Definitive Healthcare Corp. (DH) Earnings Call Transcript & Summary

We are going to go ahead and get started. Welcome, everyone. My name is Brian Peterson. I'm the application software analyst here at Raymond James. Very happy to have the team from Definitive Healthcare here, Jason Krantz and Rick Booth. So Jason, maybe get us started. There might be some people in the room that aren't as familiar with Definitive after the high-profile IPO last year, but give us -- spend a couple of minutes on a company overview.

Sure. So we've been around for 10 years now. I started the company back in 2011, and what we've created is a new category of intelligence called health care commercial intelligence. And the goal of health care commercial intelligence is to help anybody that is selling into the health care universe be more effective in their approach to selling. So we track data on every single health care provider across the U.S., detailed information on physicians and hospitals and skilled nursing facilities, and we pull all this data into a SaaS platform that allows our clients to understand the interlinkages between these organizations and help to navigate the very complex health care ecosystem.

And so if you're thinking about maybe lessons learned in COVID, like we hear a lot about digital transformation and digital go-to-market models. If you're thinking about kind of the customer intelligence narrative, what has changed over the last few years during COVID?

I think it's a continuation of what was changing anyhow. So the digital transformation is real. People want to use, have access to more intelligence and insight that they can use to be more effective in their commercialization. Health care has been transforming since I started the business, and it's frankly why I started the business in the first place. You have this market that's becoming more complex where all of these parties want something different out of the market. But in order to be successful selling into health care, you need to understand what the physicians want, what the patients want, the conveniences that they want, how payers fit into this. You need to understand all of this together. So COVID is just -- has sped this up. Because now life sciences companies have less access to physicians. You need to use data better to make sure that every at-bat that you have counts, and your messaging is spot-on, and you're talking to physicians at the right time. We help our clients with all those problems.

And it's like if you're looking at kind of health care commercial intelligence, I'm curious what were they doing before, right? In terms of like before, I know it's kind of a continuation. But when you come in like what are you displacing? Or is it spreadsheets? Or what are you displacing against what your customers need?

It's a totally new category, so it just didn't exist before. So the way that people got intelligence on the health care market previously is you build some of it organically. Your sales reps put some information into your CRM, or you hire consultants who try to cobble together bits and pieces of information, which is instantly outdated. It's a small portion of the market. What we did is we took a different approach. We said let's from the ground up, start to build a view of every single provider in the health care ecosystem and how they're connected together. We are the only company that has that view. And now what we're able to do with that is generate new data science to help our clients get the insight they need to make strategic and tactical decisions. And then we're also able to continue to bolt on new data sets and create new analytics with this data to solve an increasing array of problems for our clients.

And so how does that work like from an ROI perspective? Rick, I don't know if you want to weigh in, for your customers, just in terms of if you're adding more data sets and you're adding more functionality, does the value that they get continue to increase over time? And how does that change your customer-level economics?

The ROI, if you think about the nature of the health care industry, one, it's 20% of the U.S. economy. So the opportunities are vast. And then if you think about the life cycle development of any sort of application for the medical industry, if you're launching a drug, it's tens of billions of dollars. And so the ROI could make that incrementally better. One of our large clients came to us with a particular drug for spinal muscular atrophy, and they found 1 or 2 patients up in Alaska which paid for the entire prescription. So yes, the feedback, if you talk to our customers, is that the ROI is amazing for them. And the more that you build that virtuous circle, the easier it is for us to add more innovation because we've got a larger and more complete data set and the more confidence they have in the incremental economics.

And maybe talk about how you drive that, right? Because there's been a lot of in-house innovation. There's also been some M&A. Where do you guys focus? And maybe for people new to the story, like talk about kind of the M&A motion that you've developed over the last few years?

Sure. So let me start with internal innovation, so organic innovation. We really think about this in 3 key ways. The first is our data platform. The data is the competitive moat. We have a view of the health care ecosystem that doesn't exist anywhere else, so we want to keep innovating on that. We want to bring in new data sets like we brought in medical claims in 2019. We brought in prescription drug claims just last year. We're looking at new ways to bring in data around kind of social intent and behavioral type data. We want to keep building up that data platform so that we can give our clients different views on the market. Then there's a data science layer. So this is about how do we take the data that we have, this vast amount of information and turn this into answers for our clients. So I'll give you an example of something we're working on right now. We've created this whole new set of intelligence called physician prescribing behavior analytics, and what we're doing is we're basically scoring every physician to try to help our clients understand who actually drives new prescriptions and who are the physicians that are most willing to change from one branded drug to another branded drug, or if a generic becomes available, who's most likely to move. That type of intelligence that can be expressed in a single variable for our clients helps them make decisions quickly. So we'll continue to invest in data science, which, as we build up more data, we're able to innovate more and more quickly with that. And then finally, once you have this collective data asset with the raw data and the data science on top of it, now it's how do we deliver this to our clients to help them utilize this information across their entire organization. So we have a SaaS platform where clients can access all of the data that we have. We just rolled out a new analytics platform called Latitude, where you can screen through our data and find very specific real-time cohorts of patients that can expand your market and figure out who are the physicians that are serving them. We're increasingly working on more and more integrations. So about 70% of our enterprise clients integrate with one of their internal products today. That drives up our stickiness. We're continuing to invest in more integrations. And then over time, we're creating thin analytics on top of this that meet very specific customer demands. So health care providers is a growing market for us. We're creating analytics that are specific to that group. And we're trying to create more customized intelligence that we can deliver to sales reps throughout the organization. So these types of thin layers on top of that deep data moat that we have allows our clients to continue to utilize our data in new and efficient ways.

That was just the organic side?

That was just the organic side.

How do you think about M&A side?

So now you think about M&A. How does M&A complement that? So we're always looking at M&A. But as you see from my excitement about internal innovation, that can drive our business for many years to come. But what we look for with M&A and how we can complement that is we're looking for 2 things. The first is we want acquisitions where our data can make the solution that we're buying more powerful. So you take Monocl, as an example. We bought this company in 2020. Within 3 months, we had integrated analytics on our claims data as well as our affiliations data into their product. It raised their price point and took them from a very good product to best in class literally overnight, no more expense to us. The second thing that we want to do is we want to be able to take their solution and be able to sell it through our existing commercial sales force and be able to sell it to our existing clients to accelerate their growth. So Analytical Wizards, our most recent one, they have a fantastic technology platform that will allow our life sciences clients to integrate Definitive data with their internal data and other third-party data, so a whole new set of capabilities that we can sell into life sciences. Analytical Wizards, like a lot of small companies, had basically no sales force. They had their founders and a couple of other people who sold. We now can take that fantastic capability, push it through our large sales force to our existing clients in life sciences and medical devices and really accelerate their growth over time. So new capabilities that we can push to our existing clients is what we're looking to do from an M&A standpoint. Very disciplined. We don't have to do deals. We're growing very fast organically. But if we find the right opportunity, we can move aggressively on it.

And so you mentioned the Analytical Wizards acquisition. Obviously, that seems like it's TAM expanding. How do you frame the overall opportunity today? And what do you think you have in front of you?

We've got endless opportunities. So as I spend my days, I think more about where do we want to focus our efforts and how can we make sure that we execute rather than trying to find new opportunity. But we measure -- at IPO time, we measured a $10 billion and growing TAM. It's growing in a few different ways. First of all, health care is just growing. And health care analytics, specifically, is growing quite quickly. So there's just a general growth in TAM from the market growing overall. But at the same time, as we innovate internally or through acquisitions, we're able to get into new parts of the organization that we sell into. So specifically around M&A, Monocl got us into medical affairs. We didn't sell into medical affairs and life sciences prior to that, whole new TAM expanding opportunity for us. Analytical Wizards now allows us to integrate third-party and internal data, a whole new set of solutions in commercial analytics that we can perform that continues to expand that TAM over time. So we would expect this TAM to continue to grow as we innovate, both internally and through M&A.

And maybe just last one, high level. I'll get into specifics here. But as you think about kind of the long-term competitive differentiation, I guess, you've kind of hit on some of this before. But like where would this be different versus maybe some other approaches or vendors or how some people have kind of tackled this problem?

Yes, so if you think about what we did in the first kind of 9 or 10 years of Definitive Healthcare is we've built up this view of the health care universe from the ground up. So that is hundreds of thousands of phone calls every year. That's e-mail surveys and reaching out that way. And we've built technologies that pull data from over 100,000 different sources online. And we've figured out over the next 9 years, how do we integrate that together and how do we create a view of the universe that is complete and comprehensive and an understanding of how these companies, all, and physicians all linked together? That takes time. So you can only do what I did in 2015 because of the work we did in '14 and '13 and '12. So it's very iterative, and it builds on itself over time. As you build up more and more data and more data science, you can actually continue to accelerate that innovation and build new interesting modules more quickly. So for a company to come in and redo what we did, they need 10 years as far as I'm concerned. I've been doing this a long time. I've been launching data businesses since 2000. I know the shortcuts, and we took all the shortcuts, and it still takes 10 years to build what we have. So as we continue to innovate and bring in new data sets and apply new data science, we extend that moat.

Rick, maybe for you because I know this has been a topic that I've talked about a lot with investors just over the last, let's call it, 3 or 4 months. But just in terms of the growth profile and the margin profile, maybe just highlight that a little bit because I know -- I think there's been a preference for growth historically. Now everyone's a lot more focused on margins. I think you guys are doing pretty well there. So maybe just highlight that a little bit.

Yes, absolutely. We've always had a commitment to profitable growth. So over the prior 12 months, we grew at 40%, and we delivered very satisfactory profitability. As part of going public, we've begun to incur some additional onetime costs. So if you look from Q3 to Q4 into Q1 of '22 in our guidance, you can see the impact of fixed public company costs and a number of other fixed sales and marketing costs that we opted to bring into Q4 '21, which sets up. We're now at our low point for profitability. And we will, as we go through fiscal 2022, accelerate our adjusted EBITDA margin. So we'll exit 2022 at 30% or more adjusted EBITDA margin, which translates directly into free cash flow. So you hit the total button on that, and you've got a company that targets 30% long-term growth. That's an internal target as opposed to guidance, but we've delivered against that. So you're targeting 30% or so long-term growth with the potential to get to 40% or more adjusted EBITDA margins over time. So we think that combination of predictable growth with incredible visibility, I mean, we got 90% visibility to the next 12 months and 70% for the next 24 months, world-class unit economics, high profitability and capital efficiency that translates that profitability into cash flow. We think that that combination will be increasingly recognized by the market as we continue to put miles on the odometer. So far, we had an IPO. And our first quarter, everything is going well. We have high confidence we'll continue to deliver against that business model over the course of 2022.

Yes. I think rule of 70 is nothing to sneez at. We do have one from the audience. Go ahead.

I just have one question on the 40% adjusted EBITDA margin that means very different things to some companies here at this conference than it does to others. Can you just walk us from the 40% adjusted EBITDA margin, what that would look like from the GAAP operating margin?

Yes, and we also -- we have full bridges in our -- of what our add-backs are. Our add-backs are super clean. So the add-backs are primarily stock-based compensation and noncash amortization. So if you're comparing GAAP to non-GAAP, when we did our recapitalization in 2019, that created a huge amount of an asset called goodwill that's reported on our balance sheet and other purchase accounting-related assets that amortize through over time. And so we carefully provide full reconciliations of those bridges.

What, as a percent of your revenue, would stock comp represent?

Let's see. We are at -- so our dilution is between 2% and 3%. And as a percentage of revenue, stock comp, I believe, is around 12%.

And if we just think about kind of -- like we hit on a lot of the product investments. But like thinking about sales and marketing and incremental and sales capacity, how much of the incremental spend is maybe going towards that? And is that something that's needed as you're targeting some of the kind of verticals that you're in, right? I'm just trying to think about the sales and marketing efficiency because that's -- it's come up a lot recently with investors.

Yes. One of the investments I'm most excited about within that is standing up a second sales team focused on the provider market. 2 years ago, we weren't really targeting providers, but what we found is we have these wonderful spillover effects from the innovation that we do for life science and medical devices and now for providers, where you find the insights and the data that you're compiling to serve one set of customers is also incredibly valuable to another. So as of the time of IPO, about 7% of our annual recurring revenue was from providers, and that was really without a provider-focused product. We've now stood up a second sales team focused on that market because we think that's about 20% of our TAM. We're starting to focus incremental development resources there. And one of the nice things about our relatively short sales cycle, it's a 3- to 6-month sales cycle. So when we target sales and marketing investments, we can get rapid feedback on the payoff. And our customer acquisition efficiency metrics are an outcome, not a goal. But we've been very, very proud to deliver greater than 10x LTV to CAC and steady increases in our MDR percentages. So we think those show that the money that we're investing is being spent to good effect.

And Brian, I would add to that. We keep growing our sales team. There's a lot of opportunity out there, 100,000 customers for us to target. So continue to grow our new logo team as well as our account executives who are upselling and deepening those relationships once we bring them on, absolutely important. But we're also supplementing that with more marketing than we have in the past. And we really think about that as -- again, as we think about long-term investments, deepening our ability to really collect all of the SEO traffic is something we're pretty focused on. We have a treasure trove of data on health care that nobody else has. We need to figure out how to put this out in the world in a way that every time you search on I want to find this out about health care, Google is returning, according to Definitive Healthcare, this is what happened. So that takes time. You got to build that content up. You don't see the fruits of that labor for years but a really exciting opportunity for us.

And how do you think about -- because like investors always kind of look at the size of the lands versus the land and expand? it seems like you have an opportunity to go out and do both, right? So I mean, if we're thinking about that kind of durable growth profile, how much -- is there a way to think about net new versus kind of going back to the base and maybe kind of the ARR balance? How do you think about that?

Yes. So if you think about our ARR expansion, so put GAAP aside because it all sort of flows through to that, about 2/3 of our ARR expansion historically has come from new logos, and about 1/3 has come from existing clients. That has been incredibly consistent, and the reason is there's so much opportunity in both cases. So we're continuing to invest in both those areas. We're adding reps focused on new logos. We're expanding our marketing to bring more of those 100,000 clients to us. But then once they become a client, we're shrinking books to make sure that we can penetrate more deeply. Obviously, we keep building new modules and innovating and creating more opportunity to sell to existing clients, so both those paths. When I think about the 4 things that drive growth, those are 1 and 2. And they're probably -- to some extent, they're equal. They're both incredibly important to our growth.

It's 1 or 2. I got to ask about 3 and 4.

3 and 4, innovation, which helps everything. It's critical to our growth. Innovation drives up price. It allows us to retain more clients. When we renew clients, the vast majority are renewed at a higher price point than they started at. So a lot of opportunity from innovation and then select tuck-in acquisitions.

What about international? I mean is that -- I know it's not a huge part of the revenue today. But long-term picture, where does that fit into things?

It's a great question. I always laugh when people ask this. I've been asked this every single year for the last 5 years, and my answer is always the same. We're not really focused on international right now. But probably in 3 to 4 years, we'll start focusing on it. But that 3 to 4 years just keeps getting pushed off because the U.S. has so much opportunity, and we have so many different ways to expand there. But as I think about how do we focus and make sure that we execute, the decision to date has been that spreading ourselves internationally is not the opportunity that we want to go after today. We need to focus on the U.S. Now Monocl, the acquisition we did at the end of 2020, has global data. They have 15 million experts across the globe, and we have some presence worldwide as a result of that. So we have some sales reps in Europe, one in Japan. So we've laid a little bit of a footprint for eventually when we want to start aggressively going into the international markets, we have a head start. But even Monocl, the vast majority of their business is the U.S. market.

I'll open it up to the audience if there's any questions. Go ahead.

I have a question on a very basic level. Could you maybe just highlight just what makes your company unique? Strikes me as somebody [ that does this ] very well in some [ verticals ], but there are a lot of health care data and kind of data companies out there. What makes your business truly unique?

Yes. So from a product standpoint, it's the full comprehensiveness and depth of the entire market that we're looking at. All the other companies that are out there have a small slice of the market. And maybe it's niche-y, and maybe it's deep in that area, but nobody covers the entire expansive universe that we've covered. So from a product standpoint, that's highly differentiated, extremely difficult and time consuming to recreate. And that gives us all the opportunities to add on these spokes of data, like claims and all this other stuff, and make that more valuable. The spokes can't go do what we do, but we can go do what all the spokes do, which is exciting for future growth. What makes us unique as a company is our culture. We have an amazing culture that is collaborative. People want to be part of something bigger than themselves. The idea that we are helping our clients transform health care allows us to retain and attract people that we may not be able to attain and retract in a different way, so really exciting. Especially in a time where there's a fight for talent, we're able to keep our people in-house. We develop them. We retain them over time, and they're helping us solve the most difficult problems in health care.

It kind of struck me during the IPO process and talking to some of your customers that really -- they sell into the health care ecosystem, but they don't -- they're not health care companies. And so maybe talk about the opportunity there in terms of the customer base and how do those customers really utilize the product.

Sure. So we sell to anybody selling into health care, wanting to compete in that market. So our 4 big markets are life sciences, which would be biopharma and med devices. We sell to health care providers. We sell to health care IT organizations. And then I think what you're referring to, Brian, is this diversified group of companies. So these are companies that sell to a lot of different industries but understand that health care is a huge market. It's a $4 trillion spend. $1 out of every $5 is a spend. So companies like the HVAC company that we talked about on our most recent earnings release, banks and staffing organizations, commercial real estate organizations, these are companies that sell to a lot of different markets. But if you really want to be successful selling into the complex health care market, you need more specific intelligence than just data on accounts and executives. So those companies are investing in Definitive Healthcare to make them more successful selling into this important market. Great growth area for us. We had tremendous growth last year in our diversified group. And frankly, across all of our different markets, we've seen tremendous growth.

And maybe just talk about some of the enterprise or larger customers? And what have you seen there? And how have the sales cycles kind of compared to your expectations over the course of 2021?

Yes. Enterprise is an extremely -- enterprise clients are extremely important to us. So these are companies that we define as $100,000 or more in ARR. So we'll get enterprise clients in 2 ways. We bring clients on that are $100,000 from the start, and then we have a lot of clients that come in at maybe $50,000 or $60,000, and we have to send them more modules or expand to new functions within there and get them over $100,000 this year. Really important group to us and now makes up 57% of our ARR overall, and they're great because they -- not only -- the ARR is nice, but they have the expansion opportunity as we roll out new modules is really about how do we make those organizations more successful. They'll continue to buy new modules, new data sets to drill all those out. So they're really at the -- they're at the center of what we focus on as a company.

How do you think about the penetration rates for [ buy ] module for those enterprise customers? Obviously, they're already over $100,000. But where are you in terms of penetration today versus -- like is there a theoretical ceiling on -- what does success look like there?

It depends on the market. So when we bring in a client, the typical client buys just over 2 of our modules. With Analytical Wizards, we now have 16 modules that we can sell to these organizations. So depending on the market, life sciences could buy every one of those modules, and we're at the very beginning. We probably don't have anybody buying them all right now because our innovation is fast. We have people buying well into double digits. So a lot of opportunity for us to sell new modules. The health care providers will buy most of those modules over time, and then you get into diversified and health care IT. And the sweet spot today based on our modules is probably 7 to 9 that they would buy, so a lot of room to continue to grow when we bring on a new client.

I think that's all the time we have. Everybody, thanks for listening in.

Thanks, everyone. Appreciate it.