over-year growth, and our adjusted EBITDA was $21.7 million, which translates into a 33% margin. Revenue and adjusted EBITDA for the quarter were both above the high end of our guidance ranges for the quarter. We were pleased with our increased profitability in the quarter on a non-GAAP basis. We have been focused on becoming more efficient across all parts of the organization, and it is nice to see that work yielding some measurable results. Revenue growth was consistent with what we have seen in recent quarters and continues to reflect full macroeconomic conditions facing some of our key markets. Looking at the quarter in more detail. The good news is that despite the challenging macro, customers are continuing to engage with us in many different ways. Most importantly, we signed sizable new deals in each of our target markets with both new and existing customers. Demand generation also remains solid as frontline go-to-market and product development professionals are planning for investments in growth when their businesses begin to improve. For example, we are conducting a record number of product demos for our prospective customers interested in the health care's platform. While this type of activity is a positive sign for future growth, our end markets still remain pressured by the macroeconomic environment. The trends for new business, whether with new or existing customers were consistent with what we have seen over the past year. Budget scrutiny remains elevated, client decision processes are slow and complex and getting transactions through the final buying stages is challenging. This dynamic is true across the business at the moment, but it is most acute with smaller companies, particularly biotech firms that have been dealing with funding constraints for a number of quarters. We also continue to see these dynamics play out in our renewals. As the challenging market environment persists and customers scrutinize their budgets more tightly, they not only have pulled back on new spending, but have also in some cases, sought to reduce their existing spend, and this has led to a modest increase in both down-sell and churn in our most impacted end markets. In the midst of these conditions, we are very focused on being sure we control what we can control. And we are thus implementing a series of initiatives to try to minimize churn as much as possible in this environment. These include internal data science analysis to help identify our accounts most at risk and focus the efforts of our account managers and customer success team. Extra executive interaction and intervention with key clients and concerted value delivery initiatives from our products and professional services teams. Additionally, we have run a series of outreach campaigns to our customer base aimed at helping our clients utilize our data and solutions as effectively as possible to help their businesses during this time. The good news is that companies that have made larger investments in Definitive Healthcare generally continue to renew at higher rates than our smaller clients. And while our efforts are in the early stages, we are seeing signs that the work is worthwhile and as a result to mitigate the incremental churn we have seen. In addition, we have seen some customers that churn in the past returned to us realizing the importance and value of leveraging our data and their efforts. In a moment, I'll highlight one specific example of a customer like this. Stores like these and the consistent expansion we are seeing among many of our existing enterprise customers give us great confidence in the long-term land-and-expand opportunity in our business. It's important to remember that it remains early in the growth opportunity in the health care commercial intelligence market. And there are numerous opportunities to expand our data sets and develop new solutions that enhance the value Definitive Healthcare can deliver for customers. We've always taken a balanced approach between growth and profitability and continue to invest in strategic areas to lay the foundation for faster growth when market conditions improve. Our customers consistently tell us that they need high-quality actionable data that helps them make more informed decisions about their business. In a higher cost of capital world, companies face constraints on the number of growth investments they can pursue, this dynamic makes an unsuccessful clinical trial or a poorly designed go-to-market plan even more costly. We believe the combination of the Atlas Dataset and our commercial intelligence platform has positioned Definitive Healthcare to be the partner of choice for any company looking to make more efficient and effective investments in the health care market and we are confident that this demand will drive strong growth for us into the future. I would now like to spend a few minutes highlighting some of those customer wins from the third quarter that demonstrate the numerous ways customers are generating business value from the Definitive Healthcare platform. In the life sciences space, we had a significant win back at a leading diagnostic genomics vendor that offers a full spectrum of clinically relevant genetic testing. This customer ended its prior Definitive Healthcare contract in December 2022 and then reach out to us in the second quarter of 2023, ultimately signing a multiyear enterprise agreement in August for access to both our Atlas reference and affiliation data set and our Atlas all payer claims. This customer plans to integrate our data into its CRM system to improve targeted marketing outreach to clinicians. In August, we released a significant update to the Atlas technology installed dataset. That update contributed to multiple wins in the quarter, including one particular win at a patient engagement software vendor. Within hours of receiving access to the dataset, the client ran a report to identify 225 new targets that had its top competitors' software installed, along with the name, phone number and e-mail address of the purchasing decision maker. Thrilled with these quick results, the client continues to use our data to shape its messaging and value proposition to those targets in addition to identifying other prospects using its competition. Also in August, we announced our acquisition of Populi, a leading provider of health care commercial intelligence to the provider market. Populi had multiple strong wins in the quarter, both before and after the acquisition but its most important win was an enterprise upsell at a large academic medical center in California. This customer, which was already using Populi's network intelligence and market intelligence products, purchased our population intelligence and campaign activation services. With this expanded product suite, the customer will be able to hyper-segment and target consumers based off clinical propensities and a wealth of other behavioral, demographic and social determinants of health elements. The customer plans to run omnichannel digital marketing campaigns to recruit more patients in a highly competitive urban market. Turning to our Passport Analytics Suite, we had a multiyear enterprise win at a commercial stage pharmaceutical company focused on transformative medicines treating genetic diseases. This firm plans to submit its new drug application to the FDA before the end of 2023, with regulatory filings and additional to follow in 2024. This company will use the Path Forward planning and performance modules to assist in the implementation of an evidence plan and to assess the current standard-of-care, diagnostic path, health economics, treatment paths, and outcomes for patients with amyloid cardiomyopathy. Finally, as you know by now, I also like to include a unique customer from outside the health care industry that sells its product or service into health care organizations. In the third quarter, we were chosen by the American division of those largest dairy and cheese manufacturer to help it expand its presence in both hospitals and long-term care facilities. This customer wants to target group purchasing organizations for integrated delivery networks and plans to use our Atlas reference and affiliation dataset to understand the networks and relationships between different facilities. In particular, I plan to integrate our proprietary data into a salesforce.com incidence to better identify strategic accounts, develop customized pricing proposals, and reach out to the right individuals with purchasing authority for food services. With that, I'd like to turn it over to Jason to talk about what we're doing on the product and innovation front.

Thanks Robert. As we have discussed, we spent a lot of time, energy and money this year, improving our product. I want to see my time today to share an update on the number of ways that we are innovating to help our customers commercialize more successfully within health care. Definitive Healthcare offers unique health care commercial intelligence to help companies all types better understand, compete and win in the complex US health care market. Our approach focuses on helping our clients conveniently identify the right health care providers to target and partner with as well as the right people within those organizations. We do this by providing our clients with detailed contextual data on the entire health care ecosystem automated with powerful analytics and data science. Let's expand into these concepts a bit more. Organizations and people, we are the leading company covering providers across the entire health care ecosystem from acute care to skilled nursing facilities to clinics and to offer data on 4.5 million physicians and executives at these organizations. Importantly, we provide intricate details about how these organizations relate to and interact with each other which helps our clients understand buying authority and referral patterns. Next, convenience and integrations. Customers can choose the method for accessing our data and analytics that works best for them, whether they want to access data through our SaaS platform, through our powerful APIs or directly into the CRM or third-party data hosting platform. We work hard to make it easy for them and to ensure that we can be the single source of data tree [ph] for their entire organization. Analytics and data science, our AI-driven proprietary analytics provides automated insight to hundreds of different complex areas across a wide variety of use cases, such as physician prescribing behaviors, network referral and leakage analysis, and proprietary clinical scores across a range of 23 unique metrics. Our clients want insights that help them reach their health care targets more effectively and the work of our data science team provides them exactly the intelligence they need. And finally, context. We deliver all of the above in the context of a cohesive, comprehensive view of what is most important to our clients to know about the health care ecosystem. This includes more than 5.5 million technology installation records, quality of care and financial data, billions of all payer claims, and extensive data on social determinants of health. But this market is evolving quickly, and we are laser-focused on continuing to innovate to meet our clients' complex demands. As we previously shared earlier this year, an independent third-party research firm ranked Definitive Healthcare Number One for each of the top 10 use cases for our health care reference and affiliation data among diversified customers. However, we're not content to sit on our laurels. So we've made a number of enhancements to our data sets this year, including a 21% increase in the number of health care professionals in our database, a 43% increase in the number of practice locations, a 120% increase in the number of pharmacy claims, and a 21% increase in the number of pharmacy patients. Additionally, we launched a new behavioral health data set that leverages AI and advanced data science to provide customers with a comprehensive view of behavioral health care settings across the provider landscape. Customers can leverage the Atlas behavioral health data set to better identify, segment and research unit facilities and treatment locations that are part of a patient's care journey. And as I shared on our last earnings call, we also made significant improvements to our Atlas technology installed data set. We updated data on more than 1.5 million technology installations for hospitals, health systems, ambulatory surgery centers and physician groups by collecting data from multiple new sources and then applying our proprietary cleansing and linking algorithms to generate new intelligence. As an example, clients can now more accurately learn which clinical systems their clients and prospects are using, what electronic health record systems are installed and when that implementation took place. In addition, we added a signaling strength score that helped predict and infer installations where data may not be fully available. And when combined with our reference and affiliation data, clients can now more confidently understand how health care providers are interconnected and how technology is deployed across multiple facilities, locations, and organizations. We also heard from our clients the importance of continued investment and improvement in our platform and user experience. I'm proud to say that we delivered on that front this year. Some of the improvements we made in 2023 include a new social media and news tab and our Monocl Expert inside product to cover key opinion leader activity inventions across YouTube, Instagram, and Facebook. To help our clients understand which KOLs are influencing the health care universe online. In addition, we enhanced our search capabilities for lab, durable medical equipment and medical supplies to give better visibility into physician ordering behavior. And finally, we added a new cohort creation workflow to provide guidance on new medical code sets, patient cohorts and reports. As we emphasized in the past, innovation is critical to our growth and even in a more difficult macro environment, we continue to invest in the people, processes and data that we need to build even more effective solutions to help our clients succeed in the dynamic health care market. I'd now like to turn it over to our CFO, Rick Booth, to walk through definitive Healthcare's second quarter financial performance in more detail.

Thank you, Jason. I'll start with a detailed review of our Q3 results before providing our guidance for Q4 and commenting on 2024. In all my remarks, I will be discussing our results on a non-GAAP basis, unless otherwise noted. And all results for third quarter of 2022 or as reflected in our most recent filings. Our strong business model allowed us to deliver solid revenue results and very strong profitability in Q3 by focusing on what we can control despite economic conditions, which continue to be challenging. Our focus efficiency and continued innovation should position us well as the market recovers. Our financial highlights in the quarter include 14% revenue growth compared to Q3 2022, 33% adjusted EBITDA margin, and a 22% unlevered free cash flow margin over the last 12 months. Revenue growth, plus the trailing 12-month adjusted EBITDA was 43% or 36% using unlevered free cash flow margin. Turning to our results in more detail. Revenue for the third quarter will be $65.3 million, up 14% from the same period in prior year and at the above our guidance. This includes $2.8 million of professional services as large clients engage us to work on some of their most challenging issues. We ended the quarter with 555 enterprise customers, defined as customers with at least $100,000 in ARR. This was an increase of 51 enterprise customers were 10% year-over-year and an increase of 28 enterprise customers from the previous quarter. As a reminder, enterprise customers represent the majority of our ARR and are a key focus of our go-to-market programs. Our total customer account, which includes smaller customers, was 2,922 at the end of Q3, down from 3,023 in Q3 of 2022 and down 35 from the previous quarter. As smaller customers have been disproportionately impacted by current conditions. Gross profit was $56 million, up 10% from Q3 2022. And our overall gross margin at 85.7%, decreased 280 basis points from Q3 2022 due to both the addition of data sources from the Atlas Dataset and Populi relative to prior year. Most of these additions are intended to drive innovation and long-term growth. Sales and marketing expense was $20 million up 6% from Q3 2022. As a percentage of revenue, sales and marketing spend 31% of revenue, down 230 basis points from Q3 2022. This results from the changes that we have made to drive efficiencies in marketing are focusing on the markets and activities with the highest return on investment. Product development expense was $7.5 million up 8% from Q3 2022. Product development expenses were 11.5% of revenue, down 60 basis points from Q3 2022 as we realized efficiencies by integrating acquired operations and further globalizing our talent pool. Investing in our platform and using our existing datasets to launch or enhance multiple products is a highly effective and efficient way to increase the value we deliver to customers. Robert and Jason started some examples of these earlier, and we will continue to invest in the multiple opportunities we have identified in our long-term product roadmap. G&A expense was $7.7 million, down 13% from Q3 2022. And as a percentage of revenue, G&A expenses were 12% of revenue, down from 15% in Q3 of 2022. We expect to see continued leverage from G&A, both because these costs are relatively fixed and due to ongoing efforts to lower administrative costs as we improve efficiency. Adjusted income was $20.4 million, up 30% from Q3 2022 and as a percentage of revenue, operating income was 31% of revenue, up 390 basis points versus Q3 2022. The year-over-year margin increase was primarily due to efficiencies in sales and marketing and G&A. Adjusted EBITDA was $21.7 million, a 33% increase from Q3 2022 and above the upper end of our guidance range. As a percentage of revenue, adjusted EBITDA was 33% of revenue compared to Q3 2022. Adjusted EBITDA as a percentage of revenue was approximately 470 basis points higher due to the savings and investments described earlier. Adjusted net income in Q3 is $14.6 million or $0.09 per diluted share based on 155 million weighted average shares outstanding. Turning to cash flow. Definitive Healthcare's high margins, upfront billing and low CapEx requirements provide substantial free cash flow generation. We focus on trailing 12-month cash flows due to seasonality. Operating cash flows were $32.3 million on a trailing 12-month basis, down 27% from $44 million in the comparable period a year ago. Like any SaaS company, when bookings growth slows, so does growth in deferred revenue, which is the biggest driver of cash flow. As growth rates stabilize and recover, so should cash flows. Unlevered free cash flow was $54.1 million on a trailing 12-month basis, down 23% from the comparable period a year ago. And unlevered free cash flow was 22% of revenue on a TTM basis, effectively converting 75% of our TTM adjusted EBITDA of $71.7 million into cash. On the balance sheet, we ended the quarter with $307 million in cash and short-term investments and with our strong adjusted EBITDA profitability and only $260 million of debt, we believe that we are well-positioned to fund both organic and inorganic growth initiatives. Current revenue performance obligations of $170.8 million were up 7% year-over-year and total revenue performance obligations were up 3% year-over-year. Deferred revenue of $89.8 million was up 6% year-over-year. You will note that as we expected and have seen throughout the year, CRPO and deferred revenue grew more slowly than revenue. Subsequent to year end, we undertook our normally scheduled segment of our equities book value versus our stock market value, and that review identified a $287.4 million good retirement as of September 30th. [Indiscernible] also generated a $29.7 million gain on the TRA liability and a $17.2 million tax benefit. As a reminder, these are noncash accounting charges and have no impact on our debt covenants, and all impacts are excluded from our adjusted earnings. Moving now to guidance for the fourth quarter. We believe it's prudent to assume that current conditions also extend through the remainder of the year. Assuming this is the case, in Q4, we would expect total revenue of $65.5 million to $66.5 million for a growth rate of 8% to 10%. Adjusted operating income of $17.5 million to $18.5 million. Adjusted EBITDA of $19 million to $20 million were 29% to 30% adjusted EBITDA margin and adjusted net in of $11.5 million to $12.5 million or $0.06 to $0.08 per diluted share on 155.6 million weighted average shares outstanding. We will formally guide 2024 when we announce our Q4 results, but I can share some preliminary remarks as we approach year-end. Due to our recurring revenue model, 2023 bookings are the primary driver of 2024 revenue. The fourth quarter is an important sales and renewal quarter for us, so there's still a range of potential outcomes. But as the day, CRPO growth is our single best predictor of 2024 revenue growth. Q4 renewals and upsells are also critical to net dollar retention. We do not formally guide net dollar retention, but given our performance across 2023 to date, we'd expect year-end NDR in the low 90s on an overall basis. And from a profitability perspective, we're confident that we're making the right moves to align the business to today's conditions while maintaining important long-term growth drivers. Q4 performance will significantly impact 2024 profitability levels, but we would expect to see improvements in our year-over-year adjusted EBITDA margin. To summarize, Q3 was a solid quarter for Definitive Healthcare despite current economic headwinds. We're committed to efficiently and prudently manage the top and bottom-line results while continuing to invest in product development to best position the company for long-term growth. We believe we are well-positioned for the long-term because we have developed a clear leadership position in a large and attractive market that we believe will support high levels of predictable revenue growth, profitability, and capital efficiency. And with that, I'll hand it back to Robert for a few closing thoughts before we take questions.

Thanks Rick. Before we open the call for questions, I want to take a moment and welcome Carrie Lazorchak to our executive leadership team as our new Chief Revenue Officer. Carrie has a tremendous background on Chief Revenue Officer at SimilarWeb and SVP of Worldwide Sales at Nuance, and she brings a wealth of experience selling software as a service to both enterprise accounts and small and medium-sized businesses across a range of verticals. Her passion for customer success is evident in everything she does, and I'm absolutely delighted that she chose to join our team. In addition, I'd like to welcome Craig Hazenfield as our new Chief People Officer. Craig also has a very impressive background. Most recently, he led HR at [Indiscernible] and before that, Craig was a senior HR leader at Google, where we partnered directly with Google's Ads and consumer hardware executive teams. I'm excited to partner with Craig to grow and evolve our team as we grow our business. I'm excited about the additions of both Carrie and Craig. They are great examples of the types of the fantastic and diverse people that we're adding at all levels of the organization and that will support Definitive Healthcare as we grow and evolve into the future. I also want to acknowledge and thank all of our employees for their continued commitment to customer success. In a challenging economy, customers are routinely demanding excellence from their vendors and partners, and I'm proud to say that the Definitive Healthcare team continually rises to that challenge. Every day, I see countless of passion and innovation, all in service to our nearly 3,000 customers. As we look close out to 2023, I want to reiterate that we believe we are well positioned to deliver on our financial commitments for the year. Our team is doing a great job remaining focused on our customers and executing on our key product and growth initiatives. We have built an incredible business in a large, dynamic and growing market that provides great opportunity to meaningfully scale our revenue and profitability in the coming years, and we remain confident in the long-term opportunity for definitive health care and our ability to generate substantial value for our customers and shareholders. With that, we would now like to start the Q&A. Operator?

Thank you. [Operator Instructions] And our first question today comes from Craig Hettenbach with Morgan Stanley.

Thanks and I appreciate the preliminary thoughts for 2024. Robert, you mentioned some actions to mitigate churn. When do you think that could have an impact on customer count and for enterprise specifically, which is growing, do you still think you can continue to grow the enterprise headcount?

Hey thanks Craig. Look, we're always growing enterprise. We'll continue to grow the enterprise headcount. So, that's not a question. That's a huge part of our business, and you see that happening even in this more challenging macro. So, I wouldn't expect that to change. In fact, we'd hope to continue to do better and better on that. On the churn, we're doing a tonne. I think my comment is, feel like we're doing good work, and we are starting to see the impact of some of that work. So, I hope that we continue to see that play out into next year. Again, churn as always, you never really know until it's always in until it's in. But I do feel like the work we're doing is very positive and should yield some impact as we get into the next year. So, one thing we have looked at, if you look at kind of go back to the beginning of when we saw the first challenging macro science, which is the second quarter of 2022, so back to April 2022, if you kind of do a normal estimate looking forward through this coming March, we'd estimate that over 80% of our ARR, will have been worked through renewals between April 2022 and March 2024. So, that would give you an idea of the amount of our book that we've dealt with in this more challenging environment. So, that's also an indicator that if we get our act together and the things that we're doing and those things start to really play out across the customer base, we'd expect to see some improvement next year.

Got it. And then as my follow-up, you guys have headcount 10% this year. And as you mentioned, you're starting to see some benefits to EBITDA margins, if the environment stays the way it is, do you think you're okay in terms of organizational structure of headcount or how are you managing that kind of going into next year?

I think, Craig, there's a lot of quarter left here. So, fourth quarter performance drives a lot of where we land for next year, and we use that then to plan all of our investments. I think what you'll see from us is we'll always be very careful about balancing growth and profitability as we make our investments. So, we want to be sure that we're funding the right growth investments and have the right staff on hand to run after those, while also being prudent and being sure that we deliver strong profitability against our revenues. So, it's a little premature to have the perfect answer to that question, but it's something that we're always working on balancing.

Got it. Thank you.

And our next question will come from David Grossman with Stifel.

Thanks. I'm wondering if you could just help me just reconcile some of the disclosures in the quarter, it looks like you have a pretty good new customer enterprise as, right? You were at 28 after seeing some negative experience the last couple of quarters. Yes, despite those strong adds, the CRPO, the RPO was decelerated sequentially, and we do a calculated bookings number. It looks like that may also be down modestly as well as deferred revenue. So, am I doing the right math and if I am, can you maybe help me kind of reconcile the strong new customer adds with some of these other data points that seem to be continuing to decelerate.

Yes, I think the churn that we're seeing is among smaller customers. And the enterprise group is a pretty broad group. It ranges from $100,000 up to multimillions of dollars per year. So, depending on the mix in there, that's what you'd see on the mix. I think that's why you're having trouble reconciling those two figures.

I mean, even though the count is going -- the enterprise count is going up, which is presumably larger customers, is that you're getting the timing of when things are coming out is offsetting that? I guess, I'm still not clear on how that dynamic works.

No, I think what you're seeing is less price expansion than historically would have been the case, some more down-sell.

Got it. And then just your comments about 2024. If we assume low 90s retention, does that imply, I mean, I know there's a lot of other variables, including bookings, but it seems to suggest you could be down year-over-year in revenue. Is that right or am I -- again, just wondering if I have the quick back of the envelope math down, right?

Yes. No, I don't see a scenario in which we're potentially down year-over-year, David.

Okay. Good. I can follow that with you offline. Thanks very much.

Yes.

And your next question will come from Glen Santangelo with Jefferies.

Yes, thanks for taking my question. I apologize, I just want to follow-up on a couple of the previous questions. Rob, with respect to the net dollar retention, I think Rick said, we're sort of trending in the low 90s, can you give us some comparisons over the past couple of years of what that number has looked like so we can gauge how big the incremental headwind is?

So, we ended last year at 102.

At 102. All right. And so Rick, I mean, just to sort of follow-up on your comments on 2024, I mean you talked about booking CRPO growth, renewals, upsells and the NDR it's unclear, I think, exactly what you were trying to say. So, I don't know if you can elaborate at all a little bit more on 2024 in terms of what you were trying to say because coming into this year, we talked about the current environment, you said in this current environment. We're kind of comfortable in that mid-teens growth, but it sounds like things have shifted. And I just want to have a little bit more clarity on what you're saying about next year.

Yes, I think consistent with our earlier commentary, we've always said that one of the better indicators of forward-looking growth is CRPO growth. And as we get closer and closer to the end of year, I think it's appropriate to focus on that. It's not a perfect indicator. Things could be slightly better, slightly worse. But that's how I think about it.

Yes, if I can add, it sounds like a couple of the questions would assume that the CRPO effect and Rick's comment about NDR, you're taking those cumulatively, but those would be incorporated in whatever next year. So and Rick says that CRPO number, that's the best indicator.

Okay. Thanks very much.

And we'll move next to Ryan MacDonald with Needham & Company.

Hey, this is Matt Shea on for Ryan. Thanks for taking the questions. I wanted to follow-up on the commentary that you'll be through about 80% of your ARR by March of 2024 next year and with Q4 being a big quarter for renewals and upsells. How does this Q4 maybe compared to last year and working through that 80%? Is this potentially more important Q4 than last year. And as you kind of head towards year-end, what kind of signs are giving you optimism or concerns around those Q4 sales activities?

So, Q4 is always a big quarter for us commercially, both in terms of new business and in terms of renewals. I think our second biggest renewal quarter is Q1. So, obviously, it's a very important period ahead of us. I think what I'd say about that is our commentary is that the environment still feels kind of the same as we've seen it across this year. So, there are definitely some challenges in getting deals closed, both new business upsells and renewals. That said, we've now been operating in this environment for a while and had a lot of executional focus on how do you get what are really good top of funnel metrics down through the pipeline and close for our new business and upsell deals and how do we really focus on getting clients to renew and even expand their relationship with us. Even when their environments are challenged. So, I guess my optimism is not necessarily because the environment feels different, but it's because it feels like we've now had some time to really run these tactics and this focus through a lot more clients who are coming up for closing sales or closing renewals in the next two quarters. And I'm hopeful that, that work has been very good, and I'm hopeful that work yield some improvement.

Got it. Appreciate that. And then I think the other sign of optimism really was the win back in the quarter, and so nice to see that win back. Curious if you could just comment on what drove that churn in the first place? And then ultimately, what drove them to come back? And then as you look out across the broader book of maybe customers that have walked away, do you see other win-back opportunities in the near to medium term pipeline?

Yes. And we always look for win back. I mean the dynamic that's been going on in the market in general, this is generalizing, but we generally have a business user who is very engaged with us and what we've seen over the past 18 or so months is, in many cases, a buyer or a budget decision-maker, somewhere above that user has really tightened the reins and in some cases, has prevented the spend. And so I think that's reflected in the fact where we still have really good top-of-funnel activity. We're doing a record number of demos. People want to work with us. In general, they felt a lot more budget pressure and kind of organizational steps to get through to get things closed, and that's what's been playing out in our commercial performance. So, for example, every quarter, we have some clients that have to make tough budget decisions and can't stay with us as much as we try to keep them on board. In most cases, there's someone on the other side who really wants to stick with us is being told no. Just like Rick is telling a bunch of people here, no external spend that's happening in other organizations. So, when budget comes back, or when they've been able to work the processes internally, a lot of times, we'll get the chance to get back in with those clients, and that's what's happened in that specific example on that. We see a few of those every quarter, and we certainly win someone churns and we know we have an engaged user we'll stay after it. We don't just forget about that client. We stay after it, knowing that we're going to have a chance to get back in when things turn for a little bit for the things turn in our favor.

Great. Thanks guys.

And our next question will come from Joe Vruwink with Baird.

Great. Hi everyone. I wanted to go quickly back to the CRPO commentary. So, I think loud and clear, that's the best indicator that's growing 7% right now. I guess just given the importance of 4Q and sales and renewals in 4Q, is it possible to put bounds around a 7% number and where you think CRPO ends up at year-end? And I don't know if this is a good analog or not. But when I think about how you approach a revenue guide at the start of the year, there's normally a 300 basis point range around that. So, would you may be bound to 7% by 300 basis points? Or how would you think about that?

It's a great observation about how we guide next quarter more formally for 2024. It's really because Q4 does matter. And we've had divergent experiences across industry segments. So, I'm most comfortable sticking with what I've already said.

Okay, fair enough. And then I was interested in the pro services anecdote because that was obviously a strong line item, and it seems like it was large client related. I guess, question one, does that have a subscription pull-through associated with it at some future point? And then part two of the question, is this type of services engagement, something you can maybe look to do more of just in the context that it seems you're trying some new things. You mentioned customer success and engaging with our key clients. Is this maybe uncovering a potential opportunity that you could run more broadly in your customer base?

I think our PS engagements really speak to the strength of our relationships, especially with large, large customers. They don't necessarily have direct follow-on. But the more time that we spend with our customers, the more we understand their cutting-edge problems, the more we build that into the product in the long term, I would certainly hope for that.

Yes, I even build on that and say, as we look to grow to multiple million dollars of value that we can deliver on a per therapeutic area, even a per drug brand name area, those services are super valuable to expanding our relationship and pulling through large data sales part of it. So, early days on that, but I'd see it as a key component of those relationships and really strengthening our relationships with enterprise clients along the way.

And just to balance that. We're not seeking PS revenue as an end of itself. What we're really seeking is to become an incredibly important strategic partner to those large customers. And ultimately, we are a product-driven, product-driven company.

Sure. No, that's well understood. Thank you very much.

And we'll move next to Allen Lutz with Bank of America.

Thanks for taking the questions. Rick, I want to go after the CRPO dynamic in a little bit of a different way. So, if we look at the past three quarters, growth is 10%, 8%, 7% and obviously, that trend has moderated a lot over the past eight quarters or so, but it seems like it's stabilizing here. If we take a step back, enterprise customers are increasing, and I would assume that some of these small customers that churned off the platform or kind of anniversarying as a headwind. Do you get a sense that those two things are the case? And is it fair to assume that CRPO may be stabilizing from here? Just trying to get a sense of where you think that part or where that KPI is moving over the next few quarters? Thanks.

It's a great question. I think many of the factors that you talked about resonate. We're not in the habit of guiding CRPO, especially given the importance of the fourth quarter and the fact that we'll be issuing guidance after the fourth quarter. So, I don't have much to add in terms of the specifics on CRPO.

Got it. Thank you very much.

Your next question will come from Brian Peterson with Raymond James.

Hi, thanks for taking the question. This is Jonathan McCary on for Brian. So for a different direction here. We've seen some of your health care software vendors still kind of referenced slower clinical trial starts and I realize that oftentimes you guys further down the development pipeline. But is that any sort of a leading or coincident indicator for stage? Or maybe if not, what are some of the other KPIs you guys are tracking to maybe see when you'll see an inflection point in the macro here? Thanks.

Yes. Look, we have really, really good data for many stages of the drug commercialization process. So, we have great KOL data that helps early in the process. We have great market sizing data that helps early in the process, and we certainly have all kinds of ways we sort drugs once the decision has been made to go ahead and commercialize and take it to market. So, I'm not sure I understand the first -- understand the first part of your question. But certainly, development continues, it's important to us to have companies continuing to develop drugs, and we play a big role in helping support their success in doing so.

Yes. And we do not specifically look ahead to macroeconomic indicators or outside statistics in that way. We're in the early days of a large market opportunity, we're focused on growth. We're always out there pitching. And the more time that we spend with prospects and customers, the faster that we will rebound as conditions change.

Thanks.

[Operator Instructions]. We'll move next to Jared Haase with William Blair.

Hey guys. Good afternoon. Thanks for taking the questions. Robert, I wanted to follow-up on, I think you mentioned in the prepared remarks, that you still see a solid demand generation environment. And I think you specifically mentioned seeing a record number of demos. Would love to get a little more color. I'm just curious if anything has changed in terms of sort of your messaging to get demos in front of clients? Or beyond that, if anything has changed in terms of how willing you guys are to offer free trial just to get the product in front of users in what's obviously a challenging environment?

Yes, good question. We've -- number one, I'd say our marketing team has done an incredible job on free trials. It's a huge inbound channel for us. So, that's been delivering record numbers of inbound leads. As that team is really focused on lots of innovative ways to find people and bring them to our side and get them in signing up for free trial. I'd say the sales team has also done a really nice job executing on outreach where they self-generate demos. That's both our inside sales and our outside sales reps calling and setting up demos with people on their prospect list. And then we continue to be really active at industry events, important ones where a lot of our clients' traffic, I was at [Indiscernible], and we had a lot of our team there. That's a great conference for us. There are several of those each order that are really important for us to get out in front of clients and we have the chance to be in person and get them over to see what we're doing and understand the new and product investments that we've made. And then I pile on top of that, we have a lot of good things to talk about. If you go back to Jason's remarks, we've done a tonne this year to strengthen our data, to strengthen our products, strengthen our platform. So, we have a lot of exciting messages, and I think that really helps with the interest as well. So, I'm really pleased with where we are on the top of the funnel, again, where the challenge has still been a little bit elusive is getting that stuff down through the bottom of the funnel, but we're working hard at that, and that's something that obviously, with some macro improvement, we be in great shape on that front. But even in macro, I hope we can move the needle on that as well.

Okay, great. And then maybe just a quick clarification. On the clients that churned came back, are you aware of any of these clients that -- do they try another data and analytics solution for a short period of time? Or do they have any other replacement that they came back to you? And then also, would love to hear if those clients that are coming back or they're coming back at kind of a similar ARR scope as the previous engagement.

Yes. So, I mean to generalize a little bit because there's a lot -- we're talking about a lot of clients, both in and out. But I'd say on the question of have gone to others, generally not. Like most of what we're seeing in this environment is people with budgeting challenges. So they're opting to go without for a period of time. And depending on how painful that is for people the stronger emphasis to get them back in. So, it's generally people feeling budget challenged. They don't get on somebody else. When they get the budget back, they come back. And I'd say there's all kinds of ways of coming back. But in general, I'd say they come back at same or greater ARR. They realize what they missed, when they come back and talk to us. We have a chance to engage them around what did they miss about the product, how can we tailor better to them, by the way, did they know that we're doing X, Y and

Okay, great. Appreciate all the color. Thanks.

Sure.

Next question will come from George Hill with Deutsche Bank.

Hey good evening guys and thanks for taking the question. Rick, I'm probably going to ask you to parse some of your words a little bit here. And if I think about the last quarter versus this quarter, I think the NDR expectation went from the low to mid-90s to the low 90s. So, am I reading it right that things have gotten a little bit incrementally worse? Or am I pushing your words a little bit too much?

That's a great question. I'm pausing to give a consideration. I think we've gotten more visibility as we've gone through another quarter, still within the same range to being more specific.

Okay. And then I don't know if my follow-up don't even make any sense, which is that, if there are any change, I guess, last quarter versus this quarter, is it driven more by new sales outlook or by churn? Like what would have been the greater delta as we've moved 90 days forward?

It's really hard when you're comparing conditions in one quarter versus another, without getting into extreme operational detail. I would say conditions have been tough, and they've remained tough. It may not be quite as tough as I'm hearing for some of our companies, but we'll have much more information after Q4.

Yes, just on the -- go ahead.

No, you go ahead. I don’t want to interrupt you, sorry.

I was just going on the more qualitative commentary. It's felt the same. We've kind of seen the same environment, it feels like across this year.

Okay. And then the last one is kind of a strict numbers question. As we think about that NDR factor, is that on a like-for-like basis or inclusive of kind of pricing escalators for next year.

No, what I was speaking to is the NDR that we expect on 12/31/23, which will be a backward-looking trailing 12-month NDR and that would be inclusive of price increases and decreases.

Okay, that’s helpful. Thank you.

And there are no further questions at this time. I'd like to turn the conference back to Mr. Musslewhite for any additional or closing remarks.

Thank you all for the time and attention tonight for the good questions, and we look forward to seeing some of you across the coming quarter, and we'll go back on our next call at the end of February. Thank you.