It’s a more efficient offering, a much more scalable offering as well. So we do anticipate over the longer term after we get through those migrations over the next two, three years, to see about a total of around a 10-point improvement in terms of the technology gross margin at the data and analytics platform layer. But that will take a few years to play out as we still have those migration related costs that are pulling that increase gross margin down a little bit it. Anything you would add, Jason?
Jason Alger: Yeah. The only thing I would add is that with the wind down in our major investments in Health Catalyst Ignite, we do expect our R&D line to be down in absolute dollars compared to 2023. So we do expect to make some progress there as well.
Operator: We go next now to David Larsen with BTIG.
Jenny Shen: Right. This is Jenny Shen on for Dave Larson. Congrats on the quarter, and thanks for taking my questions. I just want to build off of an earlier question on selling into hospitals in that dynamic. And also another question on M&A to expand your solutions fleet. So it’s always made a lot of sense to us for you guys to expand your offerings and sell into like med tech companies, life sciences companies, even payers. Is that something that you’re considering? And if so, what opportunity do you see there? And if you’re not concerning that, what are some reasons why? Thanks.
Daniel Burton: Thank you, Jenny. We might have missed a little bit of your question, but I think you were focused on asking about adjacent markets, like med tech, or life sciences, or payers, and how do we evaluate that? Did I capture your question accurately?
Jenny Shen: Yes.
Daniel Burton: Okay, wonderful. So we do recognize the strategic trades and the strategic importance of being focused as a company and simplifying our focus. And that has been an important part of the last few years of Health Catalyst’s existence. I think we’ve benefited from that focus on those five key areas of opportunity. But we’re also mindful that there are some meaningful and logical adjacent opportunities for us. And in fact, in many ways, the progress that we’ve made, for example with our next-generation data and analytics platform, our Ignite platform, it may well open up not only great opportunities for our core market in the provider space, but the standardization of data elements that come with these updated data models in the next-gen Ignite platform; also, may well be really useful and improved infrastructure as it relates to some adjacent market and use case opportunities.
You may recall that a few years ago, we decided to pressed pause on some of our life sciences investments. And one of the reasons we pressed pause was we were lacking the infrastructure and the standardization of that infrastructure from a data perspective to really be well positioned to provide meaningful solutions for certain life sciences use cases. Now, we’re still early in the process, and our primary focus is absolutely on our core market. And I think that’s really important for us to continue, but we’re also mindful of the meaningful leverage. And often, there can be profitable leverage of a core capability into an adjacent market. And that could include in the future as reevaluating and considering areas like life sciences use cases, though I think we would benefit from some of the learnings of the past by being very focused on just a very small subset of use cases, where we were convinced we could have a differentiated offering and we have the right infrastructure.
Likewise, in the payer space, we still do provide solutions to some part of the payer market. But we’ve, there again, tried to be focused and really thoughtful and be convinced and persuaded that we have a truly differentiated offering before we make significant investments. International is one more example, where that’s an adjacency that we’ve tried to be thoughtful, focused, and opportunistic in targeting just a few areas where we were persuaded that we can leverage our existing strength, provide a differentiated offering. And I think the recent Saudi German announcement is a good example of us meaningfully tapping into and leveraging those core strengths in ways that they’re, again, skewed a little bit more towards technology growth, which obviously supports our overall goals for profitable growth moving forward.
Operator: We go next now to Jack Wallace from Guggenheim.
Mitchell Ostrovsky: Hi, this is Mitchell on for Jack. So AI was a big topic I had a few months ago. Do you have anything to share on that front? Anything incremental on the progress of what how you’re utilizing AI over the past few months has been? Thanks.
Daniel Burton: Yeah. Thanks for the question, Mitchell. We are excited about some advances that we were thrilled to share the Healthcare Analytics Summit. And really, three tangible use case areas of focus. One of them we mentioned as one of the success stories in my prepared remarks around using AI — using generative AI as it relates to churn of attraction. And as I mentioned in the prepared remarks, we are seeing about a 24% efficiency improvement through the use of generative AI to help automate the process of hunting and gathering the data that’s necessary for registration submission. And we still keep the chart abstraction who is clinically trained in the driver’s seat, but we found that we’re over 90% accurate in our AI and it improves and learned along the way.
And as chart abstraction has a meaningful growth area for Health Catalyst where that is a meaningful tech-enabled managed service for us, obviously, the more efficiency gains, the better; the more that we can perhaps share some of those efficiency gains with our clients and build an even more profitable, sustainable business. So that’s the first use case. And we’ll continue to look to actively and proactively test out other AI use cases that might apply to other TEMS areas as well. The second area that we talked about it has is version 2.0 with Healthcare.AI, which is a fantastic capability, incredibly relevant for us as an analytics company. Where we enable on a daily basis thousands of dashboards and visualizations, that the primary benefit of Healthcare.AI is to help interpret the data more accurately through the benefits of AI, where AI can help us lead a graph much more accurately.
We find a step function improvement in human’s ability to interpret data through version 1.0 of Healthcare.AI. And we shared examples from for version 2.0, which incorporate even more text-based active summary explanations of what’s going on in a chart or a graph. So that’s a second area of focus. And that was particularly meaningful, in that there are over 8,000 dashboards a day that are currently tapping into Healthcare.AI. And those who are viewing those visualizations dashboards are multiple times more likely to interpret the data more correctly and make data-informed decisions that make healthcare better. So we’re continuing to use AI in the interpretation of data and analytics sensors, second use case. And then the third use cases as it relates to co-development at Health Catalyst, and specifically in our next-gen data and analytics platform in Ignite, we’re building in more capabilities to streamline both the maintenance of the current version of the next-gen data platform and the development of new and enhanced capabilities.
So that we accelerate the time to new features and new capabilities through the use of AI, accelerating that process of co-development. So making it very easy and visible to the programmer to see exactly what’s coming from AI, but really, much in the way that the chart abstraction AI works, saving steps along the way that can be error prone and expensive and utilizing AI for that purpose. So we’re encouraged by that efficiency gain as well. And I think there will be lots more to come. But those are the three use case areas that we’re primarily focused on.
Operator: We go next now to Stan Berenshteyn from Wells Fargo.
Stan Berenshteyn: All right. Thanks for squeezing me in here. Maybe sticking on the tech side. So 2024 guidance reflects expectations for a year-on-year improvement in both the number of DOS client wins, as well as the size of the contracts. Can you just walk us through, what’s incremental this year that has yielded improvement expectations within bookings?
Daniel Burton: Yeah. Absolutely, Stan. So happy to share a few thoughts about our 2024 bookings guidance and how that impacts 2025. And as usual, there are some puts and takes there. As it relates to the positives that are contributing to that meaningful reacceleration, the double-digit growth, I think if you think about the building blocks, including what’s going on with our new clients and then what’s going on with our existing clients and the retention expansion, the positives that we see there are more activity, more pipeline in the new client space. We had a solid Q1 as it relates to new client activities. We’re excited about that growing pipeline that we see in the new client space. We’re also excited about the new client as a building block, because that skews a little bit more towards technology.
So that’s certainly encouraging. And that informed our guidance expectation that we shared last quarter of both an increase in the number of net new DOS subscription clients to the mid-teens, from last year. And our expectation that the average ARR per new client addition would be higher in 2024 than it was in 2023. So that’s our first building block. The second building block is with existing client retention expansion. And here again, we see some positive that are general positives. And I do want to come back to one specific element that we are watching specific to Steward Health as one example of something that we’re trying to be thoughtful about. But on the positive side, we’re seeing some positive trend lines as it relates to client retention that that continues to improve.
And that was true in Q1. And that’s certainly encouraging to see across the board, that retention improving and strengthening. And then as it relates to expansion, we continue to see a growing pipeline there of opportunities both from a tech perspective and a services perspective, and specifically on the services side more as it relates to tech-enabled managed services, which do start at a lower gross margin but then expand over time. So all of those elements I think are encouraging and we see evidence of that. And you can see that existing client confidence reflected in the guidance and the expectation that we shared of the 104% to 110% dollar-based retention, which is meaningfully higher than the 100% dollar-based retention that we saw in 2023.
So those are all positive elements. I think as is always the case, we want to be also mindful of specific situations that might be challenging. And one that I mentioned that earlier was with regards to Steward Health, that we are actively in communication with them, we are actively monitoring that situation. And as a note, Steward represents less than 2% of our total revenue as a company. So specific situations like Steward, while they’re very important, it’s good to keep them in the broader comp context. We do have significant experience across our client base with various kinds with asset acquisitions or asset transfers over the years. And certainly, that’s one of the developing elements of what will likely happen with Steward Health as they potentially sell a number of assets that have been part of Steward Health Care.
