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

Good morning, everyone, and welcome to the Health Catalyst session. My name is Bob Jones, and I cover health care services and technology here at Goldman. Very excited to have Health Catalyst with us today, a leading provider of data and analytics technology to the health care industry. I'm joined from the company by CFO, Patrick Nelli; as well as Adam Brown, who heads up Investor Relations. So welcome to you both. Thanks for participating this year.

Thank you, Bob. Too bad we're not in person, but it's good to see you virtually today.

Thanks, Bob.

Well, yes, we'll have to make do, right? But no, thanks again. I really appreciate you guys participating this year.

I thought, Patrick, maybe just will dive right into questions. Just have a conversation around some of the key things in the industry and obviously with the company. I think one area, clearly, that's top of mind for everyone is just the unprecedented situation that we face here on the health care front given the health crisis that's ongoing. I guess as it relates to the company, clearly, the decision to withdraw 2020 guidance, but put out 2Q ranges, I think, was largely understood just given all that's going on. But I guess as we sit here today in almost mid-June, what are the major guideposts, if you will, or metrics that the organization is looking to, to maybe get in a position where you'll feel better about having visibility into the balance of the year?

Yes. Good question. So we certainly take the process of providing guidance to investors seriously. It is evidenced by the fact that we've been fortunate enough to exceed guidance we provided historically. So we do take that process seriously, which is why we did not provide full year 2020 guidance on our last earnings call. We do benefit from a highly recurring revenue business model. So greater than 90% of our revenue is recurring in nature. And that meant at the beginning of the year, we had greater than 90% visibility into full year performance. But at the time of the last earnings call, there were 2 items that caused us to decide to not provide full year guidance. Those 2 items are: first, how bookings or new sales would turn out in the first half of the year. As you can imagine, while this is -- the pandemic has driven the need for data and analytics, it has caused some buying pattern uncertainty. So we wanted to see how the first half was to play out from a new client adds perspective, so that's number one. And number two is we shared that we have been proactively providing some professional services discounts. Those are time-boxed, but we wanted to get through the majority of those conversations to have a good sense of how they would impact our income statement in Q2 and partially in Q3. So we have now gotten through the majority of those. So as we think about coming out of the first half of the year, both those items essentially will be behind us. So that will give us more confidence as we think about talking to investors about future performance or future quarters or the full year.

No, no. That's really helpful and definitely had a few follow-ups on that. But maybe just sticking at a high level still. I think one of the areas that has gotten a lot of focus at the conference and just in general is folks tracking elective procedures as a proxy, if you will, for the system being able to kind of get back to normal, both from a volume and a financial standpoint. So again, like as you sit here today, any updated thoughts just relative to what you're hearing from your client base about the amount of elective procedures that are starting to come back? Has that trend continued to develop from your vantage point? Just in general, the sentiment of the health systems that you're exposed to kind of real-time would be helpful.

Yes, for sure. The sentiment is certainly improving. And elective procedures have been taking place, took place to a large extent in May, are continuing to take place in June and are scheduled out through July. And the trend is that they will be increasing their percent compared to baseline over the next few months as they have over the last couple of months. To take a step back, just to give you a sense of what these health systems, in our view, were going through was late March and April were quite painful. Essentially all elective procedures were canceled. And from an analytics perspective, that meant that these health care systems were really focused on just getting prepared. So that was the mindset in late March and April. May, it shifted to thinking about rescheduling elected procedures, thinking about recovery and the data needed for those use cases. So they're very much in the look-forward mode right now, where they are seeing improvements in elective procedure volumes. They're -- and they're very much in the look-forward mode. There is still a little bit of uncertainty around what percent of norm we get to in the second half of the year. That there's various estimations, but there's still a little bit of uncertainty there because individuals typically are only scheduling elected procedures out 30 to 60 days. So there's still some unknown as we look towards August, September and Q4 as to what percent of norm, we'll get back to.

Yes. No, I think that sounds really consistent with what we've been hearing across the industry. I guess another area that comes up is in thinking about what the health system and hospitals will look like once we hopefully come through this, it's just their financial stability. And so there's been a lot of discussion around where will they stand, where they stand today. Obviously, there's been federal stimulus. How helpful has that been? I guess the ultimate question is just what do you think about the financial stability of the system broadly, both your customers, then obviously, more importantly, potential customers? Do you think there needs to be more stimulus based on the feedback that you're hearing? And then really the ultimate question behind all of that would be, when we do come out of this, where do you think Health Catalyst DOS platform apps and addition to services will fall out as far as the prioritization in spending from those hospitals?

Yes, for sure. So I'll try to answer all those questions, if I can remember them all. So on the health systems financials, they improved materially in May. Essentially, as I mentioned, late March and April were bad. They were fairly painful from a financial perspective. What occurred in May is 2 things. They started to reschedule elective procedures, as we talked about, and they received stimulus dollars. And those stimulus dollars were and are meaningful, especially in regards to year-to-date impact of COVID. What's probably a little unknown is -- as I mentioned, it's unknown what percent of norm we get back to from a general hospital operations perspective, which includes elective procedure volume. And what percent of norm we'll get back to will determine the need for future stimulus dollars. So that -- there's still a little uncertainty in the second half of the year, but the stimulus dollars to date have been extremely helpful. As far as Health Catalyst goes, we have been very busy in helping our customers with the analytics they need for this pandemic. March and April we're very much about helping them get prepared. So we rolled out analytics along the lines of what's their current utilization of their ICU beds, ventilators, et cetera, compared to the supplies that they have available to them. Let's predict what your utilization will be over the next several weeks based on local transmission rates, local OR factors, and let's determine what supplies are at -- or the bottleneck for you, and you need to be focused on ordering. So March and April was very much around dashboards to help manage this pandemic, to help make sure they're prepared. May and June have been around helping them with recovery. So we've rolled out analytics solutions along the lines of which elective procedures should they reschedule first, what's the financial impact of those, what's the patient impact of putting all certain procedures longer, and let's make sure we get the highest need patient procedure scheduled first. So that's a whole category of analytics where we're helping them run and understand the financial impact on their business based on the elective procedure reschedulings. Another whole category is around virtual care. So as they incorporate more virtual care into their operations, what are the staffing ratios, what are the scheduling needs, what's the financial impact of those, let's run scenario analysis around which encounters can be provided virtual, which ones cannot. So we have rolled out 10-plus COVID-related analytics solutions that have been deployed 100-plus times across our client base. And when we go to prospects and show them what we've done in a month-long or a couple month-long period, that's how a lot of our sales motion is going right now. So they can see the benefit of going with a commercial-grade vendor that has a cloud-based platform where we can roll out these solutions very quickly. And when they're comparing that to their homegrown solution, where they're oftentimes a little slower to roll out all these solutions because they're not backed by a commercial-grade vendor, that's why we feel confident that coming out of this, we're going to be very well positioned. And the need for data and analytics will certainly have been highlighted over the last several months.

No, that's super helpful. I guess maybe just related to that, you touched on this, but you talked about it on the last earnings, the COVID-specific light version of DOS that, if I understood correctly, seem to be geared towards servicing systems that were not full service or even a la carte DOS users to begin with. So maybe just an update on what the uptake and implementation has been like there would be part one. And then part two, what kind of future pipeline could this, in fact, create now that, in a way, you're able to get your foot in the door with this light version of DOS and be helpful to these systems?

For sure. So as I mentioned before, we've rolled out 100-plus implementations of COVID-related analytics solutions across our client base. We also announced to this question a light version of DOS that could serve new customers who would just like to use -- who would just like access to specific COVID analytics. And that light version of DOS can actually support different types of applications that we could provide to new customers. And the framing there is some prospects come to us, and they're really focused on one problem. And we have always tried to expand and explain the value of DOS and try to get them to do more from -- with us because we think that will drive more value to them. But for certain prospects that are really just singularly focused on that one solution, we didn't have a perfect answer before because we needed to deploy DOS and that's generally more costly than a point solution application vendor that they could get elsewhere. The benefit of this DOS light solution -- and we've been working on it for about 18 months and COVID was a good reason to announce it in even a few months earlier than we would have otherwise. The big reason is so when someone's just focused on a singular solution, we can meet them where they are. And we can get a foot in the door and help bring value at a lower price point for that specific problem that they're really wanting to address, COVID-specific analytics or what we've talked about, but it can actually be used to address other specific analytics needs. The benefit we think that adds over time, we don't think there'll be a near-term benefit because we just announced this and we have a relatively long sales cycle, approximately 12 months. So even if this is a shorter sales cycle, it'll still take a while to play out. But the benefit we think it drives longer term is we think it'll be additive to the number of new DOS customers we can add in a given year. And the reason we believe it'll be additive is because we think we'll have a higher win rate for those prospects that come to us that are just singularly focused on that one problem. We have now more competitive solution to meet them where they are. And we can get a foot in the door and then expand. Because DOS is in there, we can expand the use cases that they want to tackle over time, the applications they need to use and hopefully expand the value that we're providing to them. So that's the vision. And we do think it will provide long-term benefit, although no material near-term income statement change based on this announcement.

No, that makes a lot of sense. I guess maybe, Patrick, just to go back to one of the things you touched on that was incremental response to the current situation was some of the temporary discounting that you highlighted on the last earnings call. It sounds like you believed in the back half this will be kind of behind you. But maybe just real time, have you worked through the entire customer base at this point as far as where this would apply? And I guess how confident are you that once we start to come out of this that, in fact, to your previous statement, that this will all kind of revert back in a meaningful time line perhaps even in the back half of this year?

Yes. So it's certainly an unprecedented time, but here's what we are confident in. We -- the use of our technology has never been higher. We announced that our foundational analytics usage went up 20% -- 20 plus percent in just a few weeks post the onset of this pandemic. And on the services side, customers are continuing to utilize our data analysts, data engineers, data scientists, domain experts, they just refocused a lot of the work that they were doing towards COVID-related analytics. So we feel very confident based on that information that we're providing significant value across our client base. The reason we wanted to provide these discounts is because our health systems had a really tough late March and April financial situation and we wanted to be good long-term partners. And we have spoken to the majority of our customers. So we've had those conversations around -- we've been talking to all of our customers, but we've spoken and worked through these discounts with the majority of our customers. And what I can say is they were extremely well received. We wanted to show that we're a long-term partner because we believe there are a lot of ways in which we can help customers, either incremental applications or incremental services we can provide to them. And we're focused on the long-term benefit we can provide to them and willing to be -- provide some of these short-term discounts to be a good partner. So they were very well received, and they've even opened up some potential expansion conversations as we look towards the second half of the year. So generally, we feel fairly confident that these have been well received, they'll continue to be well received and we'll come out of this back to a normal level as far as the professional services relationships that we have with our customers.

And I guess just before we change gears and not to put a specific number on it, but any sense you can share as far as how widespread across the customer base some of these discounting efforts were? Or was it very much more targeted and tactical related to health systems that you knew were struggling?

We serve a variety of different customer types, everything from large health systems to midsized health systems to large physician groups that have ACOs, to health plans and risk-bearing entities. The impact of COVID in the near term on those different types of customers was different. So we've tried to be fairly targeted around focusing on the customers that were impacted most because they're obviously the ones that we wanted to be a good partner with. And when we think of these discounts, they were generally time-boxed. So to a couple of months, 2-, 3-month type period, similar to the kind of the painful financial time period that they had in late March, April and early May. And they were generally limited the 10% to 20% of their professional services fees. That was generally the discount. So we tried to stay fairly focused, tried to stay fairly time-boxed. And it was generally well received because as I -- there was almost an emotional reaction in certain cases, where us being willing to help them out and be flexible and do what's best for them meant a lot to them. And it helped open up conversations, so we can figure out other ways in which we can help these customers.

Yes. No, I think that makes a ton of sense, and I could see why the receptivity would be so high. You mentioned the payer and other risk-bearing entity end markets. I guess just in this window of time, presumably maybe those end markets are in slightly better financial positions, has the company made a more concerted effort to go after those channels just given what's obviously, clearly, a distraction and difficult time in the kind of traditional hospital market?

I would say we've been, first and foremost, focused on our customers and making sure we're doing right by them, making sure we're meeting their analytics needs and exceeding their analytics needs. And to your point, we do serve a number of risk-bearing entities. So some of the predictive models we've rolled out have included predicting which patients are most at risk of potentially contracting COVID for -- within a health insurer's patient population. So that we've, first and foremost, been focused on our current customers, but that has included risk-bearing entities that we currently serve. When we think about new clients, I would say, a -- what we did there first is ensure all of the client conversations that we were having were healthy, were continuing -- or all of the prospect conversations, sorry, were healthy, were continuing and we were highlighting all of the ways in which we were helping current customers. So I'd say our first focus on the on new customers is ensuring that our pipeline -- we have a relatively long sales cycle, ensuring that our pipeline is healthy and we continue to mature and have customers move through that pipeline. As we think further out, we have been adding to our capabilities to be able to better serve risk-bearing entities. So that is something that, from an R&D perspective, we have been investing in and we would expect to continue to invest in post this pandemic.

No, that's helpful. I guess we've kind of touched on this, but it's another one I want to make sure that we dug into a little bit. It's kind of an overarching theme across the conference, across the health care system. And that is just things that might be more permanent as a result of this. And so you've alluded to a few times through some of your other responses, but are there specific areas that you think could actually be accelerated within the offering as a result of the crisis that the health system is facing? I think about even on the professional services side, just given that a lot of that's more remote, maybe it's some of the specific applications that people might not have appreciated that they needed and now, unfortunately, probably appreciate that they need more. I just wanted to get your perspectives on could anything be accelerated/more permanent as a result of this?

Yes. I think it's a good question because -- I think a good framing for the impact of this pandemic is that there were trends already in place, and this pandemic accelerated a lot of those trends that were already in place. So some of those trends that we think we were in place that have potentially been accelerated include these health care organizations, analytics, infrastructure maturing. So most of the industry has a homegrown analytics solution, a homegrown data warehouse. We think it's inevitable that a decade from now, most of the industry will have a commercial-grade vendor because we just think it's a better value proposition to not have these health care organizations hire the data engineers and software engineers to build their own analytics infrastructure and instead go with a commercial-grade vendor. We think this will accelerate that trend because health systems solve, in certain cases, the deficiency of their homegrown solution. It wasn't able to react fast enough. They weren't able to get analytics out fast enough. And when we were able to share the 10-plus solutions we rolled out in approximately a month, that's really powerful. So I would say that's one trend that we think did get accelerated. Another is as far as the government's role in the health care data and analytics infrastructure in the U.S., it's gone in waves, I would say, how much investment they want to make and how much of a role they want to play. We do think that it makes a lot of sense if we want to be better prepared for this pandemic later in the year and/or better prepared for future pandemics that we have a better data interoperability, data infrastructure, data and analytics capabilities at the state and federal level. So we do think that, that was already a trend. There was talk about interoperability, talk about regulation, potential investment, but I think this is accelerating that. It's a little hard to say exactly what the government will do, but I think this is accelerating that trend. And then to your point on the professional services side, there, we performed the majority of our analytics and domain expertise services remote previously. So the transition was fairly smooth, but we still went in-person a decent amount. I think everyone getting comfortable around working virtual and working remote is -- has been accelerated by this as well. So I do think coming out of this, even more of the services we provide, will be done virtually compared to in-person.

How about the idea of one of the gating factors I think I've heard in the past around the home-grown system transitioning to the commercial-grade vendors, the kind of on-prem versus cloud approach. Has this helped accelerate any of the conversations? Have you seen any discernible shift there? Just given the fact that you are obviously a cloud-native platform and a lot of systems out there, as we know, small to large, still perform a lot of this on-prem.

Yes. So health care has been a little slower to move as far as their comfort with the cloud. Most health care organizations got comfortable with the cloud starting a few years ago. But there certainly were holdouts. And I think this is a little bit the straw that broke the camel's back in regards to those holdouts, where these health care organizations realized that having a cloud-based solution provides them with more adaptability, more flexibility, they can iterate faster, we rolled out these solutions very quickly. So we do think for those last holdouts as far as CIOs that were worried about the cloud, that this is an accelerator to getting them more comfortable with the cloud. Most of the industry was already there, but there were still a few laggards, and we do think this helps push it over the edge.

Yes. I guess another -- just one other area on this is as we think about accelerant transitions would, I think, be around this system embracing value-based reimbursement. There's been some progress on some of these programs. There's a start date for direct contracting now out there. Do you think that those movements and incentives towards incentivizing the health systems to enter into more value-based payment arrangements plays into Health Catalyst's favor as far as being able to provide the tools and services that organizations, I think, will come to realize they need in order to operate in that world?

When we think about what drives our business, the tailwinds that drive our business, there's a few. There's the -- and the move to value-based care is one of them, but it's not the only one. And I wouldn't even say that's the main driver. Some of the other drivers include, generally, these organizations wanting to become more data-informed. Executives wanting more access to data to make data-informed decisions. This pandemic has highlighted that potentially more than any other event in history. We are all looking at charts every day. They -- as executives, they -- this was a turning point to them using data to run their business, whether it's local infection rates, capacity utilization, supply -- supplies, et cetera. So that's a big driver. Another driver is cost pressure. So using data to help these organizations better understand their costs, better manage their costs. And that's valuable under our fee-for-service or fee-for-value type model. As far -- so there are multiple drivers. Generally, the move to value-based care is one of those drivers, but it's not the primary driver. I would -- our general view is that even though this pandemic highlighted some of the negatives of a fee-for-service model, and it should naturally incentivize health systems to move to value-based care, we don't think that's going to happen extremely fast. We think organizations are going to be measured in their adoption of value-based care. And we think that transition will occur over the next decade or so. But when an organization is in a fee-for-service and fee-for-value model, that's a complex economic model to operate in and you need data to actually -- to be able to operate when you're in between as well. Because it's just a complicated model and you need to understand the impact on your financials from those 2 different economic models. So we do think the transition will take a while. But we do think the industry will continue to move to value-based care. It will just be an elongated time line. And we think the need for data and analytics is important throughout that entire transition.

Got it. Maybe just a couple company-specific, more tactical ones that I wanted to touch on. One was just around churn. Obviously, given some of the things we've already discussed with the financial distress being felt by many systems. Curious, just at a client level basis, are you seeing more churn than normal, more churn than anticipated? And then I guess related to that, as you think about those customers that are in renewal years, how are you approaching contract renewals any differently, any change in mindset relative to a normal renewal year?

Okay. Good question. This is certainly an unprecedented time. So it's a different environment than what we're used to. But I can tell you that we've not had any client churn associated with COVID. So there's been no client churn. And a large reason for that is because we're helping our customers with this issue. We're helping them build analytics solutions that can help them get prepared, that can help them with recovery, the use of our technology has never been higher. Customers are leveraging our analysts and data engineers to help them with these COVID-related analytics. So generally, these health care organizations realize that they need to make an investment in data and analytics as opposed to pull back. So that's why we have not had any client churn. As we think about renewals, on the -- so they're -- on the technology side, since the use of our technology has never been higher, we've rolled out 10 solutions that have been deployed 100-plus times across our client base. Those built-in contractual escalators in our technology access agreements have generally been positive conversations with customers. They understand that they're receiving more value. We're working very hard to make sure they're receiving more value, and those renewals are generally happening uninterrupted. On the professional services side, we've shared that we're providing some near-term professional services discounts, but those renewals are generally happening as expected. Where we would expect a little bit of pressure there is oftentimes that would -- we're also having expansion conversations on the professional services side, where a customer might want to do more with us and/or need more of our FTEs to help them use data across their business. While we have signed some of those professional services expansions even post pandemic, we do think it's going to be a little harder to have those expansion conversations in the very near term. And that's why we shared that we would not expect COVID to materially impact our technology dollar-based net retention in the first half of the year. But we could expect it to negatively impact our professional services dollar-based net retention because it will be harder to have some of those professional services expansion conversations in the first half of this year.

No, makes sense. I guess just one more tactical one that we had is, I know on the last earnings call, like many other companies, you outlined some cost-cutting reductions, nonheadcount-related cost-cutting reductions. I guess just how do you feel, as we sit here today, about the moves that you've made or put in place relative to how things have trended? And do you generally feel like what the company has done will be sufficient to meet some of the volatility on the top line?

Yes. We feel good about that. So some of the cost containment efforts we put in place included less sales and marketing spending, which is also fairly straightforward to accomplish when there's less travel going on and sales and marketing is generally done under a different model. We also decided to hire fewer new team members this year than our original budget. And we've made some moderate team member benefit reductions because our team member benefit package was extremely competitive pre-COVID, and thus, we believe we have some savings there as well. So we feel good about all of those. We've shared previously that we're on the path to profitability that we would expect to begin 2022 on a run rate adjusted EBITDA breakeven basis. And we believe these cost-containment efforts help us continue to be on that path. This is obviously an unprecedented time. So we need to continue to monitor that and be flexible depending on how this plays out. But we do feel comfortable that these cost-containment efforts have helped us continue to be on the path to profitability.

No. No, that's helpful. I guess maybe -- we have a few minutes left, maybe to end on a more positive upbeat note. I wanted to talk about just forward product development. Where are the key area of focus in R&D as you think about what your clients were either asking before or might start to ask again once we get through this window? And then just related to R&D focus, just perspectives from kind of buy versus build. Where is the organization investing internally versus are there areas that might be more supplemented by going external and doing tuck-ins?

For sure. So when we think about our R&D pipeline, an item to know is our data platform DOS is open. Customers build more analytics on top of it than even we do. And we have a close services relationship with a lot of customers where we're helping them build various analytics. So we have pretty good insights into what new areas of analytics customers are trying to utilize, how common those are across our client base and how much value they're driving for that customer. That, in essence, acts as our R&D pipeline. That gives us ideas for how to decide to add new analytics applications over time. And we can -- to your point, we can add those analytics applications either organically or inorganically through M&A. When we think about the impact of COVID, one obvious area that we've been spending a lot of time on are COVID-related analytics. These include everything from just a predictive model, which is fairly easy for us to roll out fairly quickly. And you can see all of these, by the way, on our website, including the predictive model. We open sourced it. But it includes predictive models, it includes dashboards and it includes taking our software applications, and adding COVID-specific measures, registry definitions, et cetera, so they can serve the purpose of helping our customers with this pandemic. So building organically COVID-related solutions has been a focus over the last several months and will continue to be over the next few months. The other trend that was playing out prior to COVID that will continue in our minds is we've been very strong in regards to clinical analytics at the applications layer. And over time, we've tried to invest to strengthen our financial and operational analytics capabilities. As an example, we have an activity-based costing software application that we built called CORUS, on the cost reduction side. But we've also been investing more on those financial and operational analytics categories. We've been investing more organically, and they could be areas as we look to M&A, where we -- there are areas we're interested in. And we could potentially find tuck-in analytics application companies to add to those capabilities. So that's the second item, I would say, versus COVID. The second is continuing to invest in financial and operational analytics capabilities. Because, ultimately, we want to be able to serve our customers across their enterprise, serving the CFO, COO, CMO, CQO, CIO. And the more that we can serve them across the enterprise, the more value we can provide to them and also the more expansion we have within our client base.

I guess just the last one in the last minute we have as it relates to tuck-in M&A. I guess just how do you feel from a balance sheet perspective in order to pursue deals? I know the convert deal, I think, was in 1Q. So just general view on how fortified you feel the balance sheet is today to go out and pursue some of those things you mentioned.

To your point, it's good to end on a positive note. So we feel very good about our balance sheet. We shared that we had over $340 million of cash on the balance sheet after the convert. We shared that in the last earnings call. We -- as we've shared, we don't need that much cash to get to operating cash flow breakeven, so we plan to use the majority of that for M&A. And we have an active pipeline for a few reasons. One is because of the uncertainty that COVID presents as far as M&A targets, thinking about fundraising or thinking about the next few years. Another reason we have such an active pipeline is we try to build a world-class culture with world-class team member engagement and industry-leading customer satisfaction. And that means when we are talking to potential partners or M&A targets, they know that we will treat their team members well, we will treat their customers well and this is a good home for them to land if they're interested in kind of -- in a deeper relationship. So those are 2 reasons why we feel confident in that consolidation strategy, specifically at the analytics application layer of the stack, while we have an active pipeline and while we'll continue to work to put that capital to work.

Let's stop. Well, look, I think we're just up on time. So I definitely want to thank both Patrick and Adam for joining us today. Thank you, everyone for…