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

Good morning, everyone, and welcome to JPMorgan's 50th Annual Global Technology, Media and Communications Conference. Appreciate everyone being here today. I'm Raquel Betesh, I'm a software analyst here in research at JPMorgan. And today, I'll have the pleasure of hosting Jason Krantz, the CEO of Definitive Healthcare; and Rick Booth, the CFO of Definitive Healthcare. Rick and Jason, thanks both for -- so much for joining us today.

You got it. A pleasure.

So to get the ball rolling here, this is your first year as a public company. So can you take a minute or 2 and just explain what you do and what the opportunity looks like?

Yes, sure. So what we do is we help our clients commercialize within the very large and complex health care ecosystem. So this is a $4 trillion market. There's about 100,000 companies who are trying to sell into or compete within this complex market. And we help them understand who are all the players in this market, how are they interconnected together, and what is your best opportunity to sell into those organizations. So our clients are life sciences companies, like biotech and medical device firms, health care IT organizations, health care providers and then any other diversified company that sells to many industries but also wants to sell into health care and understands that the complexity of health care requires very specific intelligence that we provide.

So who are the core customers for Definitive? And can you give a sense of kind of what the revenue contribution from each looks like or who makes up most of that revenue?

Sure. So life science is our biggest market. As of our time of IPO last September, that made up just under 50% of our ARR. That's followed by health care IT, which is just over 20% of our ARR back in September. Diversified, which again is companies that sell to lots of industries, either -- these are firms like staffing firms and banks that want to sell into and compete within health care, that makes up just over 20% of our ARR. And then health care providers is a really interesting category for us. So these are hospitals and health systems and large physician groups that are trying to generate physician referrals and trying to expand geographically. Our data and insights helps them do that. That makes up under 10% of our ARR as of the time of our IPO, but it's growing extremely quickly. So over the next several years, we would expect that to grow as a percentage of our ARR as well as life sciences, which is a fantastic market for us.

Your business is 99% subscription. How do you price for your solutions?

Sure. So we price in a few different ways. The first is we price off the modules that you buy, so the number of products you buy, the number of users that you have and then we value price. So just to take you through those 3 elements. The first is the products that you buy. When you subscribe to, say, our hospitals intelligence, you would pay a fee, a fixed fee every year. And then you would pay on top of that if you wanted to add physician groups. That fixed fee that you pay every year, that subscription fee would go up based on that. We have a dozen module -- about 15 modules that we can sell today, so all of those would have an additional price with them. In addition, we sell based on the usage. So this could be users, the number of people that have access to the SaaS platform. It could also be when we sell into a life sciences firm, each therapeutic area that we sell into would be an additional contract for our company. The third component, which is really important, is our value pricing. And value pricing takes 2 different modes. The first is which vertical we're selling into. So we actually charge more to life sciences companies because they get more value out of our product. So life sciences is our highest charge -- our highest fees, followed by health care providers and then everybody else. And the second value pricing is the size of the company. So a large pharmaceutical company for the same product will pay a larger fee than a small biotech company, for example.

Could you elaborate on the idea that life sciences companies get more value and therefore you charge more and just kind of elaborate on why that is?

Sure. Life sciences companies just have incredibly complex needs. So to bring a drug to market, you need to start with who are the experts that need to create your clinical trial protocols and who are the people that need to evangelize your product as you bring it to market. As you come to market, you need to be thinking about who are the physicians that are going to actually prescribe your product. And are those decisions made by that physician? Or are they made by the hospital or physician group that they're part of? And then finally, how does reimbursement work? So how do the payers fit into this? So they're able to use all different aspects of our product and as a result, they're able to derive more value. A health care IT organization, for example though, may use this much more from a pure sales and marketing use case. So they want to be able to segment and target and figure out who are the physicians and hospitals that they want to target. What's the business problems that they have? Do they have a quality problem? Or what IDN are they part of? They'll use all of that information to target, which is very valuable as well, but life sciences just get outsized value.

Yes. The sales motion in the health care is very, very different. For those of you that are generalists, the sales motion into health care is very, very different from the sales motion into other industries. So for example, one health care IT company that was doing a software to guide clinical decision-making around knee replacement surgery. They realized that step one, as they were sizing the market to introduce the product, they needed to get a deep understanding of the number of knee replacements being done but, equally importantly, who is doing them and what those outcomes were. And by the time they've moved through their product development, they needed to have an ironclad business case because you get one shot at a key decision maker. It's hard enough to figure out who that person is, let alone to get 10 minutes with them. And so their salespeople were able to walk in to a Chief Medical Officer and say, here's the volume of knee replacements that you're doing. Here are the outcomes that you're getting. By the way, it's costing you this much in Medicaid reimbursement. Here exactly are the doctors that we would target for you to do this, tada, tada, tada. It's a totally changing game. You guys have all heard about the decreasing access to clinicians and other key decision makers. One of the consequences is the shift from the physical rep to digital tools which help you prepare, so in that critical face-to-face meeting, you can really drive your value. And so that, if you think about Salesforce.com as a horizontal CRM, Veeva as a vertical CRM, it's much the same way. You can think about ZoomInfo as a horizontal data player and us as a vertical data player. So as ZoomInfo is to Salesforce, we are to Veeva.

So can you walk us through how you guys arrived at your $10 billion TAM?

We tend to be conservative in everything that we do, and that number is arguably larger now. But at IPO, what we did is we looked across each of our verticals. We developed a comprehensive data set, identifying over 100,000 companies. And that was after filtering out sizes that we didn't think were applicable and applying the revenue figures that we've achieved with existing customers back into that base. So we're presently at just about 3,000 of that 100,000 prospect universe. And that -- since then, we've introduced several more modules and we've acquired a powerful analytics capability through Analytical Wizards. So we have a large and vibrant market opportunity in front of us and the economics of pursuing that are phenomenal. We have extremely high LTV-to-CAC ratios driven in part by near 90% gross margins because this is a data and software play. So one of the things that brought me to the company is just this incredible combination of high growth, efficient sales and marketing, gross margins that translate that into profitability and a capital-light model that drops EBITDA basically 100% to free cash flow. So in today's environment, where you're beset by uncertainty on all fronts, knowing that we're domestically focused and we have no physical supply chain to worry about, and we're in a very recession-resistant industry. Even in COVID, we grew at 30% year-over-year. There was only about a 6-week visible impact on our pipeline. That, to me, are some of the most investable aspects of this business model. Sorry to take us down the financial rathole, but...

It's always good to go down that rabbit hole. But there's a lot of concern among investors about the potential for recession. So how do you guys think that could potentially impact your business? And to what extent have you factored that into forward guidance?

Yes. So we had a really strong Q1. So we've had growth across all parts of our business, which is all 4 of the verticals that we participate in as well as for bringing on new logos and continuing our land and expand with existing logos. So things are quite strong. Obviously, there's macro headwinds affect everyone, but I think a lot of the things that Rick just pointed out are really important for Definitive Healthcare, domestic health care, which is very recession-proof overall. And then all of the tailwinds that we have, which is the digitization of health care. So in a world where people are forced to cut back, we help them grow. So we help them grow more efficiently than they can on their own by providing data to figure out who they want to spend their time with and how to effectively target them. So we think we're in a really good position no matter what the future holds from a macro standpoint. If you go back to the COVID year, I think it is an interesting point to bring up. So we sell into health care. Health care system, as we know it, essentially shut down for 6 months in 2020. No elective surgeries, that's a big client for us. Health care IT was not being implemented too rapidly, big market for us. That year, we grew 38%. So just to give you a sense of what happens in tougher times. So we think we're in a really good position. We've shown really good growth, as you saw through our Q1 results, and we think we can continue to do that going forward.

The other thing that's powerful about this business model is any company that sells into health care is a potential customer for us. And so if you think about in a broader recessionary environment where manufacturers are suffering from supply chain, et cetera, et cetera, where are diversified companies like waste management or others going to look to for growth? They have to look to health care. That's going to be where they will look. And the ROI, particularly within life sciences, for a rare disease company in many instances, if they can find just a handful of new patients, they can pay for their subscription.

So how much of your growth right now is coming from existing customers and pricing changes versus more users and modules?

Yes. Historically speaking, as you think about our expansion, so -- which is either bringing on a new logo or selling more to existing clients or raising prices, it's about 66% new logos and about 33% selling more to existing clients. That has been a very stable percentage over the last several years. And I think it really gives you a sense of how robust both of those areas are. So we're playing in a very large market, 100,000 companies that we can sell into, we have 3,000 today. So what that means is we have a tremendous amount of opportunity to continue to bring on new logos. And then as we bring them in, they get turned over to our account management team, who's responsible for renewing them and then upselling them over time as well. When we bring on a new logo, they'll sign up for a couple of modules that we sell. And we have, as I mentioned before, we have over 15 that we can sell. So being able to continue to sell them more products over time, there's a tremendous amount of opportunity that we're in the first inning of. And as we continue to innovate, we create more opportunities over time. So that gives you a sense of how that breaks down and what we expect to see in the future.

How many modules are customers purchasing on average?

Yes. So when they come on as a new logo, they buy about 2. And then the amount that they expend depends a little bit on the industry that they're in. So life sciences could potentially buy all of our modules. So they want everything that we potentially provide to them. So over time, they can get into double digits, and we have clients that are in that area. As you look to our other markets, health care providers can buy most of our modules, they'd be interested. And then health care IT and diversified, you could see them over time, a good client would have 9 or 10 of our modules.

And modules are only one way for us to grow. We have strong growth in our multiyear pricing because we're so active with our platform. So our customers are happy to sign up for multiyear deals with mid- to high single-digit price increases. And the way in which we price is we look at the value that will be received from a given therapeutic area, for example, within a larger life sciences organization. We'll license it to that. So in addition to broader application of the tools, they can also be bridged across multiple therapeutic areas, in brands as well as expand it in the number of seats. So I think investors sometimes have a tendency to focus on modules because it's a simple number you can put in a spreadsheet. But in reality, the growth in the adoption and the long-term optionality of this platform is about much more than modules.

Piggybacking off modules there though. Is there a bulk or a concentration in which modules your customers are getting? Or is the penetration there more equal?

There are certainly ones that are more popular overall. I mean, if you think about the health care universe, the mainstays or the central part of the health care universe is hospitals and physicians. So those are very popular products. The physician group product is a really interesting product that we have because this data doesn't exist anywhere else. We've built this from the ground up, identifying who are these physician groups, who are the physicians that are affiliated with them, and how are they linked into imaging centers and skilled nursing facilities and surgery centers. So it's very, very complex data. That's extremely popular. Our claims data is quite popular as well. And then all of those ancillary, all the post-acute is popular as well. But those 3 areas, as you think about the health care system, that sort of is reflected in where we sell more product.

One thing that I think investors are beginning to appreciate but aren't all the way there is the difference between our claims information, our claims data and the insights that we can provide versus commodity claims providers. So if you think about many of the traditional or legacy companies that provide claims data, they're missing many of the facilities in the U.S. If you think about the U.S. health care system, about 45% of facilities never process a claim and doctors are always moving, et cetera, et cetera. So what our platform does is really unique is we've mapped as close as possible to every health care provider in the United States and every facility. We've been tracking them since 2011. Up until 2019, we didn't have any third-party data. So we have this proprietary view, which then means when we appended the claims information starting in 2019, we're able to buy a commodity, raw claims information, map it against our unique affiliations information and start to answer questions that are not just concerning but absolutely fundamental to providers and life science companies. So if you're a health care provider, you're desperate for revenue right now. And what you really want to understand is how can I get more referrals into my system and how can I stop leakage out of my system. Well, if you're missing half the facilities in the U.S. that are potential sources of upstream or downstream referrals, you're starting with one hand tied behind your back. And that's what makes us, if you're thinking about Definitive Healthcare versus a Clarivate or an IQVIA, that's the most fundamental difference. You hear us talk a lot about our innovation flywheel, the Definitive ID and the way in which we derive new information using machine learning, but that's really core. So when we shorthand it by talking about claims, don't think it's the same claims that other people are talking about.

How differentiated are the sources of data that you guys use?

Yes, extremely. So as Rick just mentioned, from 2011 when I started the company through 2019, all of the data that we had that was collected was proprietary. We bought no third-party. We licensed no third-party data. So we were getting that data from our proprietary data collection which was phone calls. We make about 700,000 phone calls a year. We do e-mail surveys in the millions to directly -- to get data directly from providers. And then we've developed technologies to gather data on a real-time basis from a few hundred thousand different sources out in the public domain. And we're pulling all this data in constantly, and we've developed algorithms over the course of the year to link this data together and cleanse it. And when information was missing from one source, we figured out how do you take a proxy that doesn't seem related and start to figure out how can you fill in those blanks. And you do this over the course of 11 years and it builds on itself and it accelerates like a snowball over time by working with our clients and trying to understand with them how do they interpret this data and what can we use for proxies. And you develop this view of the health care ecosystem that is completely proprietary and does not exist anywhere else. And if you want to go recreate it, in my mind, I've been doing this a long time, I've been building data businesses for 25 years, it will take you 11 years to do it. So enjoy that journey. But it makes it very difficult to recreate. And that is a value proposition that's going to last for a really long time. And we keep deepening that moat by creating -- adding more sophisticated data science on top of it. And every time we bring in another new data source, we make the overall platform stronger and we continue to create and deepen that moat over time.

Who do you guys see as your primary competition? And does it differ by customer type?

It differs by customer type significantly. So if you think about life sciences, we sell against companies like IQVIA and Clarivate and Symphony. They have great claims data sets, as Rick said. But what we do is just completely different. So we take a commodity of claims. We attach that as a proprietary view of the world with affiliations and quality metrics. And we now allow clients to do things like I want to roll up claims volume by a health system or I want to understand when a patient actually leaves a health system network. So all new use cases you can't do with only claims data. So what that means is a couple of things. It means we're solving new problems for clients that they've never sold before without using consultants for several months. That's really important. The second thing that it means though is we can replace an IQVIA or Symphony if they want to use our claims data or we can sit beside them and they will link all of that proprietary data to an existing IQVIA claims data set for example. So it becomes an and or nor, which is a really powerful place to be in. It allows us to have a tremendous amount of white space to continue to grow. As you think about our non-life sciences markets, our core and our diversified market and our software IT market, we'll compete more with ZoomInformation. Zoom has a great business model. I have a tremendous amount of respect for that company. But they are all about being 10 miles wide and an inch deep. What we provide is all of that health care context, quality of health care affiliations within their cost of an episode of care, for example, all of the data that's very, very health care specific that is incredibly important if you want to sell into health care that Zoom would never do. They're more about international expansion, all of that. So we will tend to do really well against them when you sell into companies that have -- that really put an importance on selling into the large health care market.

Can you talk a little bit about the Definitive ID and just give some color on what it is and how it's being used by customers?

Yes. The Definitive ID is really important. So as I mentioned, we've mapped out the entire health care ecosystem, every single provider. The Definitive ID is essentially the key to who all these organizations are and how they're all connected together. So if you want to understand the complexity of this ecosystem and how a physician is related to multiple facilities or how a physician refers to other physicians, the Definitive ID allows you to follow this path and understand the entire ecosystem. It's really -- as you think about DUNS number, has for years and years been the number to think about credit across different corporations. What we've done with the Definitive ID is really the same type of thing in the health care universe. We're the only people that have mapped out the entire health care universe. It's becoming the de facto industry standard to understand who are the players in this universe and how are they connected together.

Yes. I mean it's so complicated to understand this because you might have a doctor who practices across 5 facilities. And some of those facilities are governed by a physician group that doesn't appear anywhere in the claims data. So when you're trying to identify the true decision-maker and how to influence this doctor, you need to understand things like where is their primary affiliation, who are the true decision-makers within the organizations that are doing that because often, individual clinicians are not making buying decisions. And then you have to figure out who are leaders and who are laggards. So for example, if you've got a new drug, you want to understand who's willing to switch from prescribing the old faithful to prescribing a new drug and drive it through their system because 80% or 90% of them just renew. So these are all of the things that, particularly when you're thinking about a ZoomInfo who's trying to cover the entire world in multiple geographies, this is the power of the vertical-focused business model.

I want to open up the floor to Q&A. If anybody has any questions, somebody will come and help you ask your question with a mic. Yes, gentleman in the front.

Yes. Regarding the proprietariness of your data, you gave a great example for a period of time of a decade, it's all proprietary. And now you marry that with the third-party. So if you look at -- if you can comment on the company-wide basis, if you look at the whole data, call that 100%, how much of that is proprietary and how much of that is third-party? So maybe there is no clear answer because, over time, the commodity data, because it is attached to your proprietary, becomes semi-proprietary. So if you -- if there is any way you can categorize the scarcity of your data set, that will be fantastic to understand your story.

I think 100% of the data becomes proprietary, as you mentioned. There becomes a sort of gray of what started as something we licensed. We transform in so many different ways. So if you think about just claims data as an example, first of all, we get claims from multiple different sources. So there's duplications in that, and there's a lot of work to do just to sort of merge that together and clean it up. But then there's -- claims are very messy. This is not, you get a claim and it tells you all your answers. There's a lot of missing data in that. There is -- it's unclear where the patient is from. It's unclear the site of service that the physician actually provided on. By linking that to our proprietary data, we're actually able to insert a lot of that information and broaden that claim and deepen the amount of insight from that claim. And then when you link it up to the proprietary data, you can roll it up and you can see when patients are leaving network. So it really all becomes proprietary over time and is massively transformed from any original source that we got it from.

The other question is regarding the modules. I mean you actually started talking about the 15 modules. And I believe that every year, you guys introduce 1 to 2 new modules into the marketplace. I don't know whether you guys have talked about what would be the peak. In other words, I mean, the -- looking out 10, 20 years, how many modules you're going to have? I mean -- before running to kind of -- running to like a diminished return on the incremental modules. Because there are a lot of companies that share a similar model, for example, Advisory Board. For example, the CEBs. I mean they are not exactly the same, but they are -- they have the similar models. And eventually, I mean, they grew to be much bigger before they saturate that market. Although the numbers of penetration, it is still way below their target. So I just wonder how you guys think about this. And that would be helpful.

Yes. It's a really important question. I guess a few things that I would think about on this is, first of all, there's -- our platform is entirely integrated together, which is really important. So while there's different modules and add-ons, everything is integrated, so you can sort of bounce around the ecosystem, if you will. And that's essential to our clients because this market is so complex that you need to understand in its own totality in order to be successful selling into it. So everything is integrated together. The number of modules that we have is there will be a tremendous amount of innovation at Definitive so that we could have 100 modules that we want over time or we could have 20. It's going to be really more about how do we want to commercialize this new intelligence that we have. So let me give you an example of a decision we're trying to make right now. So we -- our data science team has been working for about 8 months on physician prescribing behavior. And essentially, the idea is how do you figure out -- Rick alluded to this a little bit before, how do you figure out which physicians are actually driving prescription behavior versus I'm being told what to do by my physician group or my IDN that I'm part of or I'm just a guy that refills and maintains. So we've done a ton of work to help figure that out. Now that, we could either push that into our Rx module and make it better and raise the price as a result. Or we could say, this is something that we want to separate out and charge separately for and then it would become, in theory, another module. So I think, I guess, the answer is really, there's sort of no limit to the innovation. It just becomes much more around how do we want to package this up and continue to charge more. Is it higher price? Or is it in a different module? And those decisions will really be made dependent on the innovation.

And there's more and more raw material available every year. In contrast to some other parts of data-based industries, in health care, the pressure is to release more information to improve the quality of care. So with our unique core assets, we can expand their functionality and their analytical abilities at very low marginal cost. It's one of the beautiful things about this business model.

Any more questions from the audience? Feel free to raise your hand if anything comes up. So how much of the business at this point is analytics versus core use case from CRM?

I don't totally understand the question. Sorry.

How much of the business at this point is analytics versus core use cases?

Yes. So I guess I think about our innovation in really 3 ways. It's continuing to bring more data into our platform, which is more proprietary data, so pulling in more data, cleansing data in new ways and then adding data like more claims providers. The second way is data science. So how do we take all of this data and create new information from it. That physician prescribing behavior data that I talked to, that's an example of using data science to create new intelligence that doesn't exist. The third innovation is analytics, which would be using data that we have in new and unique ways to allow our clients to get the answers that they need and the tactical information they need to go act upon that much more quickly in their workflow, pushing into their CRMs and other integrations. All 3 of those are highly important, how you sort of link between them all, all 3 of those are key parts of our innovation every single year.

Do you guys view #2 -- number of Phase II or Phase III clinical trials as a leading indicator for Definitive Healthcare?

Yes. Within life sciences or biopharma in particular, we'll start selling -- we actually are selling to clients earlier and earlier in the process. It used to be we'd sell to them when they were Phase III or commercial. Now we actually start selling in Phase I and even in the IND stage. And the reason is we have all of this data on 11 million experts globally. These are the people that are experts in designing clinical trials or experts in a specific genetic mutation. They are the people that you need to bring in early to help take you through that clinical trial process which has been a great opportunity. We also help those companies size markets. So as you think about where to allocate your research dollars early on, you want to figure out how many patients there are and how concentrated are those patients. We can help them do all of that so that they make the right product development decisions very early in the process.

Can you talk a little bit about what your long-term growth outlook looks like?

Yes. We see the -- we're in a market that is expanding. Health care information, the most recent studies that I've seen, have it growing more than 20% year-over-year. In our fiscal '21, we grew just about 40%. Long term, you'd never project that out over 10 years, but we feel confident in our ability to continue to grow in the high 20s, low 30s over a very long time period and do so while delivering the extraordinary economics that we have. We're going to exit this year with more than 30% free cash flow. And in our long-term model that we discussed at IPO, we see the potential to return to 40% to 45% unlevered free cash flow margins. We've successfully delivered that and more before we incurred the fixed costs associated with going public.

Do you expect your long-term strategy to incorporate M&A at all or be more focused on organic growth?

Definitely include M&A. We have a very, very successful history of being tightly focused. We've tended to acquire early-stage companies where they have a unique data asset that we can quickly incorporate into our own. And when I say quickly, in a matter of months, combining the information, so that both their legacy sales force can be more effective and upsell and our sales force can take their capabilities to a broader portion of the universe. So think things that are in the -- I would call it the tuck-in category, $5 million to $25 million of revenue, tightly focused within our existing markets, because we're not looking to be all things to all people. And if we can see the combination of the fit of the technology and the fit of the route to model -- route to market, then we're prepared to move aggressively, and we've got the capital already on the balance sheet to do so, so no worries about dilution.

Jason and Rick, thank you both so much for being here and for joining us today. It's been a pleasure hosting you.

Thank you. Appreciate it. Thanks.