Definitive Healthcare Corp. (NASDAQ:DH) Q1 2024 Earnings Call Transcript May 11, 2024

Definitive Healthcare Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to Definitive Healthcare’s Q1 2024 Earnings Call. Our host for today’s call is Jason Krantz. [Operator Instructions] I would now like to turn the call over to your host, Mr. Krantz, you may begin.

Matthew Ruderman: Good afternoon and thank you for joining us today to review Definitive Healthcare’s financial results. Joining me on the call today are Jason Krantz, our Founder, Executive Chairman and Interim CEO; and Rick Booth, our CFO. During this call, we will make forward-looking statements, including, but not limited to, statements related to our market and future performance and growth opportunities, the benefits of our healthcare commercial intelligence solutions, our competitive position, customer behaviors and use of our solutions, our financial guidance, our planned investments, generating value for our customers and shareholders and the anticipated impacts of global macroeconomic conditions on our business results and clients and on the healthcare industry generally.

Any forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section and elsewhere in our filings with the SEC. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement included in the earnings release that we have just posted in the Investor Relations portion of our website. Additionally, we will discuss non-GAAP financial measures on this conference call.

Please refer to the tables in our earnings release on the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I’d like to turn the call over to Jason.

Jason Krantz: Thanks Matt and thanks to all of you for joining us this afternoon to review Definitive Healthcare’s first quarter 2024 financial results. As you will hear on today’s call, our first quarter performance was mixed. While we met our revenue guidance for the quarter, we underperformed our new logo and upsell expectations, largely due to the continued macro headwinds and disruption from our restructuring at the beginning of the year. However, we delivered strong adjusted EBITDA margin expansion as we continue to focus on operational efficiencies to set ourselves up for long-term profitable growth. Furthermore, we continue to improve our customer renewal rate during the quarter as our work to deliver more value to our customers faster, continue to take hold.

Finally, the financial power of our business model is shown as we translated 97% of our adjusted EBITDA into unlevered free cash flow over the last 12 months. Before I get into the details, I would like to reiterate how excited I am about the long-term opportunity for definitive healthcare. We have highly differentiated data and cutting edge data science delivered through a scalable SaaS platform. We have a talented and committed workforce, and we compete in a complex market with a large and growing TAM. Furthermore, we have a fantastic business model that is able to generate a powerful combination of growth, profitability and free cash flow. And we believe that the work we are doing today will set us up to get back to the growth we expect.

With that said, for the quarter, our total revenue was $63.5 million, representing 7% year-over-year growth. And our adjusted EBITDA was $20.0 million, a 32% margin. We also during the quarter delivered record unlevered free cash flow of over $28 million. Additionally, as Rick will discuss in more detail, due to the slower-than-expected start to the year, we will be adjusting our guide down for both revenue and adjusted EBITDA. However, we will still deliver on our goal of 200 to 300 basis points of year-over-year adjusted EBITDA margin improvement. Our slow start in the year can be attributed to two factors. First, macroeconomic conditions continue to create headwinds. Similar to the dynamic in 2023, sales cycles remained elongated as buyers continue to scrutinize their spend in a cost-conscious environment.

This continues to be more acute in new logos rather than expansion in upsells with existing clients. Second, as previously discussed, as part of our restructuring on January 4, we reorganized our go-to-market team to significantly reduce overlay expenses, create a separate group in sales motion for our small and medium-sized customers and allocate more resources to our most important enterprise customers. The extent of this change resulted in significant disruption to our sales efforts in the first 2 months of the year as we transition to the new model. Despite these near-term challenges, we are confident these important strategic moves best position the company to deliver on our long-term goals. Now that we have completed these large structural changes, we are focused on driving improved consistent performance and we are already seeing positive indications of this on our business.

For example, in March, we added over 80% more pipeline as measured in dollars in new logo opportunity versus what we added in January and we surpassed our pipeline adds from March of 2023. In addition, we continue to see year-over-year improvement in our customer renewal rate as our product and delivery investments continue to take hold. We believe this improvement will continue as we roll out our new claims analytics platform to all markets and drive operational excellence across our delivery teams. Importantly, we continue to manage our expenses well as we work through our restructuring. We are laser-focused on ensuring all of our researches are pointed on the areas of our business that can drive the most value for our customers. This resulted in a strong adjusted EBITDA, which grew 28% year-over-year during the quarter as well as an adjusted EBITDA margin that improved over 500 basis points year-over-year and was at the upper end of our guidance range.

We will continue to maintain this cost discipline as growth resumes. Finally, we continue to demonstrate an ability to deliver exciting value to our customers. One metric that I look at is our average ACV across our client base, which increased 13% year-over-year and continue the streak of increasing sequentially every single quarter since we have been a public company. Over the coming quarters in 2024, we will focus on three key areas. First, we will continue to focus on operational excellence. We are incredibly focused on driving data-driven performance within our highly scalable sales engine to build pipeline and work with our customers to deliver the data and products they need to accelerate their growth. Additionally, we will continue to focus on ensuring that we run the company as efficiently as possible.

From G&A to product, to our data collection and research, we will ensure we continue to deliver on the EBITDA margin expansion we guided to at the beginning of the year. Second, on the product front, we are heads down on all the important initiatives that we discussed at our last earnings call. These initiatives include: Growth of our core data assets to include new affiliation and provider types such as infusion and cancer centers, which will be launched in early H2. Continue to expand on our core data asset is an ongoing and essential part of our business, and it’s what sets us apart from the typical data vendors. For example, in Q1, a leading provider of chronic care management products and services selected Definitive Healthcare as their central source of truth for all healthcare provider data.

They are using our products to build heat apps for their sales teams and are integrating our affiliation hierarchies into their CRM system. This will allow their teams to identify new white space opportunities at their clients and prospects. As discussed previously, we are also expanding our popular claims analytics and visualization platform to serve all of our end markets. Originally designed to help our provider customers solve their most important use cases, we believe other markets will similarly benefit from the platform as we create use case-based solutions that allow these customers to leverage our proprietary data in new ways. Two recent popular deals include a leading health system in the Southeastern United States, whose strategic planning and business development teams selected the popular network and market intelligence modules to analyze patient out migration within their existing practices as well as to evaluate potential practice acquisitions.

In addition, the marketing team at a Texas-based health system selected the population intelligence platform to drive their consumer marketing programs for expansion of new and existing service lines. Additionally, we continue to focus on AI and data science to turn our proprietary data into new actionable insights for our customers. An example of this is our upcoming launch of DH market forecast, which is a cutting-edge 10-year projection tool that revolutionizes healthcare plan in the U.S., utilizing our comprehensive Atlas datasets, spanning provider, consumer and claims data this tool predicts changes in healthcare utilization as well as disease incidents and trends in supply and demand. This invaluable research will empower our customers across all verticals.

For example, life science firms will be able to anticipate disease trends and the resulting shifts in therapy demand. And healthcare providers will gain insights into service demand, helping optimize physician staffing and adapt to shifts from inpatient outpatient care. Finally, on our last call, we also touched on our Carevoyance acquisition which has now been fully integrated into our organization, both from a product and commercial perspective. We are excited at the early indications of market demand. An example of an early win in Q1 was a leading manufacturer of advanced heart pump technology. A client of both our View platform and Carevoyance who expanded their Carevoyance spend to help drive growth in their therapeutic awareness and physician programs.

The third area of focus for the remainder of 2024 will be on the success of our existing customers. Products is a major part of this effort, and we believe the improvements that we are making will deliver more value more quickly to our customers. But we are also investing in processes to assist our customers’ success and claims deliveries teams to help our customers get more value out of our data and products. An example of this effort the heart pump manufacturer, I just mentioned, cited the excellent support they received from our customer success team as a key factor in their expansion efforts. With that, let me turn the call over to Rick to walk through the numbers. Rick?

Rick Booth: Thanks, Jason. I’ll start with a detailed review of our Q1 results before finishing with our guidance for Q2 and commenting on the full year 2024. In all of my remarks, I’ll be discussing our results on a non-GAAP basis, unless otherwise noted. As Jason mentioned, our performance was mixed in the quarter. We delivered both revenue and adjusted EBITDA within our guided range. And while we’re pleased with the profit performance in the period, revenue was at the low end of our expectations. We remain focused on what we can control and we continue to advance our efforts to operate more efficiently while delivering innovation for clients, both of which we expect to position us well as the market recovers. Highlights of the quarter included revenue growth of 7% compared to Q1 of ‘23, and we grew EBITDA, adjusted net income and core EPS by 28%, 44% and 41%, respectively, over the same period a year ago.

We delivered a 32% adjusted EBITDA margin for the quarter up over 500 basis points year-over-year. And as a result, Q1 revenue growth plus the trailing 12-month adjusted EBITDA margin was 38% and we generated $28.3 million of unlevered free cash flow in the quarter and $76.1 million on a trailing 12-month basis, which is up 43% versus the same period a year ago. Turning to our results in more detail. Revenue for the first quarter was $63.5 million, up 7% from the prior year and within our guided range. This includes $1.7 million of professional services as large clients engaged us to work on some of their most challenging issues. We ended the quarter with 559 enterprise customers, which we define as customers with more than $100,000 in annual recurring revenue.

This was an increase of 30 enterprise customers or 6% year-over-year. As a reminder, these customers represent the majority of our ARR and are a key focus of our go-to-market programs. Our total customer count, which includes smaller customers, was approximately 2,800 at the end of Q1, down about 200 from Q1 2023 and down 100 from the previous quarter as smaller customers have been disproportionately impacted by current conditions. Adjusted gross profit was $53.1 million, up 7% from Q1 2023. The adjusted gross profit margin of 83.6% decreased approximately 60 basis points from Q1 2023 due to the impact of Populi, which was acquired in Q3 of ‘23. Excluding Populi, gross margins expanded by over 100 basis points year-over-year, demonstrating the scalability of our solutions.

Sales and marketing expense was $19.5 million, down 6% from Q1 ‘23. As a percentage of revenue, sales and marketing expense was 31% of revenue, an improvement of over 400 basis points from Q1 ‘23. The year-over-year improvement reflects the changes we’ve made to drive efficiencies in sales and marketing by focusing on the markets and activities with the highest return on the investment. And based on our current full year revenue outlook, which I’ll get to in a few minutes, we now expect to see operating leverage from sales and marketing in 2024 of 300 to 400 basis points relative to full year 2023. Product development expense was $7.3 million, up 6% from Q1 ‘23. As a percentage of revenue, product development expense was 11.5% of revenue consistent with Q1 ‘23.

We believe investing in our platform and using our existing data sets to launch or enhance multiple products is a highly effective and efficient way for us to increase the value we deliver to customers. Jason touched on some examples of these earlier, and we will continue to invest in the multiple opportunities we have identified on our long-term product road map. We continue to expect full year 2024 product development expense as a percentage of revenue to be fairly consistent with full year 2023. G&A expense was $7.2 million, down 5% from Q1 ‘23. As a percentage of revenue, G&A expenses were 11.4% of revenue, which is an improvement of about 150 basis points compared to Q1 ‘23. We expect G&A as a percentage of revenue in 2024 to be roughly consistent with 2023.

Adjusted operating income was $18.6 million, up 32% from Q1 2023. As a percentage of revenue, operating income was 29% of revenue, up over 500 basis points from Q1 ‘23. The year-over-year margin increase was primarily due to efficiencies in sales and marketing. Adjusted EBITDA was $20 million in the quarter, a 28% increase from Q1 in the prior year. As a percentage of revenue, adjusted EBITDA was 32% of revenue, up over 500 basis points from Q1 of the prior year. As we move through 2024, we continue to expect to see year-over-year improvements in our adjusted EBITDA margin. We will continue to make adjustments in the areas that are most important to us and to our clients and maintain a balanced financial profile that drives margin expansion.

Adjusted net income in Q1 was $13 million or $0.08 per diluted share based on 156.6 million weighted average shares outstanding. Turning to cash flow. Definitive Healthcare’s high margins, upfront billing and low CapEx requirements provide substantial free cash flow generation. We focus on trailing 12-month cash flow due to seasonality. Operating cash flows were $42.8 million on a trailing 12-month basis, up 16% from $36.9 million in the comparable period a year ago. Unlevered free cash flow was $28.3 million in the quarter, our largest quarter ever of unlevered free cash flow generation. And on a trailing 12-month basis, unlevered free cash flow was $76.1 million, up 43% from the comparable period a year ago. Unlevered free cash flow was 30% of revenue on a TTM basis, effectively converting 97% of our TTM adjusted EBITDA of $78.7 million into cash.

On the balance sheet, we ended the quarter with over $295 million in cash, cash equivalents and short-term investments. With strong adjusted EBITDA profitability and only $254 million of debt, we believe we are well positioned to fund both organic and inorganic growth initiatives. Current revenue performance obligations of $182 million were up 1% year-over-year, and total revenue performance obligations were up 2% year-over-year. Deferred revenue of $108.1 million was up 2% year-over-year. And you will note that as expected, CRPO and deferred revenue continued to grow more slowly than revenue. And I have more to say about that in our guidance. As Jason mentioned, we experienced greater than anticipated disruption from our transformative actions earlier in the year and we are adjusting our guidance accordingly.

For Q2, we now expect total revenue of $62 million to $63.5 million for a growth rate of 2% to 4% year-over-year. And within total revenue, we expect subscription revenue to increase slightly from Q1, while we expect the revenue recognized from professional services to decline due to lower bookings of these projects in Q1. From a profitability perspective, we expect operating income of $17 million to $18.5 million. Adjusted EBITDA of $18.5 million to $20 million for a 30% to 32% adjusted EBITDA margin and adjusted net income of $13.5 million to $14.5 million or $0.08 to $0.09 per diluted share on 157.2 million weighted average shares outstanding. Rolling forward to the full year 2024, we now expect revenue of $255 million to $261 million for a 1% to 4% growth rate.

And we continue to expect our growth rate to moderate as we move through the first few quarters of the year given current economic conditions, along with our wrap on the Populi acquisition in the second half. From a profitability perspective, we’re tightly managing operating efficiency and the associated costs to protect margins. Accordingly, we now expect adjusted operating income of $75 million to $78 million. Adjusted EBITDA of $81.5 million to $84.5 million for a full year margin of 32% to 33%, with margin unchanged from prior guidance. Adjusted net income is expected to be between $56.5 million and $59.5 million, and earnings per share are expected to be between $0.36 and $0.38 on 157.5 million weighted average shares outstanding. Our guidance for Q2 and the full year fully reflects our assessment of current conditions.

We remain focused on driving operating efficiency and investing to meet client needs, both today and for the future. Finally, I’d like to touch on our newly announced share buyback program. On May 1, the Board authorized the repurchase of up to $20 million of stock. This repurchase program is expected to continue through the end of 2024. This buyback authorization reflects our strong cash flow generation, our confidence in the long-run prospects of the business and our commitment to enhancing shareholder value. So to summarize, we took several actions to improve the margin profile of our business, and we added meaningful capabilities to our portfolio through organic innovation and through strategic acquisitions. We remain confident that we are well positioned for the long-term in a large and attractive market that we believe will help us drive shareholder value for a long time to come.

And with that, I’ll hand it back to Jason for a few closing thoughts before we take questions.

Jason Krantz: Before I open it up to questions, I want to reiterate our excitement about the future of Definitive Healthcare. We have an incredible team that is committed to driving real value for our customers in a market with a large and growing TAM. We have proprietary data assets that create a true competitive edge and we are confident that the work we are doing to drive innovation and operational efficiency will translate into the long-term growth and profitability that makes this company such an exciting investment. With that, I would like to open it up for questions.

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