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

Thank you, everybody, for joining us today. For those of you who don't know me, my name is Vikram Kesavabhotla, part of our research team here at Baird. I lead our coverage of the health care technology and services space. Very excited to be hosting the Baird Healthcare Conference this week and excited right now to be hosting this fireside chat with Definitive Healthcare. Joining us from the company is CEO, Robert Musslewhite. Just to level set, we have 30 minutes scheduled for this conversation. We're going to kick it off with a quick overview on a couple of slides from Robert. And then we'll dive into some Q&A from there. And I think with that, we can jump in. So Robert, thanks for joining us. And if you want to start with maybe just a quick overview of the business and share anything else you want to touch on to start off here.

Yes. Happy to do it, and thanks for hosting. It's been a great conference so far. So we appreciate Baird hosting. I'm going to skip that one. You guys know that one. I just brought 2 slides for those of you who might not have talked to us before. They're from our IPO, which was last October. And then really, we can let it be Q&A. And obviously, if you guys want to ask questions, feel free to raise your hand, too. The reason -- what's so cool about Definitive, and I've been -- for those of you who don't know me, I just became CEO at the beginning of August. I've been with the company since October. I've been on the Board since last June. So I've been with the company a little more than a year. I ran a company called the Advisory Board Company, which was a public company for many years and then was at Optum. After Optum, purchased our health care business, wherein OptumInsight. And when I left Optum, I came to Definitive because it's an incredible business with huge opportunity. It's category-defining software for health care commercial intelligence. It's really for anybody who wants to sell into health care, market into health care, succeed in growing their business in health care. We have a great solution for them. So that means we apply not just to health care companies but to any companies outside health care that want to sell into health care. So it means we have about 100,000 potential clients who are prospects for Definitive. And we're just shy of 3,000 clients today. It's a huge market, $10 billion TAM. One of the first things I did in coming on board was to really look at our strategy and how we would grow as a company and how big we could be. And the good news from that analysis was we have a great market right in front of us. We don't have to do anything transformational. We don't have to go into a different vertical. We don't have to create a huge international operation. That TAM is very real and very achievable and right in front of us. We feel like we have a lot of expansion opportunities into it. It's a really cool health care AI engine that takes our data, runs data and analytics on it to create new data sources, which gives us a very unique data set for our clients. And every time we add in a new data source or a new analysis on our data, it creates something else that we have in our platform that we can take out to all our clients. And that platform is delivered via a SaaS platform. So it's very easy for our clients to use. I love the fact that I can go sit down with a prospective client, go on the site, demo the tool. And immediately, they see how they'll use it and how easy it is to get the information they need. So we put a lot of time into figuring out how to embed it into their workflow most effectively, but it's a very easy to use SaaS tool. On our financial metrics, those of you who know us, very strong growth, very high margins. We have a Rule of 70 financials and a great management team. The team -- the company has done a lot of work before -- even before I joined of building up the management team with people with a mix of SaaS experience, public company experience and really have a good team in place. It's not like I had to come in and kind of build the team. The team has been fantastic. And that includes our founder, Jason Krantz, who stepped into the role of Executive Chair when I became CEO on August 1. We're very good partners. He's still very active in the business. He's not here today because he's out doing another conference on the West Coast with our CFO. But we kind of divide and conquer that way. And he and I see very eye to eye. We're very analytics-driven. I think there's a lot of value. He still brings the business, of course. He's got a ton of experience. He knows the product well. So I really value having him as a partner. So that's the quick overview. This page, I'm not going to go through. Rick loves this page, our CFO. So I put it in for him. But you can see some of the metrics here. And I think we can leave this up maybe as you start asking questions. And if people have questions about these, please feel free to ask. Basically, our model is one of very strong growth. But we're also very profitable and we care about both. And if you look at visibility in any given year, as we come into the year, we have 88% visibility into our revenues for that year. And I believe it's between 50% and 60% for revenues the following year. Again, a 99% subscription business, very strong renewability, very strong visibility going forward.

Okay. All right. Well, a lot to jump into there. So I guess maybe a good place to start would be a kind of a higher-level question and one that I still get pretty frequently. It seems like a key element of the story here is obviously the quality of the database that you have and the information that you gather. I guess can you talk about how you go about collecting and gathering that information and also maintaining the accuracy of it and how those processes have evolved over time? It would be great to start there.

That's a key part of our operations is maintaining what is our distinctive data and being sure that it continues to be super useful for clients that it refreshes at the right rate, that it's always current. When Jason founded the company, the insight he had was health care is super complicated. If you're trying to sell into health care, it's very hard to understand all the things you need to know to be successful selling in. And somebody should really create a map of the health care ecosystem to be able to help people navigate that. And so he set about trying to collect whatever data there was out there publicly, so government websites, third-party websites, CMS, things like that, and then proprietarily going out and doing a lot of first party or first person research into the market to verify information, to understand which physicians are working for which practices, et cetera and really ended up creating this map of every connection point in the ecosystem. So if you look today, we still do 700,000 phone calls. We still do 3 million digital interactions to verify and update our data. But we essentially have the comprehensive map of affiliations and connections in health care. So we can tell you if you want to know anything about a health system, where does that health system of facilities, which doctors are affiliated with a health system, what IT system they purchase, what GPO they use of their physicians, what is their current practice breakdown, what kind of patients do they see, what kind of success rates they have with those patients, what drugs they prescribe, where they refer their patients. They refer them back into the system somewhere else. It's all those connection points are all in our database and made easy used by our platform. And so when clients come to us, it's for any use case that's around growth. It's business development, market sizing, sales and marketing, sometimes M&A use case, expansion use case. But it's anything around building their business or growing their business. And I love being in that part of the spend cycle because if people end up and all challenged on budgets, I still feel like they're going to spend money on growth and on sales performance.

Yes. So maybe just staying on a higher level before we dive into some more specific topics. I guess when a customer is evaluating Definitive Healthcare as an option, what are some of the other solutions that they're evaluating as part of that process? And what are the key factors that you think are -- is moving the needle on that decision for your customers?

Yes. So going back to your first question, if you think about our distinctive data, it wasn't until a couple of years ago that we actually started buying third-party and we started buying medical claims and now are buying prescription claims. And so that puts us in a world of there are a lot of people who sell claims or who use claims to deliver solutions. But the fact that we add our proprietary database of affiliations and reference data to the claims data gives us use cases that other people can't satisfy. And I say that by reference to -- we obviously sell life sciences, one of our largest segments. Most life sciences companies use one of the large data vendors out there or sometimes multiple of them. So we'd say IQVIA, Symphony, DRG, companies like that, we tend to see but we're not direct competitors with. So in a lot of cases, they'll use those companies for sales force performance benchmarking or for patient journey type work, things like that. But they'll still use us for the use cases that are distinctive to combining claims with reference data. So things like understanding at which facility a certain prescription was made so you know the doc. But you might know where the facility. And that facility is governed by a certain formulary relative to another. There's a lot of specifications sort of having that information to be able to deliver that. So in a lot of times, we'll sit side-by-side with those clients, a long way of saying. Obviously, sometimes, we'll sell against them in the claims universe. But in general, if we sell to a life science company, they're probably using another large data vendor and we're sitting side-by-side. Veeva is the other one we get asked about a lot. Veeva still has one of the market-leading CRMs. So most of our life science clients will use Veeva CRM system. Where we sell to those clients, we tend to sell the unique data that we have. In a lot of cases, they'll integrate that data into their CRM. So it makes their CRM perform better. And we love it when people integrate into their CRM because that makes us stickier. If they're using our data in their CRM, it's harder to take that away in a given year. So it increases the chances we'll continue to renew that client. On the other side, so if you think about our business, we have life sciences companies. We have hospitals and health systems. And then we have everybody else who sells into health care but who isn't a health care company. That includes software IT, professional services, cleaning companies, architecture companies, construction companies. Last quarter, we sold a coffee company. But anybody who wants to sell into a part of health care is a potential client of ours. For those clients, we tend to compete against like list vendors. So a list of executives, companies like ZoomInfo that will give insight into who you want to target within different executive suites. And we just go much deeper in health care. So if a company wants to put dedication to selling into health care, they almost always want to buy Definitive because no one else has that depth to help sell into health care. Sometimes they'll say, "Hey, we're fine with the list sort of across the industry. We're not that focused on health care. So we won't win those." But generally, if someone's focused on health care, very high win probability. And then they'll have us sitting side by side with their other vendors for the other -- ZoomInfo or a list vendor. So it's very rare that we're sort of head-to-head on exactly what Definitive does. But in a lot of cases, we sit side-by-side others.

Yes. And maybe just staying on that theme of kind of elements of the sales process and kind of what differentiates DH. I guess is there a way to measure or characterize the ROI that you're delivering to your clients? And if there's not a specific number there, I guess what else are you looking at to measure whether or not customers are satisfied and kind of measure the value that you're bringing to the table?

Yes. So our philosophy is land and expand. I'm sure that's not different than other companies you guys see. So we have a team that's a new logo team that goes and sells first time to a client. Once a client is on board, then we have a customer success team and an account executive team that's responsible for renewing and up-selling and being the customer success, making sure they get the value out of it. So generally, if someone's on board, they renew at very high rates. We have NDR and GDR rates above 100% -- NDR rates above 100%, GDR very high. People tend to renew over time. When the -- when we try to quantify the ROI, I wouldn't say we quantify that in particular. But we have about 40 client testimonials on our site, most of which will say it's the best investment they made last year, it's the highest return on investment. So if you just think about it like in the life sciences space, a rare drug manufacturer, if we can help them find 10 physicians that are more likely to have patients that fit their drug and end up making 1 or 2 sales, they more than 10x pay for their Definitive Healthcare subscription. And so the value tends to be very high. We don't price all the way to that value on the front end because we want to land and expand and have them see the surplus value and then upsell them over time. But in general, it's, like I said earlier, because we're playing into the sales, marketing, business development growth case, it tends to be pretty clear to our clients this is going to boost their sales. And that tends to be very quick and very fast return.

Yes. So one of the things that you talked about on the last conference call was that you're seeing longer sales cycles evolve with your customer base. And I think it's probably a good opportunity to dive into that a little bit more here. So what do you think is driving that longer sales cycle? Is it mostly just a function of the macro environment and everything that's going on? Or is there something more specific to the category in terms of how decision-making is evolving? It would be great to get some more color on what you're seeing in terms of sale processes right now.

Yes. And for those who don't follow our calls, what we specifically said was we felt like our sales in the second quarter, we saw sales cycles elongate. So we didn't close many deals at the end of the quarter as we normally would have expected to. It was more on new business than upsell, although we saw it in both. But it was primarily on the new side. And that's understandable, I think, because if somebody doesn't have Definitive and they're trying to make a case for it, it's easier to not spend on new versus if you have Definitive and you see the value of it, it's easier to make the case to expand it. It was mostly driven by process stuff like, "Hey, there's a new approval process for this. It's going to take some time. Or CFO put in place a budget process above a certain amount. And our spend fell above that. Or a new person came into the process, said let's hold off on this before we take a look at it." It's kind of the same thing we're doing to our vendors, quite honestly. I mean we've consolidated off space this summer. We consolidated down across Zoom and Teams to one platform and just stuff that made common sense but in this environment seemed to make a lot of sense. So that's kind of what we saw. Our win rates stayed consistent. Close rates were down. And so we weren't losing the deals. Deals are just taking longer and sitting in the pipeline. So pipelines are bigger by a commensurate amount. So I think that's the good news is that stuff is still there. The value proposition is still high. We've been continuing to generate a lot of top-of-funnel activity with people very interested in our work. It's just taking longer to get through that cycle.

Yes. And maybe just to put a finer point on some of that. I mean is there a way to characterize like what a typical sales cycle was like before versus now in terms of how many months it takes for you to close a customer?

Yes. It depends a little bit on size and segment. 2 to 6 months, as we always say, like 2 months for the sort of 1 module, smaller client, pretty clear. They turn on the demo. They see it's going to be valuable. So they'll buy it or not. If you take a more complex life sciences client or biopharma client, where we might be doing an Analytical Wizards analytics project, that's a higher dollar. It's more approval and a little more scoping of the -- what type of data we're going to be using in that product. That can just take longer. So that tends to be the typical amount of time.

And so I guess, based on the discussions you're having now, is there a sense for like when sales cycles can start to normalize again or person behavior can normalize? And I guess what are your customers looking for to give them the confidence to kind of go back to making these decisions at the same pace that they were before?

Well, like we said at the end of the second quarter, we said it -- out of caution, just assume that it continues throughout the rest of the year. So we gave a little bit of color around what impact that would have for us. We're certainly doing everything we can to make it easier for our clients to shorten the cycle. So start at the beginning of the process, understand who all the decision-makers are going to be, understand who decision makers could be, even if the client doesn't tell us those are the decision-makers. Be sure we're actively engaging those people throughout the process. Unit -- weekly management of unit in progress. I mean just sort of nuts and bolts sales execution with a little more focus on the fact that processes have changed from what they were at the beginning of the year and being sure our sales reps approach every new kind of sale opportunity with that perspective in mind.

Yes. And so I think you highlighted on the call as well, the CRPO or your revenue obligations at that point in the year may be a little bit lower than what you had anticipated. It sounds like you said you're out of caution you're expecting that, that type of behavior might continue through the end of the year. I guess if you put all that together, what is the implication for, I guess, fiscal '23 revenue growth as a result of the selling environment right now?

Yes. I mean we haven't given guidance for '23. So I think the message that Rick gave out in the last call, our CFO, was that specifically CRPOs were probably about $3 million lower than you'd expect them to be on a seasonally adjusted basis. So that was the slowed bookings from the longer sales cycles. If you played that out and assumed that what we saw in second quarter continued throughout the rest of the year, I think it was about 2 to 3 percentage points impact on if it wouldn't have happened. So whatever number you would have thought for next year on normal pace would be 2% to 3% lower.

And I guess from a profitability standpoint, does that revenue shortfall largely flow through to the EBITDA line or other steps that you guys are planning to take that and offset [indiscernible]?

No. We've been careful on EBITDA and some controllable and some not controllable. We've been a little behind on hiring, like everybody else. So hoping to catch up in the second half of the year. We make periodic data purchases. And how those tend to work is a step-up in expense once. But then you grow over it over time and it stays constant. So those are kind of periodic step-ups which we've been doing for the past couple of years. And then the rest is decisions on investments. So we're investing a lot in sales and marketing right now. We still think that's a great yield on that investment because we have a huge growth opportunity. And we feel like, again, win rates have been consistent. So while the sales cycle is a little longer, we still feel like it's a really good investment over the short and medium term. We want to keep doing that. But that's an investment you can make a decision on how much you do that. Investment in the product. We're doing a lot of product innovation. Again, that's a decision. And then M&A, M&A tends to be a margin because we tend to buy companies that are smaller, growing more quickly, they tend not to be as profitable as we are. So when we buy one of these companies, it tends to be something that we can pull out across our platform, take that new capability out broadly and have a lot of success with it. But a lot of times, that comes with a little bit lower margin, at least initially. So we want to be sure that company can grow to the margins that we have today or close to them, but they might not be at the beginning. So that can also impact margins. So I always say the company ran at 40% EBITDA margins before we had public company costs and all the investments we're making recently. We can get back to that point at the -- in the range of growth that we're talking about. It's just a choice on how much to invest versus harvest. And like we're a little bit more on the investment side now because we see a huge opportunity in front of us.

So a couple of things to follow up there -- to follow up on there in that answer. But I guess one place to start, you talked about the impact of fiscal '23 potentially from what you're seeing. I guess as you look beyond that, historically, you've talked about long-term targets of organic revenue growth of about 30%. Is that still the right number, you think, for this business? And I guess can you give us some more color on some of the components that help you build up to 30% over time in terms of where that growth is going to come from?

Yes, sure. I mean I think that the -- we've seen 30% in the past. We're still -- last quarter, we were 39%, closer to 30%, a little bit above 30% on the organic side. So even in this environment, we still see it. I think it's the right target. I mean obviously, there's a point at which you become so large that 30% is not possible where I don't feel like we're there yet. And what tells me that is the $10 billion TAM, the fact that if you look at our average customer spending in the kind of 5-digit thousands of dollars. And we have plenty of clients now that are over $1 million and a few other $2 million. And those have been from having 0 of those 2 years ago. So the progression of the dollars per client, we've seen enough clients to know that we can do that across our client base. And we're only at just under 3,000 clients and have 100,000 potential clients. So on the new side, there's tons of running room. So to me, it's just a pacing question of how quickly can we capture that opportunity. And we're trying to obviously set up the org to be able to maximize success on both those vectors while still spending prudently, if that makes sense.

Yes. And when you think about those 2 drivers, right, of upselling your existing base versus adding new customers in these next couple of years, is one of those going to be more substantially contributing to growth than the other?

So for the past few years, it tends to be -- if you take our AR expansion during the year, it tends to be about 2/3 from new business -- new clients and 1/3 from upsells. I always think that's going to start shifting a little bit. The good news is we keep adding new clients at a rapid pace. So that tends to create more and more places to upsell. But if you look at the dynamic I just talked about is that we're so underpenetrated for our large customers, we have so much more running room that over time, upsell should become a bigger part of the mix. It hasn't happened yet. So I think that 2/3, 1/3 will continue to hold roughly certainly in the near term. But over time, that upsell opportunity is going to be a huge driver of our success.

And in terms of the end market mix that you work with, and you called out, I think in your introduction, that life sciences is your biggest market right now. Going forward, how do you expect that mix across the different customer end markets to evolve as you grow?

Yes. If you want to say for the sake of simplicity, like let's talk about our customers in 3 markets. We have a little more sophisticated organization for tailoring our sales teams. But think of life sciences, which is biopharma and med tech. If you go back to the time of our IPO, that was close to half our revenue is a little bit less than half. If you take everyone else that's non-health care was probably in the 40% range-ish, maybe a little more and that includes software IT, professional services and just diversified companies. And then the third group is providers. Life sciences, like I said, was about half, growing very fast. Diversified was 40%, also growing rapidly, maybe not quite as fast as life sciences and provider or it's small, it's been growing the fastest partially because it's a low denominator. But also because we had never really focused our attention on the provider market. And I think we have a huge opportunity in the use cases we can deliver to health systems. So I think that business has a lot of running room. So we see good running room in all those markets. And the nice thing is it's all off the same database and the same platform. We will do more to tailor how we deliver that into the different segments especially for life sciences to get to those $2 million, $5 million, $10 million client accounts. We have to be sure that we have, for example, subject matter expertise in our sales force, subject matter expertise in our delivery. If we're delivering, for example, a large-scale analytics project, we have to have strong analytic engines, which we now have through Analytical Wizards. But it's all there in front of us if we can organize against capturing it.

One of the other things that you mentioned in one of your prior answers was M&A. You recently acquired Analytical Wizards. It seems like the company has just periodically made these acquisitions. I guess as you look ahead, what are you seeing right now in terms of the opportunity in the M&A pipeline? And when you are making these deals, what are you looking for, both from a strategic perspective and then financially as well?

So we love M&A as a growth lever. We tend to start with strategically someone bringing capability that we can take out, build into our platform and take it out broadly across our market. So if you look at the characteristics of our last several acquisitions, they all have that. There's something we weren't doing that gave us a platform to do that, and then we could integrate it into the company. It can be part of what we take out to our clients, we make their data better. They make our data better or our capabilities better. We have a huge sales force and can take it out across the market. Size-wise, I think the ideal size for us has still been in that sort of $5 million to $20 million range. So smaller companies growing fast. That sort of means they've proven out the fact that they can sell a commercially available product and they deliver some value. So it's not 0 million and it's not -- you get them before they're $100 million. And you then help invest and capture that growth. And we want to have the scalability inherent to get to our margins over time or at least close. So that's kind of what we look for. In terms of what we're seeing out there, we still see a lot of good targets. Valuations, I think it always takes longer in the private market than the public market to adjust a little bit. So we still want to focus on acquiring the right companies more -- we care about price. We care about the right company most of all because if it's the right company, we'll create a lot of value with it, no matter what we pay. But we also want to be careful on price. So I think we've been -- we've sort of been hoping and sort of waiting for the private valuations to catch up a little bit to what's happened in the public market. I think it's happening but slowly. If someone has to go back for financing, I think that tends to start changing the conversation a little bit. If someone has got 2 years of cash, it's probably a tougher time to get them to have a different value than they might have had last year.

Yes. And I guess related to that and also going back to some of your prior comments on -- you're continuing to invest in R&D. I guess from an innovation standpoint, what are some of the key things that you're paying attention to in terms of the product road map for DH and things that you're looking to add to the platform going forward?

Yes. It's -- the formula is continue to add data because when we add data, it makes all the rest of our data more powerful. And then we can run data science and analytics on it to create new data sets. So it just continues to compound the distinctiveness of our data. And that's both claims-oriented data sources and other data sources. Second is a lot of our innovation is to help the product and the data be a little bit more tailored per segment. So I'd expect us to build a provider product. We certainly look at provider M&A opportunities. Life sciences, we've done a couple of M&A opportunities that play in the biopharma space. I expect us to continue to look at med device and biopharma as an attractive market. And then for our diversified groups, the key there is to make the data, to embed it more easily into their functions. So things like integration with our CRM, things like helping them understand the buyers a little better, buyer behavior, buyer intent, any analytics we can run about the buyers that help them target the bigger influencers to go after things like that are things that are all interesting to us.

Yes. And then I guess from a capital deployment perspective because you do generate cash, if you don't have M&A deals that happen in the near term, I guess what are your other priorities from a cash deployment standpoint?

I think M&A is certainly one of the best uses of our cash. So I don't think we'd do anything different from a capital structure perspective or anything like that. We do -- like I said, we invest in internal development, but we capitalize very little of that. So I think we just continue on our path. There will be good M&A opportunities that come around that are high value creators for the company. So we're comfortable with letting that right, if we haven't found the right thing.

Yes. I guess maybe -- we're down to a couple of minutes here. I guess a couple of higher-level questions just to kind of round out the conversation. Maybe going back to earlier when you were talking about the competitive landscape. I guess what are some of the bigger things that, I guess, where are your obstacles that you're focused on from a competitive standpoint going forward? It seems like there's a lot of investment happening in this part of the world, a lot of capabilities that are growing out in the market and solutions for your customers. I guess what are you most focused on? And kind of where you're at from a competitive standpoint over the coming years?

I sort of covered the people who we tend to run into. And so number one, I think being in the part of the market we're in is positive. So even if sales force dynamics and marketing dynamics are changing in our client base, the tailwinds of needing to understand digitally better how to get into doctors, get into health care facilities, things like that is a positive, like we really help with that. So we can help with whatever way they're targeting. And so the sort of digitization of sales and marketing is a tailwind to what we do. The second, the fact that we play in the growth part of the budget. So sales, marketing, business development, like anything that's going to help their business grow is also a positive. So I feel like from a competitive standpoint, there's a lot of dollars to go around. And obviously, we want to capture more and more of our share of those. But it's a place that I don't see people pulling back on it. It's so important and critical for all of our clients to be improving their performance there. And we can provide that.

Okay. Maybe just in the last couple of minutes, I wanted to give you a chance to talk about -- you obviously have a lot of conversations with the investment community. You guys have been public for a little while now. I guess anything in particular that stands out to you that you think is kind of misunderstood or underappreciated about the company? And I think you also have an interesting perspective as joining the company last year and recently becoming the CEO. What stands out to you as something that you think needs to resonate better with the investment community?

I think people understand us pretty well. We've done a lot of work. So we appreciate all our shareholders. And they've been -- they ask good questions. Our call has been really good. The one thing that I think stands out probably got lost a little bit last year as a lot of companies came out, went public, they were high growers. We were high grower as well. But we've been profitable from day 1, when Jason never had to take outside capital and never did, did it to essentially recap a little bit along the journey. But it's a very profitable model. And like I think sometimes that gets lost. And we, of course, we want to invest. So I don't think we're pulling back on investment. But it gives us enough room to invest and continue to be profitable. So that's the one thing I think we spent more time this spring is a little bit of a differentiator, maybe among sort of a class of companies that went public at the same time. The models is really fantastic.

All right. Well, we're just about out of time, and I think that's probably a good place for us to wrap up the conversation. Thanks, Robert, for joining us today. Thanks to all of you for joining us in the room. If you have more questions, feel free to send them to me or get in touch with Robert and the team. I'm sure they'll be happy to help you out. And we'll leave it there. Thanks, everybody.

Thank you.