Definitive Healthcare Corp. (NASDAQ:DH) Q1 2023 Earnings Call Transcript

Definitive Healthcare Corp. (NASDAQ:DH) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Greetings and welcome to the Definitive Healthcare First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Ruderman. Thank you, Matt. You may begin.

Matt Ruderman: Good afternoon and thank you for joining us today to review Definitive Healthcare’s quarterly financial results. Joining me on the call today are Robert Musslewhite, CEO; Jason Krantz, Founder and Executive Chairman; and Rick Booth, CFO. During this call, we will make forward-looking statements including but not limited to, statements related to our market and future performance and growth opportunities, the benefits of our Healthcare Commercial Intelligence Solutions, our competitive position, customer behaviors, our financial guidance, our planned investments and the anticipated impacts of global macroeconomic conditions on our business, results and clients and on the healthcare industry generally. Any forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve a number of risks and uncertainties, including those discussed in the risk factor sections and elsewhere in our filings with the SEC. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements to reflect events that may arise after this conference call except as required by law. For more information, please refer to the cautionary statement included in the earnings release that we have just posted to the Investor Relations portion of our website. Additionally, we will discuss non-GAAP financial measures on this conference call. Please refer to the tables in our earnings release on the Investor Relations portion of our website for reconciliation of these measures to their most directly comparable GAAP financial measure.

With that, I’d like to turn the call over to Robert.

Robert Musslewhite: Thanks, Matt. I appreciate you all joining us this afternoon to discuss Definitive Healthcare’s first quarter results. On today’s call, I’ll provide an overview of our first quarter results, provide some perspective on business trends and what we are seeing in the market, review some of our key wins from the first quarter, and then turn it over to Jason to highlight some of our latest product innovations. Let’s begin by reviewing our first quarter financial results. Revenue exceeded the high end of our guidance range, while adjusted EBITDA was in line as we continue to deliver on our goal of balanced growth and profitability. Our total revenue was $59.2 million, which represents 18% year-over-year growth and our adjusted EBITDA was $15.7 million, which translates into 26.5% margin.

Overall, we got off to a solid start to the year given the context of the ongoing macroeconomic challenges. We continue to have strong demand generation and customer interest in our commercial intelligence platform. Our customers recognize that the Definitive Healthcare platform, the strategic role in their go-to-market and product development efforts, and that our solutions will be critical in accelerating their business performance as market conditions improve. The continued strength of our demand generation efforts is great validation that the fundamental value proposition of the Definitive Healthcare platform is resonating with customers. While I’m generally pleased with how we executed in the quarter, the business environment remains difficult.

Just as we saw in recent quarters, we continue to see a number of organizations follow more comprehensive deal review processes, as companies continue to closely scrutinize their budgets. The net result continues to be an elevated level of deferred purchasing decisions across all markets due to the difficulty economic environment. We are working hard to do an effective job of managing through these challenges and we have put in place several changes that should help us perform in this environment, but until we see a strengthening macro, we do not expect to see meaningful improvement from current dynamics. From a sales perspective, we signed important wins in all of our target markets with both new and existing customers. As I mentioned, our top of funnel and pipeline generation activity has been strong and our commercial teams are doing a good job adapting to the longer sales cycles and more comprehensive approval processes required to get transactions through the finish line.

As I mentioned on our last call, we’ve made moves to more vertically align our sales teams and institute more in-depth account plans. And as these changes mature through our teams and sales cycles, we will be in an even better position to engage with customers on the full value proposition of our platform. The increasingly strategic conversations we are having with customers reflects the important role the Definitive Healthcare platform can play in their day-to-day operations. As we mentioned last quarter, recent independent market research ranked the Atlas Dataset as first or second in each of the top 10 use cases for healthcare reference and affiliation data. We believe the success is due to our ability to provide proprietary actionable data in a cloud environment that enables thousands of customers to generate better returns on their sales and marketing investments and increase the probability of successful and profitable product launches.

Finding the right physicians, physician groups and hospitals and then understanding how they all work together is critical for the success of any life science, medical device, provider or diversified company targeting the $4 trillion U.S. healthcare market. Our customers consistently tell us that the Definitive Healthcare platform delivers unique insights across numerous use cases that other vendors simply cannot match. The breadth, depth and accuracy of our data together with the speed at which business users can leverage that data to positively impact their business is a compelling competitive advantage and we continue to invest in our platform to create and deliver new insights for these customers. Jason will talk about some of our most recent innovations in a moment.

Now I’d like to spend a few minutes highlighting some exciting customer wins from Q1 that demonstrate the numerous ways customers are generating business value from the Definitive Healthcare platform. Before I jump into specific customers, I want to note that the Staffing Industry Analysts trade group recently published their annual ranking of top healthcare staffing agencies, and I was pleased to see that all of the top 11 firms were Definitive Healthcare customers as were 18 of the top 20 firms and 24 of the top 30 firms in their rankings. I think we’re all aware of the ongoing labor shortage in the healthcare sector, and staffing agencies play a crucial role in filling those job openings. We’re thrilled to provide them with access to our more than 2 million medical professionals and more than 1 million executives through our Atlas Dataset.

We profiled one of these customers on our website recently. Thanks to our data, this interim leadership and Locum Tenens Consulting company more than doubled its funnel of potential executives and doctors that they could recruit, and then improved e-mail response rate by 4x by leveraging our highly accurate contact information. Turning now to deals that closed in the first quarter. We saw a solid performance in both new business and upsells. In the Q4 2022 deal that pushed to Q1 2023, the world’s leading mRNA therapeutic company expanded its relationship with us by adding a six-figure enterprise deal to add our Monocl ExpertInsight product so they could better identify clinical experts around the globe who could accelerate their R&D. Also, in our Life Science business, we had a significant deal that not only reversed customer churn from 2022, but also expanded our presence at a multinational pharmaceutical and biotechnology company.

This highly competitive win included a multiyear platform commitment through 2025 to our Passport Analytics Suite. This company plans to use the Passport Analytics Suite to optimize its global marketing spend and reallocate precious investment dollars to the sales and marketing channels that are delivering the highest return. In the provider market, the Atlas Dataset also played a big role in our win at a leading children’s hospital in the Western region of the United States. As part of an enterprise deal, this hospital purchased access to our Atlas All-Payor Claims Dataset, our Atlas Reference and Affiliation Dataset and our executive contact data, along with our Latitude Analytics Suite to help it understand the pediatric market in its region, including market share, patient flow, network leakage and competitive analysis.

Moving to our diversified market. The Atlas Dataset also played an important role in a Q1 upsell win. A non-profit humanitarian organization that provides emergency assistance, disaster relief and disaster preparedness education across the United States signs an upsell enterprise agreement that more than doubled the size of our relationship. A long-time user of our HospitalView product and internal champion at this customer reached out to us following our Atlas Dataset launch. In the first quarter, this organization purchased Atlas All-Payor Claims Dataset, which we’ll use to transform its sales strategy and identify the U.S. hospitals and departments offering the most opportunity for growth. Finally, I want to highlight one last new customer in our software and IT market that selected us based on the strength of our new data integration capabilities.

This customer is the largest virtual musculoskeletal clinic in the United States. This customer will be using our new DefinitiveConnect products to directly import data from our Atlas Dataset into their Salesforce instance to drive their business development strategy. In addition, this company strategy team will use our ConnectedCareView products to get better insurance coverage in their core markets of hospitals and long-term care facilities. As we look ahead to the remainder of the year, we are highly focused on execution and hitting our targets for the full year. We are at the early stages of penetrating our $10 billion-plus market, and there are tremendous opportunities to add thousands of new logos and greatly increase our ARR per customer over time.

To that end, we continue to focus on customer success, operational excellence and ongoing investment in our platform and go-to-market initiatives to keep us moving forward. We made great progress in Q1 on our product road map and investments in our verticalization and global account team strategies, and we’ll continue to invest throughout the year. We are making these investments while remaining vigilant in managing our expense structure. We’ve built Definitive Healthcare from day one to be highly scalable and efficient, which has been the foundation for our consistently strong track record of profitability. We are proud of the scalable business model we have built and believe it will support both faster growth and expanded margins over time as the economy improves.

I’d now like to turn it over to Jason to discuss our product innovation.

Jason Krantz: Thanks, Robert. The innovation flywheel continues to spend here at Definitive Healthcare. The pace and quality of our product innovation is a key competitive differentiator that we are constantly focused on expanding. I’d like to share the details about two significant recent product enhancements. Two weeks ago, we launched three new offerings that significantly enhance our data integration capabilities. When we deliver Healthcare Commercial Intelligence, our goal is to make that intelligence available where and when our clients want it, in any form, in any system. In addition to our best-in-class platform and in-depth analytics, our customers have asked us to make our data available on the internal tools and systems that they use every day, including Salesforce and other CRM tools.

With our new integration capabilities, customers can choose from a range of flexible options and support services to seamlessly integrate our Healthcare Commercial Intelligence into their IT infrastructure. Our three new data integration offerings are: one, DefinitiveConnect. Optimized to work with Salesforce Enlightened platform, DefinitiveConnect provides users with access to more than 300 data elements that are continuously updated directly in their Salesforce environment through automated data sinking. This access to our mission-critical Healthcare Commercial Intelligence and our client CRM allows them to leverage the depth of data we provide in every interaction they have with their physician and hospital clients. DefinitiveConnect app is available now on the Salesforce AppExchange.

Photo by Patty Brito on Unsplash

Second, Snowflake. Customers of one of the industry-leading data warehouse platforms, Snowflake, can now leverage its secured data sharing technology to access the Atlas Dataset. Existing clients can opt to work with our professional services team to ingest the data they need into Snowflake, unite multiple datasets, and create data marts to perform advanced analytics. We already have three example datasets on the Snowflake marketplace to showcase our Healthcare Commercial Intelligence to prospects with more to come. Third, APIs. We’ve launched a new suite of modern commercial APIs to support automated synchronization of Definitive Healthcare data into a broad range of applications and systems. Developers can use these APIs to request and retrieve Definitive Healthcare data through virtually any CRM software system or business intelligence data warehouse.

With these new tools, our customers can now more efficiently access our Healthcare Commercial Intelligence within their existing workflows while also ensuring that they are working with the most up-to-date and highest possible quality data. I also want to highlight the launch of Atlas AI, which we announced just last week. While we’ve always had proprietary analytics embedded throughout our solutions and services, we’re deepening our investment in this area even more and making these analytics available to help drive the success of our vast customer base. Atlas AI is built on the Atlas Dataset, which contains robust claims, reference, affiliation and expert data that provides a longitudinal, comprehensive and current picture of the healthcare market.

Definitive Healthcare’s data science team leverages the Atlas Dataset and applies deep domain expertise, natural language processing, machine learning, graft networks and proprietary algorithms to create new intelligence. Atlas AI enables clients to better target opportunities, allocate resources and inform strategic planning to drive critical business decisions. Atlas AI expands a competitive moat that separates Definitive Healthcare from our competition. We’ve long talked about the virtuous flywheel, where we ingest, clean and link data from multiple disparate data sources and how we apply our proprietary data science to create new intelligence and new types of data that help our customers understand and win in the complex healthcare market.

Atlas AI takes our commitment to the next level by delivering some of the most unique insights into the U.S. healthcare system that I’ve ever seen. These insights help our clients become more productive and more effective every single day. Atlas AI is available through our View and Monocl data products as well as our Latitude Analytics Suite and Passport Analytics Suite. Additionally, clients can use Atlas AI analytics in offline reports and custom projects for even more complex analysis. We’ll be adding new analytics frequently to Atlas AI to help our clients optimize their commercialization efforts. The first release of Atlas AI includes 11 proprietary analytics, each designed by our data science team to address a specific customer challenge.

I’ll highlight a few here. First, ACE Projections. Our All Claims Estimations, or ACE Projections allows our clients to gain a deeper understanding into the total addressable market of the diseases or procedure areas that are most important to them. Earlier this year, we increased our Atlas Prescription Claims coverage by more than 60%, and our Atlas All-Payor Claims coverage also increased significantly, including nearly 20% increase in key areas such as rare disease, oncology and chronic conditions. However, no claims data provider has 100% of all claims transactions that happened in the U.S., which makes our ACE Projections model pretty much the only way that clients can get a view of the entire U.S. healthcare market. ACE Projections apply advanced data modeling techniques and machine learning to the data in our Atlas All-Payor Claims Dataset to generate reliable estimations of clinical activity to compensate for the fact that every claims vendor has only part of the overall picture.

We believe that our proprietary projection is unique in the industry because we use our reference and affiliation data as explanatory variables to train our AI models. We identified groups of features that best represent the drivers of clinical volume for a segment of facilities or providers and that we extrapolate missing claims volumes based on the provider and facility-level characteristics. Second, expert ranking. This insight utilizes natural language processing and AI to create a proprietary scoring system that allows our clients to immediately identify the top-ranked scientific and clinical experts within a specific therapeutic area. Rather than ranking experts solely by volume of activity, Definitive Healthcare’s data science team leverages the Atlas Expert and Atlas All-Payor Claims Datasets, and applies graph networks, centrality scores and a proprietary algorithm to rank experts and physicians according to their positions within a community of practice.

This saves our clients from trying to do this work on their own by pouring through thousands of publications, clinical trial results and claims analytics, and it results in a much better and more accurate prediction, given that we do it at scale across nearly 14 million experts. Third, RxDecision Insights. RxDecision Insights is critical for our biopharma clients. These insights help our clients understand which physicians are the heaviest prescribers, which are more likely to prescribe a brand name therapy, and which prescribers are most likely to switch from a competitor’s therapy. Our data science team derived RxDecision Insights from a complex computational process and methodology and scaled it across the entire Atlas Prescription Claims Dataset.

Our proprietary methodology processes billions of longitudinal prescription claims, curates them into individual patient journeys and buckets them into decision-making events. These insights help our customers refine their commercial targeting, better align and research their Salesforce and arrive at the most efficient and high opportunity targets for their sales teams. We have dozens more analytics and development, each of which we believe will help our customers become smarter and more efficient and deepen our competitive advantage in the marketplace. We plan to roll out continuous enhancements of our Atlas AR offering in the coming quarters and years. I’d now like to turn it over to our CFO, Rick Booth, to walk through Definitive Healthcare’s financial performance in more detail.

Rick Booth: Thank you, Jason. I’ll start with a detailed review of our Q1 results before finishing with our guidance for Q2 and reconfirming guidance for the full year. In all my remarks, I will be discussing our results on a non-GAAP basis, unless otherwise noted. Our strong business model allowed us to deliver solid results in Q1 despite tough economic conditions and a challenging compare. Our financial highlights for the quarter include: 18% revenue growth compared to Q1 2022, 26% adjusted EBITDA margin and 22% unlevered free cash flow margin over the last 12 months. Revenue growth, plus the trailing 12-month unlevered free cash flow margin was 40%, putting us at the Rule of 40 on an unlevered free cash flow basis or at 44% using adjusted EBITDA.

Turning to our results in more detail. Revenue for the first quarter was $59.2 million, up 18% from prior year and 3% above the midpoint of our guidance. This performance was driven by new business and upsell as in the first quarter, we continue to experience heightened churn, especially in life sciences and providers due to industry conditions. Pro forma organic growth – revenue growth was 15% in the quarter. We ended the quarter with 529 enterprise customers, which we define as customers with at least $100,000 in ARR. This was an increase of 81 enterprise customers or 18% year-over-year, with a decrease of nine enterprise customers from the previous quarter. Our total customer count, which includes smaller customers, was 3,011 at the end of Q1, up from 2,939 in Q1 2022, but down 34% from the previous quarter.

Overall, economic conditions continue to be challenging in Q1. Despite the continued headwinds, we believe new business and expansion opportunities remain strong even if realization is slightly delayed in this environment. Gross profit was $49.8 million, up 13% from Q1 2022. And gross margin of 84.2% decreased 380 basis points from Q1 2022 as the additional data sources in the Atlas Dataset came online, as we had communicated previously. We expect to see gross margin expansion as we move through the year so that the full year impact is 200 to 300 basis points for the full year. Sales and marketing expense was $20.7 million, up 18% from Q1 2022. And as a percentage of revenue, sales and marketing expense was 35% of revenue, consistent with Q1 2022.

Product development expense was $6.9 million, up 24% from Q1 2022. As a percentage of revenue, product development expense was 12% of revenue, up from 11% in Q1 2022. Investing in our platform and using our existing datasets to launch or enhance multiple products is a highly efficient and effective way for us to increase the value we deliver to customers. Robert and Jason touched on some examples of these earlier, and we will continue to invest in the multiple opportunities we have identified on our long-term product road map. G&A expense of $7.6 million was up 4% from Q1 2022. And as a percentage of revenue, G&A expenses were 12.9% of revenue, down approximately 170 basis points from 15% in Q1 2022. We expect to see continued leverage from G&A, both because these costs are relatively fixed and due to ongoing efforts to lower administrative costs.

Operating income of $14.4 million was up 6% from Q1 2022. As a percentage of revenue, operating income was 24% of revenue, down 260 bps versus Q1 2022. The year-over-year margin decline was primarily a result of the gross margin impact of the Atlas Dataset expansion, offset by G&A cost improvement. Adjusted EBITDA of $15.7 million was a 12% increase from Q1 2022 and at the upper end of our guidance range on a dollar basis. As a percentage of revenue, adjusted EBITDA was 26% of revenue, approximately 160 basis points lower than in Q1 2022 due to the investments described earlier, which were in line with how we planned the year. As we move through 2023, we expect adjusted EBITDA margins to expand, allowing us to deliver the full year adjusted EBITDA in line with guidance despite the impact of the gross margin pressure noted above.

Net income in Q1 was $9.2 million or $0.06 per diluted share based on 154.3 million weighted average shares outstanding. Turning to cash flow. Definitive’s high margins, upfront billings and low CapEx requirements provide substantial free cash flow generation. We focus on trailing 12-month cash flows due to seasonality. Operating cash flows were $36.9 million on a trailing 12-month basis, up 46% from $25.3 million in the comparable period a year ago. Unlevered free cash flow was $50.7 million on a trailing 12-month basis, down 16% from the comparable period a year ago. Unlevered free cash flow was 22% of revenue on a TTM basis, effectively converting 77% of our TTM adjusted EBITDA of $65.4 million into cash. Like any SaaS company, when bookings growth slows, so does deferred revenue, which is the biggest driver of unlevered free cash flow.

As growth rates stabilize and recover, so should unlevered free cash flow. On the balance sheet, we ended the quarter with $344 million in cash and short-term investments. With strong profitability of only $265 million of debt, we’re well positioned to fund both organic and inorganic growth initiatives. Current revenue performance obligations of $180.9 million were up 10% year-over-year, and total revenue performance obligations were up 2% year-over-year. Deferred revenue of $105.5 million was up 12% year-over-year. You’ll note that as expected, CRPO and deferred revenue grew more slowly than revenue. The primary driver of CRPO is, of course, new business and upsells, but we also saw a continued financial distress, particularly in life sciences and providers, and those cancellations show up immediately as the reductions from CRPO.

These factors have been largely anticipated, and we believe that we remain on track to hit the guidance for the year. Moving now to guidance for Q2. We believe it’s prudent to assume that current conditions continue and extend through the first quarter as well. Assuming this is the case, in Q2, we would expect total revenue of $60.5 million to $61.5 million for a growth rate of 11% to 13%, adjusted operating income of $14.5 million to $15.5 million, adjusted EBITDA of $16 million to $17 million for a 26% to 28% adjusted EBITDA margin, adjusted net income of $7 million to $8 million or $0.03 to $0.05 per diluted share on 155.2 million weighted average shares outstanding. For the full year, there is no change to our previously communicated guidance.

We continue to expect revenue of $249 million to $255 million for a growth rate of 12% to 15%, adjusted operating profit of $61.5 million to $65.5 million, adjusted EBITDA of $67 million to $71 million for a full year margin of 27% to 28%, adjusted net income of $30 million to $34 million and earnings per diluted share of $0.19 to $0.23 on a 155.5 million weighted average shares outstanding. Within this guidance, the key expected cost drivers are the gross margin impact of the new data sources coming online early in Q1, the annualization of expenses associated with people hired in 2022, the impact of cost-of-living increases on employee wages and selective investment in the very highest growth priorities. We expect that these costs will be partially offset by continued efficiencies and costs not directly associated with revenue growth.

So to summarize, Q1 was a solid quarter for Definitive Healthcare despite current economic headwinds and uncertainty. We are well positioned for the long term because we do have a clear leadership position in a large and attractive market that we believe will support high levels of predictable revenue growth, profitability and capital efficiency. And with that, I’ll hand it back to Robert for a few closing thoughts before we take questions.

Robert Musslewhite: Thanks, Rick. I want to take a moment and recognize all the time and energy that our Definitive Healthcare team has put into building an award-winning, employee-centric culture. Just in the first quarter alone, we had multiple events, both in the office and remote, that celebrated our diverse and inclusive culture. I had the opportunity to attend many of these events, including a virtual global celebration of the Hindu holiday of Holi, a panel discussion on the importance of self-advocacy in honor of Women’s History Month and a talk by medical expert Ben Haseen in honor of transgender data visibility. I even had a chance to serve as a judge for the first annual Definitive Healthcare Chili Cook-off, benefiting Definitive Cares, and my stomach has not fully recovered yet.

All kidding aside, it’s these types of events that forge important relationships across the company, and they’re a huge part of the reason why I consider myself so fortunate to serve as CEO of this fabulous organization. Before opening the call for questions, I want to reiterate that we are off to a solid start in 2023 and well positioned to deliver on our objectives for the year. Our team is doing a great job remaining focused on our customers and executing on our key products and growth initiatives. We’ve built an incredible business in a large, dynamic and growing market that provides great opportunity to meaningfully scale our revenue and profitability in the coming years, and we remain incredibly confident in the long-term opportunity for Definitive Healthcare and our ability to generate substantial value for our customers and shareholders.

With that, we would now like to start the Q&A. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question is from Ryan Daniels of William Blair. Please go ahead.

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Matt Ruderman: And I think that we have hit the top of the hour. Appreciate everyone’s time. We’re going to be out at the conferences in the upcoming weeks and look forward to seeing many of you in-person. Goodbye.

Robert Musslewhite: Thank you.

Operator: Ladies and gentlemen, the Definitive Healthcare call and webcast has concluded. Thank you for your participation. You may disconnect.