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

All right. Well, good afternoon. My name is David Grossman. For those of you who I don't know, I cover the digital health space. And it's my pleasure to welcome the management team from Definitive Healthcare. On my immediate left is Robert Musslewhite, the company's -- you are the CEO now, as of today?

President still.

President. President. Kind of on-site promotion here. We've got Rick Booth, the company's CFO. And to my far left, we've got Jason Krantz, the company's founder and current CEO, soon to be Executive Chairman. So thank you all of you for joining us today.

So I'm going to kick it off. If anybody has any questions -- I don't think we can take questions online, but anybody in the room, feel free to raise your hand. Happy to get you involved in the conversation. But let me kick it off. So Definitive is in the data business, right? And it's -- your business consists of taking unstructured data, right, and applying algorithms to make it more valuable and more usable or to create your own proprietary data sets. So there's a lot of people that say they're in the data business, right? Perhaps why don't we just take a moment to level set and get started and just walk through maybe the most important 1 or 2 products in, your mind, in each of the different categories that you serve just to give people a good sense of kind of what the business is about, and again, focusing on probably the top 1 or 2 use cases in each of the categories that you want to outline.

Does it make sense to rewind just a tiny bit and start with just what we do to kind of enable that use case, maybe?

Right. I was probably too subtle. I was trying to use that as a question to do that but go ahead. Take it away.

So maybe I can give a little overview of why Definitive Healthcare was started and the problems that we're solving for our clients. So 10 years ago, if you look back, you think about the health care system overall, this is a $4 trillion part of the U.S. economy, $1 out of every $5 spent in the U.S. economy is health care. But what makes health care particularly interesting for a company like Definitive Healthcare is how complex it is. So you have all of these different players within this market, from physicians to hospitals, to the health insurance companies that reimburses and the government who regulates it. They're all highly interconnected. And in order to be successful selling into this vertical, you need to sell into that entire ecosystem, not to an individual facility or physician. So as I was starting the company, everybody I talked to said, we love this market. We want to be in it. We want to sell into it, but it's too complex. We don't know how to be successful selling into this market. So that's the problem that we tried to solve and we are still solving today. So over the next 10 years, we built a data set of every single provider of health care across the entire U.S. We have detailed analytics on how they're all connected together, how they're related to each other. We understand the quality of care they provide, the EHR systems and technology infrastructure they use as well as things like the number of patients that they see for different disease categories and different diagnoses. We pull all this together in a SaaS-based platform and sell subscriptions back to anybody who wants to sell into or compete within health care. So our clients are accessing our data to be more successful in commercializing into health care. So if you think about who our clients are, it's anybody selling into health care. There's about 100,000 companies that we think are potential buyers of our product. Today, we have 3,000 of them. Overall, if you think about the categories that we're selling into, it's life sciences, so that made up about 50% of our ARR as of the time of IPO. So biotech and pharma companies, and I'll come back to use cases. We sell into providers, so hospitals, large physician groups, health care IT organizations. And then diversified companies that sell into many industries, but understand that health care is a really important market, and they need health care-specific intelligence to be successful. So that's banks, staffing firms, commercial real estate firms, et cetera. So to try to bring this to life a little bit about how a client might utilize our data. So a health care IT company, to take a simple example, let's say somebody helps drive down readmission rates after knee replacement surgeries. You can utilize our data to understand who, which hospitals and which physicians are driving the volume of knee replacements across the U.S., how they're getting referrals from different physicians, and what their current quality of care is on knee replacements. Do they have a readmission problem? Is this something they're looking to solve? Utilizing all of this data, this health care IT company can figure out who to target, what their business problems are, and how to present their solution to really prove an ROI when they go sit down and have a conversation with that company. So that's more of a sales and marketing use case. On the provider side, our clients will utilize our data to figure out who are the physicians that they want to drive referrals from into their hospital or their health system. Or similarly, they want to understand when they're losing patients out of their network, why are they losing them? Is it a specific service line or a specific geography? And how can they solve that? And then life sciences. We sell across an entire -- across really the entire life sciences business, everything from sizing markets as they're making decisions about where to invest from a technology standpoint, all the way through to as they start commercializing, finding out who are the physicians that care for the patients that they want to treat, who has under diagnosed patients and who are the influencers that are actually driving the prescription process. So that gives a sense of the types of things that we do.

Great. Did you have anything to add, Robert, or are you good?

No.

All right. Great. So one area that you're getting into now is claims, which is another area that's -- it's a very busy space. I think, Jason, you and I have talked about this. There's a lot of providers of claims data. How do you expect to differentiate what you're doing with claims data versus the people that are out there providing that data today?

So coming in -- I'm still relatively new in the company, so coming in from outside, I can tell you sort of have a view on why I wouldn't call us a claims data provider. I'd say we have 11 years of proprietary data that was built up. For 10 years, the company -- or for 9 years, the company didn't purchase any third-party data. It was all built up for a ton of hard work, a ton of investment. For example, even today, we're still doing 700,000 calls to providers to verify information. Those are very targeted with analytics as to the places where we need to update the data. We send 3 million surveys. We still work with hundreds of thousands of websites to pull data in. We still mine data from a bunch of government agencies, pull all of that together, clean it and append it to create essentially our proprietary data around Definitive ID for every provider and every facility out there. So that's all before we append any claims data to it. So when we bring in claims data, certainly, there are a lot of vendors who have claims data, like you said. I think there are a lot of legacy. People have been running claims for a long time. But without that web of affiliations and reference data that Jason talked about that drives our differentiation, they can't do with claims data what we do, we append that to the claims data that makes it way more powerful. So for example, when Jason talked about the life science use cases, if you only have claims in your life science company, you'd be able to understand what happened to a certain patient, but you wouldn't necessarily be able to roll that up to the appropriate provider and facility and physician groups. So what you might not be able to tell is if I'm really going to go target the right buyer for something that I want to market or the right influencer, you won't necessarily know that a procedure occurred in a certain facility, and that facility is the buying entity for your potential drug or therapy. So you just don't get the richness that we can provide. So essentially, every time we add data, that data makes our platform more powerful. And then we're able to conduct our own AI and data science on that data to create new data sets. So the last example I'll give is because we have claims data and because we have the years of proprietary data built up, we've been able to help our clients understand not just who are the prescribers of their therapy, but who are the influencers in their drug class. So someone might provide it because they're told to by their -- the buying entity above them. Others might be doctors who are actually experts in their field are the ones that they start prescribing it, others will follow. Or if -- third, you can find out who the deciding entity is and target them for your sales. So that's something you never would be able to do with just the claims data set alone.

Right. So maybe this is an opportunity to kind of help people better understand, just a segue, and we've covered a little bit of this already, but the competitive dynamics in this marketplace. And how do you define the competition? Because I think it's pretty hard in this particular space to define competition. I've got 3 companies here alone this week that say they're doing something like this in some way, shape or form. So do you want to tell us a little bit about how you define the competitive set? And if you do lose business to somebody, and I think it's really hard in this market because usually it doesn't really work quite that way. It's not like you're buying -- designing in a semiconductor right into a box. So -- but if you do lose a piece of business, what are the reasons you lose that piece of business?

Sure. So on competition, what we always say, because it's true, there's really is only one Definitive Healthcare. There's no one who does exactly what we do. And that's a real positive in this market. So we do have other entities, and I'd probably describe it best by segment. So in the life sciences space that Jason talked about, there's the IQVIAs, the DRGs of the world that provide largely claims data, the legacy data providers. A lot of our clients will use those -- that data and have been using them for years for sales force measurement and compensation-type metrics. But none of them have the affiliations data and that map of the ecosystem that we've built up over the years. And so when we come in, that will be generally what life science companies always want from us. And then it's a question, will they also work with us on claims or on the combination of claims and our reference data. So sometimes we might replace those other data sets. But other times, we'll just sit side by side. But there's no other place for them to get the affiliations data that we can bring. So that's usually -- we don't really consider ourselves competing directly against those vendors. It's more about selling into the same clients. On the -- if you go to the far end of the spectrum such to our diversified client base, these are companies that sell into health care as well as other segments. There's lots of list providers or kind of executive list services, there's ZoomInfo that kind of go a mile wide, but not that deep in terms of providing contact points and helping people reach the right people, but health care is totally different. Just having the right people doesn't tell you anything about the types of use cases that Jason was talking about for these groups. So it really doesn't help you sell into health care effectively unless you know which physicians are treating which kinds of patients, rolling up to which facility, which IT vendor are they're using today, which GPO are they affiliated with. So all that stuff in health care in general. So someone might buy ZoomInfo to work across industry, but they'll still buy -- if they have a focus on health care, they'll still buy Definitive Healthcare to ensure that they can sell effectively into health care. So again, we don't really compete, we tend to sit side by side when we go into diversified. So we don't really have a light competitor in that light. In terms of the second part of your question, like when we lose business, why do we lose it. The biggest primary reason for us in life science business is that either a drug fails. We've been working with them and the drug is now being commercialized. That tends to dry up. Or M&A. And with M&A, we'll usually keep the dollars. But if a smaller drug company is bought by one of the larger ones, we'll keep that spend for a little while. But then over time, you're kind of serving the integrated in, and you're serving that drug within the larger company. So generally, M&A over the long term, that may end up losing some of that business.

Right. Then...

And I don't know if you'd add to that, Jason, for other reasons?

I mean sometimes Nexus gets mentioned in this bucket. I don't know if that's someone you see at all. Not at all.

We really don't. I'd say they're a data source for some of our clients. Our clients buy a lot of different groups of data, but I don't think their data is apples-for-apples in terms of...

Right, on the health care side. Got it. All right. So there's obviously, a lot of attention now on the macro. I'm sure you guys get this question every meeting that you have. And so as I think about your model, I think of 3 elements: the health care end markets, obviously; net revenue retention, so same-store sales growth, let's say; and new client sales, right, some new bookings. So recognizing -- I don't think, Jason, you've ever really been at the scale when you've had a major economic slowdown, right? So you've never really faced this before. So I realize that's somewhat new to you. But maybe you can discuss at least how you're preparing for that possibility even though it hasn't really hit you yet. And if it does hit you, as you think about your business, what should those 3 vectors do you think would be impacted most?

I mean it's a good question because we all read the news and the environment feels a little different. But for our model, and it's not like we don't talk about it or think about it, but our model is incredibly durable. Like number one, we sell into the revenue-generating portion for any of our customers or the growth portion. So a lot of times, it's the first dollars they're going to spend. I mean no matter what the economic environment is, people are going to want to sell and are going to want to grow and going to want to try to expand their business. So it's a very good part of the market where we are, and we provide a high return around that endeavor for all of our clients. And second, yes, health care is a great market, but remember, we have 100,000 potential clients. So a lot of our clients are not health care companies. They're just companies that are selling into health care. And health care, among their end client basis, tends to be a continuously growing market. So it is a good place for them to focus their attention. So again, if you look across our customer base, it's a place where, in our experience, they're going to want to continue to spend money. I think the best example of that, if you go back to 2020 during COVID, I wasn't here, but the company -- the health care market was really disrupted for at least 6 weeks and probably for a few months early in that year and did have some impact on our new sales, but the company, Definitive, still grew 38% that year. And so I think that there's a lot built into -- we're still such at the tip of the iceberg against those 100,000 clients. We only have 3,000 today. In terms of what we can do for our clients, we're still really small relative to the value we can provide for our clients. There's a lot of upsell we can generate. So I think as long as we continue to execute, you'll still see -- continue to see very strong growth. In terms of retention, we do divide our sales into new sales that generates new logos. And then once we have someone on board, we totally focus on upselling them, we're upselling them. And that sales motion has been -- and that -- the results of that have been pretty consistent year-over-year also. Most years, we'll generate about 2/3 of our incremental ARR, so new ARR from new sales and about 1/3 from upsell, and that's been true for the last several years. And then the last thing I'd say about just looking forward in the environment is Rick's favorite point about visibility and just how visible the model is. I don't know If you want to...

The business model, if we step back one level, the business model is ideally positioned. So if you think about the biggest topics that are front line of the news, we're not impacted by international tensions. We're not impacted by supply chain. The secular long-term trends are toward more digitization of information, fewer sales reps, therefore, they need to be more efficient. Then the economic model that we bring to address this opportunity is incredibly efficient, near 90% gross margins. As those scale, and as Robert mentioned, we have wonderful visibility. We enter any given 12-month period with 90% visibility to revenue. So it would be extremely unlikely for us to have to tack or adjust in any sort of a sudden fashion. And because many of our costs are fixed, absent continual effort to continue investing in sales and marketing and development, we would have a natural expansion of margins. So we delivered not just strong growth, but also very strong profitability. If you think about us as a combined rule of 60 or rule of 70 company, we're just ideally positioned. The way that I like to think about it is tough times for everyone else tend to create opportunities for us.

So is there anything -- you just reported a really strong quarter. You raised the guidance by the amount of the outperformance. So is there anything you can share about what you're seeing in your pipeline? Because like you said, you've got very good visibility that gets priced in. So we're thinking into next year almost right now. So anything about the sales motion, the pipeline, anything you're seeing in the market that you can share today that would at least give us a better understanding of what's going on with your business in the context of the current environment?

I mean first quarter, the last we reported on was still a very good growth quarter across all of those segments. We continue to see a really strong -- we track everything. So we have sort of a waterfall that takes place, which is you have to get the right number of leads in to create the right number of opportunities, do the right number of demos to sales discussions to close rates across the way. And so really, all year, you focus on both not just the results of the sales, but everything you're putting into the pipeline at the beginning of it. And that activity has continued to be really strong. So we're filling the pipeline with the right number of leads and opportunities, and we have a huge focus on that across the summer because like a lot of organizations, we tend to do more of our commercial activity relative to other quarters in the fourth quarter of the year. And so given a 2- to 4-month sales cycle, we're going to want to have those leads and opportunities coming through across the summer, so we're well set up for the fourth quarter as well.

Got it. So it's fair to say that those inputs, Robert, that go into building pipeline and sales activity, you haven't seen any real diminution of any of that thus far?

Team has done great. I think we also talked about we're fully staffed on our commercial teams, which is great. Very happy about that. And being fully staffed makes sure that when the opportunities come in, you can continue to progress them through the funnel at the right rate.

Got it. I'm sorry, go ahead.

Focusing on that across summer obviously.

So before I go on to the next, does anyone in the audience have a question, just to make sure if anybody has anything before I go on? All right. Good. So let's talk a minute about margins. So you were running mid- to high 40s prior to going public. You're running kind of low- to mid-30s now, rough range. And I think there were 4 elements to that: increase in sales and marketing; increase in R&D; public company expenses; and the integration costs related to some acquisitions, right? Those are the 4 things that impacted it. So let's focus on those first 2. So the investment in sales and marketing, the investment in R&D. So can you talk a little bit about what you hope to accomplish with those incremental investments? It's great to say, we're spending more. But what's the endgame? What are you shooting for with those incremental investments? Because you were doing pretty darn well going into the public offering. So...

Yes. It's really about continuing to scale. If you think about the nature of a platform like ours, where we continue to add capabilities, we want to get deeper and deeper into our existing customers as well as continuing to land new customers. 18 months ago, we had no million-dollar clients. We now have low- to mid-double-digit million clients, and our largest client is now over 2 million with us. And so in order to support that deeper, more sophisticated sales motion, we've continued to verticalize our sales and marketing motion. We've talked about how a few years ago, we verticalized new business. We've now verticalized the support teams in terms of customer success and account executives. We're increasingly verticalizing our sales and marketing materials and motion and getting extremely targeted around that. So the right kind of high ROI investments that will help us continue to scale because we're focused now on 2023, 2024 and 2025 growth. So as we take our largest customers from a couple of million to mid or even high single-digit long-term potential revenue from some of these global pharma companies, that's the structure that we need. So from a sales and marketing perspective, we continue to be very, very efficient. At time of IPO, we were over 10x LTV to CAC. And as I said then, and as I say now, I'd be happy even if that was mid- to high single digits, still an excellent return on investment. And then in terms of development, as you develop a more sophisticated marketing operation and as you decrease the number of accounts that a salesperson is trying to cover, you need to keep arming them with incremental functionality, and that's incredibly high ROI because we serve our customers from a single unified data set. On top of that, we provide analytics and workflow that bring the insights from that data directly to bear on a specific actionable decision to make it as easy as possible, like in Jason's example of the knee replacement software, how to serve all of that information so that you can say, here's what it means to you, your readmission experience relative to Medicaid reimbursement. So that workflow, once you have the data and once you have our unique affiliation data appended, you can spin off those insights very quickly. And then we have a general analytic engine above that. So sales and marketing and development are incredibly efficient and effective investments for us. Public company costs are really meaningful at our scale, high single-digit millions of fixed public company costs. And many of our costs are largely fixed. We talked about a few things, including public company costs and the short-term dilution from the acquisition of Analytical Wizard. One thing we didn't talk about is the cost of adding prescription data. Again, that's a largely fixed cost. So we are ideally positioned to continue to expand our adjusted EBITDA margins as we go through this year. We should exit with adjusted EBITDA run rate of 30% or more by the end of the year, and that translates almost directly to free cash flow.

Right. So it's fair to say that margins though, have reached a theoretical low at this point given that you're only leveraging those expenses going forward, those gross investments?

Right. Exactly. And we have a culture of frugality. The leadership team has operated through the 2008 and other economic downturns. So we measure everything. We focus our investment where we see clear returns. You pointed out that we used to operate in the high 40s. I think as a public company, there's a different level of investment required. But long term, we're very comfortable about operating in the low- to mid-40% range over time to grow.

Yes. Got it. Okay. So there are 2 other things. I just want to make sure, are we at -- because the clock -- I don't know if it reset properly. Are we at 10 minutes half the hour right now? Is that where we are?

We have 5 more minutes.

Is that right? So that clock is right? Okay. So there's 2 things I want to talk about. Let's do the leadership transition first. So you recently announced the leadership transition, obviously, Jason and Robert. I think it surprised some of us the timing of that. So maybe you could walk us through, a, the rationale for the move, why the decision. And probably more importantly, how the change allows each of you to better leverage your strengths and just create more value for the company and the shareholders?

Well, I'll kick off on sort of rationale. So we actually think this is a really good time to make a transition like this. The company is performing extremely well. We've got 3 quarters as a public company that have all been very, very strong. But we've had a history of really strong performance far before that as well. So this is a continuation of something we've been doing for years now. We have a fantastic leadership team that we put together over the last 3 to 4 years, very stable team. We've got a great strategy and a game plan over the next few years. And we are lucky enough to find Robert and bring him on board. Obviously, Robert has great pattern recognition. He can tell you himself, but he was CEO of Advisory Board, which many of you know from scaling that company from $200 million to $800 million. So really good timing to have him take over. And the transition will really be an evolution of something we've been working on anyhow. Robert came in at October 1. He's been running the commercial organization since then. This will give me personally more time to spend on product development in areas that I'm incredibly passionate about. I'm still a big shareholder in the company. This is my baby. I plan on sticking around for a long time as Executive Chair and spending more time on more strategic aspects of the company.

Yes. And for my part, I'm a huge believer in a transition like this for a company. It's what happened in Advisory Board. I worked under Frank Williams for a long time. And he transitioned. I was lucky enough to become CEO. He transitioned to Executive Chair, and we worked together in my capacity for 3 to 4 years really productively. And so Jason and I have a great partnership. I think having his expertise and knowledge and experience with the company around for a long time is a great thing for us and will only make me better in my role and our team better at managing the transition. So for me, I'll take over more day-to-day management of the company. I think we're aligned in terms of being excited about the strategy of the company. So it's not like I won't spend time there, but it will be great to have a partner working on that because I think our big -- the big key to this company, I mean, Rick described it is a very stable model. It's an incredible high margin, good growth model, it's about choosing correctly. So we have all kinds of opportunities, but we're going to do a good job picking the best ones and investing in the right places to drive really that 200 to 800 and hopefully beyond million dollar growth. So that's -- we're lucky to have lots of opportunities. We want to be sure we invest well and choose well.

Right. So if you think about that, and you can take this since we only have time probably for one more answer here is just either what did you bring with you from Advisory Board, do you think, that would be most helpful in driving this enterprise? And then also maybe you can weave in how you think about the balance sheet because you've got a boat load of cash, you generate a lot of cash. And what does that mean for the business?

So very quickly, from Advisory Board, there's a lot of pattern recognition, the sales motion of a lot of smaller dollar subscription-based products is very similar. The way we get new logos sold in is very similar to what we used to do. And then the way we think about growing those accounts once they are clients, in terms of renewing them and then building on those relationships. There's a lot of similarities there, which I think has been really helpful. I love the model here of being able to sell to anybody who cares about health care. So it's 100,000 potential clients versus just 5,000 providers, hospitals, especially given hospitals have had a rougher year this year. We have a broad client base. They actually need Definitive more than ever. So that's been a great -- I like the product mix, and I like the fact that we've built everything off one data platform. So that everything we do -- any time we make a data investment, it benefits everything we do automatically because it's all built off of that common data platform. So that's -- those are huge advantages that I love. And I think lesson learned, those are better attributes than I had at Advisory Board. In terms of the balance sheet. We do have a great balance sheet, and that's what you rightfully pointed out. We will continue to make really disciplined, but hopefully very good, M&A decisions. We've been averaging about one acquisition per year. They tend to not be huge companies, but tend to be very strategic in terms of a new capability or data set or something unique that we can build into our platform that makes what they bring better and that makes our platform better. And then the ability to commercialize that broadly through our commercial operations. So the ability to take that out and expand it over our huge client base for some small companies like that is usually a key value creator. I think you've seen that with Monocl. We're going to start seeing it with Analytical Wizards, our most -- 2 most recent acquisitions. So we'll continue to look at companies like that and bring them in. And it's always a question of can we build or generate the capability ourselves? Or does buying it give us tremendous benefits in terms of speed to market or in terms of capability or data we just couldn't get on our own. And that kind of is the dividing line between whether we build or go out and get it.

Right, right. So I think we've gone past. Is that right? Sorry, I didn't see the clock reset properly. Is that -- are we at...

Yes, it was right.

All right. I think that's it. Thanks for joining us.

Thanks, David.