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

Great. Well, good morning, everyone. Craig Hettenbach, I cover the health care technology and health care provider space from Morgan Stanley. I'm very pleased to have with us Definitive Healthcare and CFO, Rick Booth. So thanks for joining. Just before we get started for disclosures, you can see them at the Morgan Stanley website, www.morganstanley.com/researchdisclosures.

So Rick, I think we could jump right in and just a company overview. And really in the context, there's a lot that has changed the last couple of years, not just for Definitive, but for the public markets, growth companies in general. So how is the company -- maybe you can set the stage in terms of Definitive Healthcare, but importantly, how is the company evolving to a changing landscape?

Yes. So Definitive Healthcare, just to set the stage for anyone who's watching this that is not familiar with us, we specialize in providing health care, commercial intelligence. So any company that is looking to commercialize a solution into the U.S. health care system can use the information that we provide to identify the right decision maker at the right time and the right information to prepare for that discussion in order to have a fruitful discussion and help them understand the benefits of their product or service. You can really think of us in many ways as like a highly verticalized Zoom info. So we don't play in the realm of clinical information per se as opposed to the commercial information that surrounds that, it's a big TAM. We've estimated it at $10 billion. Some of the large players that also address this TAM, the IQVIA and Veevas of the world. About 60% of that TAM relates to life sciences. So biopharma and medical devices, there's another 20% that relates to hospital providers. And then the remaining 20% is diversified, everyone from Smucker's to AWS to waste management that wants to sell into hospitals. So it's a surprisingly broad universe of companies that need to penetrate the opaque health care space. In terms of the overall industry dynamics, we've seen expansion and some contraction depending on where we are in the life cycle of our end customers. In particular, life sciences has been in a tough period over the last few years due to the changes in their funding environment and the increased interest rates. We're now seeing the beginnings of green shoots there. So we're optimistic about that. We continue to do well with software and IT as well as in the diversified space. We're a near rule of 40 company. Last quarter, we grew 5%, adjusted EBITDA 33%. So that's kind of a quick snapshot of who we are.

Got it. I do want to touch on up top, just some leadership changes in the appointment of Kevin Coop. So as I think through what has been a rapidly changing landscape and a company evolving to that, what are some of the things you think Kevin is going to bring to the table for the strategy going forward?

Yes. We had a very clear picture of what we're looking for in our next leader. We wanted someone here as product first and customer obsessed. And Kevin absolutely fits the bill. He's been a data executive for most of his professional career focusing on commercial leadership, very growth oriented and very decisive. We have a wonderful market opportunity in front of us. We've got some leading assets but we had allowed our culture to be a little more slow moving than the market. And so Kevin is really helping us really spend the first few weeks out with customers, really getting himself very deep in their needs and then bringing that message inside and starting to increase our pace of execution. So I couldn't be more pleased with his early days.

Got it. Anything to keep in mind from a milestone or things like as he gets kind of settled in, you mentioned, of course, he's engaged with customers. What are some things that maybe for the investment community of proof points or things to watch for under Kevin?

Yes. So there's a few milestones. One just for awareness because you'll see when you review the result our last earnings calls that we've just anniversaried our last significant acquisition, which was a company called Populi. So last quarter, we delivered 5% growth. We're actually predicting to shrink in Qs 3 and 4 versus the prior year because we won't have the benefit of that acquisitive growth. Acquisitions continue to be a part of our road map, Kevin is also bringing the idea of partnerships. So I would continue to look for in terms of milestones, additional tuck-in acquisitions and potentially the addition of some operating partnerships in there as a way to even more quickly expand our functionality. And then for operating metrics, I would keep an eagle eye on our commentary about churn. Each quarter, we comment on how our churn is progressing. We've been pleased over the last several quarters to improve operating churn year-over-year, but it's not yet where we want to be. That's probably our single biggest short-term variable in our performance. So between that and expansion, you'll see that showing up in our CRPO, the current revenue performance obligations, which is the most reliable forward indicator of revenue growth. and we talk about that each quarter as well.

Got it. I do want to touch on just the sales organization. You had a pretty meaningful reorg at the beginning of the year. The CRO recently just left and Kevin is going to take some of the responsibilities. So what are some of the things you're looking to do on the sales front just from an execution standpoint?

Yes. We did have a significant reorganization in January of this year, which resulted in reallocating the majority of both our prospects and our existing customers. That cost us some momentum, but we think that it gets us to a better coverage model going forward. And we're starting to see now the benefits in upsell within our existing customer base, still taking a little longer to see the benefits in terms of the new logos that we're looking for. But it's really just continuing to refine that go-forward sales model. There's a lot that we are, right? There's a few things that we're continuing to adjust.

Got it. And I think one of the things there was an increased emphasis on enterprise-level accounts. Any context there? Because I think that part of the business actually has been more stable when I think about churn in...

And when I referenced the upsell, enterprise is a key area of upsell. So that kind of core. That strategic cornerstone is playing out well. And now it's just kind of building around it and beginning to get those folks who, back in January, got new prospects, and we have a 6- to 9-month sales cycle, hopefully, we'll see some of those prospects coming in as new logos as well.

Got it. As we look longer term, right, and there's still, I think, a lot of near-term uncertainty, you mentioned some green shoots, which is encouraging. But how do you think about this business model from both kind of a long-term revenue growth and profitability perspective?

So the market remains very healthy. So there is a lot of spending in health care, commercial intelligence, and it's only increasing because there is decreased access to health care decision makers which means you need better and better targeted messaging to earn the right to that meeting. And then when you're in that meeting, you need to be able to clearly use the prospect's own data to show the value of your product or solution. So if you can go in and say, hey, we give 5 points benefit in terms of reduced readmission rates for knee surgery, and that could mean $3 million to your system, you've got someone's attention right from day 1 as opposed to I have a better knee joint, trust me. So the market is there. We believe the market continues to grow in mid-single digits, and we have the opportunity to grow more quickly than that. We're in a little bit of a rebuilding mode, given where our present growth is. Luckily, our valuation fairly reflects that. So it's a good entry point for us to get in there.

Got it. So if the market is growing mid-single digits, you think low mid-double digits longer term potentially? Or how do you think about the -- it basically....

Yes, I think high single, low double level in organic basis with M&A and partnerships being layered on top of that is a reasonable long-term goal -- And we won't get there in a 1-year period, as you can imagine, and we're going to be guiding 2025 as we reached the end of this year. But our long-term aspirations are in that area and with enhanced profitability versus where we are now.

Got it. And on the profitability front, you're kind of in the low 30s EBITDA margin. So still very highly profitable today. What are some of the levers longer term? And how do you think about a steady state longer-term EBITDA margin?

Yes. So we're pleased. We improved our EBITDA margins by 450 basis points versus prior year in the last quarter. So we paid a lot of attention to cost management. We feel good about our cost position as we grow as we've established it. So now it's really about revenue growth. The nature of our business is you buy the data once and you sell it many times. So we scale wonderfully as revenue is going up, our gross margins are presently about 83%, but more than half of those costs are fixed. So as you add an additional dollar of revenue, the flow-through is significant. And then you reinvest some of that in further growth, new product introduction that keeps a virtuous cycle going and boost that growth rate. And we would hope to modestly expand our adjusted EBITDA margins over time, not necessarily on 100 basis points per year, certainly not the 450 basis points that we improved margins this year, but modest improvement in that as we go forward.

Got it. And maybe we can just build on that, just some of the cost initiatives that you've had. You've done kind of the reorg. Anything you'd call out in terms of some of the costs you've taken out? And maybe how the cycle has made you think through in terms of allocating capital or investing in certain areas?

Yes. So I would say we were lucky in that as a company that had grown up into and through the pandemic. When we turned our attention to efficiency, we were able to find duplicative software applications and a lot of nonlabor costs that we were able to remove as we consolidated our operating systems to have an end-to-end flow. So that was the first round of cost efficiencies. As we looked more deeply at spans and layers and at our global talent strategy, that's also unlocked additional opportunities where we've built our operating centers of excellence in India and we've continued to automate. So we feel like we're in a pretty good place in terms of people cost and efficiency there. Now it's really about enhancing the productivity of those salespeople giving them the products and tools that they need to get their ARR per person back up to where it used to be, which is a key goal for all of us.

Got it. I want to turn back to the macro. You mentioned green shoots in the environment. What are customer discussions like today? Because one of the things through the cycle, which typically happens sales cycles elongate, decision-making, things kind of get pushed out. If you can just give us a pulse on how that kind of evolves for this year and maybe what's leading to some of those green shoots?

Yes. Yes. So I think customer conversations continue to be more proving and more comparative than they have been in the past. So that elongates the sales cycle. It also puts a premium on demonstrated impact. So the ability to show how your solutions are delivering ROI for that customer. A secondary thing that we're seeing is a bit more consolidation of decision-making, especially within large pharmas, which has played out to the benefit of larger incumbents like IQVIA and Veeva. Our strategy is evolving to be able to work in the white spaces that we know their solutions do not support as well. We cooperate very well with each of them as part of our clients' ecosystem. And so that's what we're seeing in the marketplace.

Got it. And just since you mentioned in terms of some of those white spaces, I know you also have partnerships, be it with Salesforce and Data Bricks. Can you talk about that kind of where that stands today and maybe how that might help you over time?

Yes. Yes. Some of those in -- also a partnership with Snowflake. The way that I think about it is we have this incredibly valuable reference and affiliation data related to health care, commercial intelligence. And so it's allowing the customers to use that in the way that they want through the platform that they want. So via Snowflake people can access precurated data via our sales force partnership. They can embed that data within their existing CRM via our Populi applications, they can access prebuilt analytical dashboards in Tableau or Power BI or the BI tool of their choice. So it's really making our information available to the customer in the way that is the most valuable to them and in the place that is most valuable to them. So we think that's a significant unlock over time. You've heard us talk a lot about how rearchitecting the platform to make it more interoperable, taking that legacy Populi interface and applying it to diversify and ultimately to life science as well, we think is a significant unlock.

Got it. And we touched on Life Sciences, which is the biggest market. We would also love to get an update in terms of what you're seeing in providers. I know it's smaller, but it's an important growth initiative. And then just the diversified space, what are you seeing from customers?

Yes. So with providers, we're seeing a very positive reaction to the new platform. The nature of the decision-maker and providers is often slightly less sophisticated and less well staffed than the data science teams that you see within a global pharma, for example. So we make available to them through their Tableau or Power BI or the tool of their choice. Some pre-formatted analytics that say, okay, if you are looking to understand network leakage downstream, pick your specialty, maybe it's radiology and once someone is diagnosed as needing radiology treatment to what extent do they depart your system when they're getting the actual end treatment. So by pre formatting that, we accelerate the time to value for that solution. So we're seeing improvements in our renewal rates there, and while we're also seeing larger initial sales. So we're pleased with what we're seeing in providers. And then in diversified, that continues to hum along quite nicely. Different industry segments at different times in terms of whether it's coming primarily from consulting companies or whether it's coming from medical supply manufacturers were different things, but that continues to hum along because if you're in that area, there's no one else that is offering an application that's really focused on health care, commercial intelligence at a comparable price point to what we offer for Diversified.

Got it. Just going back to the competitive landscape for a minute. And you mentioned there's some large incumbents, be it IQVIA, Veeva, you're trying to hit that scene in terms of the white space. Maybe you can just refresh people in terms of just some of the differentiated qualities of Definitive Healthcare kind of what resonates with your customers in the marketplace versus some of these other larger companies?

Yes. So Definitive Healthcare, we are resolutely focused on health care, commercial intelligence data and insights. And so we don't play in the CRM space, for example, as Veeva does. Running a CRM is a very different business from providing extensive data, the application through which you provided, the relationships that you need in your upstream supply chain, all of those relationships are different. Veeva is investing quite a lot, getting a lot of press around their efforts in data. And based on their most recent press releases, it sounds like they're willing to quite -- strike quite inexpensive deals, particularly around key opinion leader data, to get people trying that application. I think it's a smart strategy for them. It's not a substitute for the information that we have because our reference and affiliation data can be fed directly into Veeva systems and can coexist with it. So we have the concept of the Definitive ID, which is a unique ID to every health care provider in the United States, which is tied to location information and other information, which is very difficult to extract from claims, so it needs to be built organically. So that's part of our unique value proposition. So Veeva is trying to leverage their position in CRM to offer low-cost data to get you to try it. And then presumably, they'll change their pricing strategy over time. IQVIA is taking the opposite approach. They're taking a more services-led approach saying, hey, we don't have the technology assets, but we have a massive throw weight of data, some of the most complete data sets out there in terms of claims and large professional service team that when you ring them up with a question, they can provide you an answer to that question. It takes some time, but it's the minimal effort. So if you think about folks who don't have a big data science team, they'll provide essentially that outsourced team via services, whereas we provide that through our preconfigured analytics and the power of our platform.

Got it. So these are some of the larger players in the space and doing different things. How long [ or ] just the private company backdrop? I mean funding certainly has dried up. Are you seeing any changes there in the last 12 to 18 months?

Yes. We're seeing some of the big players that have unproven business models are struggling a little bit and starting to run into questions about their contractual right to use all of the data that they're using in the ways that they're using it. So I think we're seeing some maturation of the industry in that way. The larger players saying, "Hey, you're on our radar now. I won't use specific names just out of respect for other industry participants. There's also some smaller companies that are getting some decent traction in specific segments of the market. So for example, in providers, there's one company that we realize -- or sorry, medical devices that we realized was offering lower quality data, but at a significant pricing discount to us. So we're now adjusting appropriately in order to create offerings that are more head-to-head competitive. So all good normal competitive activity as we figure out how to segment this world and everyone finds their sustainable competitive niche.

Got it. I do want to touch on just the go-to-market strategy, and that was one of the things I think Kevin emphasized in his first call in terms of this unified platform. So can you just touch on that in terms of what that means for the opportunity set and customer engagement?

Yes. So I think the way that I would think about it is more bundled sales, some multiproduct sales. We've had -- our heritage was in selling point solutions to end users to cheap and Cherry that was $20,000 to $50,000 per year are small deals with a 3- to most 6-month sales cycle. As we've continued to evolve and we've become a more valuable strategic partner to our customers, our deals have gotten bigger. So hence, the emphasis on enterprise customers. Those sales cycles have extended. So 6 to 9 months is now more typical. Bigger deals can go longer. And so thinking about the way that we use pricing and packaging to make it easier for our customers to consume not just the first product, but also the second and third. As you add additional products, your solutions become stickier, which go back to our point about increasing our renewal rates. And so we're working on primarily the UI layer of our solutions, getting to a single look and feel and the ability of when someone logs into a single Definitive homepage to see both the assets that you currently have. And then perhaps this is conceptual, not literal, perhaps seeing grayed out areas for the solutions that you could subscribe to, but you don't yet have.

Got it. And how do you think about that on a longer-term basis that contribution from new logos versus higher ACV and this kind of upsell are bundling?

Yes. So we have -- historically, we were seeing 2/3 of our growth coming from new logos over a multiyear period, if you just looked at the expansion of ARR. It's more balanced today, which I think is actually a better mix for us. So we're getting more of our growth. It's closer to 50-50 between new logo and upsell. These customers can be very, very large customers with a lot of needs into deeper penetrating a multi-brand life sciences company has real value to us or a multi-location hospital system. So getting ourselves more fully embedded and becoming an invaluable strategic partner. So I think it will be more balanced going forward.

Got it. And if I go back to kind of the sales reorg, is the sales position today to be doing this? Are there any other new salespeople or things you're doing to maybe capture on this platform bundled approach?

I think it's refinement of the sales organization tweaking some of our compensation, et cetera. As I mentioned earlier, there's a lot that we got right. And of course, there's some stuff that we're now choosing to refine. But I would not see a major further major changes there.

Got it. All right. Just switching gears to kind of AI and data science, which they designed at the heart of some of the things you do. So what's the strategy there? What are some of the things you're looking to really invest in to make sure that Definitive continues to differentiate versus competitors?

Yes. So our primary usage of AI is within the company and within our walled garden of proprietary data. We're not in a place at this point where we think it's prudent for us to be using AI to generate directly in real-time customer insights. The idea of hallucination with some of this data would be very negative. So we use it to help accelerate our innovation and then to provide those insights. We are looking internally at ways that we can use Gen AI to make it more kind of natural language processing for questions and that sort of thing. But we will always be a measure twice, cut once approach in delivering externally facing Gen AI or other insights of that type.

Got it. And I think one of the questions from investors is just the ROI on these investments broadly. And so can you give a sense there in terms of things that you're doing and the money you're putting to work that -- whether how you measure it or making sure that they are good investments?

Yes. What I really focus on is the time to value with new product introduction. So how long does it take us to go from concept to the initial GA product release and then the subsequent uptake? So where we see the maximum benefit is the ability to slice our existing data in new ways to solve an adjacent problem. In that way, you minimize the cost other than the process processing costs of the data. The real heavy fixed cost is when you get a new data set. So we're not making massive transformative investments in new data at this point or in AI to process that.

Got it. And since you mentioned in terms of the cost of data sets, you alluded to earlier, kind of gross margins in the 83% range. How do you think about that going back to kind of on a longer-term basis? What do you think is kind of a good steady-state gross margin?

Yes. I think mid- to high 80s is about a sweet spot for us. Year-over-year, we took a 260 basis point hit primarily due to some new data sets that we took in as part of the Populi acquisition. Now those are partially overlapping. So if you look at a venn diagram of our existing data sets and those which we took on board through the acquisition, there was the opportunity for some synergies there, and we're working our way through that as well.

Got it. Let's touch on just capital allocation. Earlier this year, the Board authorized kind of a small buyback. Historically, M&A and tuck-ins in particular have been very important to kind of the growth strategy. What should investors think about in terms of how you and the Board are evaluating opportunities?

Yes. We continue to look for attractive tuck-in acquisitions. We're disciplined on the strategic fit and the ability to drive synergies from them as well as disciplined on price. So we would love to put even more capital to work on M&A., but we're not going to sacrifice the quality of that. And therefore, with nearly $300 million of cash and investments on the balance sheet, we said at the prices that we've been trading at recently, and we thought it was a good opportunity for us to take a modest amount of shares off the street at an attractive valuation. We're not doing it in order to drive share price. I think essentially, with our present growth rate, it's fairly neutral, not driving any major impact. But as we accelerate growth, we'll be glad to have taken those shares back on board at these valuations.

Got it. And understanding it's early days still for Kevin, but is there any different approach he has when he thinks about M&A and what that means for the overall strategy?

Nothing that I would go into detail here on but he's been doing -- he's been working in data businesses for 30 years, and he's got an extensive playbook both of acquisitions and partnership opportunities. So thinking about that strategically and able to leverage, just a great role at exit context.

Got it. And if I think about some of the prior deals, be it Populi, analog Wizards, is there anything about those deals that might inform what you look at going forward in terms of opportunity set and what really works for Definitive or lessons learned, those type of things?

Yes. I think what gets us really excited is those places where we can accelerate the innovation, whether it be around the unique data set or insight methodology or delivery mechanism that's been proven with a handful of customers, but not yet fully commercialized, kind of the sub-$30 million, you're not paying the high premiums that you're paying for a business, which is more closely at scale, which is further scale. So those have been great tuck-ins for us. And we can move incredibly quickly on those, get them integrated into our back office and our commercial organizations within 90 days. So a real smooth motion there. While we continue to look at the opportunity for more significant or transformative acquisitions, which would likely be driven by both revenue and cost synergies.

Got it. And look I'm going to ask, just going back to overall management and changes, just Jason's level of involvement today, kind of day-to-day business, bigger picture.

Yes. So he's playing a more traditional Executive Chairman role. He stepped in and did Yeoman's work as Interim CEO, but we had a very clear desire to find someone who's product-centric and customer-obsessed and could do that full time for multiyears. Jason is fantastic. That's not what he's choosing to do with his life right now. So we led an extensive search, and we feel great about where we landed, which allows him to then step back, spend more time on mapping out the industry thinking about the next steps for us in M&A product and playing a more arm's length advisory role.

Got it. Well, as we almost come close to time here, just wrapping up, what are some things over the next 12 months that you want to make sure Definitive is executing on for investors?

Yes. I think the most important thing in any 12-month period is delivering the results. So I feel good about where we are, feel good about the expectations that we set. So we're really focused on execution. As we do that, the couple of key milestones, the single biggest lever for us is to continue improving our customer renewal rates. So keep your eye on that in our commentary. And that will show up first in our CRPO. And then that will lead into our revenue outlook. Those are really the couple of items that matter most.

Great. Well, I think we're out of time. So thanks so much, Rick, for being with us this morning.

Thank you, Craig.

All right. Thank you.