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

Great. Well, good afternoon, everyone. My name is Craig Hettenbach, I cover the health tech space for Morgan Stanley. Very pleased to have with us Definitive Healthcare today, CEO, Robert Musslewhite; and CFO, Rick Booth. Just before we get started, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures.

So with that, I think we'll start with the conversation. State of the world, it's a macro-focused environment today. But just if I put into context, last year, the company was growing kind of high 20s organic growth and this year kind of low teens, if you will. And so can we just talk about the influence of the macro, what you're seeing on the business today?

Yes. And I think we've been very clear about this since probably a little more than a year ago. I'd say in the second quarter of last year, we started seeing some challenges in new sales where we saw decisions deferred, some chatter around budgets being deferred or pulled back on. Across the latter half of last year, we saw that trickling to our upsells, which both of those are a big part of our business each year, a big part of our growth. And then we've seen it this year kind of play into churn. Now that cycle is not altogether surprising to me. I lived through this in -- starting 2008 at the Advisory Board where the same pattern held. We saw it first in new sales and in upsells and then in renewals and then they've kind of recovered in that order as the macro sort of came back. But look, there's definitely been a different macro environment than we saw going back 1.5 years ago, and that's been a challenge for us. We're still growing at a reasonable rate. And I think we can perform reasonably well in this environment, but we can certainly use a little help. And then the other thing I'd say is I don't always blame all macro. It's never only macro. So when things -- the way this happened, it's a good opportunity to really look at, are we doing everything we can to perform well in this environment and be sure our clients are getting surplus value from us so that even in a tough environment, they'll be more likely to stick on board with us or to purchase our services, to help them through their own macro. So anyway -- but the reality is, like where we help clients, we help them grow. We help them with their sales performance, help them with their marketing performance, help them with their business development performance. And when they feel less confident in their own growth, in their own investments in that, that does trickle back to us. And I think that's what we've seen.

Got it. And to your point, last year, I think you were one of the early companies to signal some of this, which was good at least to be in front of it. On the last call, you guys talked about net dollar retention, so reflecting some of this churn. And again, I think last year, you got 102%. This year, you're kind of saying like low to mid-90s. Can you maybe just expand on that? I know biotech funding has been one of the themes, but just from a churn perspective, what you're seeing in the marketplace?

Do you want to take the math and I'll take the [ second one ]?

Yes.

Go ahead.

Yes. So what we're seeing is across all sectors of the economy, we're experiencing some degree of increased pressure that's been most acute in the parts of the economy that have been in the news and under the most pressure. So particularly small to mid biotech, healthcare providers and some small software IT. So there's none of this that we think is a long-term phenomena, but it does impact us in the short term, and that impact shows up in the form of NDR.

Got it. All right. Well, let's shift gears from the macro focus to something a little bit more exciting, AI. And our view has been, right now, there's so much focus on macro that kind of AI takes a back seat. At some point when the business recovers and get some momentum, it will probably be more important from a stock perspective. And so we'd love to hear what you're doing on the data front, particularly with Atlas Dataset, if we can start there.

Sure. And I think the reason we pursue AI is all about making things better for our clients, and I think there's a lot of great opportunities to do that, like we have great data and we've continued to focus even during a little bit slower growth time on making important investments in our data and making sure it's really world-class. And that's what makes for great use of AI and learning language models. So we've always invested in building a great data set. Part of that investment has been having data analysts who do a lot of training of models on our own data and generate new data from that. So a lot of data that our clients purchase are self-generated through our own analytics, new data elements. So one we talk about a lot that's really easy to understand is like prescribing leadership score. So what we can do for somebody who cares, a life science company who wants to target physicians in a certain therapeutic area, we can tell them by volume and certainly by patients and by script volumes and all that stuff, who's interesting or who tends to switch more their drugs. But through analytics, we can also predict which doctors, if they can switch to their prescription, have the most follow-on benefit of doing that, either because they lead value committees at their institution or their respected academics or whatever. But we can put a prescribing leadership score on those to give another way for them to target physicians in a way that's super valuable, and now that's become a standard feature in our data set. We have hundreds of variables like that, that we've created new elements around based on client requests or based on stuff that our team has done, and it's probably the easiest way to see AI at work. I think the cool stuff from the new learning language model is going to come in the form of -- right now, we have great data. We have a great SaaS platform for people to be able to access the data, search, cut it the way they want to, but at the end of the day, our site is also somewhat complex. It takes some training for someone to learn how to find the right data, we do provide a lot of help. But you can imagine a world where a client, instead of having to go to figure out sort of which procedures they want to search on, which therapeutics they want to search on and which geography and have to run all that just to be able to type in a free search, say, "Hey, give me all the doctors I should be calling in this region, around in this therapeutic area, who prescribe this drug first and this drug second. Boom. It then runs the search off of that and the data comes out. So the thing that makes that so powerful, great data enables great AI and because we've spent a lot of time focusing on great data, I think there'll be a lot of applications like that of AI for our clients to do great things. We also have a bunch of internal -- we will go into them now, unless you want to, but ways that we think AI is going to make our business more effective, marketing performance, our own sales targeting and some parts of our coding enterprise, we all think, over the next year or so, should be improved a lot by AI.

That helps. You mentioned in terms of training on some internal models, I think at the time of the IPO, there was 65 data scientists. At the time, it was like 10% of the workforce. And so I'm just curious the investments that you're making on that front. And then also we'll get into kind of some of the cost-cutting measures, but how do you view on kind of the core of what you're doing on data and analytics from an investment perspective?

We -- in a world of tight spending, we still spend a lot on both acquiring data, and that's through both first-party work. We have about 4 million interactions a year to continue to refresh our data and supplement the data where we need to. We have a large data science team and a bunch of data analysts, per your comment. And we actually buy a lot of data as well to append to all the data that we collect on our own. So we've kept a pretty heavy investment in data, data quality, data expansion. We cover way more experts and way more providers than we did even a couple of years ago through these investments with a lot better contact information. We have a lot more information around each provider institution than we had even a couple of years ago. And so it's kind of an ongoing enterprise that we see is the cost of doing business in our market. We want to stay ahead in our data moat. We don't want to ever kind of we'll get complacent around that because that's why our clients ultimately get surplus value from us.

Got it. And how should we think about just monitoring some of the development here, particularly with Atlas Dataset. From a proof point perspective, will it be certain traction with customers? Or how will you be able to share with the investment community in terms of how this is paying off?

Yes. Ultimately, I think the payoff is long-term continued success of the business. It's hard to say in this macro right now because you're seeing the sort of growth number go the wrong direction against that. But I do think that these investments are foundational for when there's any sort of good news on the macro front. We'll be really well positioned to get back. Like the macro issues, how they played out to us is not like we're losing to others more often. I think our win rates are probably the same or even improved. It's much more clients feeling a lot of budget pressure and having to defer decisions. And usually, we have a sponsor on the client side who wants Definitive. If it's a new client, we have someone interested. If it's an existing client, we have someone we've been working with, who likes what we're doing. They have someone like Rick above them who's saying, "Listen, your budget is cut this year. We're not spending on external stuff because we're having to lay off people. And so sorry, you just have to have to deal with that." That's the majority of the conversations we're having. So we have to stay in the position where we are the vendor of choice when those budgets come back, when people decide to spend again externally. And that's, for us, everything is driven off that incredible Atlas Dataset.

Got it. I think that's a good segue just to the competitive backdrop. It's probably one of the most common questions we get on Definitive in terms of what differentiates the platform. And if you look at it on the one hand, it's someone like an IQVIA, established. You also have a lot of new data vendors. So from your perspective, you mentioned win rates are at least flat, maybe a little bit better. What are you seeing in the competitive landscape? And how has the macro changed that in terms of how customers are evaluating the sources they want to use?

Yes. I mean we've continued to make important investments to be better and better competitively. And I guess I'd say my main comment on the competitive environment is, I don't think it's changed that much over the last, say, year. Our competitors differ by end market. So if you take our business, we have 3 main verticals that we talk about. One is life sciences. The next one, next largest one is diversified, which is everyone that's not in healthcare, but who sells into healthcare. And then the third is providers, healthcare providers, small but mighty, the fastest-growing but smallest. In the life sciences side, you mentioned IQVIA. There's a lot of other data vendors in that space. Our value proposition there is not by being like -- IQVIA is always going to have better prescription claims coverage than anyone else because they pay from the pharmacy level and they have kind of -- they make those big investments that we and most other vendors aren't able to make and really cover the market. So for retail pharmacy use cases, they're always going to be better for sort of ones that cover the whole country. Where we spike is really -- we have good enough pharmacy coverage and we have great medical claims coverage, and then we link all that to our Reference & Affiliation data, and that's really the secret sauce, which is not only can we compete on the claims side, but we can link that to, for example, the exact institution roll-up, which physician group, which facility the patients -- the physicians see a patient at. Where was the script made. We connect it to the medical claim where we have very, very good data, so we can put together a full patient journey that's not just the script side of things. And so we have a lot of use cases that we can do for clients that a lot of the other larger data vendors don't do. Or if they do it, it's very much a custom data effort. Where for us, it's all part of their prescription -- subscription. Freudian slip there, prescription, subscription. So anyway, we have a model that makes it very easy for them to get a lot of value from the work they do with us. And so I think that's how we'll continue to differentiate in that market. All the way on the other end, in the diversified market, it's a different story. We're really the only vendor of choice to get that window into healthcare that helps demystify the healthcare end market for someone who wants to sell into healthcare. So if someone has a dedicated sales force and go-to-market effort against healthcare, it's an on-off decision. Definitive Healthcare or you're not going to make that investment this year. Where we lose in that market sometimes is to the cross-industry list vendors. So if someone is not focused on healthcare and they just want to find all CFOs across everywhere, they can buy that list. They can do ZoomInfo. They can do something like that, where it covers kind of their needs. But if they want to have any sort of strategy at selling into health care and understand like, okay, how many patients does the institution see? Which facilities are part of the institution? How many docs? What types of prescriptions do they write? What types of IT systems they purchased today? Do they have an RFP last year? Like everything you need to walk in, create a very impactful and effective sales presentation and improve your sales, we're the only vendor that has that. So in that market, that's kind of where our strength is. And then for the provider market, it's small. We just made a major acquisition, not a huge acquisition, but important for us, Populi. And I think what Populi brings in that market, it really puts us head and shoulders above everyone else in that market because we have the best data, but we've never had the perfect sort of client interface in that market the way that providers like to see the data and use the data. Populi has made great investments in awesome visualization tools and a really easy set of APIs, where clients can take the data, pull it directly into their Tableau or their sales force or whatever the system they want and use the data. It's already formatted and sort of cut in a way that makes it very easy for them to do geographic analysis, do service line analysis, things like that, that I think put us in head and shoulders above kind of where we were and certainly where everyone else in that market is. So while it's a small market for us, I think we'll have great growth prospects through Populi as well. So I think in that market, I'd hold us up against anybody.

Got it. And we'll certainly come back to Populi. Just one more. When I think about the cap -- the tightness of capital budgets today. Are there examples of products where you're engaging with customers and saying, I can't do without that and I have to keep it versus maybe some offering that they say, you know what, I want it, but I'll cut back. Did you have any context on that across the -- what you do?

I mean, look, we always try to be sort of nondiscretionary, like people have to have us. I think where we're most like that is in the diversified segment where people, if they have a healthcare-oriented sales force, we still continue to do very well in that group. And I think that's a group that -- like I said, it's either off or on. If you can't afford it, you can't afford it this year. But if you're going to sell into healthcare, you will get meaningfully higher return. It's very clear the ROI they'll get. And so if you're going to focus on the sales, we'll get the sale 9 times out of 10. I think in life sciences, people have, over the past couple of years spent on lots of different data sources and lots of different solutions. I still like our value proposition there because we can do a bunch of use cases that others can't fulfill. So we're not really me too, but in a world where people have -- they have budgets of X and this year, they have 50% of X or they're deferring budgets, sometimes we're subject to those decisions. And so I think that's -- small biotech has been a place where we -- Rick mentioned, we've been particularly seeing a lot of budget challenges and not been able to always make the case to stay in when they're trading off spend on us versus spend on SaaS or spend on survival.

Got it. Maybe we can shift gears just to kind of the longer-term growth profile. I know it's a difficult question because no one knows when the macro is going to clear. But let's just say we get to a point where the macro isn't a headwind and maybe turns into a tailwind. How do you think about the long -- what's a reasonable longer-term growth cadence for someone like a Definitive Healthcare.

Yes. And Rick can weigh in here, too. It's certainly faster growth than we're seeing this year. I feel like there's enough just disruption in our commercial activity from budget pressure, from new decision makers, from shifting sort of where it's 15 messages we get back from the client at the end of sales cycles that we never saw before this year. So there's enough disruption there to know that like if things get back to a more normalized environment, just that alone would help. We're also making a lot of important growth investments. So -- we don't believe in -- we're tighter on investment, of course, but we're still trying to make the growth investments that we think will pay off over the medium and long term regardless of the end environment. So Populi is an example of that. It's dilutive, so that's an investment for us, both in balance sheet capital and in a little bit of our margin this year. But we're huge believers that that's going to give us a whole different trajectory in the provider space. We made some really important investments in our data. Again, is that lifting sales this year? It hasn't had a direct correlation, but it's made our data meaningfully better and made us more efficient at delivering value to clients, and that's going to pay off as we get into almost any environment, especially if things improve. So I guess the best way to put it is we've seen much faster growth from us in better environments, number one. Number two, we've continued to invest in important ways to drive more value to clients and to differentiate against others even during a difficult time. And then three, I guess the last thing I'd say is we've tried to have a real mantra of, focus on what we can control. So in our go-to-market work, we've tried to focus on top of funnel. So we have really strong top of funnel. As you saw across the first half of the year, we have really good pipelines. We've obviously had a little bit of challenge at the bottom of the pipeline, but we're in a position where you have a lot of people interested in wanting to buy. And with a little bit of a catalyst on that front, I'd feel really good about an acceleration of growth.

All the fundamentals are there for solid long-term growth. We're in a large market, data is becoming more and more central to decision-making. I think AI makes quality data even more important because it further accelerates the value that can be created from that. When you think about our data, there is so much we source directly. There's so much we source indirectly through partners. And then there's a lot of data that we infer through our own analytics. So there's I remain very, very confident in the long term for this market. And it's funny, it was just 12 months ago. I'm kind of listening to us talk and thinking we're allowing the macro to drag us down a little bit. A year ago, we printed 33% growth, 29% adjusted EBITDA, of that 33% growth, 29% of it was organic. So these no one likes these times, and it's always tempting to obsess about when things will change. Our philosophy is to keep a steady hand on it until I make the investments that we need to. And our fundamental economic model is still dropping incredible contributions, gross margin contributions, largely from fixed costs. So as things grow, we're going to return to the profile that we want.

Got it. Well, that's a good segue, and maybe we'll stick with you, Rick, on just the margin profile. And I think some companies have cut probably more out of necessity in terms of weren't profitable or really need to see improvement. That wasn't necessarily a problem, but slowdown in growth, you have adjusted, right? There's been a 10% workforce reduction. Just kind of talk us through just how you're balancing the near-term growth and profitability into the overall health of the business long term.

Yes. Well, you know we're famous for saying, we measure everything. We try to have a very, very solid command on the economic leverage of the business. And when we started to see the return on investment being a little bit lower than we wanted from some of those sales and marketing investments, we had, had by the time we got through the first half of the year, we had 6 months under our belt with some of the more seasoned industry veterans. We had carried other kind of legacy reps along with them. And so by the time we got to August, when we took our action, we're able to take the best of the best so that we maintain the ability to go from selling to the end user level, which is very direct. Leveling that with some folks that have the experience of managing larger enterprise relationships. That's a natural hurdle for people to get through. We've maintained that investment while refined our targeting. And our expectation is, since we focused heavily on performance and we've retained industry veterans, that what we should see is we're moving more of our best opportunities to our best salespeople so that they have the opportunity to over perform. We feel strong about our ability to continue to close out the year without missing a beat.

Got it. And then from a longer-term perspective, I think the target has been kind of low to mid-40s adjusted EBITDA. Is that something you're still in the right environment you can get to? Or how do you think about where you are today, kind of high 20s to progression forward.

Yes, conceptually, nothing has changed with that. I think data businesses can operate in the high 30s to low to mid-40s with in a very sustainable fashion. Now it's never a linear path from here to there. So over time, we continue to plan to expand our margin, but we will also invest appropriately because at the end of the day, the best lever for margin expansion is revenue growth. And we're in the early days of the $10 billion opportunity. So you'll recall, almost 2 years ago, we started talking about the Atlas Dataset, how that would play out in the gross margin. And then we'll see that scale out over time. So we'll continue to manage that open communication, and I would expect that margins would move up and to the right, but there may be years where they're up and there may be years where they're down.

Understand.

The only thing I'd add to that is our revenue -- incremental revenues are extremely profitable. And so in a world where growth is a little bit slowed, you don't have as many of those incremental revenues, but there's still a lot of profitability, and we make really careful growth investments and when we deliver strong bottom line performance. When things turn up, back to your scenario before, that incremental growth is very profitable. It leaves you room to both deliver much better margins and invest more. So again, that's aided to Rick's point by -- if we focus on driving long-term growth, that growth generates a lot of profitability that will chill. Let's just do both.

Got it. I wanted to shift gears to capital allocation. You mentioned the Populi deal. And as part of the core of your strategy to do tuck-ins, you got more capabilities to the platform. Why was that the right deal, right time? I know on the provider side, it sounds like it kind of cements you put you in a good place. But talk about buying Populi versus other things maybe you were considering in the marketplace?

I mean, I think I told you why Populi was a great investment for us, and that was all -- I only talked about the deal model part of it. There's actually a couple of different ways that could help even beyond our deal model. They're bringing new capability and marketing activation that we think will be interesting, not just for providers, but across our business. And then the way that they work with claims and help visualize claims and make it easier for clients to use, like it's possible that will help our overall claims delivery enterprise, both be more efficient and better for clients. So there's a lot of value we expect to get from the acquisition. That said, we're always looking. Our strategy is to do 1 to 2 deals per year. We tend to look at smaller companies that are growing quickly. They're generally not profitable or they're roughly breakeven. We like them at that stage because they bring a unique -- what we want is someone who brings a unique capability product or data set that we can build on and add to our platform, and then put in our commercial team's hands and take it out broadly across the market. That's a formula for driving a lot of top line inflection and getting us something that then we can spend our own investment, time and attention on other places. So it just helps add to the overall growth for us. And we've seen that work really well. We acquired Monacl a few years ago, as you know, which is our KOL solution for medical affairs, reps and biopharma. Last year we acquired Analytical Wizards, which is essentially a standardized analytics company that lets us work not just with Definitive data, but with any data a client chooses to use, their own competitors, whatever, to come up with really nifty analytics solutions that drive value for them in the biopharma space primarily and then Populi this time. So again, we're always looking at it in terms of is it incremental to our overall platform, and then can we drive the commercial success within one of our markets or across all of our markets. And there's a lot of different examples of companies that we're continuing to look at even now, even in the wake of Populi. The other question we get asked just to front run it is how valuations trended. And I would have said 6 months ago, it still felt really tough to get an acquisition done in this market. A lot of private companies felt like they were still up here, whereas it does, does this in the public realm, felt like we were a little more down here. I think that's moderating a little bit, especially among private companies that are coming back for financing. So when I talked about the profile being breakeven or losing money, if they're in that zone, at some point, they're going to need more financing. I think that's when you start to get a little more rationalization and valuation and get into the range where we have more opportunities. So that's good news for us.

Got it. And understanding cash is king, right? You have a very solid balance sheet, $300 million. Have you and the Board thought about in terms of an addition to doing tuck-ins like a buyback? I mean if I look at your multiple versus some of the -- even the private valuations that are coming down, but still higher, how do you kind of evaluate that?

Yes. Our philosophy, we believe there is tremendous value in a strong balance sheet. I've managed through a lot of business cycles up and down. I think down brings as many opportunities as up. We want the flexibility to respond as we see incremental opportunities. We are very, very good at moving quickly to integrate acquisitions, not only from the back office perspective, but also the important underlying core data. We never want to be priced out on that. We'll shift the mix of cash versus stock, depending on our point of view of valuation and that sort of thing. You'll note that we were all cash for the acquisition of Populi because we think that we're not a seller of our stock at this price. But we'll keep that optionality rather than in the short term, looking to buy up some shares because we're still relatively thinly traded. We've got a firm repayment float. So we're going to keep our capital focused on growth.

Understood. I do want to touch -- I know we have a few minutes left, but just on management changes. This is something we focused on across the space, right? You have a lot of companies that have come public, strong growth, facing crosscurrents. You joined and you hired John Mack as President as well. So can you just talk about the organization, how it's maturing? What are some influences that you're having and John as well?

Yes. I think we're kind of moving from small fast growth company to medium fast growth company. And I think the endeavor of that is different than the prior stage. So the things that we still need to grow, but growing now encompasses not just sort of finding an opportunity and throwing some people at it. It means building scale into the business and finding ways to do it more efficiently over a larger enterprise. So all that said is I think there's a lot of organization building behind that. You've seen some transition this year where you mentioned we have had a couple of instances where we've down sized. We've had a couple of senior leadership changes even beyond John coming in, and I think we're in the process of really setting up the company for the next 5 to 10 years of growth. There's some really great people coming into the company. There have been some really good people inside the company who have stepped up in the new roles. And it's something that I see is really part and parcel of preparing for a little bit faster and more efficient growth environment that's ahead. I know I'm speaking generalities. I can't talk about all of it, but I am really excited by the sort of next phase that we're building into right now. And I think it will be, again, it's not just macro, but I think it will help macro. We'll be in a really strong position for the next wave of our growth. So it feels -- having been part of it and Rick also of a company that grew from $100 million to close to $1 billion, this is important foundational work and it's not a bad time to do it. A year ago, it was hard to find talent. It was hard to keep talent. Now, I think it's a little better environment to find talent, build better environment to keep talent and to get people really focused on, okay, macro is tough right now, but if you look around the corner, we still have a huge market. The stuff we're building is still really powerful. We have great clients. Even the clients that aren't with us now want us. And so they'll be ready when the time comes. And I just think we're sort of like winding up the springs to be ready when that moment comes. So I hope it comes sooner versus later, but when it does come, we'll be ready.

Got it. Well, as we wrap up here, if you look out a year from now, what are some of the things you're going to want to have to deliver on for investors in terms of execution and proof points?

Yes. I'll let Rick answer to, but certainly long-term growth. I mean we want to have a long-term growth outlook where we're staring at the path to being a $1 billion company very credibly and it's definitely out there in our TAM.

Yes. I think keeping our promises around both growth and profitability. I remain proud that we managed to absorb Populi, which is a money-moving entity while not having to decrease our profitability outlook. We take that responsibility incredibly seriously. So continuing to hit our promises in terms of revenue and profitability and also continuing to add even more value for our customers, which you'll see coming through in improving NDR as we drive out. So those are the key things that we focus on.

Got it. Well, I think we're right at time. So Robert and Rick, thank you so much for the discussion this afternoon and being with us.

Thank you.

Thank you.

Appreciate it.