And a few of our most recent acquisitions are good examples of that, where we have accelerated our capabilities in measures and registries, for example, through the most recent acquisition of ERS or the RMS acquisition before that. So we’ll continue to be focused, I think, more in that use case area and the apps layer. And we’ll continue to be really financially disciplined as well in the way that we think about these. I do believe that the acquisition opportunities that we’ll focus on will be much like those more recent acquisitions over the last few years where they’re more tuck-in acquisitions, they’re more tech-focused acquisitions, that just allow us to accelerate our product road map and accelerate our offering to our clients, but likely more in those use case areas and more specifically skewing towards technology tuck-ins.
Anything, Jason, you would add?
Jason Alger: Yeah. The only thing I would add is from a financial profile standpoint, profitability is extremely important to us. So we will be focused on adjusted EBITDA that these deals are primarily adjusted EBITDA neutral to adjusted EBITDA positive. There could be trades that we might consider in certain deals, but profitability is very important.
Operator: We go next now to Elizabeth Anderson with Evercore ISI.
Elizabeth Anderson: Hi, guys. Thanks so much for the question. I guess, one of the things that was interesting to me was just obviously the strong gross margin and the professional services. If we think about the kind of like the — maybe separate out the impact of the TEMS deal ramping versus maybe, what I’ll term like, bees, gross margins outside of that, can you just talk through maybe the non-TEMS ramping portion of it just so we kind of understand the multiple moving pieces there?
Daniel Burton: Yeah, absolutely. I’ll share a few thoughts over there. And Jason, please feel free to add as well. So separating out the mix dynamic of TEMS deals for the ramp from a low gross margin, do a little bit higher gross margin over time, I think the main factor that really helped us was really getting into greater balance from a supply-demand perspective through the workforce reduction that Jason had alluded to in the prepared remarks that in those higher margin consulting services, I think we now have right-sized the right size of staff and team with the right level of demand. And that had a meaningful positive gross margin impact.
Jason Alger: Yes. The only thing I would add there, Elizabeth, is that we do expect our revenue to ramp in the second half of the year. Some of that ramp will be the new TEMS fills. Those TEMS fills will put a bit of pressure on our adjusted professional services gross margins. We’re very pleased with the progress that we made in Q1 and expect to continue to make progress, but do expect to see a bit of pressure in the second half, which is where we set our expectation at the high-teens from an adjusted professional services gross margin level on the year.
Elizabeth Anderson: Got it. That’s super helpful color. Thank you. And then maybe just as a follow-up, can you talk a little bit more about the 2Q and maybe to the extent that you have the visibility into the 4Q bookings season? Just sort of what are you seeing and how is the increase — how is the change in appetite in terms of like making commitments, mix of things that could potential customers and current customers are interested in? Any other color on that would be helpful.
Daniel Burton: Yeah, absolutely. Thanks for the question, Elizabeth. So we started with a strong Q1, where our performance was consistent with our expectations so that’s always a good sign. As we mentioned in the prepared remarks, we do see some meaningful overall positive trends as it relates to our end market and operating margins. Now, there’s a spectrum of experiences across our client base and that still includes some on that spectrum really struggling. Many of you may have seen some of the recent announcements as it relates to Steward Health Care, which does include and a part of our client base that still is struggling. But at an overarching level, I think we’re encouraged to see those trend lines. Now, specific to Steward Health given their financial challenges and their announcement around the bankruptcy proceedings that they are working their way through, as you might expect we are keeping a close eye on that situation.
And this is recent information, and the situation is continuing to evolve and expect that we’ll learn a lot more in the weeks and months ahead. We’ve been an active frequent and direct communication with senior leaders at the C-suite level at Steward, including even as recently as over the last few days. And as a reminder, even with the announcements that Steward has been sharing, each of the more than 30 hospitals, medical centers, and physician offices within Steward Health Care are open. They’re caring for patients on a daily basis, and we’re also actively providing our solutions in support of that care on a daily basis. Senior leaders at Steward have communicated with us that they view us and our solutions as critical to their ongoing operations.
And the solutions that we provide are critical, and they have meaningful hard-dollar financial benefits associated with those ongoing solutions. And as such, our default assumption in this specific scenario is that these solutions will continue in 2024 and beyond, including in various asset sales scenarios. We’ve been receiving regular payments from Steward, and we anticipate that during the bankruptcy proceedings we’ll continue to pay for active contracts like those that we are continuing with them. We’re actively seeking to collect all of the outstanding payments that are due to Health Catalyst. But of course, we acknowledge that there are challenges with respect to collection of pre-petition debt in any bankruptcy situation. And there’s some uncertainty around collectability of pre-petition amounts.
Therefore, we’ve made some meaningful provision for the possibility that we may not collect all of the pre-petition amount owed.
Operator: We go next now to Stephanie Davis, Barclays.
Anna Kruszenski: Hi, guys. This is Anna Kruszenski on for Stephanie. Thank you for taking our questions. The first one I wanted to ask on is just if you could talk maybe a bit about the push/pull of the Change outage, but then also the improving operating margins and how maybe that impacting TEMS decision making?
Daniel Burton: Yeah, absolutely. So in general, we’ve been grateful to see no major disruption from the perspective of our business as it relates to the challenges of the Change Healthcare situation. There is one case with regards to a meaningful tech-enabled managed services opportunity that has been progressing in our pipeline. One particular existing client asked us to discuss pause, while they dealt with the near-term operational challenges over the last couple of months related to the changed healthcare situation. We’re grateful to see meaningful progress there, even as early as recently as just over the last weak or so that systems are becoming operational once again. So that was the only major example of some specific pipeline-related delay, related to that one tech-enabled managed services opportunity.
But in other parts of our pipeline, both on the new client side and on the existing client side, we have not experienced any specific interruption or challenges related to that. It is important to note that we have a very different business model and solution than what Change Healthcare provides, and that solution continues to be in demand with our clients. And we continue to be really vigilant and focused on information security Health Catalyst, as evidenced by our HITRUST’s certification, our SOC 2 certification, and StateRAMP certifications, and we’ll continue to be vigilant and focused in that really important area. Anything you’d add, Jason?
Jason Alger: I think you covered it well, Dan. Thanks.
Anna Kruszenski: Awesome. Thank you so much for that color. And then just one other one. I was wondering if you could talk about the expansion with the Saudi German Health? Just curious how much of that book is international?
Daniel Burton: Yeah, absolutely. So that is all international opportunity for us. We’re excited to see a meaningful expansion in that relationship. And I would say this is a good example of something that we’ve talked a little bit about earlier, which is as we saw more and more technology-oriented growth opportunities, both with existing clients and new clients, as the end market improved, we have proactively shifted more of our growth resources to focus on those technology opportunities. And Saudi German expansion is a good example of that, where much of the expansion is technology expansion, which obviously has higher gross margin and contributes more to our profitable growth expectations and our forecasts. So we’re really excited to see that meaningfully technology-heavy expansion, which is also encouraging to see in the international segment of our business.
Operator: We go next now to John Ransom with Raymond James.
John Ransom: Hey, good afternoon. Just kind of stepping back and asking more of a macro question. You’ve had to come through the end of the free money era, the coming and waning of COVID, some pivoting your strategy. But when you think about Health Catalyst in 2024 versus the Health Catalyst that came public in 2019, what do you think the major changes or the major lessons learned? What did you learn from all of this? And how do we think about the company differently than maybe the company that existed a few years ago?
Daniel Burton: Yeah. Great question, John. The company is very different than what it was five years ago. I would characterize us as more than adolescent five years ago as a company. We were about a third of our current revenue size. And we had less than a fifth of the total number of clients that we have today. We were also meaningfully unprofitable from an adjusted EBITDA perspective. And I think one of the anticipated benefits of the company going public was the discipline and the rigor that it would require of us and the consistency of performance that it would require of us. And as we approach our five-year anniversary here in just another two months or so, I really feel grateful for that discipline and that capacity for consistency that Health Catalyst has developed through that experience of being a publicly-traded company.
