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

Yes. And we're selling to create revenue with a very direct connection to the return. So certainly, scrutiny takes time, but on the other end of that pipeline, things that lead to revenue with a short payback period are much easier to justify than things that are more indirect.

Yes. Yes, that's an important point. So one of the questions I get a lot is around the size of the opportunity. And you gave us a headline number, you said $10 billion. But I think what underpins the question is like, hey, how many modules can these guys really build from the same data asset, right? So it gets that kind of 2 things, is like, a, what do you look at -- how do you think about future potential for module expansion? And, b, how important is bringing new data assets in to kind of expanding that TAM?

I think both are great avenues for our innovation and growth. So we've been on the pace of launching 1 to 2 and probably a little more modules per year. So those are new use cases built off our platform that expand us into a new area of spend for a client. Or a different area of spend -- new value story for a client. And we've been doing that since -- certainly since I've been involved with the company, and I think going all the way back every year. So I don't think there's any sort of ceiling on the number of applications and use cases we can roll out, especially given the diversity of our end markets. So for example, our data and our platform is amazing for providers. We haven't spent much time tailoring that into a provider-focused product, and yet our provider is our fastest-growing market. So we now have a team dedicated to building a provider product. We expect to have one of those coming out sometime in future quarters. When we have that, that will, I think, accelerate our growth and open up new use cases and provider as an example. And I could go through examples in each of our end markets where we have opportunities to do that. A good example also is you asked about bringing in new data sources. So we continually do that as well. And I think you're seeing that this year as we're adding some new prescription and commercial claims -- medical claims sources. That's important for us to do because of all the value we can create with that. So when you bring the claims onto our platform and merge it with all of our proprietary reference and affiliations data, again, you create many more powerful use cases that we talked about earlier. So for us, we're always looking for new data sources because we can not just have those data sources to then bring to our clients, we can enhance them with all the other things we do by connecting them and creating new data elements from that, if that makes sense.

Yes. No, it totally does.

So this innovation machine is a key part of our growth. So we innovate heavily on our platform. We also continue to build new modules that we can take out across.

And I think it's important to remember that the ultimate decision makers are buying answers, not data. So if you compare this to the way that legacy claims data providers try to solve this problem, they will generally provide a large extract and then professional services to slice and dice in this back and forth process. What we've done is we've instantiated that data into our SaaS application in real time and provided modules that guide users in their decision-making. So it's fast, it's direct and companies that don't necessarily have large teams of data scientists or are having trouble maintaining the staffing of those data scientists can use this to get more leverage out of them. So it really is -- it's a bit of a paradigm shift and a tech application, which rests on a robust platform of proprietary data.

Yes. Yes. I was going to ask about competition next, but maybe that's kind of part of the answer is it's these data providers plus professional services that you're really competing with. But I think investors also look at a company like Veeva, right, who's talked a lot about kind of pursuing a data strategy. So, a, did I characterize kind of the competitive environment correct, who you're selling against like who else is in the last company standing in RFP? And then b, maybe talk a little bit about Veeva and their data strategy, how it compares to what you're doing and if you see overlap there over time?

I always like to say we don't have a direct competitor, which can be good and bad. But in general, we think it's good. We have a moat, and we're the only company that has the health care affiliations and reference data connected to everything else. So in all of our end markets, we're unique. There's no other company where people can get the depth of health care, commercial intelligence that we provide. So you mentioned the claims vendors and Rick talked about them. So if you're going to a life science company, they'll normally buy claims data from other vendors that they've been using for a long time. But because we connect those claims to the reference and affiliations data we bring, we end up covering a lot more facilities and have a lot more of the interconnections, which they can't get from those other vendors. So a lot of times, we'll be side-by-side. They won't trade us out. Of course, we'd love to trade them out over time, but we will be side-by-side and they can't get what we have from the other. So we tend to always have a sales opportunity. We never get closed out by them working with another company. On the diversified side, these are companies that sell across multiple industries but also sell in the health care, there are lots of intelligent sources they get. They're list vendors, ZoomInfo's out there. Those are very broad companies that cover all the industries. We're the only ones that have the depth in health care. And so if you really are going to have a concerted sales effort in health care, you need Definitive to help you do it or you're going to be missing a lot of the intelligence. So that's why I say we don't really have a direct competitor. You asked about Veeva. We sort of see our relationship with Veeva as more of a, I don't know, collaborate -- not collaborative, but we sort of sit -- we work in conjunction with Veeva a lot. So a lot of companies will take our data and load it into their CRM system, which is generally Veeva on the life sciences side, to make it better and more powerful. And I don't think that changes even if Veeva has some data, we have, again, such unique data that I think the value proposition of life science companies, even if they're using Veeva as a CRM, they're going to want other data sources to make their CRM smarter. And that's actually good for us because it embeds us even more deeply in our clients' operations. It makes us much more sticky. So we're happy if people take our platform and take our data and load it into Veeva.

Yes. Yes.

The other piece -- I was going to say just to quantify the advantage we have for a minute. So within life sciences, you have all these legacy claims providers like IQVIA and Symphony and DRG and Clarivate. If you take the claims data and you overlay that on to the entire ecosystem that we've built from the ground up, only about -- you'll miss about 45% of the universe. So 45% of the facilities out there in the world will never generate a claim. And the reason is because they're generating it through the physician or the other relationships that they have. They don't actually issue a claim. So if you just look at the world through claims, which is what like an IQVIA provides, you miss 45% of the universe. That's incredibly powerful, and that took us 11 years to build up that advantage and that competitive moat that we can keep building on over time as we attach claims and build out prescriptions and pulling information on social intent and all the data that we can continue to add to enhance this platform over time.

That's a great step. I want to talk about the M&A strategy a little bit. I mean you guys have been regular acquirers, I would say. At a high level, like what do you look for in a target? Like what are the financial thresholds that it needs to meet? And then maybe you could bridge that into a conversation around Analytical Wizards and what you're doing there?

Sure. I think we start strategically. So we tend to look for companies that have a capability that we see would be really good built into our platform and delivered to our clients, that we think we can also accelerate. So it's something we don't have, maybe we're thinking about developing it ourselves, but in whatever way it's something new and different that we can bring out. And then tends it to be a growing company. It tends to be -- I mean, if we had our ideal company, it's in the $5 million to probably $20 million range, growing quickly, doesn't have to be profitable, but we have to see that it could scale to similar economics, similar margins that we have. And we can obviously help with that. And so if you kind of take that sweet spot, what we're able to do is take a company like that and build it and integrate it quickly into our platform, which makes our platform more powerful, again, from the dynamics I talked about before, and then also accelerate their commercial performance by putting them in the hands of our large commercial teams out across all of our markets. So I think our last 2 acquisitions are perfect examples. Monocl has been a great acquisition. That's our expert information product. It's sold generally into medical affairs representatives and pharmaceutical companies or biotech companies, biotech and pharma. That's been a great way. It's new data that we were able to load into our platform that gave us a lot of additional data. We could accelerate their growth. They've grown faster under our ownership and we're able to use that data and connect it with our data to create new data sources that make us more valuable to biopharma. Analytical Wizards, the company we acquired in February, same thing. They bring an analytical platform that enables very quick and very standardized analytics, again, for biopharma companies, but they can use any data sources in that. So if we're going to a company and they want to use Definitive, but also other data sources, Analytical Wizards can pull all that together and create robust analytics very quickly that then refresh over time that help, again, supplement clients, analytic teams when needed to create awesome analytics that they need. And so it gives us another angle. And there are times even when we walk into a client and they don't have Definitive data, and they might not be looking to purchase additional data, but now we have a solution we can bring to them because they can use their own data and other data sources and still run Analytical Wizards' applications. And we just launched our first product. We announced at the end of -- or in our announcement, the launch of Passport Express, which is the first product that we built together with Analytical Wizards where we essentially preload Definitive data into an Analytical Wizards framework -- analytical framework for about 20 therapeutic areas, and our teams can then take that out and sell that as almost a prepackaged solution. So hey, here we can address your TA, make the purchase on day 1, they're getting the robust analytics from them.

Yes. Yes. Time is dwindling. I want to make sure we spend a little bit of time on the numbers. I think it's important to just reemphasize kind of the balanced growth profile of the business. I mean it was near 30% organic growth, north of 30% cash margin. So we're talking well north of a Rule of 60 business. As you look and think about the trajectory going forward, a, talk about kind of opportunities for continued growth in operating leverage. There is some M&A activity in the model, so like how do you think about balancing all that out? And then, b, kind of like how high is up for margins? I mean we've seen other data-driven businesses get to mid-40s cash flow margins. Like is that in the cards?

Yes. So a couple of thoughts on the margin profile. We value growth and profitability, and we measure everything. Every environment creates opportunity. So just as our customers are providing more scrutiny to spend -- we are doing the same thing. We managed to bring our G&A expense down by 230 basis points over the last 2 quarters from Q4 on a run rate basis. Right now, we're choosing to reinvest that in sales and marketing and development because the ROI on those investments is incredibly high for us. Over time, as we scale, we're confident that we will be able to target at least mid- to low adjusted EBITDA margins. I know some of the larger companies out there are doing even more at greater scale, but we like to stick to what we can see.

Mid- to low 30s?

Mid- to low 40% adjusted EBITDA margin.

Yes. Got it. Maybe just a concluding question, I've been asking kind of all the companies that I've had presenting is just what do you think is something that investors still underappreciate about the Definitive story?

I think the predictability. So this company is built to scale and create shareholder value over a very long time. The combination of our revenue growth, our profitability and our capital efficiency positions us perfectly to compound and scale over time. So we're always looking at the business from a long-term perspective. We enter any given year with about 90% revenue visibility. So it gives us a rare opportunity to manage day-to-day fluctuations, communicate openly with clear metrics. And we like to think that we're a stock that let you sleep at night.

Yes. Yes. Well, predictability is certainly highly valued in this market. So thank you guys very much, Robert, Jason, Rick. I really appreciate you being here.

Thanks, DJ.

Thank you.