HCAT - NASDAQ

Welcome to the Health Catalyst Second Quarter 2024 Earnings Conference Call. At this time all participants have been placed on a listen-only mode, and the floor will be open for your questions, following the presentation. [Operator Instructions]. I would now like to turn the call over to Jack Knight, Vice President of Investor Relations.

Good afternoon, and welcome to Health Catalyst's earnings conference call for the second quarter of 2024, which ended on June 30, 2024. My name is Jack Knight. I'm the Vice President of Investor Relations for Health Catalyst. And with me on the call is Dan Burton, our Chief Executive Officer; Jason Alger, our Chief Financial Officer; and Dan LeSueur, our Chief Operating Officer. A complete disclose of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC. Both of which are available on the Investor Relations section of our website at ir.healthcatalyst.com. As a reminder, today's call is being recorded, and a replay will be available following the conclusion of the call. During today's call, we will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding our future growth and our financial outlook for the third quarter and full year of 2024 and 2025. Our ability to attract new clients and retain and expand our relationships with existing clients, trends, strategies, the impact of the macroeconomic challenges, including the impact of inflation and the interest rate environment, the tight labor market, bookings, our pipeline conversion rates, the use of proceeds from loans under our credit facility and the availability of the delayed draw loan thereunder, our ability to refinance our existing indebtedness, the demand for deployment and development of our data and analytics platform, M&A activity and the general anticipated performance of our business. These forward-looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may materially differ. Please refer to the risk factors in our Form 10-Q for the first quarter of 2024 filed with the SEC on May 10, 2024, and our Form 10-Q for the second quarter of 2024 that will be filed with the SEC. We will also refer to certain non-GAAP financial measures to provide additional information to investors. Non-GAAP financial information is presented for supplemental informational purposes only has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. A reconciliation of non-GAAP financial measures for the second quarters of 2024 and 2023 to their most comparable GAAP measures is provided in our press release. However, we have not provided forward-looking guidance for professional services gross margin, the most directly comparable GAAP measure to adjusted professional services gross margin discussed below. Technology gross margin the most directly comparable GAAP measure to adjusted technology gross margin discussed below or net cash from operating activities, the most directly comparable GAAP measure to adjusted free cash flow discussed below. And therefore, not provided related reconciliations of these non-GAAP measures to their most comparable GAAP measures because there are items that are not within our control or cannot be reasonably forecasted. With that, I will turn the call over to Dan Burton. Dan?

Thank you, Jack, and thank you to everyone who has joined us this afternoon. We are pleased to share our second quarter 2024 financial performance and other recent highlights. I will begin today's call with summary commentary on our second quarter 2024 results. We are encouraged by our second quarter 2024 financial results, including total revenue, of $75.9 million and adjusted EBITDA of $7.5 million, which both exceeded their respective midpoint of our guidance. Likewise, we are pleased with our bookings performance through Q2 2024, especially as it relates to our net new DOS subscription clients, which we now refer to as our platform subscription plans. Now let me highlight some additional items from the quarter. You will recall from our previous earnings calls that we measure our company's performance in the three strategic objective categories of improvement, growth and scale and we'll discuss our quarterly results with you in each of these categories. The first category, improvement, is focused on evaluating our ability to enable our clients to realize massive, measurable improvements while also maintaining industry-leading client and team member engagement. Let me begin by sharing an example of a recent client improvement. Often in health care, both consumers and health systems struggle with cost transparency. To help connect this issue, Temple University Health adopted the Health Catalyst data platform and our power costing application, a module of Health Catalyst revenue and cost improvement suite to power its financial transformation, in this cost transparency and ensure clinical improvement and excellence. Our solution allows Temple to more precisely and granularly track costs, understand data from patients' electronic medical records and track each drug and supply used in patient care. Leaders at Temple can then visualize clinical and useful data that is seamlessly combined and integrated, which allows them to budget more accurately, better negotiate with insurers, and remove unnecessary costs. Additionally, power costing allows the organization to compare individual patient outcomes and cost by physician more easily than other methods which are often less precise and require manual analysis. Temple has also leveraged Health Catalyst power costing application to quantify delivered but not yet reimbursed services. They have shared that this opportunity represents over $3 million of additional annual revenue. Also in the improvement category, we have been fortunate to receive additional external recognition. First, Newsweek has recognized Health Catalyst as one of the 50 best health care data analytics companies in the U.S., one of the world's best digital health companies for 2024 and as one of America's greatest workplaces for parents and families. Additionally, for the 12th year in a row, Health Catalyst has been named the Best Place to Work in health care by Modern Healthcare, as one of the best companies to work for by U.S. News and World Report and for the second year in a row as a certified Great Place to Work in India. Lastly, we are excited to share that Linda Llewelyn, our Chief People Officer, was recognized with the Lifetime Achievement Award at Utah Business' HR Achievement Awards in 2024, recognizing the exceptional work that Linda does to Health Catalyst a great place to work. Our next strategic objective category is growth, which includes expanding existing client relationships and beginning new client relationships. Consistent with what we have shared recently, we are encouraged to see health system operating margins steadily improving and stabilizing in recent months. Our strong pipeline, along with an improved end market contributes to our continued confidence in our expectation that our top line growth will accelerate back to double digits in 2025 related to our full year 2024 bookings expectations. We are pleased to be well ahead of our forecast for net new platform subscription client additions, driven by the increased modularity and flexibility of the Health Catalyst Ignite platform, our increased effectiveness in cross-selling Unite to our expanding non-platform client base and our increased focus on higher-margin technology opportunities. Through the first half of 2024, we have already added more net new platform subscription clients than we did in all of 2023. As a result, today, we are increasing our forecasted number of 2024 net new platform subscription client additions to be in the low 20s. As a note, achieving this number of additions would represent the strongest year in the company's history in terms of net new platform subscription client additions. Also, it is important to note that our first half new client additions as well as some material existing client expansion includes meaningfully greater international and health information exchange clients than we have typically experienced. These international and health information exchange implementations can often take significantly longer than our other clients to ramp into revenue recognition. As a result, we anticipate more of the revenue impact from these wins to occur in late 2024 to early 2025. Given that much of the stronger-than-anticipated performance in net new client additions has come from the cross-selling of a more modular Ignite platform to existing non-platform clients, which has a lower average starting price we anticipate the average ARR plus non-recurring revenue for 2024 net new platform subscription clients will be between $400,000 and $1 million which is directionally similar to 2023. We are encouraged by our improved cross-selling capability. And over the past year, we have observed that we have more than twice the conversion rate in winning deals with existing clients, whether they are platform or non-platform clients than our conversion rate with new clients or we do not have any existing relationship. We anticipate this cross-selling opportunity will be a key driver of our growth moving forward. As it relates to our existing clients, we are pleased with our first half performance and have observed some encouraging trends. Through the first half of 2024, we have experienced meaningful improvement in existing client downselling relative to 2023. Additionally, we've outperformed in our technology-related client expansion, highlighting the significant value that our technology solutions provide to our clients and overperformed in professional services non-recurring expansions. These non-recurring professional services tend to be higher margin than the initial few years of tech-enabled managed services or TEMS. And these non-recurring services fall outside our current definition of dollar-based retention. As a result, they do not contribute to our dollar-based retention rate for 2024 under the current defined metric. As a note, these nonrecurring services expansion opportunities in aggregate, would likely represent approximately 3 or 4 points of 2025 revenue growth contribution, which are unaccounted for in the current dollar-based retention metric based on the current trends of clients regularly purchasing non-recurring services for project-based work. For clarity, even with this increase in non-recurring revenue, we continue to benefit from a business model that still includes over 90% of our revenue that is recurring. Second, we are pleased that in the first half we continued to expand and deepen our relationships with clients through TEMS contract. But these were smaller expansions in some of the TEMS contracts that we signed in late 2022 and 2023 and more focused on specific areas like chart extraction or report writing. In the first half, we did not signed any TEMS contracts that were larger than a few million in recurring revenue. While we have a meaningful pipeline of TEMS opportunities, we also have a technology expansion pipeline, our non-recurring services pipeline and a new client pipeline that are larger than our original forecast at the beginning of 2024. We will continue to prioritize the technology and non-recurring services expansion opportunities with existing clients and new client opportunities within the pipeline, as these opportunities are more profitable than TEMS opportunities. As a result of the trend towards a higher proportion of our professional services expansion, coming through non-recurring projects and our prioritization of non-TEMS existing client and new client opportunities in the pipeline, we are updating the range of anticipated 2024 dollar-based retention for platform subscription clients to 100% to 106%. Due to some of these dynamics, we are considering updating the metric definition we use to describe existing client retention, consistent with our continued desire to provide shareholders with meaningful insight into our client retention. We anticipate being in a position to share this potential update during the February 2025 earnings call. The upticks could include non-recurring revenue in a client retention metric and may also incorporate all of the solutions that contribute to our client revenue, including acquired solutions rather than just focusing on our platform subscription clients as currently defined. In summary, these positive growth results as well as positive momentum from our recent technology-focused acquisitions, reaffirm our confidence in our expectation that double-digit revenue growth will return in 2025. Next, we are pleased to announce a meaningful new client partnership with SingHealth, the largest group of health care organizations in Singapore. Health Catalyst enterprise data platform will be implemented in SingHealth leveraging Health Catalyst pop analyzer, pop insights, analytic accelerators and professional services to support data-driven outcomes improvement, value-based care initiatives and population health management. We are excited to be working with SingHealth, a world-class health system that is recognized for its efforts to deliver high-quality accessible health care. We are also excited to communicate that Adena Health, a four-hospital system in Ohio has signed an agreement in the second quarter to implement the Ignite analytics platform later this year. Lastly, we are also excited to announce a meaningful expansion with a long-standing health catalyst client, South Dakota Health Link, a state designated Health Information Exchange serving communities throughout South Dakota and other states in the Midwest and Western U.S. Over the past decade, we have partnered with South Dakota Health Link to help achieve its mission to foster the sharing of information through a secure platform to improve the quality and efficiency of care provided to all citizens. As part of this partnership, the renewed extended agreement will include the migration of technology to Ninja Universe, helped Catalyst Ignite's interoperability platform. Ninja Universe is an end-to-end cloud-native platform with applications purpose-built for health information exchanges like Health Link. We are grateful for the opportunity to expand our partnership and look forward to continuing to help support South Dakota Health Link's mission, utilizing the power and interoperability of Ninja Universe. Given the importance of our next-generation Ignite platform and enabling a growth and product strategy, our Chief Operating Officer, Dan LeSueur, has joined this earnings call, and we expect he will join future earnings calls to help answer Ignite related questions. With that, let me turn some time over to Dan LeSueur.

Thank you, Dan. I'm grateful to join to help answer questions on the adoption of our Ignite platform with both existing and new clients. We continue to see strong demand among existing clients to migrate to Ignite and steady progress with implementing migrations that are underway. We're generally on schedule relative to forecasted time lines for migrations, and we have a dedicated team that is assisting with these migrations and anticipate we will continue to migrate our existing DOS clients to Ignite over the next couple of years. We also continue to welcome new clients directly onto the Ignite platform. With that update, let me turn it back to Dan.

Thank you for that update, Dan LeSueur. Before I turn over to Jason, I want to share a few comments related to our acquisition strategy. We have continued to maintain a pipeline, technology-focused tuck-in acquisition opportunities that enable us to act as a consolidation platform and support our clients in their improvement goals. Consistent with that strategy, we announced that we closed the acquisition of Carevive in Q2. Carevive is a leading oncology-focused health care technology company centered on understanding and improving the experience of patients with cancer. Oncology is one of the most strategic and important delivery programs within a health system and access to high-quality data is essential to success in the oncology space. We believe our acquisition of Carevive bolsters our capabilities and will help better position Health Catalyst in the oncology space. In addition, we are pleased to announce our acquisition of Lumeon, which closed a few days ago. Lumeon integrates data from disparate sources, create individualized and highly coordinated patient journeys. Closing the gap between clinical intent and clinical delivery, a gap that often causes wasted effort, missed follow-ups and confused patients. Existing solutions like EMRs are not sufficient to resolve this problem. And Lumeon is uniquely positioned to help. We are thrilled to welcome both Carevive and Lumeon's talented team members to help Catalyst, and we look forward to working together with them in support of our shared mission. Both tuck-in technology-focused acquisitions are immaterial to our financial statements in the near term. Our recent acquisitions provide us with additional avenues to deepen our client relationships and cross-sell additional solutions. We believe our clients will continue to focus on consolidating relationships that we will be among -- and that we will be among that small group of strategic long-term technology partners. Clients have shared that they appreciate it when we consolidate strong app layer technologies so they don't have to manage the complexity of small relationships with point solutions who are often thinly capitalized. This allows clients to deepen their relationship with us as their long-term strategic partner. When we acquire a smaller technology-focused point solution company, we benefit from also acquiring their existing client relationships, which can meaningfully expand the total number of organizations where Health Catalyst then has an existing client relationship. Also expanding our cross-sell opportunity. When we are a consolidation platform, we can sell into these existing relationships and have seen cross-selling conversion rates into existing clients that are more than twice as strong as selling into a new client where Health Catalyst doesn't have an existing relationship. With that, let me turn the call over to Jason. Jason?

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 second quarter performance. I will now comment on our strategic objective category of scale. For the second quarter of 2024, we generated $75.9 million in total revenue. This represents an outperformance relative to the midpoint of our guidance and it represents an increase of 4% year-over-year. Technology revenue for the second quarter of 2024 was $47.6 million, representing an increase of 1% year-over-year. Professional services revenue for Q2 2024 was $28.3 million, representing 9% growth relative to the same period last year. This quarterly revenue performance was slightly higher than anticipated in our quarterly guidance, primarily due to pull forward of onetime project-based revenue. For the second quarter of 2024, total adjusted gross margin was 50%, roughly flat year-over-year. In the Technology segment, our Q2 2024 adjusted technology gross margin was 67%, roughly flat relative to the same period last year and in line with previously shared expectations. In the Professional Services segment, our Q2 2024 adjusted professional services gross margin was 20%, representing an increase of approximately 330 basis points year-over-year and a decrease of roughly 190 basis points relative to the first quarter of 2024. This quarterly performance was generally in line with expectations we shared on our last earnings call. And is meaningfully higher than the adjusted professional services gross margin for 2023. In Q2 2024, adjusted total operating expenses were $30.3 million, as a percentage of revenue, adjusted total operating expenses were 40%, which compares favorably to 45% in Q2 2023. Adjusted EBITDA in Q2 2024 was $7.5 million, exceeding the midpoint of our guidance and representing an increase of $4 million relative to the same period last year. This Q2 2024 adjusted EBITDA result was mainly driven by the quarterly revenue outperformance mentioned previously, along with the timing of some non-headcount expenses that we anticipate will be pushed out to the second half of the year. Our adjusted net income per share in Q2 2024 was $0.12. The weighted average number of shares used in calculating adjusted basic net income per share in Q2 was approximately 59.3 million shares. Turning to the balance sheet. We are pleased with the strength of our financial position, which provides us with meaningful financial and strategic flexibility. We ended Q2 2024 with $308.1 million of cash, cash equivalents and short-term investments compared to $317.7 million at year-end 2023.In terms of liabilities, the face value of our outstanding convertible notes is a principal amount of $230 million due in April 2025. We are also excited to have announced we entered into a new credit facility for up to $225 million with Silver Point Finance. This new credit facility closed on July 16, 2024. Initially, Health Catalyst borrowed $125 million on the closing date and the credit facility also includes a delayed draw component. With this delayed draw facility, Health Catalyst has the option to draw up to $40 million at any time up to six months after the closing date and then up to an additional $60 million at any time up to 18 months after the closing date, each subject to certain terms and conditions. This financing is an important milestone for Health Catalyst and its shareholders. The credit facility will assist with refinancing our existing convertible notes, and will also provide flexibility and additional non-dilutive capital for us to continue to proactively pursue meaningful inorganic growth opportunities. This will support us in acting as a consolidation platform for our clients, integrating compelling technologies within our areas of focus which we believe positions us well to create client and shareholder value. We are pleased to have Silver Point as a long-term strategic financing partner as we continue our mission to be the catalyst for massive, measurable, data-informed health care improvement. As it relates to our financial guidance, for the third quarter of we expect total revenue between $74.5 million and $77.5 million and adjusted EBITDA between $6 million and $8 million. And for the full year 2024, we continue to expect total revenue between $304 million and $312 million and adjusted EBITDA between $24 million and $26 million. Now let me provide a few additional details related to our 2024 guidance. First, as it relates to our Q3 2024 expectations, we anticipate that our Technology segment revenue will be flat to slightly up quarter-over-quarter, driven by technology revenue ramping from contracts signed in the first half of 2024. For our Professional Services segment, we anticipate that our Q3 revenue will be flat to slightly down sequentially, mainly driven by the pull forward of some onetime project-based revenue that hit in Q2 we mentioned earlier. Next, in terms of our gross margin, we anticipate that our adjusted technology gross margin will be slightly down compared to Q2 2024, driven in part due to ongoing migrations to help Catalyst Ignite. In the Professional Services segment, we anticipate our Q3 2024 professional services adjusted gross margin will be relatively flat quarter-over-quarter. Lastly, we anticipate operating expenses to be roughly flat to slightly down relative to Q2 2024. Next, let me share a few additional details related to our full year 2024 guidance. We continue to anticipate that our year-over-year total revenue growth will be higher in the second half of 2024 compared to the first half of 2024. As we see a benefit from in-year 2024 bookings translating to revenue in the second half. We were pleased to see a portion of our first half bookings come from our health information exchange and international clients. However, these health information exchange and international contracts generally take longer to fully ramp into revenue, due to lengthier implementation times. This delayed revenue recognition is also often true of our nonrecurring professional services contracts. As mentioned, we experienced nonrecurring bookings overperformance in the first half relative to our expectations. But these bookings will not translate into revenue until late 2024 to early 2025. In terms of our adjusted gross margin, we continue to expect adjusted technology gross margin will be in the high 60s this year. While we are seeing near term headwind due to costs associated with migrating additional clients to Health Catalyst Ignite from our legacy DOS platform, we anticipate that over the longer term, the migration to Ignite will drive adjusted technology gross margin expansion. Likewise, we continue to expect our adjusted professional services gross margin will be in the high teens for 2024. This will be primarily driven by the mix of professional services as our TEMS relationships start out at a near 0% gross margin before ramping meaningfully over time. As it relates to our operating expenses, we expect to continue to see material operating leverage. R&D expense is expected to be lower in absolute dollars relative to 2023. Mainly driven by ramping down the larger upfront investment made in Health Catalyst Ignite. Additionally, we anticipate SG&A will decline as a percentage of revenue in 2024 relative to 2023. These expectations for full year 2024 include a meaningful bad debt reserve related to a client in bankruptcy proceedings. Despite this incremental bad debt reserve, we are encouraged to be in a position to reiterate the full year adjusted EBITDA guidance range that we initially shared on our February earnings call. Lastly, we continue to anticipate that our adjusted free cash flow will be approximately breakeven in 2024. With that, I conclude my prepared remarks. Dan?

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

[Operator Instructions]. Our first question is coming from Stephanie Davis with Barclays. Please go ahead, your line is open.

Hey guys, thank you so much for taking my questions. I'm curious how you're thinking about the extension hospital portfolio sales and relationship to your business. Given the client relationship, is this something that creates potential contract loss risk? Or since they're mostly an app customer, do these create conversations with potential new buyers or opportunities for new wins?

Yes, absolutely, Stephanie. We do benefit from the fact that our solutions are really directly tied to hard dollar payments and hard dollar ROI, that does increase our confidence level that those solutions will need to be maintained in order to access that ROI and access those meaningful payments. That does increase our confidence level in multiple scenarios as we watch things unfold. But that is a situation that we're monitoring closely. Anything you'd add, Jason?

Yes, similar to what Dan mentioned. We are in close contact with leadership as well as advisers in these scenarios. It is something that we're monitoring closely, and we would expect a continued relationship that is what we've seen in certain cases historically where there have been sales situations.

All right. And then, I guess, related to that, on kind of just hospital in that row, as it sounds like it's beginning to saw a little. Should we think of this as a push pull that makes some of your core product more attractive, but maybe decreasing labor headwinds could impact the demand for outsourcing solutions? Or what's the best way to think of kind of the puts and takes?

Yes. I think that's a reasonable way of thinking about things. We have been encouraged as some of the financial pressure subsides in our end market to see more of an interest and more of an appetite in our higher profit margin solutions, our technology solutions. There's much more of an appetite for those cross-sell conversations that is one of the reasons why we're ahead of schedule with regards to our technology expansions relative to our initial forecast. We're also seeing some ahead of schedule activity with existing clients as it relates to some of those non-recurring initiative projects. And that's also a higher margin than the first few years of those TEMS contracts. We continue to have a pipeline of TEMS contracts and we were pleased to see some meaningful expansions that occurred in the first half through TEMS relationships. But as we mentioned in our prepared remarks, they were a little bit more focused on areas where we have a significant track record and a little bit more focused in areas like charter traction like report writing or lower levels of data management and analytics. And as such, they weren't quite as large as some of the contracts that we signed in late 2022 and 2023. But we will continue to prioritize with existing clients in those TEMS opportunities where it's a great value to them. And we have a strong track record of being able to deliver that better, faster and cheaper. But we'll also prioritize those higher margin, higher profit opportunities, both in the existing client pipeline in terms of the tech opportunities, the tech cross-sell opportunities and the non-recurring higher-margin professional services opportunities, and we're definitely seeing really meaningful opportunities in the new client pipeline where that end market improvement is opening doors for us to have additional conversations and begin new client relationships. Those also skew towards more technology as a proportion of the total relationship. And therefore, they are also higher margin, and we'll keep prioritizing those opportunities.

Super helpful. Thank you.

We'll take our next question from Anne Samuel with JPMorgan. Please go ahead, your line is open.

Hi. Congrats on the quarter. Maybe just one on the bookings, just given the better-than-expected booking guidance, I was hoping maybe you could just discuss how that might flow through to margins in 2025. Maybe if there's a little bit of upside there from that? And then just kind of given the seasonality of such strong bookings in the first half of this year, is there any difference that we should think about in terms of the seasonality and how that revenue might come through next year?

Yes. Great question, Anne. Thank you. So first, the booking experience that we've had, as we mentioned in the prepared remarks, we're pleased to see overperformance in the parts of our portfolio that tend to be more profitable. And that does strengthen and renew our confidence in our EBITDA progression that we've shared previously, which would include being on track as it relates to seeing really meaningful EBITDA progression in 2025 relative to 2024. Obviously in 2024, at the midpoint of our guidance, we're expecting around 125% year-over-year EBITDA growth. And when you look forward to 2025, we're on track to deliver around approximately 50% growth year-over-year in terms of the adjusted EBITDA. So that's really encouraging to us. And that certainly is helped by and strengthened by the fact that the mix of our growth of our bookings tends towards a little bit the higher-margin element. So that's thought number one. And as it relates to your second question, I think, one of the elements that we observed, and we commented on this in the prepared remarks was that in the first half, we saw some overperformance on the new client side, and we were encouraged to see some overperformance on the existing client side. But there were some dynamics that were a little more pronounced than usual. So for example, on the existing client side, a number of the expansion opportunities were either non-recurring expansions or health information exchange or international expansions. And each of those types of expansions tends to take longer for the implementation to occur and therefore, for revenue to be recognized. We do expect to see some meaningful ramp from the second half versus -- because of some of those dynamics, we believe more of that ramp will happen in the Q4 time frame and then early into 2025 as well. That was true on the new client side as well. We had a little bit higher proportion of our new clients that were in that health information exchange and international category. And those new implementations take a little bit longer than what we experienced in other segments of our business. And as such, we expect more of that revenue recognition to really hit late in Q4 and into 2025. But all of that certainly informs to your last comment, our increased confidence and our renewed confidence in returning to that double-digit growth rate in 2025 from a revenue perspective.

Great. Thank so much.

We'll take our next question from Jared Haase with William Blair. Please go ahead, your line is open.

Good afternoon. And thanks for taking the questions. Dan I just wanted to double-click a little further. You mentioned kind of the improved upsells with existing clients. I guess just wanted to tease out how much of that is sort of the new product and some of the incremental capabilities that you're able to discuss with customers? How much of that is just improving macro? And then has anything else changed in terms of your go-to-market strategy or your sales force structure to better capitalize on those opportunities?

Yes. Great question, Jared. I think that's a good way of framing it. So let me comment on each of the contributors to that improved upsell and cross-sell. So one certainly is that the new Ignite platform is just more modular, it's more flexible. It offers us a range of starting points that are wider than what we had with DOS. And we are seeing that, that makes it easier for a non-platform client to really consider components of the Ignite platform, whether that's our healthcare AI componentry and module where they get instant value in all of their visualizations, for example, or other components of or other modules of Ignite, it just makes it not quite such a huge jump in terms of the size of the relationship in order to start benefiting from components of the platform. So that is certainly a meaningful contributor. And we saw that a meaningful proportion of those net new platform subscription clients came through that cross-sell motion. I think to your point, we also are observing end market improvement, helping us and as a tailwind to us, especially, I would say, in those prospective client discussions where you don't have an existing client relationship. And we have been pleased to see more traction there in the first half of this year relative to what we were experiencing last year and what we're experiencing in late 2022. So that's certainly an element that has contributed. I would also share just to your last point about has anything else changed with regards to the way we're managing our sales force or our go-to-market. We have deepened our emphasis on that cross-sell motion, and that has been an area of focus for us over the last few years. And as we mentioned in our prepared remarks, we are pleased to see and to have studied the data that indicates that when we're cross-selling within an existing client relationship, we see more than twice the conversion rate. In our pipeline relative to the conversion rate that we experienced when it's just a brand-new client relationship. And so the more that we can focus on that cross-sell opportunity, the more productive and the higher the conversion is, and we're starting to see some of the benefits of that. That will continue to be a real meaningful area of go-to-market focus for us. And it is one of the benefits that we see from being a consolidation platform as well where when we acquire a new tuck-in technology company, we're also acquiring those existing client relationships. And it's been interesting to note and to see that it doesn't matter the size of that existing relationship that more than double conversion rate holds true across the board. And so we're excited as we see more and more existing clients coming into the Health Catalyst fold, whether it's through our sales efforts or through our acquisition efforts, that just represents a larger and larger cross-sell opportunity, and we're getting better and better at cross-sell.

All right. That’s good to hear. Appreciated, thanks.

We'll take our next question from Elizabeth Anderson with Evercore ISI. Please go ahead, your line is open.

This is Sameer Patel on for Elizabeth Anderson. And maybe just sticking with the cross-sell opportunity I know a big point of leverage for you guys is the fact that one account manager could handle a pretty sizable customer or customer base. Do you think it could benefit Health Catalyst to maybe reinvest more, just given the opportunity, whether it be Ignite or the macro just benefiting you? Or do you think the existing structure is pretty sufficient?

Yes, that's a great question, Sameer. We are monitoring that. And I think as we think about the go-to-market and the cross-sell opportunity, we categorize it in just a couple of categories. So think of the platform cross-sell opportunity and wanting to make sure we have depth of domain expertise that can speak to the benefits of Ignite to existing clients that don't have any components of Ignite in their client relationship. That's certainly one part where we want to make sure that we've got good coverage there. And our senior account managers or account executives can facilitate those discussions. Likewise, at the apps software, we want to make sure that we have a really effective sales force that can sell multiple apps into these cross-sell client opportunities. That's been an area where we have consistently monitored, and we are investing more in ensuring that as we add app capabilities like the recent acquisitions that we have announced that we have sufficient cross-sell sales force capability to really take advantage of that and convert those cross-sells into meaningful opportunities across that combined client base. So that will be an area of focus for us because of that higher conversion rate, it's also a very efficient sales motion. And so even as we make investments, we anticipate that our sales productivity metrics will stay really robust because of that higher conversion rate that we benefit from.

Super helpful. Thanks guys.

We’ll take our next question from Richard Close with Canaccord Genuity. Please go ahead, your line is open.

Yes. Thanks for the questions. Congratulations on the results. Just with respect to Ignite, I'm curious if you can talk a little bit about the conversion to Ignite with existing clients, how are time lines for implementation going. How do you think about the margin opportunity on Ignite versus the legacy platforms?

Yes. Great questions, Richard. And I'm glad you asked those. We've introduced Dan LeSueur, our Chief Operating Officer, who is the senior leader overseeing all of our Ignite activities, both the migration and conversion within our existing clients and the direct move to Ignite with new clients. So let me turn it to Daniel to share some thoughts in response to your questions.

Yes, great question. I think I'd share just a couple of observations. Those migrations are on track to be completed over roughly the next couple of years. We have a solid pipeline of interest from existing clients, looking forward to the increased modularity and flexibility of our next-generation platform. And we have made some investment. We have a dedicated team focused on those migrations. And they've been really effective at assessing the work that needs to be done to help those successes and migrations be successful and fill that pipeline of interest. So we're managing through several of those migrations right now that are going well and each migration thereafter will learn from the first and get increasingly margin. So we're excited about that. I'll also share that we're excited to be bringing on new clients directly to the Ignite platform. And so that's been a really positive and exciting milestones there as well.

Dan, can you talk a little bit about the margin?

Yes. I think Jason was going to comment on that. Go ahead, Jason.

Yes, Richard, just quickly on margin. Yes. No worries at all. Just quickly from a margin standpoint, we are excited about the margin profile related to Health Catalyst Ignite. It does run at a little higher margin profile than DOS. We'd expect it to run around 70% gross margins, where our application deals are running 80% plus DOS was running closer to 60%. So there is a bit of a margin pickup related to Health Catalyst Ignite once clients are migrated over to the new platform.

Thanks a lot. Thank you.

We'll take our next question from John Ransom with RJS. Please go ahead, your line is open.

Thinking about '25 and just kind of stepping away for a minute from the accounting complexity, you're targeting double-digit growth. Could you just give a high-level of what percent of that would come from new customers versus what percent would that would come from existing customers?

Yes. Thank you, John. So if you think of those two primary building blocks with existing clients and then with new clients, we shared in our prepared remarks, the updated dollar-based retention that we expect this year to be between 100% and 106% and we also noted that, that excludes an incremental 3 or 4 points of existing client growth that are going to be realized through those non-recurring professional services contracts that we're ahead of schedule in signing. So if you took those two components and added them together, that's a reasonable approximation of next year's revenue growth contribution from existing clients. And as we think about new clients, we would think in roughly a similar sizing of growth contribution. And then when you combine those two together with a little bit of momentum from our recent acquisitions and the cross-sell opportunity of the recent acquisitions, that gets us to that renewed confidence level of returning to double-digit percentage growth in 2025.

And just a quick one for Daniel. What is the elevator pitch for Ignite versus DOS?

Ignite? Yes, you bet. Ignite is a much more modular, flexible technology built on industry standard expert technologies and it allows for a lower cost footprint of technology to enable the same use cases of improvement within their ecosystem.

All right. Thanks so much.

We'll take our next question from Jessica Tassan with Piper Sandler. Please go ahead, your line is open.

Hi, guys. Thank you very much for taking the questions. I was just curious to know how you're thinking about the potential for existing customers to kind of migrate downstream or just down the ASP stack and whether or not that would degree the 100% to 106% dollar-based retention rate that you guys have put out there.

Yes. Thank you for the question, Jess. So we did experience some meaningful downsell in 2023 and in late 2022. But we've been grateful to see improvement in that regard from a downsell perspective. And we're seeing that as a tailwind as we're moving into the latter part of 2024 and into 2025. We do have a dynamic of the migration to the Ignite platform that it is a lower cost infrastructure and a higher gross margin infrastructure. And so that is part of our discussions with existing clients as we talk about migration. We talk about sort of a menu of options of how we want to think about that relationship moving forward. And we do give some optionality to those clients that in any cases, they want more functionality, more scalability, more storage capacity for the same price. And we can offer that with Ignite because of the improved cost structure in a few cases, they may want the same scalability, the same functionality for a slightly lower price, and we can accommodate that as well. We've had more extent and more of our clients that have requested the former category. And so that's been encouraging to us. But there is some downsell potential because of the efficiency and the productivity gains that are embedded within Ignite. But so far, we've been able to manage that pretty effectively.

Got it. That's helpful. And then I wanted to ask, I think that you have a fairly sizable 10% or so customer that is up for renewal or that had been subject to a 10-year deal up for renewal, I think, in '25. Just does your kind of preliminary look contemplate or have visibility into the renewal of that contract? Or just any thoughts there would be helpful. And that's it for me. Thank you guys.

Thank you, Jess. So we have a few clients that have been long-standing clients that have meaningful sizable relationships with Health Catalyst. So I'm not sure specifically exactly which client you may be referring to. But with multiple of those clients that are among our largest clients, we benefited from signing incremental updated contracts, inclusive of one client that I can think of where we started with a really meaningful 10-year relationship deal but then five years, six years into that relationship, we expanded and updated that relationship and then that expands well beyond that 10 years. So I think with our largest clients, we're continuing to feel a level of confidence in the continuance of that relationship. We're really grateful for those relationships. And especially with those clients where we have a larger relationship, there is often a TEMS component to that relationship. And those tend to be really sticky and have also been really loyal client relationships where we've experienced very little in the way of downsell. So I think we feel good about our visibility there, and we'll continue to monitor and manage those relationships moving forward.

We'll take our next question from Daniel Grosslight with Citi. Please go ahead, your line is open.

Hey, this is Louise on for Daniel. I just wanted to ask, are you thinking about your life sciences strategy given you acquired Carevive, should we expect more additional investment in this space?

Yes. Thanks, Louise. We did mention as part of the Carevive acquisition that a portion of their client base is in the life sciences space. We're excited about that. We're interested in that. And certainly within the oncology world, clinical trial recruitment clinical trial activity is really important and drug development is really important. So those are mission-aligned activities. And we are interested in and we're excited about those possibilities. I think relative to what we've done a few years back, the way that we're thinking about this is very targeted, very specific to just a few use cases where Carevive has had success. And so we're going to be very opportunistic and focused in the way that we think about accelerating those couple of use cases, but be very cognizant of making sure that we see traction before making a lot of incremental investment. But we are encouraged to return to that mark space, and that will be something that we'll continue to monitor over time.

Got it. Thank you.

Take our next question from David Larsen with BTIG. Please go ahead, your line is open.

This is Jenny Shen on for David Larsen. I just wanted to ask another question about Ignite. Can you go into more detail about underlying technology and specifically what capabilities it gives users that they wouldn't have otherwise? And also, are you worried at all about potential churn during the migration process?

Yes. Thank you for the questions. I'll share a few thoughts, and then Dan LeSueur, please feel free to share as well. So I think one of the benefits that Dan alluded to in the elevator pitch answer was the fact that with Ignite you get the best of both worlds. You get the benefit of tapping into great cross-industry scalable technology from companies like Microsoft and Snowflake and Databricks. So we stitch that together in a really meaningful way. So you're accessing that great, scalable, very robust technology. But then you also get the benefit of that healthcare specific investment that healthcare specific content that stitches data into data relationships, where you can use the data in logical ways for specific clinical, financial and operational use cases. You'll never get that from the across industry vendors and if you don't get it from a healthcare specific company like Health Catalysts, you really have to do it yourself. And we have developed a commercial-grade infrastructure that is far better, faster and cheaper than what any of our clients, even our largest clients could replicate. And that's the combination that is really, really compelling that they wouldn't have otherwise if they didn't partner with Health Catalyst. Anything you'd add, Dan?

I'd just say one of the benefits of having those best-in-breed and latest cross-industry technologies is that you tap into a workforce, an emerging workforce that comes ready prepared with those capabilities. So tapping into a broader capability set from a workforce or a labor perspective is really helpful for our clients. And then when we talk about flexibility and modularity, really what we're saying is that it can be tailor-made for the specific use cases that are interesting to the client. So rather than having a very large footprint in DOS that accommodated all use cases, you can be very targeted in deploying just the comments that are relevant to the interesting use case. And then lastly, I would say that Ignite has an elastic compute capability. So you're just paying for the compute capacity that you need for your use cases rather than fronting all that cost upfront.

And then potential risk of churn?

Yes. We've been encouraged to see that our existing clients have been -- have really warmly received this updated Ignite infrastructure and technology solutions. And we currently have a situation where demand for the migration a little bit exceeds our supply. And so we've had some useful mechanisms to match supply and demand, but have been really pleased and encouraged to see that existing clients are excited to stay with us and really making the technology strategy decision that will likely last many years to come that this is an important part of their technology architecture and their technology strategy moving forward.

That sounds great. Thank you.

We'll take our next question from Jack Wallace with Guggenheim Securities. Please go ahead, your line is open.

I wanted to touch back on the pipeline strength you called out in the prepared remarks. How much of this would you attribute to, say, incremental demand for the Ignite platform and thinking about the kind of more digestible ARR size of those deals as being maybe TEMS spending juxtapose that versus a general recovery in the end market. And then as you, as a follow-up to that, just thinking about the NDR you guided. And if there was a -- just given your ability to onboard and type of business you're considering bringing in a preference for and making, maybe a trade for near-term profitability versus longer-term sustainability via recurring products?

Yes. Great questions, Jack. So on the first element, in terms of what we're seeing with pipeline strength. I do believe both components that you highlighted are at play here where because of Ignite modularity, we're able to go down market and provide viable financially viable solutions to a smaller healthcare organization than what we could do with DOS. So we do see some TEMS expansion that we're encouraged by. We also see that positive impact of the general recovery in the end markets. So I think both of those dynamics are in place. And then as it relates to the way that we expand with clients, we are seeing a trend, a pattern that we believe will be longer term, where clients appreciate on the professional services side, the opportunity to either enter into a long-term TEMS type relationship where the cost and the price point is lower, but we get a longer-term commitment from the client. And that is deeply recurring, and it's got great visibility, but it starts at a really low margin for us or going to more of the non-recurring project-based professional services contract that gives clients a lot more flexibility and a lot more control over the right timing of different initiatives and projects relative to their budget cycles and their priorities and they seem to really appreciate that. What's interesting that we've observed over the past year or so as we've seen an uptick in those non-recurring professional services initiative-based contracts is that our clients choose to repeat these. And there will never be an end to the number of improvement projects that we could pursue and the need to improve. And so we do anticipate that this will be an ongoing part of our client relationships, it's just that the way that we contract for those is shifting a little bit. And that's where I think we want to be mindful and thoughtful as we're observing that shift to make sure that we're providing investors with the most useful visibility of how those client expansions and relationships are occurring. And in the current definition, those non-recurring professional services contracts fall outside the definition of a dollar-based retention, so you don't get that visibility. That's one of the reasons we shared that additional 3 to 4 points of next year growth that we see coming from those nonrecurring professional services expansions. And we are trying to think about an updated potential metric that we might share going into next year. That does incorporate all of what's going on with existing clients. We're still studying that. But that does feel like a pattern that we want to be able to reflect in the metrics that we give to you so you can model our growth in our business in the most accurate way possible.

Thank you. Appreciated.

We'll take our next question from Stan Berenshteyn with Wells Fargo. Please go ahead, your line is open.

Maybe just sticking with the go-to-market theme here. Has the modularity of the Ignite platform sped up the sales cycle at all? Or has it simply allowed you to increase the shots on goal?

Yes. Great question, Stan. I think there is a little bit of both, but we're still early in gathering data. So whenever we have seen a lowering of the initial price point, we typically see a correlation between price point and sales cycle. The larger the price point, the longer the sales cycle and conversely, the lower the price point, the shorter the sales cycle could be and the fewer the approval levels that are required. We have observed that initially in a couple of cases, but we're still early on. And so we'll keep monitoring and gathering down that moving forward.

Maybe just very quickly, any impact from CrowdStrike on either you or your clients?

Yes. Thanks for the question, Stan. We were fortunate that we were not meaningfully impacted and we did not see a client impact from the CrowdStrike situation. So we were grateful to be able to mitigate what specific issues came out within a very quick time horizon. And so we've been able to move forward beyond that without a significant issue.

We'll take our next question from Jeff Garro with Stephens. Please go ahead, your line is open.

Good afternoon. And thanks for taking the question. I want to ask about capital deployment. You've been clear on the strategy there and now on capacity as well with the new financing. So I want to ask how we should think about potential pacing for deploying capital going forward. And maybe also any lessons learned along the way on the integration and growth plans for acquired capabilities? Thanks.

Yes. Great questions, Jeff. So we do feel like an important part of our value proposition to clients is to be a consolidation platform. They have chosen us in many, many cases, as one of two or three really important long-term strategic technology partners, and they really appreciate it when we integrate really strong app layer capabilities within our overall solution set. So that is something that we want to be mindful of, and we want to be open to. We want to make sure we had a capital strategy that would support that. I do believe that will meaningfully skew towards smaller tuck-in technology capabilities at the apps layer that fit within our areas of focus, as Jason mentioned in his prepared remarks. And that we will continue to be disciplined in the way that we think about price point and valuation and ensure that we do have an opportunity to realize a great ROI. I think that strategy is also informed by some of that cross-selling data that we shared, where we have observed a very high conversion rate when we have an existing client relationship in cross-selling other parts of our solution set within those existing client relationships, more than double the conversion rate. And so from a sales efficiency and productivity perspective, that does offer us a really meaningful opportunity to expand the number of organizations that have an existing client relationship with Health Catalyst to give us more opportunities to cross-sell with more applications that are still within our areas of focus. And I think those lessons from the past have informed us that this is an important part of the value proposition that we can provide to clients as we've acquired companies in the past, we've seen that our clients have really appreciated the ability to consume those new solutions and capabilities within the context of a broader Health Catalyst relationship. And we think that's something that we can provide clients for years to come, and we're grateful to have a capital strategy that will enable that.

Great. Thanks for taking the question.

And there are no further questions on the line at this time. I'll turn the floor back over to Dan Burton for any additional or closing remarks.

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