Health Catalyst, Inc. (HCAT) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to the Health Catalyst presentation at the JPMorgan Healthcare Conference. My name is Anne Samuel, and I cover Healthcare IT for JPMorgan. It's our pleasure to have Health Catalyst this morning. We've got presenting are CEO, Dan Burton; and CFO, Patrick Nelli, and we'll be taking questions at 1:30 in the Olympic Room, we'll be meeting back there. So with that, let me turn it over to Dan.

Thank you, Anne. Good afternoon, everyone. Thank you for choosing to spend this time to get to know Health Catalyst a little bit better. My name is Dan Burton. I'm excited to share with you an overview of our company. I serve as the CEO of Health Catalyst. Let me begin at a very high level, and then I'll share a few clicks down. As it relates to our company, it's areas of focus, the solution that we provide, the problems that we help solve, and then I'll turn it to Patrick for some financial details as well. So at an overall level, Health Catalyst is a leading provider of data and analytics technology and then complementary services to primarily U.S.-based health care organizations. Our solution includes 3 important parts: first, the data platform, a data platform that is cloud-based, flexible, open and scalable and is designed to help our clients bring data from every relevant clinical, financial and operational source into a single source of truth. Importantly, our clients view that data platform as their data platform. And they use that data platform to run their operations. Secondly, above the data platform layer, we provide an analytics applications layer, that is designed to help pinpoint opportunities for clinical, financial and operational improvement. An example of an opportunity for clinical improvement could be improving our sepsis mortality rate. An example of improved financial performance could be improving our cost per case and an operational example of improvement would be improving the throughput of our emergency department. Then after we've gleaned those insights about those opportunities for improvement, we complement the technology with the right services expertise in each of those domain areas, starting with data science and analytics domain expertise, but also including those important clinical, financial and operational areas of expertise so that we help our clients actually make improvements occur. Now the way in which we execute against that improvement mission. With each client, each year can be illustrated using a framework called the flywheel. We begin each relationship with each client, each year at the top of the flywheel, where the client really takes a leap of faith that the combination of the 3 parts of our solution, the data platform, the analytics applications and the services expertise will combine together to lead to measurable improvement, clinically, financially or operationally. When that measurable improvement actually occurs, the trust builds between us and our client, and they choose to renew their relationship with Health Catalyst, expand that relationship into more improvement areas. And they often refer us to their colleagues in other organizations. Importantly, at the center of our flywheel is the team member and team member engagement continues to be my #1 priority as the CEO as it is our team members that enable success at every other stage in the flywheel. Let me next just highlight 5 investment components that if we were an investor, we would care the most about at a summary level, and then I'll drill into each one of these in a little bit more detail in the next couple of minutes. First of all, Health Catalyst has been repeatedly recognized as an industry leader in health care data and analytics and health care data and analytics expertise is critical. It's central to solving a very large problem. The $1 trillion problem of waste or inefficiency in U.S. health care alone. But without advanced data and analytics capabilities, you don't know what needs to be fixed and how to fix it. That capability has provided us with a meaningful and large current TAM of $8 billion. That is a U.S.-based TAM based on our core offerings today. And it's a TAM, we believe, will increase over time. Second, we don't just offer technology, and we don't just offer services, but we have a comprehensive solution, including the data platform, the analytics applications as well as the services expertise, and we've developed depth of expertise in each of those 3 categories. At the data platform layer, we've invested over $100 million over the last decade to build out and automate the process of ingesting data from over 300 of the most common data sources, including every major EMR, supply chain, costing, finance, lab, administrative patient experience, pretty much you name it we've worked with that data source and automated the ingestion of that data into the data platform. We're also accustomed to working with large volumes of data. Often between 10 and 100 terabytes of data per customer. At the apps layer, we've fully built out 8 application suites across clinical, financial and operational areas, along with a library of lighter touch visualizations that help our clients meaningfully improve in each of those areas. And we have hundreds of experts, data scientists, analytics, engineers, and clinical, financial, operational domain experts as well that all lead to the third investment highlight, which is the proof of our solutions efficacy. And that is the number of measurable clinical, financial and operational improvements. One update that we're excited to share today is that 2019 was a record year for Health Catalyst clients. Our client base realized just under 700 of these measurable clinical, financial and operational improvements. And that represented the strongest year in our history. As you can see to date, our clients have realized a total of about 1,200 improvements. So you can see how much that flywheel is accelerating in 2019. We're excited to see that growth across our client base. And we're also encouraged to see that as clients spend more time with Health Catalyst as their partner, they realize more and more improvements per year. All of this is enabled, as I mentioned a few minutes ago, by world-class team member engagement. Many of our team members were concerned as Health Catalyst went through the process of becoming a public company in July of this last year, that we would lose our focus, that I would lose my focus on the team member experience and the unique culture and mission orientation that Health Catalyst has developed over the last decade. But we, as a management team, redoubled our efforts to make sure that the team members experience stayed at center and another update that I'm excited to share with you is that following the process that we've used for many years now, every 6 months, the Gallup organization surveys our entire team member base to understand our engagement levels. And just this last week, we received the results of the most recent 6-month period, which were the highest levels of engagement in the company's history, well into the 99th percentile. We believe this is a fundamental part of the secret sauce of Health Catalyst's success as a company and this will continue to be my #1 priority as CEO. All of this leads to an attractive operating model. With greater than 90% of our revenue recurring in nature, a long-term revenue growth profile in the 20-plus percent range and a loyal customer base that chooses to meaningfully expand with the 2018 dollar-based retention rate of 107%. Now let me touch on each of those categories briefly. The fundamental problems that we help health systems to solve are, first of all, that problem of waste or inefficiency that I mentioned a couple of years ago. It's estimated that there's approximately $1 trillion of waste in U.S. health care alone or about $0.30 out of every dollar that's being spent today is inefficient. But to know what to fix and how to fix it you need to have advanced data and analytics capabilities. The second challenge that health systems face is really the challenge around complexity, complexity around the economic models that health systems are asked to manage between value-based and volume-based model. This requires incredible complexity management and incredible data and analytics capabilities. That data complexity and that economic complexity are fundamental reasons why Health Catalyst has been chosen as a strategic long-term partner to our health system clients. We've been fortunate over the course of the company's 11-year history to work across the health care delivery ecosystem, including working with some of the largest, most innovative health systems in the world, along with rural, small health systems and even physician practices, academic medical centers, ACOs and many others. And we found that our solution produces measurable improvements in all of those situations. We've been fortunate to be recognized by multiple third parties as an industry leader, both from a technology perspective, like what was highlighted in the most recent Chilmark health care analytics report where Health Catalyst was 1 of only 2 companies with straight A grades in terms of technology capabilities. And in terms of customer success and customer satisfaction, with the most recent KLAS evangelism score highlighting that Health Catalyst clients are typically about twice as satisfied with their relationship with us than the industry average for health care IT. Importantly, one of the frameworks that we try to help our health systems utilize in their own journey towards maturity is the health care analytics adoption model, that we co-authored with the HIMSS organization a number of years ago. And it's the way of a health system thinking about its use of data and analytics over the course of years and even decades to become more and more advanced, more and more capable of really harnessing the power of data and analytics. Importantly, we have found over the last 11 years, working across the health care delivery ecosystem that there are meaningful parts, especially at the lower levels, levels 0 through 4 of this analytics adoption model, where we're increasingly being asked to help our health system clients realize meaningful efficiencies because we are in a position to be better, faster and cheaper than a health system manually undergoing those processes on their own. We've invested in the technology that automates manual processes, and we've invested in process improvement on the services side to be a fundamental helpful partner to our clients, especially at those lower levels in taking on more responsibility so that our clients and we can migrate up to the higher levels of analytics maturity over a long period of time. The way that we think about the TAM at Health Catalyst aligns with the 3 parts of our solution. At the data platform layer, using today's pricing, that represents a U.S.-based $2 billion TAM. At the analytics layer, based on the current offering that we have of the 8 application suite that adds $3 billion to the TAM. And then the complementary services that we offer add another $3 billion based on what we offer today. We do see that TAM increasing over time meaningfully as we expand beyond the U.S. and beyond our core markets. The solution that we provide has the 3 components that I mentioned before. We've invested heavily at the bottom of this diagram. At the data platform layer, that's where we always start in our relationships with clients, with a data warehouse capability that's flexible, open and scalable with over 300 source connectors to the most common sources needed for health care improvement. Through our partnership with Microsoft, all of our new instances of the data platform are hosted in the Microsoft Azure environment, which gives incredible scalability to our platform. And together with that, we continue to invest very meaningfully in specific health care content like reusable data logic, machine learning models and algorithms, terminology services that we're constantly adding to that's woven right into the fabric of the data platform. Then at the apps layer, we've chosen to invest in 8 application suites across clinical, financial and operational areas that we then complement with specific services in each of those domain areas, along with our most popular offering, which is data science and analytics ongoing support. From a competitive landscape perspective, the competitive landscape looks very different depending if you're talking at the platform, the apps or the services layer. At the platform layer, the most common competitor that we face is a homegrown solution that a CIO has typically built often with some help from a cross-industry tech company. We have found that over the course of the last decade and all of our investments of over $100 million, we really are better, faster and cheaper than that homegrown alternative, often offering a 2 to 4x ROI versus that alternative. The second data platform alternative is the EMR vendor. And we do find that there are use cases that make sense to use the EMR vendor, particularly when the data that's being analyzed is already inside the EMR. But for all the use cases where it requires data from multiple sources, and we see the predominance of use cases requiring that data ingestion and that flexibility to ingest data and analyze data from many different sources, we are purpose-built and optimize for those use cases. At the apps layer, there are over 1,000-point solution vendors that are often very good at solving one particular problem, but where they fall short is their ability to help a health system solve hundreds of problems. That's really our strength as a long-term partner to these clients. And then finally, at the consulting layer, we find that our differentiation lies in the fact that we couple consulting with the right technology at the apps and at the data platform layer. And that combination of all 3 components has been time and time again, what we have found to be required in order for measurable improvement to occur. We don't see any other company offering all 3 of those solutions the way that Health Catalyst does. These 3-part solutions have led to the kind of measurable improvements that our clients have realized. As I mentioned before, we were excited to see that in 2019, we saw a dramatic increase in the number of measurable improvements that our clients realized. And that as clients spend more time per cohort with us, they realize more and more improvements per year. Let me walk through one example of one improvement with one of our clients, Allina Health that I see Ric in the back, representing Allina Health. It's great to see you, Ric. Ric is the CFO and has been an important partner to Health Catalyst in enabling this kind of improvement. So this particular case is a clinical example of improvement in the patient safety area, as it relates specifically to sepsis mortality rates improving. I'll start at the bottom and work my way up through this example, Allina Health had a hypothesis that they believed they could improve their sepsis mortality rate. In order to test that hypothesis, they needed data from multiple different sources, including their EMR, but they also needed claims data. They needed costing data. They needed labs data. And we made sure all that data was flowing into the data platform first so that then at the analytics layer, they could test that hypothesis. And in testing that hypothesis, they could compare their performance with a benchmark data set of over 100 million patient records as well. And they found that, in fact, they could improve their sepsis mortality rates. And the analytics layer helped to pinpoint specific cases where we were missing an early diagnosis opportunity or we weren't using all of the most effective treatment protocols within the first 30, 60, 90 minutes of diagnosis. That's when the third layer of our solution expertise came to bear, which was bringing our services experts. We have a nationally recognized experts in sepsis improvement that work together hand-in-hand with the clinical leadership at Allina Health to implement changes to the way that we diagnosed and treated sepsis patients. And that combined solution led to a 30% reduction in the sepsis mortality rate as well as over $1 million in sepsis cost savings. This was one of over 100 projects that we worked on together with Allina Health in a recent year and represents a good example of the way that we bring the 3 parts of the solutions together. As I mentioned, we keep team member engagement at the center of everything that we do. We've been honored to be recognized 50 times now as the best place to work and to maintain 99th percentile in our most recent Gallup engagement score, engagement and satisfaction. And this leads to industry-leading customer success and customer satisfaction, as measured by KLAS. We've been fortunate to have a strong and consistent leadership team with expertise from a technology perspective and a clinical perspective as well as a functional perspective. And we continue to emphasize the importance of these 4 operating principles of improvement, ownership, respect and transparency as well as these 4 cultural attributes that we ask every team member to apply every day to be a continuous learner, to be hard-working, to be humble and to strive to be world class in every position and at every functional area. Let me end with this slide before I turn it to Patrick, and then we'll take a lunch break and meet in another room for Q&A. So when I think about the long-term growth prospects of Health Catalyst. I am excited by the opportunities that lie ahead for us. I see many examples within our core client base as well as from an expansion perspective for Health Catalyst to continue to grow in the years ahead. First, within our current customer base, we have the opportunity to continue to expand. When we begin a relationship with a client, we typically begin at just under $2 million a year relationship size. But our longest-standing clients spend more than twice that much and we understand how that progression occurs. Likewise, we can continue to add new clients and grow our overall customer base. As of the end of 2018, we had 50 DOS subscription customers, 16 net new in 2018, amidst a total universe of around 1,200 U.S.-based potential buying organizations, which represents only about 4% penetration. We can likewise add new applications and services. We've chosen at the apps layer, the specific 8 application suites, but we're constantly evaluating the possibility of adding new applications and services as well. We can also continue to invest in adjacent markets, like life sciences and international, and we can also grow through partnerships and mergers and acquisitions. We continue to believe that, that apps layer, in particular, with over 1,000-point solution companies provides a meaningful opportunity for us through organic and partnership and inorganic means for us to continue to grow. Let me now turn it to Patrick for some financial updates.

Thank you, Dan. So because we offer the vast majority of our technology as well as services under a subscription access model, greater than 90% of our revenue is recurring in nature. We've achieved meaningful historic organic revenue growth and expect to continue to meet our long-term revenue growth target of greater than 20%. That revenue growth is driven by 2 primary factors. The first is that we expand within our current client base. So as Dan mentioned, we had 107% dollar-based -- net dollar-based retention in 2018. We continue to feel that we can expand within our current client base at roughly that rate. Also, as an additional data point, in 2019, a customer surpassed the $10 million ARR mark for the first time. The second big driver of our revenue is us adding net new DOS subscription customers. As Dan mentioned, we had 50 DOS subscription customers at the end of 2018. And since that, we believe there are 1,200 possible purchasing organizations for our solution in the U.S., we believe we're significantly underpenetrated. Through this growth, we've managed to expand gross margins meaningfully by approximately 12 points in the last couple of years. We expect to continue to expand gross margins over the long run, primarily as a result of the fact that our analytics applications vary scalably, plug on top of our data platform and, thus, are very high gross margin. We've achieved significant operating leverage historically and expect to continue to given significant investments in building out our sales and marketing infrastructure and building out our product portfolio. That concludes the talk today, I believe we'll be chatting in an hour. Thanks, everyone.