HCAT - NASDAQ

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

Good afternoon, and welcome to Health Catalyst's earnings conference call for the first quarter of 2022, which ended on March 31, 2022. My name is Adam Brown. I'm the Senior Vice President of Investor Relations and Financial Planning and Analysis for Health Catalyst. And with me on the call is Dan Burton, our Chief Executive Officer; and Bryan Hunt, our Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC. Both of which are available on the Investor Relations section of our website at ir.healthcatalyst.com. As a reminder, today's call is being recorded, and a replay will be available following the conclusion of the call. During today's call, we will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding trends, strategies, the impact of the COVID-19 pandemic on our business and results of operations, our pipeline conversion rates and our general anticipated performance of the business. These forward-looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may materially differ. Please refer to the risk factors in our Form 10-K for the year ended December 31, 2021, filed with the SEC on March 1, 2022, and our Form 10-Q for the quarter ended March 31, 2022, which will be filed with the SEC today. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of these non-GAAP financial measures to their most comparable GAAP measures is provided in our press release. With that, let me turn the call over to Dan for his prepared remarks, and then Bryan will subsequently provide his prepared remarks. Dan and Bryan will then take your questions. Dan?

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

Thank you, Dan. Before diving into our quarterly financial results, I want to echo what Dan shared and say that I am pleased with our first quarter financial and operational performance. I will now comment on our strategic objective category of scale. For the first quarter of 2022, we generated $68.1 million in total revenue. This total represents an outperformance relative to the midpoint of our guidance, and it represents an increase of 22% year-over-year. Technology revenue for the first quarter of 2022 was $42.2 million, representing 25% growth year-over-year. This year-over-year growth was driven primarily by recurring revenue from new customer additions, from existing customers paying higher technology access fees as a result of contractual built-in escalators as well as from our Twistle acquisition that closed on July 1, 2021. This quarterly revenue performance was slightly higher than anticipated due to technology environment go-lives occurring, on average, faster than forecasted. Professional services revenue for Q1 2022 was $25.9 million, representing 17% growth relative to the same period last year. This amount outperformed the guidance expectations we shared last quarter, mostly the result of successfully achieving completion of a large milestone-based contract in March, an occurrence we had mentioned was a possibility on our last earnings call. For the first quarter 2022, total adjusted gross margin was 54.6%, representing an increase of approximately 30 basis points year-over-year. In the Technology segment, our Q1 2022 adjusted technology gross margin was 70.1%, an increase of approximately 95 basis points relative to the same period last year. This year-over-year performance was mainly driven by existing customers paying higher technology access fees from contractual built-in escalators without a commensurate increase in hosting cost, partially offset by headwinds due to the continued costs associated with transitioning a portion of our customer base to third-party cloud-hosted data centers in Microsoft Azure, which increases our hosting costs. In the Professional Services segment, our Q1 2022, adjusted professional services gross margin was 29.3%, representing a decrease of approximately 220 basis points year-over-year and an increase of approximately 600 basis points relative to the fourth quarter of 2021. This quarterly performance was higher than the expectations we shared on our last earnings call, mostly the result of the large milestone-based contract we achieved in Q1. In Q1 2022, adjusted total operating expenses were $36.5 million. As a percentage of revenue, adjusted total operating expenses were 53.6%, which compares favorably to 55.8% in Q1 2021. Adjusted EBITDA in Q1 2022 was positive $0.7 million, with this performance beating the midpoint of our guidance and comparing favorably to an adjusted EBITDA loss of $0.8 million in the first quarter of 2021. This Q1 2022 adjusted EBITDA result was mainly driven by the strong quarterly revenue performance mentioned previously, along with the timing of some non-headcount expenses that we anticipate will be pushed out to later in the year. Our adjusted net loss per share in Q1 2022 was approximately $0.06. The weighted average number of shares used in calculating adjusted net loss per share in Q1 was approximately 53 million shares. Turning to the balance sheet. We ended the first quarter of 2022 with $425 million of cash, cash equivalents and short-term investments, compared to $445 million at year-end 2021. As a reminder, in April 2020, we issued a private placement of convertible notes with a principal amount of $230 million. The net carrying amount of the liability component is currently $225.4 million. As it relates to our financial guidance for the second quarter of 2022, we expect total revenue between $68 million and $71 million. And adjusted EBITDA between a loss of $1.5 million and positive $0.5 million. And for the full year 2022, we continue to expect total revenue between $287.8 million and $292.8 million, and adjusted EBITDA losses between $4 million and $2 million. Now let me provide a few additional details related to our 2022 guidance. First, in terms of our full year 2022 year-over-year revenue growth by segment, consistent with what we shared on our last earnings call, we continue to expect the Technology segment to grow a little above 20% and the Professional Services segment to grow a little below 20%. In terms of Q2, we anticipate that our technology revenue will grow a few percentage points sequentially and that our professional services revenue will be flat to slightly down quarter-over-quarter. This quarterly professional services revenue dynamic is mainly driven by the material outperformance in Q1 professional services revenue resulting from the large milestone-based contract achieved in March. Normalizing for a more ratable revenue recognition across quarters, our Q2 professional services revenue growth would be more aligned with our typical quarterly revenue growth cadence. Next, in terms of our adjusted gross margin, we continue to anticipate that our adjusted technology gross margin will be in the high 60s for the next few quarters and that our adjusted professional services gross margin will be in the mid-20s. Specifically for Q2, we anticipate our professional services adjusted gross margin will be a few percentage points lower than our Q1 2022 performance. Given that the Q1 2022 margin was boosted by the onetime large milestone-based contract achieved in Q1. Lastly, and consistent with what we shared -- on our last earnings call, we continue to expect some seasonality in our operating expenses, especially in the third quarter related to our Healthcare Analytics Summit, as well as the timing of certain other nonheadcount operating expenses, including the onetime Twistle integration expenses throughout the year. With that, I will conclude my prepared remarks. Dan?

Thanks, Bryan. In conclusion, I would like to recognize and thank our highly engaged team members. Without their consistent contributions to our mission and growth, none of this would be possible. And with that, I will turn the call back to the operator for questions.

[Operator Instructions] Our first question comes from Anne Samuel with JPMorgan.

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

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

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

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

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

Next question comes from Ryan Daniels with William Blair.

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

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

Our next question comes from Jessica Tassan with Piper Sandler.

Congrats on the execution against the profitability target. I just wanted to ask a little bit more about the quarter-over-quarter decrease in G&A. I think there was -- it was down pretty substantially versus Q4. So just what drove some of the operating expense efficiency. And what does that decrease the $10.6 million decrease in the fair value of contingent consideration referred to specifically.

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

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

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

Our next question comes from Cindy Motz with Goldman Sachs.

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

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

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

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

Our next question comes from Elizabeth Anderson with Evercore.

One of the questions we've been getting a lot from investors on our side is with the general sort of capital markets environment being what it is, are you guys -- do you guys have any anticipated plans in the next 12 months to raise capital in any form?

Yes. Thanks for the question, Elizabeth. So we -- as we mentioned in the prepared remarks, have a strong balance sheet. We're grateful for that. That enables us to be in a position to make important strategic moves, which could include and have included in the past strategic M&A. To your point, the current M&A landscape and current market environment presents some unique challenges in terms of disconnects between public market valuations that have been adjusting significantly. And there's often, as you know, a lag between public and private market valuations. And so we're mindful of that. As we mentioned in the prepared remarks, we intend to stay very disciplined in our approach to M&A, but appreciate having a strong balance sheet that can enable us if and when we find opportunities in the M&A landscape that makes strategic and financial sense to be able to move forward there. And like we mentioned in the prepared remarks, we're also mindful that M&A is one of a number of items in the toolbox as it were from a capital perspective. We remain open to and are consistently evaluating different options as it relates to the most effective use of capital in creating long-term shareholder value, and that will continue. I think given where we are today, we feel very good about our strong balance sheet. And there may be many scenarios where we have sufficient capital to execute well against our strategy in the next several quarters ahead.

Just to add to that, Dan, I do think it's worth kind of mentioning that in terms of recent M&A, we have been fortunate to deploy some of that capital. While still having a strong balance sheet over the last -- a little less than a year on 3 acquisitions. And having done a few as a public company, it does give us a lot of internal runway and opportunity to focus on those integrations and to execute against what we're seeing is some of the cross-sell opportunities, both apps to DOS customers as well as DOS cross-sell opportunities. So we're excited to continue to be heads down, executing on those opportunities internally as well.

Our next question comes from Stephanie Davis with SVB Securities.

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

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

Just to add to that, Stephanie. In terms of the -- what we expect in terms of contribution towards our net new DOS subscription goals this year, we do continue to believe that the majority of those ads will be more of our enterprise DOS sales motion while we will have some contribution from DOS light. We did sign a few DOS light customers last year and that pipeline continues to grow, but still is a minority of the ads that we'd expect and that's reflective of our current pipeline as well.

Good to hear the enterprise remains strong. Is there -- are you seeing any of your offering shift in rankings of prioritization just as we are seeing this backdrop, and would you ever maybe go farther outside of your adjacencies and is something like credentialing, which could still use your data, but could also help manage hospital staffing issues?

Yes, great question. I think right now, as Bryan mentioned a minute ago, -- we've got plenty of wood to chop with the acquisitions that we've done. There's a lot for us to work on, and we have many markets open to us that we're really excited about. And so we're actually quite energized just focusing on the markets that we -- that we've already invested in and entered into. I would share in terms of any shift in demand or popularity, certainly with some of the trends around staffing shortages, labor shortages, labor utilization being a challenge. We're cognizant of the fact that that's an important area for our clients. . And solutions like power labor, for example, and power cost really help you manage and optimize based on those labor constraints that a lot of our health system clients are facing. Pop health can also directly contribute to efficiencies that are important to maintain in this kind of environment. And pop health continues to be very active from a pipeline perspective. And then the last area of chart abstraction, we mentioned earlier with the ARMUS acquisition being a popular and a growing area for us. That is something that we can offer that helps to alleviate some of the staffing shortage issues and also provides a better, faster and cheaper alternative to many health systems that they can make in hard dollar savings. So those solutions where there's hard dollar savings on the cost side and solutions where there's hard dollar revenue implications like but we showed in our prepared remarks around Vitalware with Chargemaster management. Those are all great examples of very near-term helpful items that in today's environment have been quite popular.

Our next question comes from Richard Close with Canaccord Genuity.

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

Yes. Good question, Richard. And it certainly is both a headwind and a tailwind. Maybe I'd probably keep it pretty equal. On the headwind side, even the fact that these health system clients are often spending a little bit more on staffing, definitely put some pressure on their margins. And so whenever there's pressure on margins, you have to be very cognizant of that. At the same time, the fact that we have so many solutions that both help them optimize the staff that they have and help them be more efficient is a very natural discussion for us to have, and we can really be part of the solution. . And so that's where certain aspects of what we offer and that even plays into your question about services. Certainly, the mix of services can be impacted by what expertise -- our clients are having a hard time recruiting for, for example, where it's often really hard for them to recruit for data scientists or deep domain experts. And that tends to be an area of real popularity for us, and that's a little bit higher margin. And then on the flip side, our outsourced chart abstraction for example, is another area where we've seen meaningful interest and growth because it's low cost and it's lower cost. And we also do a really nice job of keeping engagement levels really, really high when clients outsource that to us and we can give them a hard dollar savings that's a lower-margin offering within our services portfolio, and also something that we've seen be more popular. So they kind of mix together -- and that's why I'd say it's probably about equal parts headwind and tailwind, but we're grateful to have so many solutions that can really help even in the near term to help these health systems navigate this difficult labor environment.

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

Yes, happy to, Richard. So we tend to think about the first 6 to 12 months post acquisition as really important heavy lifting from a technology integration perspective. And so if you think about the last 12 months, within the last 12 months, we've acquired Twistle, and we're probably furthest along of those -- of the 3 acquisitions we've done this last year in terms of the Twistle technology integration and we're seeing some really encouraging signs. I mentioned one example in our prepared remarks, where there's some really natural connection points between Twistle's patient engagement technology and other population health efforts and clinical improvement efforts where it's a really natural extension of what we're already doing with our clients utilizing DOS and utilizing some of our clinical assets at the applications layer. So that Twistle technology and people integration is on track with where we hope to it would be, and we're coming up in 1.5 months on the 1-year anniversary. So I would say it's tracking well with our expectations. The other 2 acquisitions, KPI Ninja and ARMUS were both quite a bit smaller acquisitions. And more tuck-in in nature. But we're pleased with where we are with regards to the KPI Ninja integration and very excited about the technology that they're bringing to Health Catalyst in terms of real-time streaming capabilities and other capabilities that are very relevant at a platform and a data layer for all of our clients. And then ARMUS just closed a few weeks ago. And so we're excited to be seeing positive signals, but we're very early on there. But it's a small tuck-in acquisition and will be embedded within our outsourced services business unit. And so we anticipate that, that integration will go smoothly and quite well.

Our next question comes from...

You cut out there for just a moment. Could you repeat that?

It was not me, there was a mystery guest. This is John Ransom at Raymond James.

John, welcome, thank you. Sorry about that.

So I guess I'm trying to think like second level a little bit about you mentioned the rapid -- of course, we are all aware of the rapid reset in public valuations. In your experience, how long is the standoff between the public market and the private market. And again, I'm trying to think about this glass half empty or glass half full. I mean if you don't have to raise capital, do you think there might be the opportunity to find some neat assets at much better prices than you might have a year ago, 2 years ago? And if so, how long typically your experience is a date for the market to adjust to the reality.

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

And just as a follow-on to the low stock price environment we find ourselves. Is this -- I know your retention levels are up, but what kind of complexities great view in terms of stock comp and/or substitute cash for stock comp or any other -- any other things that we're not thinking about that lower than desired stock price might that you have to adjust your tactics around.

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

Our next question comes from Daniel Grosslight with Citi.

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

Yes, absolutely. Thanks for the question, Daniel. So we are excited about that cross-sell. And that was certainly an important factor in our 2021 dollar-based retention performance of 112%, which was meaningfully higher than what we'd ever experience before that. Certainly, as we tried to highlight, a cross-sell of these newly acquired technologies contributed directly to that higher than historic dollar-based retention. And we were excited that we were able to add meaningfully more net new DOS subscription clients in 2021 than we were in 2020, for example. And that also informed our comfort level last earnings call, in raising the annual guide in terms of the net new DOS subscription clients to the high teens. And in raising beyond historic level, multiyear historic levels, the dollar-based retention that we expect to be more in that 108% to 111% range, whereas in prior years before 2021, we've been in more of that 107% to 109% range. So as we mentioned in our prepared remarks, based on our Q1 performance and our view of the pipeline today, we felt comfortable reaffirming the full year guide for both of those bookings metrics around net new DOS subscription clients and the dollar-based retention, and that's definitely informed by some encouraging data around the cross-sell. Now I will share, I feel like we're in early innings as it relates to the cross-sell opportunity that exists. We're just beginning to really understand how to do that at a systematic level. So -- and that takes time to figure out with each acquisition. It take some time to develop the integrated messaging and to integrate the go-to-market strategy. But over time, we believe that will be a major growth engine for us that we're excited about.

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

Our next question comes from David Larsen with BTIG.

Congratulations on a good quarter. What are your expectations for GAAP G&A costs over the remainder of the year, like for 2Q, 3Q and 4Q? And I know that there was a sort of that gain in SG&A in 1Q, but it seems like it was pretty material, like from $23 million a quarter down to $8.8 million a quarter. Was it -- it was like a $15 million gain. So -- just any color there would be helpful?

Yes. Yes. Thanks, David. Yes, the -- so the gain is laid out, if you look through kind of our non-GAAP reconciliation most of the acquisition-related non-GAAP expense that we break out was related to that change in fair value of the contingent consideration for the earn-out. So that's the main dynamic in Q1. Moving forward, I don't expect huge changes on a quarterly basis through the remainder of the year, in particular, on a non-GAAP basis, that should stay fairly consistent on the G&A line item. There's some seasonality like we talked about toward the back half of the year with G&A. But we can see, to your point, there can be fluctuations on a GAAP basis, mainly related to that earn-out. Good news is that, that will get trued up this next quarter, just given the earnout timing as of June 30.

Okay. So there was -- it looks like there was like a $4.8 million item in 1Q? And then in 2Q, will there be another adjustment like that and then that's sort of complete, so no impact in 3Q and 4Q?

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

Our next question comes from Dev Weerasuriya with Berenberg.

I want to just touch on the inflation environment here. A lot of commentary on many other calls just addressing that. How are you thinking about the price escalators built into kind of your older contracts and maybe -- are you looking to kind of renegotiate those as you -- through this inflationary environment? Or are they already pegged to some sort of CPI index? How are you thinking about the pricing and adjusting for this both in the tech side and on the professional services side? And then second, is any of that baked into guidance? Any color on that would be helpful?

Okay. Great. Thanks, Dev, for the question. Yes, inflation is on everyone's mind these days, understanding which elements of inflation are long-term, which elements are or more transitory are important factors. Interestingly, within the health care space outside of certain aspects like the labor shortage, for example, with nurses, health care pricing increases have been below many other sectors. And so we try to be cognizant of that as well. We do have built-in technology escalators that are contractual in nature with the passing of each year. Those are often in the low double-digit percentage range. So they're already very robust. And while there is an opportunity every few years to look at that, typically, we have 3- to 7-year contracts put in place from a technology pricing perspective, but they're often very robust in terms of those built-in escalators. And so we wouldn't anticipate dramatic changes to the way that those are structured. On the professional services side, those are a little bit more fluid. -- and there's an opportunity for us to stay a little bit more fluid and flexible in terms of understanding the market conditions. And as I mentioned earlier, there will likely be some cases where like with domain expertise services, it may be appropriate for us to think about higher prices and for our clients to accept those. In other circumstances and cases, the fact that we can offer a lower cost alternative and an efficient alternative will be the primary driver of the value proposition to those clients, and they are very sensitive to that value proposition that pricing. But the compare might be a little bit more favorable because they're experiencing a little bit more price increases in terms of their own labor and especially those areas like clinically oriented areas like chart abstraction. So we're seeing some puts and takes, and we're keeping our ear to the ground, tech is a little bit longer term from a pricing perspective, already built in contractual escalators that are pretty robust. Services, there's a little bit more flexibility, but we are sensitive to ensuring that our value proposition is really strong to clients. And so except in a few circumstances where like with domain expertise services, there might be a reasonable and merited meaningful price increase. I think we'll try to stay at a more reasonable level with our clients and stay in line with what they're experiencing as well.

Just your second question, Deb, in terms of what's built into guidance. So to Dan's commentary, what we've reflected is more representative of kind of the historical pricing that is built in to our existing customer contracts. And so as Dan mentioned, that's going to take some time to play out and adjust against that. So that's what we expect in terms of guidance impact from that this year. There is on our -- on the cost side of the equation for us, the technology line for us is less headcount intensive. So it's less impacted by inflationary pressure or wage pressure, which benefits our gross margin relative to the services segment, which is mainly headcount that's where we are seeing more of that wage pressure hit. That's a bit of a headwind for us, while it takes us time for us to adjust.

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

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