Ladies and gentlemen, thank you for standing by and welcome to the Health Catalyst Incorporated Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker today, Adam Brown, please go ahead sir.

Good afternoon and welcome to Health Catalyst’s earnings conference call for the third quarter of 2019, which ended on September 30, 2019. My name is Adam Brown.

I am the Senior Vice President of Investor Relations for Health Catalyst and with me on the call is Dan Burton, Health Catalyst’s Chief Executive Officer and Patrick Nelli, Health Catalyst’s 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 the 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 and 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 days. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may differ materially.

Please refer to the risk factors in our most recent Form 10-Q for Q2 filed with the SEC on August 23, 2019 and our form 10-Q for Q3 that will be filed with the SEC. We will also refer to certain non-GAAP financial measures to provide additional information to investors.

A reconciliation of these non-GAAP to GAAP measures is provided in our press release. During the call, we may offer incremental metrics to provide greater insights into the dynamics of our business. These details maybe one-time in nature and we may or may not provide updates in the future.

With that, let me turn the call over to Dan for his prepared remarks and then Patrick will provide prepared remarks, as well as provide the outlook for Q4 and the full year 2019. Dan and Patrick 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 third quarter 2019 financial performance along with the other highlights from the quarter. First one our third quarter financial results; I’m pleased with our performance across the board.

To start, I’m happy to report that our total revenue for Q3, 2019 was $39.4 million. This represents an outperformance relative to the midpoint of our guidance.

Total adjusted gross margin in the third quarter was 54% which compares favorably to 50% in the third quarter last year and our Q3, 2019 adjusted EBITDA was a loss of $8.4 million which represents an outperformance relative to the midpoint of our guidance and shows meaningful improvement from loss of $11.3 million at the same period in the prior year.

Now let me transition to some of the highlights from the quarter. You’ll recall from our last earning’s call that we measure our company’s performance in three primary strategic objective categories; of improvement, growth and scale. And we’ll discuss our third quarter results with you in each of these categories.

The first category improvement is focused on evaluating our ability to enable massive, measurable improvements for our customers while sustaining industry leading satisfaction and engagement. I’m pleased to report that the number of documented improvements achieved with our customers continues to accelerate through the first three quarters of 2019.

We have more than doubled the total number of documents improvements achieved in all of 2018. In our view this strong performance and customer verified improvements is evident to the Health Catalyst flywheel accelerating throughout our customer base.

I would now like to highlight three examples of documented improvements from recently published case studies.

First, Hawaii Pacific Health leveraged our solution to more accurately forecast its workforce meetings and more effectively manage staff schedules which led to the realization of $2.2 million in savings in 16 months while continuing to maintain high quality critical outcomes.

Next, Orlando Regional Medical Center utilized our solution to address its need for patients to be seen more quickly and into emergency department.

Orlando has reduced the time of patient arrival until first provider contact by 46% resulting in $1.2 million in additional revenue and reduced its overall emergency department length of stay by 22% and third, Christiana Care Health System leveraged our solution to determine that just 16 data features, 7% of the original data set had the equivalent predictive value to its previous 236 features which reduced the complexity of its 90-day admission predict model.

The care mangers at Christiana Care bolstered by a higher level of understanding and trust in the simplified algorithm use the output of that machine learning tool to engage with an average of over 850 distinct members each week. We’d encourage you to please visit our website to view hundreds of documented customer case studies.

Our next performance measurement category is growth, which we defined as adding new customers while also deepening existing customer relationships. Within this category, I’d like to share some highlights from our sixth annual healthcare analytics summit that took place in September in Salt Lake, City.

We view this annual conference as a meaningful opportunity for Health Catalyst to continue to provide thought leadership within the healthcare data and analytics industry while carefully listening to our customers and to the broader industry.

This year’s conference hosted over 1,600 healthcare professionals and achieved an overall satisfaction rating of greater than 99%. The theme for this year’s conference was powering digital transformation within healthcare.

We heard from numerous key note and break out session presenters who are on the leading edge of digital transformation within healthcare including the latest advances in machine learning, artificial intelligence, natural language processing and wearable’s data to analyze and improve care.

We also had the opportunity to reflect on talks from technology innovators and leaders in other industries speaking how data and analytics transformed their respective industries while the conference was focused on highlighting and sharing the power of digital transformation within healthcare organizations, it was also an important reminder that healthcare’s embrace of technology is slower than most industries and that most healthcare organization still need a trusted and experienced partner that can facilitate the use of data and analytics to help them achieve meaningful clinical, financial and operational improvements.

Based on the survey of conference attendees two-thirds characterized their organizations adoption of it analytics as either in the beginning stage whether organization is recognizing the importance of analytics.

But in the early stages of determining what to do and how to do or in the middle stage where the organization has started using data and analytics and are beginning to see results in a few select areas. As it is every year, the Healthcare and Analytics Summit was an important opportunity for us to speak with our customers.

As part of the summit, we held our annual customer user group along with our products and services showcase.

These events which were the most well attended in the history of the summit were a chance for our customers to better understand the breadth of opportunities and their work with Health Catalyst as well as for us to carefully listen to our customers’ feedback.

Hundreds of individuals from our customers attended and we heard a few consistent themes some of which, I will share. First, we received feedback that our solution is highly differentiated within the market and that our customers continue to have a strong commitment to the partnership with us.

Next, we heard that healthcare organization continue to value us as a partner who can drive results at the lower levels of the analytics adoption stack especially an enabling greater the efficiency consistent with my commentary that most healthcare organization are in the early innings of digital transformation, another survey of conference attendees revealed the majority of attendee organizations struggle most with administrative and operational efficiency and with data infrastructure transformation.

This feedback reinforces the breadth of our solution which is focused on driving customers up the analytics adoption stack overtime as they mature with us.

Lastly, we heard consistent feedback that our services offering should continue to be prescriptive as healthcare organizations are eager to work with a partner who can guide them to the adoption of best practices within the industry.

This year’s summit also hosted hundreds of attendees from healthcare organizations who are not currently Health Catalyst customers.

We held dozens of meetings with later stage sales prospect which presented an important opportunity for these prospects to further understand our offering and to facilitate progress towards Health Catalyst as their partner likewise, the conference is an important component of our early stage sales cycle generating meaningful interest from our marketing prospects and helping move them along in our sales funnel.

Moving onto to more details on our selling efforts, our third quarter performance was in line with management’s modeled expectations used during the IPO road show process. We continue to add new customers within our core market and expand within our existing client base.

We feel comfortable that our sales to-date and our current sales pipeline supports the full year 2019 guidance that Patrick will share later in this call.

Lastly, I’d like to share that we have appointed two new members of our Board of Directors effective January 1, 2020 Julie Larson-Green and Dawn Smith will join our board resulting in an increase in the number of Board of Directors from nine to 11.

We are honored to add these experienced leaders to our board and we anticipate that they will contribute meaningful to the growth and maturation of our company. By way of background, Julie Larson-Green currently serves as the Chief Experience Officer of Qualtrics.

Prior to her time at Qualtrics, Julie spent 25 years at Microsoft serving in a variety of executive leadership and product development roles including building Microsoft Office, Windows, Internet Explorer, Xbox and Surface.

Julie brings more than two decades of successfully applying artificial intelligence, collaboration and digital assistance capabilities at an incredible scale.

Her world class expertise in building and in scaling technology solutions will be deeply relevant as Health Catalyst works to continue to scale its technology offerings in the months and years ahead. Dawn Smith currently serves as the President and Chief Operating Officer of Cologix Incorporated.

Prior to her time at Cologix, Dawn served as Senior Vice President, Chief Legal Officer and Chief Compliance Officer at VMware where she led a team of more than 150 team members and was responsible for global, legal, compliance and government relations. She also previously served as Executive Vice President and Chief Legal Officer at McAfee.

Dawn’s regulatory compliance and financial experience in public company settings coupled with her operational leadership expertise and capability will directly contribute to our company’s growth and scale and will strengthen the effectiveness of our board. I’m extremely pleased to welcome both Julie and Dawn to our board.

Now I’ll turn the call over to Patrick, who will review our performance in the category of scale including providing a detailed view of our third quarter financial results and our guidance for Q4 and the full year 2019.

Patrick?.

Thank you, Dan. As Dan mentioned I’ll be discussing our company’s performance in a strategic objective category of scale. This category focuses on enabling greater contribution to our mission by sustainably scaling our organization.

Before diving into our third quarter financial results I want to echo Dan’s sentiment and say that I’m pleased with our third quarter results and the momentum we’re seeing across our business. For the third quarter 2019, we generated $39.4 million in total revenue.

As Dan mentioned this represents an outperformance relative to the midpoint of our guidance and it represents an increase of 20% year-over-year. Technology revenue was $21.2 million an increase of 16% compared to the same period last year and professional services revenue was $18.3 million an increase of 25% year-over-year.

Total organic growth was driven primarily by recurring revenue from new customer additions from existing customers paying higher technology access fees from contractual built in escalators and from existing customers expanding their services relationships with us.

As a reminder, our Medicity acquisition lapsed in Q2, 2019 so we will no longer breakout that revenue stream separately. In line with what we’ve communicated previously however, I’d share that the Medicity business was a headwind on our technology revenue growth rate in the third quarter.

additionally, as a reminder of what we shared in our last earning’s release our Q3, 2019 technology revenue growth rate faced a second headwind due to one-time legacy license revenue that was recognized in the third quarter of 2018 and did not recur in the third quarter of 2019.

Normalizing for the impact of this legacy license revenue which was $1.1 million in Q3, 2018 our year-over-year technology revenue growth rate would have been 23%. For Q3, 2019 we achieved total adjusted gross margin of 54% an improvement of approximately 400 basis points year-over-year.

On the technology side, our adjusted gross margin was 68%, an increase of approximately 190 basis points year-over-year.

This year-over-year increase was mainly driven by existing customers paying higher technology access fees from contractual built-in escalators without the corresponding increase in hosting cost partially offset by headwinds due to the continued cost associated with transitioning a portion of our customer base to third party cloud hosted data centers in Microsoft Azure.

And on the professional services side, our adjusted gross margin was 37% which represents an increase of approximately 800 basis points year-over-year. As a reminder, our professional services are comprised of data and analytics services, domain expertise services, outsourcing services and implementation services.

While the majority of our services follow under the first two higher margin buckets data and analytics services and domain expertise services.

The delivery mix between these services in a given quarter can lead to a few percentage point fluctuation in our quarterly adjusted professional services gross margin compared to what we communicated as our long-term services adjusted gross margin expectation in the mid 30s.

And in the third quarter our services mix led our professional services adjusted gross margin to be a couple of percentage points higher. As we look longer term, we continue to expect technology and professional services adjusted gross margins to be consistent with what we shared during our Q2, 2019 earnings call.

In Q3, 2019 adjusted operating expenses totaled $29.6 million as a percentage of revenue adjusted total operating expenses were 75% which compares favorably to 84% in Q3, 2018.

As a reminder, our healthcare analytics summit that we held in the third quarter is a meaningful quarterly expense causing our quarter-over-quarter operating expenses to increase.

Additionally, there was a roughly $200,000 worth of one-time operating expense spend that we had anticipated that would be expense in Q3, 2019 but will end up being incurred in Q4, 2019. Adjusted EBITDA in Q3, 2019 was a loss of $8.4 million which compares favorably to an adjusted EBITDA loss of $11.3 million in third quarter of 2018.

As Dan mentioned earlier, we’re pleased to report that we outperformed the midpoint of our guidance.

Adjusted EBITDA performance was driven by the higher gross margins mentioned previously, more efficiently deployment of our operational expenses and the shift of roughly $200,000 worth of operating expense spend from Q3 to Q4 that I mentioned previously. Lastly, our pro forma adjusted net loss per share was $0.27.

I’d like to take a moment to discuss the components of our calculation of this metric.

Our pro forma adjusted net loss per share starts with our GAAP net loss attributable to common stock holders and adds back as applicable any stock based compensation, amortization of acquired intangibles, loss on extinguishment of debt, post-acquisition restructuring cost and accretion of redeemable, convertible, preferred stock.

Our adjusted net loss for Q3, 2019 was $9.8 million and the pro forma as adjusted weighted average number of shares used in calculating adjusted net loss per share in Q3 was 36.4 million shares.

On a related note, I’d also mention that in order to calculate our share count under the treasury stock method we have 7.9 million [ph] options outstanding at a weighted average strike price of $10.64 as well as 250,000 restricted stock units outstanding.

Turning to the balance sheet, we ended the third quarter with $241.4 million of cash and short-term investments compared to $33.2 million at year end 2018. As of September 30, 2019 we had $47.9 million in total debt an increase of $27.8 million over the end of 2018.

The increase in our cash balance and debt are the result of the financing event in Q1, 2019 and our IPO that took place in Q3, 2019. Before I move onto guidance, I will share a few additional thoughts related to adjusted EBITDA and our balance sheet strength [ph].

First, I’d mention that consistent with what we’ve previously stated we anticipate that we’ll begin 2022 on an adjusted EBITDA run rate breakeven basis. Next given the size of our current cash position of over $240 million, we anticipate we have significantly more than enough coverage to reach cash flow break even.

I’ll conclude my commentary with our guidance for the fourth quarter and full year 2019. For the fourth quarter 2019, our guidance for total revenue is between $40 million and $43 million. For the full year 2019, our updated guidance for total revenue is between $151.4 million and $154.4 million.

At the respected midpoints, this represents an increase of $2.1 million compared to the full year revenue guidance we shared last quarter.

For the fourth quarter 2019, our guidance for adjusted EBITDA loss is between $9.2 million and $7.2 million and for the full year 2019 our updated guidance for adjusted EBITDA loss is between $30.1 million and $28.1 million.

At their respective midpoints, this represents an improvement of $1.6 million compared to the full year guidance we provided last year.

A couple of comments on this guidance; first, I’d reiterate a comment from our last earning’s call that our revenue in the fourth quarter of 2018 included certain performance based revenue arrangement where performance was measured and achieved in that quarter.

Moving forward, we expect performance based revenue arrangements to become a much smaller portion of our overall revenue base and thus, they pose in approximately $2.5 million headwind to our Q4, 2019 year-over-year revenue growth rate.

Next, I’d reiterate Dan’s sentiment that we feel comfortable that our sales to-date and current sales pipelines supports this full year 2019 guidance. I’ll finish by saying that our third quarter represents a promising continuation to 2019 and we look forward to a strong finish in 2019. That concludes my review of our financial results.

I’d like to turn the call back to Dan for his closing remarks.

Dan?.

Thanks Patrick. In summary, we’re pleased with the performance of the company. We could not have made this progress without all the hard work, commitment and dedication of our Health Catalyst team members who work each day to enable our customers to realize improvements.

We’re looking forward to keeping you updated on our progress and with that, let’s open it up for questions..

[Operator Instructions] our first question comes from Anne Samuel with JP Morgan. Your line is now open..

Without providing guidance, just hoping maybe you could help walk us through how to think about headwinds and tailwinds looking into 2020? Thanks..

Absolutely, thanks. Annie. So this is Dan and I’ll share a few thoughts and then Patrick, please feel free to add additional comments.

So as it relates to tailwind, we continue to be excited about some of the investments that we’re making both from a core business perspective as well as in some of the new markets that we’ve invested in, as it relates to our core markets.

We’re pleased with our performance as it relates to the addition of new clients as well as the expansion of our existing clients and as mentioned just a few minutes ago.

We feel comfortable with the robustness of the pipeline moving into the fourth quarter of 2019 and beyond, that pipeline supports the long-term guidance that we’ve provided from a growth perspective previously.

Likewise from a tailwinds perspective, we were pleased to see some additional progress though the deals were small in some of our new markets like Life Sciences where we signed an additional deal this time with an expansion within a current customer relationships and likewise in international we were excited to see another contract signed albeit a small contract in Asia Pacific and we will continue to invest in that regard.

As it relates to headwinds moving into 2020, as we’ve discussed previously the acquisition of Medicity represents a revenue headwind generally speaking as that core business is a flat to slightly declining business though we are excited and anticipating one of the benefits of that acquisition as we’ve mentioned previously being the opportunity to cross sell to that core Medicity installed base and given the one-year sales cycle, we anticipate much of that cross sell opportunity manifesting in 2020 and beyond, but that core business is certainly a continued headwind though that component will continue to diminish as a percentage of the total revenue of the company as the company continues to grow.

Let me pause, Patrick if you have anything..

The only other numbers I would add as a tailwind since we’ve greater than 90% of our revenue under our recurring fashion and since we’ve greater than 100% dollar based retention and our current customers expand with us as they mature with us overtime, both of those factors give us a natural tailwind going into a year because the vast majority of our revenue for that year will be revenue under contract from current clients..

That’s very helpful. Thanks guys..

Thank you. Our next question comes from Robert Jones with Goldman Sachs. Your line is now open..

I guess maybe just a similar question, I know you guys in the past have talked about having fairly good visibility given the length of the sales cycle for at least the following six months just given the nature of the sales cycle.

It looks like based on the 4Q guidance the recent strength you guys have experienced clearly it looks like it’s expected to continue and I know Patrick will get more on the full year 2020 next quarter.

I’m wondering if maybe you could weigh in a little bit on how does the start of 2020 looks from where you sit today, just any sense you can give us on how the sales pipeline is progressing relative to previous expectations would be helpful..

Yes, I’ll share a few overall thoughts and then Patrick you can share any additional thoughts.

I would share and reiterate that we feel good about where we are, we feel comfortable that the pipeline as it stands today is in support of the projections including the updated forecast for Q4 and the full year 2019 that Patrick just shared which was an increase to what we had communicated previously.

I would also agree with you that we do benefit from significant visibility both because of the recurring nature of our existing relationships and our business model, a recurring revenue business model such that we enter any given year was typically greater than 90% visibility into the revenue for that year.

Likewise as you’ve said given the longer sales cycle on average that we experienced we do have a sense for how that pipeline will play out overtime and I would just reiterate, what we’ve said previously that we continue to feel comfortable with the long-term growth guidance that we have provided previously as it relates to our growth profile..

Well said, Dan..

Great. I guess just a follow-up question on that as it relates to the summit. I appreciate all the perspective and details you guys shared around this year’s summit. But obviously not having the historical perspective.

I’m curious how would you characterize the feedback from this year’s summit versus previous one’s it does sound like in the prepared remarks you mentioned that this has historically been a platform for generating sales leads and so, wondering how this one went relative to ones in the past and then I guess just related to that Dan, appreciating you sharing some of the survey results from the summit as you pointed out.

It sounds like many customers are in the early innings not surprisingly of embracing technology and analytics.

Curious on that front, how did those results compared to what you had expected to hear from the attendees?.

Yes, great question. Thank you for asking Bob. So I’ll offer a couple of thoughts. First, as I relate to how this summit compared to prior summit.

As I mentioned in the prepared remarks, we were pleased to see this as the most well attended summit, so we had both in the most overall attendees to the summit as well as the most overall attendees to our user group which happens prior to the broader summit.

So it was an opportunity for us to listen to and receive feedback from the widest audience that we’ve ever had in terms of the summit’s history. Now every year has followed that same pattern where the most current attendee group is the largest in history, so it does follow a pattern that we’ve seen over the years.

As it relates to the specific feedback, the survey feedback that you asked about, I would share and I alluded to this in the prepared remarks that one of the interesting patterns that I think we are trying to responsive and careful listeners to, is as it relates to that analytics adoption model or that analytics adoption stack that we talk a lot with our clients about how we can help them mature in their analytics capabilities overtime and one of the most significant piece of feedback that our clients including our most mature clients came back with, was the continued need for help at the lowest levels of that analytics maturity model at the foundational levels of aggregating data, at the foundational level of reporting the results to regulatory bodies for example they’re required to report.

Those lower levels of analytics activities continue to be very, very significant areas of needed improvement, of potential efficiency gains and our clients shared with us very direct feedback that they would like more of our help at those lower levels and it’s often tempting for us and even for our clients to jump up that maturity model and get excited about the latest most cutting edge artificial intelligence, algorithms and capabilities and a lot of what we are trying to have the discipline to do is to ensure that we’re doing everything that we should be doing to be a good long-term partner to these clients and helping them with the foundational elements lower in the maturity model that have to be in place, if you’re going to actually scale and leverage those more advanced capability.

So that would be, I think dramatically one of the most significant elements that came out of this year’s summit..

Very helpful, thanks so much..

Thank you. Our next question comes from Ryan Daniels with William Blair. Your line is now open..

I wanted to just kind of jump back to professional services gross margin. Patrick, I appreciate some of the details you provided there just on kind of the benefit you saw from the mix of services.

If I recall back in the second quarter, we had talked about you’re feeling like the team was maybe stretched a little bit in there and kind of a need for some hiring investments just curios if you have any updates on that front kind of where you stand and if you saw any benefit from kind of leaner team in that respect during the third quarter?.

Yes, great question Jared. Thank you.

So as it relates to the desire that we shared last quarter to catch up and ensure that our team members in professional services have a sustainable pace, we’re pleased with the progress that we’ve made in actually catching up and we feel good about where we are today, we’ve benefited from the fact that Health Catalyst continues to be recognized as a best place to work, we saw the pattern continue of – for every position we posted we averaged more than 50 applicants and for every offer that we extended, we averaged greater than 90% acceptance rate, we continue to also see very low voluntary turnover rates at Health Catalyst which really helps us to deliver against our mission and against the objective of measurable improvement with clients.

I would also share as it relates to the gross margin performance of the professional services organization.

Mix is a very important component as Patrick mentioned in his prepared remarks and mix can cause a meaningful difference of a few percentage points in gross margin up or down from what we’ve shared to meet that long-term guidance in the mid-30s.

as an example, earlier this year in Q1, we recorded a gross margin in the services space of 32% which was driven primarily by the mix of services being demand skewing more towards the outsourced and implementation type services and we view that as something that could repeat itself in the future and not be a negative for the business or for our client relationships but rather just be tied to the mix shifting overtime..

Got it, that’s very helpful color. And then maybe just one more as a quick follow-up. Maybe taking a step back and we talked in the past about sort of 70-30 split on the technology subscription customers 70% being kind of all access subscription versus roughly 30% more of a limited subscription.

I’m curious given where the pipeline’s at today, if you’ve seen any meaningful shift from that or do you sort of expect that to kind of remain consistent going forward. I guess maybe just wondering, if the value proposition of sort of that all access model continues to resonate with customers..

Yes, good question. We do see it continuing to resonate it with customers and we haven’t seen any meaningful shift from what we communicated previously..

Okay, great. Thank you..

Thank you. Our next question comes from Sean Wieland with Piper Jaffray. Your line is now open..

I wanted to ask about the launch of the Pop Health product that you announced in June that seemed to be aligned pretty well with what folks were saying at your summit. I think you called out 22% believe that their Pop Health strategies weren’t working. So I was wondering if you could highlight any anecdotes there..

Yes, great question Sean.

So we also felt that the launch of the Pop Health foundations solution that we talked about in our last earnings conference call aligned well with the feedback that we were receiving from clients generally as well as specific to Population Health where just as I mentioned a few minutes ago that general feedback that we need to not skip the foundational components of what’s required to be in place in order for us to get more advance is true [ph] generally, it’s also true [ph] from the feedback that our clients gave us with regards to Pop Health and that was a general appreciation recognition that foundation’s bundle helped to accomplish some of those foundational elements that are pre-requisites required to really make meaningful progress in terms of identifying the right patients to be included in care management program for example using data aggregated from multiple sources being able to understand those populations using a tool like Population Builder and being able to quickly analyze the performance of different Pop Health programs at a foundational level using Rapid Response Analytics for example.

So those were validated I think in large part, again thematically consistent with our clients needing foundational health before we skip ahead to more advanced cases and examples..

The only other item I would add, is that we also heard in the summit that our customers are still in the early stages of taking risk and moving to fee-for-value. But a lot of them want to put in place the right analytics infrastructure to ensure they’re successful as they continue to move towards fee-for-value..

Great, thanks and Patrick, just one other for you.

The $1.1 million of legacy license revenue from Q3, 2018 that did not recur could you call out this quarter or perhaps this year, the amount of legacy license revenue say this year that won’t recur in 2020?.

Yes of course and we can follow up with more specific [indiscernible], but it’s been a relatively small amount this year-to-date to give everyone some color on this.

We move from a perpetual license to a subscription model starting in approximately 2015 and in 2018 greater than 90% of our revenue was recurring in nature, so we were for all intents and purposes kind of through the vast majority of that transition.

But there still was a small amount of one-time license revenue which as I mentioned before there was about $1.1 million that occurred in Q3, 2018. This year-to-date we’ve had a very small amount, but we can follow-up with an exact number..

Okay and then what was the $2.5 million that you called out in Q4 headwind?.

Yes, of course.

So previously we had more performance based arrangements primarily on the services side with a handful of customers and essentially we would set certain financial, clinical and operational metrics and if us, working with our customer if we fit those metrics, we would receive, you could think of it as a bonus payment overtime actually our customers gained a lot of trust with us and they wanted budget predictability, so we actually moved away from these more one time performance based bonus payments to a more predictable recurring subscription model and that’s actually what you can see in the numbers that we had approximately $2.5 million of one-time of these performance payments in Q4 of 2018 that we moved away from it now, that revenue has moved completely to a recurring model..

Got it, that’s helpful. Thank you..

Thank you. Our next question comes from Michael Newshel with Evercore. Your line is now open..

Can you just characterize the overall [indiscernible] environment for hospitals right now, with all the policy noises out there? Is any of that uncertainty headed into Election next year delaying strategic or buying decisions or you’re seeing any impacts on your sales efforts at all?.

Yes, good question. Thank you for asking Michael. So unlike some other companies that have a business model that’s much more directly tied to movement like the move from fee-for-service to fee-for-value.

Our business model is much more about helping our clients deal with data complexity and then leverage that complex data to analyze it and then optimize their decision making in any environment and so, we have not historically seen a significant movement based on the political environment, based on the speed with which the economic model is shifting because there’s data complexity in all of those scenarios and so we have not seen any specific impact in either direction as it relates to our pipeline..

Thanks and maybe if I could just follow-up with one more. I just want to clarify your comments on the revenue outlook for Medicity for 2020. So obviously the required revenue stream is still shrinkage [ph] as you pointed out.

But do you think you’ll make enough cross sells in the near term to get to positive net gross for that customer base in 2020 or is that an inflection further out..

Good question, so we do think about in two separate categories. So the first category is, we model and try to understand and forecast the core business and we continue to see the pattern that we have modeled before we acquire the business.

In fact, we’re just a little bit of ahead of our forecast in terms of that core business performance relative to the modeling that we did before acquiring the business. That’s the first category and we believe that same pattern will continue in 2020 and beyond of flat to slightly declining revenue in the core business.

Then we also modeled back before we acquired the business.

What we expected would be a realistic forecast for cross sell within that existing customer base and as we’ve mentioned previously, we knew when we looked at forecasting this business that we would need to take the first nine months or so to make sure that we were addressing the team members components operationally to make sure we have the right size of team member base and we had stabilized the core product as well, that customers don’t want to hear across all message that the core product is not being adequately supported.

So we knew, we needed to take time to do those two things first and given the typical one-year sales cycle, we really only and previously earlier this year began those discussions with clients as it relates to cross sell.

So we anticipated that most of the benefit of that cross sell would happen in 2020 and beyond and we feel comfortable that we’re on track with regards to what we had forecasted to be the impact of that cross sell on our overall growth trajectory long-term..

All right, thank you very much..

Thank you. Our next question comes from Daniel Grosslight with SVB Leerink. Your line is now open..

Just a quick one on your 2020 revenue outlook. As you look forward, I know each year most of your clients have an auto renewal for their contracts at least the DOS clients.

Are there any big contracts coming up for renewal near term and have you seen any deviation from historical client turn of your DOS clients?.

Yes, good question. Thank you, Daniel. As you mentioned essentially all of our client relationship are structured in such a way on both the tech and the services side that each year, they have the opportunity to choose whether to renew or not renew in their relationship or expand that relationship or contract the relationship.

And so consistently throughout the year, we had clients who are coming up on that renewal decision and this has been the case for a number of years we’ve been really pleased given that fact that as we’ve shared previously those clients who are in that 70% category that are all access tech subscription clients and we’ve never lost one of those clients across multiple renewal years cycles and we anticipate that same kind of performance that we’ve historically had in terms of the dollar base net retention of our client base at 107% in 2018 and 108% in 2017 to be a good way of thinking forward about the company’s performance with those clients in 2020 and beyond..

Got it, thanks and just a follow-up on tech gross margin. It outperformed our estimates pretty substantially. I was expecting some more degradation due to the transition to the cloud. But it seems like that was well offset by some pricing escalators.

Going forward, do you think – I guess is that due to cost being pushed out to Q4 and we should see it return to kind of mid-60s Q4 or is there some structural benefit that you’re getting from the business. Thanks..

Yes of course. When we think about our tech gross margin, our tech calls for revenue in particular there were two primary components. The first, are our cloud or hosting calls. The second, our personnel calls to support our technology revenue and our cloud environment.

We essentially worked very hard to drive efficiencies in both of those and you saw some of those efficiencies come through this past quarter.

As we look out over the next couple years, we do continue to expect for overall gross margin stay roughly flat, due to the fact that we still have a few remaining on-prem and private cloud data center, customers that we need to move to the Microsoft Azure environment.

As we look out more than a couple years, we continue to expect the long-term gross margins that we communicated on the Q2 earnings calls of overall gross margins in the high 50s.

So in summary we’re certainly working every day to continue to drive efficiencies on the technology gross margin line, but we do have the headwind of continuing to move few customers to the Microsoft Azure environment..

Got it, thank you..

Thank you. And our next question comes from Stan [indiscernible] with SunTrust. Your line is now open..

Actually on behalf of Sandy Draper. Just wanted to get your thoughts on the Google related news, where [indiscernible] data from an ascension health system.

To what extent do you see that as a competitive force to your own offering?.

Thank you for that question, Stan.

So we believe long-term that the cloud companies that operate and have built the cloud business at a significant scale will have an important long-term role to play and contribution to make to the healthcare overall ecosystem and its one of the reasons why a number of years ago, we decided to partner with Microsoft and move all of our clients overtime onto the Azure environment, the scalability of that cloud environment offers a significant advance including efficiency advantages but also significant scale capabilities from the data and analytics perspective that we believe the industry broadly speaking will benefit from at a dramatic level.

What we have focused on, is higher in a technology stack within the healthcare specific area at a data platform layer, most of our $100 million invest is specific to healthcare content, healthcare algorithms, healthcare data sources and mapping those data sources, automating that process of bringing data into the data platform in an automated and fast way.

[Indiscernible] at the apps layer [ph] and then even more so at the services layer, we’ve made a long-term commitment to complement the data platform capabilities with the right healthcare specific application and the right healthcare specific domain expertise which is why, our business model and our company profile includes significant portion of our revenue historically around 45% of our revenue in the services space because we found, as we move up the stack, the healthcare specific domain expertise that’s required to be an ideal long-term partner to our health system clients is very pronounced and it’s a different business model, it’s a different economic profile from what you see low in the technology stack where these cross industries cloud companies have typically enjoyed a much more high gross margins, very scalable business and it’s one of the reasons why we expect that long-term those cloud based companies will end up choosing to play a meaningful role, but stay lower in the technology stack..

Got it, that’s very helpful. Thank you. End of Q&A.

Thank you. I’m not showing any further questions at this time. I would now like to turn the call back over to Dan Burton for any further remarks..

Thank you for your interest in Health Catalyst. Thank you for the opportunity to share with you updates as it relates to our most recent quarter. We look forward to future discussions. Have a great day..

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect..