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

Hello, everyone, and welcome. My name is Kyle. I'm on the healthcare technology and distribution team here at JPMorgan. Today, we're thrilled to be welcoming Definitive Healthcare. And I'm joined on stage by CEO, Robert Musslewhite; and CFO, Rick Booth. We're going to kick it off with a Q&A on mind, and I'm happy to take questions later on. But I wanted to just start and explain for everyone in the audience, can you explain who your customers are and how your solutions help them?

Sure. So Definitive Healthcare, we'd say we're the leading purveyor of healthcare commercial intelligence. And what that means is we help really any kind of company or organization that cares about selling into or marketing into or having any sort of commercial success or growth in the healthcare market. And by healthcare, we mean any doctor physician group, hospital, health system facility, really any sector of healthcare. And so if you think about that, who's interested in doing that, we have 3 main client segments. The first is life sciences, biopharma and medical device. Obviously, they have a real interest in understanding which physicians make sense for them to market to, how they like to consume information, which physician group they are part of, which health system they are part of, who makes purchasing decisions, who makes formulary decisions, what payers they're part of. That's all stuff that we do. So very valuable to life sciences companies. The second segment is hospitals and health systems providers. They care a lot about using our data. They think about M&A, they think about market expansion. They think about staffing. There's a lot that they think about understanding how their patients flow through their network or sometimes out of their network. That's really important information. We have all that. And then third is what we call diversified and diversified is made up of a lot of different subsegments. But if you think about diversified, it's anybody who's not in healthcare that cares a lot about selling into healthcare. So these are software firms, healthcare IT firms, consulting firms, all the way to like architects, cleaning firms, coffee shops, anybody who has any interest in selling into healthcare and has a devoted sales effort will generally be a customer of our products. And so we think about we have probably 100,000 potential customers. We are only in 3,000 today, and that's because mostly of this diversified space. There's just so many types of companies that could take advantage of what we do to help have them succeed in healthcare.

Awesome. That's super helpful. And I was wondering if you could just touch more on the client side. What challenges are they facing in the market today? And how is Definitive addressing those?

Yes. So we see the challenges, I'd say, on a per segment basis. So obviously, within life sciences, smaller to midsize biopharma has been a tougher space. The recent just interest rate environment, funding environment, bank failure, I mean, that's been probably toughest on that sector for us. We have seen some financial distress pop up in that sector where we hadn't really in the past. A lot of times, people can't get funding. If they can't get funding, it's hard to advance their drug. It's hard to make investments in commercialization or precommercialization, which is where we tend to do a lot of work with them. So that's been a little bit of a greater challenge. On the flip side, diversified while certainly the economic challenges have played in, that's been a place where you still see really good economic activity, especially in certain subsectors that are a little less impacted. So I think it's balanced across our client base. I'd say, in general, what we've talked about for us is we have seen the impact of what's going on in the economy kind of across all type of sales activity. It's not that we haven't had interest. We've had really good what we call top-of-funnel activity. So a lot of clients interested, continue to be interested in what we do, where it's been a little troublesome over the past 9 months has been getting from that point through to close. So a lot of new purchasing restrictions, a lot of new budgetary requirements, a lot of new decision-makers who pop up late in the process. So things have just taken longer. Sales push a lot more. Upsells push a lot more. Renewals push a lot more. Still getting great levels of conversation. Client NPS has been consistent. So we still feel like there's a great pipeline out there. And if things sort of return to where they were before, there's good momentum behind people wanting definitive services. It's just been a little bit tougher environment really across all segments on purchasing. And there's -- I can go into like reasons for each segment, but each segment has a little bit of pain from the current environment.

That's super helpful. Maybe just going into the reasons since you mentioned them, maybe the larger biopharma segment, is there a specific there that you've seen? Or is that just a general tightness? Would you say anything specific in that segment?

No, I think within biopharma, it's small to medium where there's been more commercial. Obviously, larger biopharma, those are large companies, they spend a lot of money. Purchasing processes are definitely tighter there. Like every company has a Rick Booth as their CFO, who's imposing a bigger scrutiny on any external spend, just like we are, just like most companies are. But large bio have drugs in market in commercialization. So that's been a place where we still feel like we have good opportunities to get in. So while it's still harder, it's less sort of existentially challenged in some companies that are in the smaller space where they really depend on funding from the external market. They're not in commercialization yet. They're looking ahead to it. Those have been the ones that we saw a little more impact from. And that plays out for us where new sales are impacted, upsells are impacted, and in some cases, churn or renewal was impacted as well.

And as your clients are looking at their budgets, with these additional constraints in place, is this largely locked in for the year looking at it and then revisit year-end? Or is there room -- you see -- you mentioned if you see stability later on, you could see maybe upside there. Just how are they thinking about that as we go throughout the year into the next?

I don't think budgets are fixed. I mean, certainly, last year budgets weren't fixed because they contracted. So I think budgets can easily go the other way. And in fact, in biopharma medtech, that is industry that historically has a lot of Q4 purchases as they find out at the end of the year that they have room. So we've seen that pattern in our business. I think others have seen it in their business. So that's a place where I think decisions, especially about what we do, we really help clients grow. We help clients sell more effectively. And so if you think about that, right now, people are tight on making sales investments because they worry that the market is not as good. So sales investment -- dollar sales investment might not return what it did a year ago. However, the minute they see that being positive, it's an easy spend to turn on. It's an easy result to inflect. And so we always say that like, wow, we don't love people being tight as things loosen up, if and when they loosen up. We tend to be some of the first dollars we'd expect people to spend, and that's consistent with what the company saw during the pandemic, which is in 2020, everything stopped. Clients really held up on purchasing. Sales opportunities got stuck. And once people saw that things were picking back up, the company ended up having a very good year because things picked up again very quickly.

And speaking of things that are picking up and how that applies to Definitive Healthcare model. How fastly can you see that translate to top line growth? Is there a dynamic at play there? Or is it immediate switch on? Or does it take time for that to progress?

I mean it will always take a little time because by the nature of our model, when we make a sale, we accrue that revenue over 12 months. We're a SaaS model. So when someone makes a purchase, we'll spread that revenue forward over 12 months. It's a 3-year contract. It gets spread over 36 months ratably. So that always takes -- I mean, you saw it last year when sales were being challenged, we still had a great revenue year. This year, we have a lower revenue year because sales slowed down last year. But if sales picked up this year, you'd see it mostly in next year's revenues. So you'll see a little bit this year but mostly next year's revenues. That's kind of the way our model works. Also, I'd say that the sales cycle -- we tend to have a different sales cycle that can depend on the client. A lot of small clients can buy within 30 days or 2 months, but a lot of the larger clients that will tend to take 4 to 6 months or even 8 in this environment. So even if things picked up, and we could tighten those a little bit, there's still some time line for getting sales through.

That's helpful. And then speaking of sales, I know you've made some incremental investments in your sales force and worked on that. Just readiness, I think, is the word you used before. Can you touch more on what you've been doing in your sales force for that readiness and the investments you've made there?

Yes. I think there's really 3 things we've done across sales, some with this environment and some just as part of our strategy. And the broadest thing which we've talked about before and have been doing, but did even more this year is verticalization. And what that means is, as we've thought about more and more, our business being a little bit different across the 3 verticals, obviously, same data platform, same data, but the way we interact with customers and their needs and their industries differ across those verticals. We have verticalized more. So if you think about life sciences, we have I'd say, this year, much more expertise and industry experience in our commercial team in life sciences. Same thing in provider, so that's been -- that goes through not just sales, but to account management to customer success to the product team. So if you think about that, we've really tried to be speaking their language, a lot more product marketing. And so that's been a positive development. I think it will continue to help us be more relevant in each of our segments. The second is a lot of training around how to be better in this environment. So for a salesperson, you know every single person that might have an influence on this deal, have you gone through the purchasing process with the client? Do we have an account review where we focus on being sure that we've covered all our bases? Is our marketing material effective? We focus heavily on ROI because we are a high ROI solution. If we can inflect just a couple of sales for any client that tends to pay for their Definitive subscription many times over, especially for a lot of these expensive therapeutic manufacturers. So we tend to focus really on what we can control, being sure that people understand the value of the solution. And then the third is what I'd call top-of-funnel activity. So we do a really nice job of lead gen. We have very efficient marketing. We get people to come to the site. We have free trials. We turn free trials into demos. We get people in the pipeline. So if you look at our top of funnel, it's as strong as it's ever been. That's resulted in a lot more pipeline. Obviously, it's the bottom of the pipeline where we've had a little bit more slowness. But continuing to focus on that and really looking at the levers we can do to be sure that pipeline is robust and is there. And so if we get a little bit of inflection on the bottom of the pipeline, it's there and ready to go. So those are really the 3 things.

That's super helpful. And maybe to touch on the first part of your sales force realignment, you did by vertical. We haven't talked about the provider vertical yet. Thinking about kind of industry headwinds turning into maybe tailwinds in terms of the solutions you provide. Labor shortages is always brought up in the provider market. So wondering if you could touch on how Definitive Healthcare helps in that market with the provider labor shortages and how you see that progressing?

Yes. We're really bullish on the provider market. I mean, obviously, last year was a tough year for hospitals and health systems, but that's a sector that will continue to grow. It needs a lot of help from data and analytics, and we have a lot of great ways we help that sector. So we think it's a really nice growth opportunity for us. In staffing, in particular, we help in a number of ways. So number one, we do serve a lot of healthcare staffing and healthcare labor agencies. So we help a lot with the organizations that help the providers get access to the right labor when they need it. So that's a big way to help. And then we also help directly where we work with a lot of providers. We have great data on doctors, on nurses, on a lot of healthcare individuals. And so we can help them directly understand, for example, if they're looking for a certain kind of doctor or doctors with a certain Medicare share of their payer mix or a payer -- a certain commercial payer in their payer mix or does these kind of procedures versus those? There's all kinds of ways they can look at which doctors they might want to recruit into their network or practices they may want to acquire. So we do help a lot with the places of acute shortage. And I'd say the #1 acute shortage still is nurses. Our models would show that we're running 200,000 nurses behind, and it's not going to catch up anytime soon. And so that's a problem we see across the economy. That's a place where we can really help a lot. And then the doctor shortage. I don't know if it's a doctor shortage per se. Some call it doctor shortage, but there's certainly high demand for certain pockets of doctors. It feels like there's a shortage in certain areas and we really help both the agencies that do it and the ultimate providers that hire them.

That's super helpful to think and contextualize. You also talked about ROI in your sales force and measuring that. I was wondering if you could touch more maybe through an anecdote or just generally how your customers are measuring the ROI that they use from Definitive solutions and how that plays out.

Yes. And I should note that just because we didn't describe the solution for those of you who might be new to Definitive is we have a database that -- of healthcare commercial intelligence that essentially collects a ton of information: public, government, proprietary. We have, I think, 4 million interactions every year to continue to build the proprietary part of our database. We run data science and analytics on our own data to create new data elements, which I'll talk about in a second. And then we've also recently started incorporating claims data, not because we want to be a claims vendor per se, but because when we add the claims vendor to everything else we collect and aggregate it at the physician level, it enables use cases that others can't fulfill and provide a ton of value to clients. And then we serve clients through a SaaS platform, so it's very easy when a client comes on board, you turn a lot and give them access. They can get value within 20 minutes. I mean they obviously need some training. And some clients will -- we make it very easy for clients to download the data to integrate it in their CRM system, to integrate it into their core systems if they have another place they want to use it. But we want the clients to be using the data, the more they use it, the more it's incorporated in their sales and marketing activity, the better. So that's how people use us. It's a very easy platform to use. We sell it on a subscription basis, tend to get multiyear contracts, tend to build in a price increase. It's very much a great model for multiyear value creation for clients. The way they use us, I mean, the easiest way to think about it is we help clients sell more and sell more efficiently and more effectively. So take a life science manufacturer. We have a case in our site for neurofibromatosis where it's a rare drug manufacturer, sales weren't going that well. They came to us. and said, hey, we need help because this is a treatment that can save and it's like 1 in 3,000 kids get it. But when they get it it's serious, and they had a drug that could really help, but it's very hard to find those kids. So came to us and said, hey, can you help us increase the incidence of finding the right places so we can find these patients that will help our drug and through analyzing their typical doctor and their typical set of patients where they tend to find clients, we could run that through our models and we tripled the number of doctors they could outreach to and had a big inflection in our sales. And it's one of those expensive rare drugs. So 1 or 2 sales dwarfs the cost of the Definitive annual subscription. So that's an easy example. There are a lot of other examples. We can analyze marketing spend effectiveness. We can improve recruiting physicians for health systems. For the diversified industry, there's all kinds of case studies. But you think about a software and IT manufacturer who wants to understand which hospitals have which type of IT systems so they can prepare their sale, they can identify the right hospitals to go to the right buyer at the hospital and the right approach. If you're Epic, for example, and you want to sell against Cerner, you have one way of selling in Cerner, it's very helpful to know which hospitals have Cerner, who's the buyer there. Did that buyer use Epic in the past? Or did that buyer always was with Cerner? We have all this information. And so it makes it for a very effective ROI lift to any sales process. We hear from a lot of our clients that they'll oftentimes use Definitive and it saves them a couple of salespeople and increases their sales. That's the diversified space. And then the hospitals, there's all kinds of use cases we can go into, you covered staffing scheduling. But when you think about a health system right now, especially when they're challenged on growth, one of our best use cases is we help health systems keep patients understand where their doctors are sending their patients. And if doctors are referring patients out of network, be able to identify that, talk to the doctor and get them to refer patients in network. So this patient flow is a really important use case these days. That has a big impact on health system profitability. So that's a place that they use us a lot for as well. But all of them have the characteristic of very quick value from using the information, and that's what we really try to be sure clients and prospects are aware of.

Super helpful. And you mentioned data science is a key part of enabling all that ROI, and I don't think it would be a tech conference if I didn't ask about AI. I'm wondering the use cases of AI/ML that Definitive is using now and then if there's anything on the horizon that could open up opportunities on the line.