Definitive Healthcare Corp.
Q2 2022 Earnings Call Transcript

Published: 7 Aug 2022

[Operator:]

Good day, and welcome to the Definitive Healthcare Conference Call. . Please note, this event is being recorded. I would now like to turn the conference over to Mr. David Samuels, Chief Legal Officer. Please go ahead.

[David Samuels:]

Good morning, and thank you for joining us today to review Definitive Healthcare Second Quarter 2020 Financial Results. Joining the call today are Robert Musslewhite, Definitive Healthcare's CEO; Jason Krantz, Definitive Healthcare's Founder and Executive Chair; and Rick Booth, Definitive Healthcare's Chief Financial Officer. During the call, we will make forward-looking statements, including, but not limited to, statements relating to our markets and future growth opportunities, the benefits of our health care commercial intelligence solutions, our competitive position, customer behaviors, our financial guidance, our planned investments and the anticipated impact from the COVID-19 pandemic on our business and results of operations as well as on our clients, the health care industry generally and the macroeconomic environment. 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 of our filings with the SEC. Actual results may differ materially from forward-looking statements. The company undertakes no obligations 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 statements included in the earnings release that was just posted to the Investor Relations portion of our website. Additionally, we will discuss non-GAAP financial performance measures on this conference call. References on this call to profitability are on an adjusted EBITDA basis. Please refer to the tables in our earnings release on the Investor Relations portion of our website for a reconciliation of these measures to the most directly comparable GAAP financial measures. With that, I'd like to turn the call over to Robert.

[Robert Musslewhite:]

Thanks, David. I would like to thank all of you for joining us this afternoon to discuss Definitive Healthcare's second quarter results. Let me start by saying that I'm incredibly excited to lead this terrific company. We are at the early stages of delivering on our mission to transform data, analytics and expertise into health care commercial intelligence, and I believe we are in a great position to generate strong growth at scale for years to come. I'm also thrilled to be able to continue to partner with Jason in his new role as Executive Chairman. I'm sure we will all continue to benefit from his passion for product development and delivering value to our customers. On today's call, I will review our second quarter results, provide some color on what we are seeing in the market and discuss several important recent wins before turning it over to Jason to discuss our latest product innovations. We had a solid second quarter, signing significant wins in each of our markets

[Jason Krantz:]

Thanks, Robert. We had a busy second quarter in product development. including the introduction of Monocl ExpertInsight 2.0 and Monocl ExpertGO as well as continued innovation across our entire integrated platform. But let me start with our recent user conference, Definitive LIVE!, which we held virtually on May 17 with almost 1,100 customers in attendance. This is a great opportunity for us to showcase the full breadth and depth of the Definitive Healthcare platform. Over the course of the day, we held more than 20 breakout sessions that highlighted some of the most innovative ways customers in each of our end markets are using our platform. It was incredibly powerful to hear firsthand testimonials for numerous customers on how they're utilizing the data and context our platform provides to drive significant tangible value to their business. There are a number of these testimonials on the Investor Relations section of our website. I encourage you to listen for yourselves. One of the key takeaways for us is that the challenges and opportunities facing our customers continues to grow, and there's the desire to use our platform to solve even more of these challenges. This underscores the opportunity for us to continue to innovate and as a result, expand not only our total number of customers, but also to grow our relationships with existing customers through more data, analytics and tools. The most significant product announcement within the quarter was a simultaneous release of Monocl ExpertInsight 2.0 and ExpertGO. Monocl ExpertInsight 2.0 is the next generation of our expert identification solution that significantly expands the capabilities of this product and provides customers access to nearly 13 million key opinion leaders. In this latest version, customers can use live filters that provide realtime updates of scientific activity by expert or a therapeutic area as well as more granular key opinion leader mapping. These capabilities make Monocl even more effective at helping medical affairs teams find the right experts that can help develop better medical strategies and bring new drugs for medical devices to market quicker. We've also made it even easier to access Monocl with the release of our new mobile app, ExpertGO. This is an important release as medical science liaisons are common users the Monocl, and most of them spend the bulk of their time in the field visiting experts in person. ExpertGO, they'll now be able to use Monocl no matter where they are. We also worked hard during the quarter to continue to leverage the value of the technology platform we acquired with Analytical Wizards. Last week, we launched Passport Express, the first product that integrates the comprehensive analytics built by Analytical Wizards with the proprietary data from Definitive Healthcare. We acquired Analytical Wizards in February of this year. And in less than 6 months, our combined product and engineering teams were able to design and ship this new product, a great proof point of the speed at which we look to integrate acquisitions and the innovation this can drive. Available for more than 20 therapy areas, Passport Express delivers fast and easy access to off-the-shelf health care commercial intelligence, enabling biopharma companies to better understand treatment pathways, brand behavior and market share. For a given therapy area, we've extracted mission-critical data from our industry-leading commercial intelligence platform, including payer claims, physician affiliation information and health care reference data. These data are then pre-populated at the Analytical Wizards environment where customers can instantly query flexible dashboards and powerful visualization tools to quickly get answers to their questions. The integrated data and analytics and Passport Express practically eliminates the research requirements and time lines traditionally require for commercial teams to source real-world data, normalize and link it and then build analytical models on top. With Password Express, you get that right out of the proverbial box. This is the first of many innovations to come that will combine the power of the highly proprietary Definitive Healthcare data with the best-in-class commercial analytics platform that Analytical Wizards has developed. These are great examples of how we're able to quickly innovate and iterate on existing solutions to provide additional value to customers. This is a key part of our product development strategy. And you should expect to see continued enhancement of our existing modules over time as well as in the development of brand-new solutions. I'd like to now turn it over to Rick to walk through Definitive Healthcare's financial performance in more detail.

[Richard Booth:]

Thanks, Jason. Our Q2 results reflect another quarter of steady execution highlighted by ongoing revenue growth and very strong profitability. I'll start with a quick overview of our business model from a financial perspective, then provide a detailed review of our quarterly results before finishing with our guidance for Q3 and full year 2022. In all my remarks, I'll be discussing our results on a non-GAAP basis, unless otherwise noted. I'll start by reminding everyone of some of the key attributes to make Definitive Healthcare's business model so compelling. We're a high-growth subscription business, selling into a $10 billion and growing total addressable market with low single-digit market penetration. We have excellent forward-looking visibility through our multiyear contracts and high net dollar retention rates. We operate profitably with high gross margins and a very efficient customer acquisition engine. We innovate efficiently by building on our proprietary data asset and data science platform. And finally, up-front billings and low CapEx requirements help us translate profits directly into cash flows and shareholder value. Our Q2 results illustrate how the business model plays out in practice. Highlights include

[Robert Musslewhite:]

Thanks, Rick. Before I close out, I want to take a moment to congratulate our customer success team who won 3 Stevie Awards in Q2 at the 20th Annual American Business Awards, including Customer Service Department of the Year and Customer Service Executive of the Year. And I also want to quickly recognize that Definitive Healthcare was recognized by Energage into as a top workplace culture excellence winner in 5 categories, including innovation, compensation and benefits and purpose and values. A huge thanks to all of our employees for their dedication and hard work they put into building our incredible culture and making Definitive Healthcare such a special place to be. I'll finish by reiterating the strength of Definitive Healthcare's performance in the first half and our confidence to generate strong growth at scale over time. We have clearly established health care commercial intelligence as a large, growing and strategically important market in which we are tremendously well positioned. Our solutions help customers drive profitable growth across all stages of the health care market in a way that nobody else can. With that, we will now open the line for your questions.

[Operator:]

. Your first question comes with Craig Hettenbach.

[Craig Hettenbach:]

Just starting with a question on the macro and the lengthening of sales cycles. Are you seeing any impact in terms of the length contracts that customers are looking for? And then also just want to be clear on the distinction. It sounded like these are new customer engagements versus existing customers in terms of where it might be more pronounced.

[Jason Krantz:]

No, we're not going to...

[Richard Booth:]

Craig, thanks for the question. Yes, with regarding to sales cycles, it's primarily in new customers, as we said, that's mostly where we saw it and generally in some of the larger, more complex deals. And no, we haven't seen changes in the terms of the deals. They remain pretty consistent throughout the year.

[Craig Hettenbach:]

Got it. And then I just wanted to follow up M&A is an important part of the strategy, just to kind of touch on the pipeline. And in particular, are you seeing maybe any compression in valuations out there or any changes in terms of potential targets and their appetite to be acquired?

[Robert Musslewhite:]

On the M&A side, we've seen continuing good activity. We're always out there talking to companies. We have a really good formula for M&A, as you know, finding a unique capability that brings something new to us that we can then take out broadly across our customer base in that kind of sweet spot of size range and have had good success with Monocl and Analytical Wizards as you've seen. So we're always out looking for those and, we have a strong balance sheet, and we're hopeful that we'll continue to find those opportunities going forward. We'll still expect to do 1 to 2 per year moving forward. And like I said, still seeing some good targets out there.

[Operator:]

Your next question comes with George Hill with Deutsche Bank.

[Maxi Ma:]

It's Maxi on for George. So just want to follow up on the question on slowing deal process. Can you provide some more color on demand by subsegments and by regions? Which ones are seeing the most impact from economic uncertainties and which ones are more resilient?

[Robert Musslewhite:]

Yes. The only sort of categorization of those that I think is -- that we've seen is that it's more on new business. It was kind of the same across each of our core end markets. And of course, most of our business is here in the U.S. So there wasn't a real difference in geographical impact there. But we saw it across each of our end customer segments roughly similar trends.

[Maxi Ma:]

Okay. I know it's still early, but on a very high level, can you talk about how do you see the demand trending in 2023 and whether the growth rate will hold?

[Robert Musslewhite:]

Sure. I mean, it's obviously too early to comment on 2023 in terms of demand, but we're still seeing good demand. I mean the nice thing is while there's a little congestion in moving through the pipeline during these times of uncertainty, revenue-generating solutions get prioritized and funded. We're having great conversations. We think it's just a matter of when, not if on these deals. And particularly as we look at the types of solutions that we offer and the type of end market that we play into, which is health care, people need our help and people need our kinds of solutions that they're going to sell into health care. So it's a massive end market. It's generally not as cyclical as the rest of the economy has really strong demographic tailwinds, and it's confusing. So as it continues to move towards digitization, we really feel good about what we're hearing out there about people needing our solutions and feel good about demand continuing.

[Jason Krantz:]

Yes. Well said, Robert, I think top of the funnel demand is strong. On a short-term basis, we are seeing a little bit of pipeline elongation. As I mentioned in my remarks, the year-to-date CRPO was about $3 million below where we would normally expect it to be. I think it's prudent, and we've considered in our guidance that the second half of the year could look a lot like the second quarter. So simple math would then translate that to around the 2% to 3% headwind if things don't change. in 2023. So not major, but certainly something that we're aware of, and we're paying attention to.

[Operator:]

Your next question comes with David Grossman with Stifel Financial.

[David Grossman:]

I know you don't really disclose retention quarterly, but perhaps you could give some qualitative commentary about what you're seeing on the retention side. Obviously, you've given us some good color on what you're seeing in new customer activity. But just given your recurring revenue model, just curious kind of what the retention trends are looking like as you went through the second quarter.

[Richard Booth:]

Yes. Thanks, David. Retention has been good. I mean I think we continue to see the dynamic when a customer starts using our solution, they get very high return from it. And they tend to -- a lot of cases, embed our information into their CRM or into the workings of their sales force or marketing team. And so once they start using it, it's something that they want to keep using because they recognize that value. So we continue to see consistent retention trends and feel like that's exactly what I said. It's because of the value that our solution provides, and we'd expect that to continue.

[David Grossman:]

And sorry -- go ahead.

[Jason Krantz:]

I was just going to point out, what we see is exactly what other people are talking about. When you're talking about a new incremental investment, so a new logo, things are just going through more scrutiny. And we, like everyone else, are doing that. But ultimately, the things that drive growth and things that have fast ROI are going to get .

[David Grossman:]

Right. And I'm sorry, Rick, you had mentioned, I think you gave us both the current and noncurrent RPO numbers. Can you just repeat those? I didn't get them when you mentioned them on the call.

[Richard Booth:]

Yes. Current RPO is $163 million. Total RPO is actually very close to the CRPO, but let me pull that up to you. I will hop back into the line and on the second with that. Till then we can take another one.

[David Grossman:]

Sure. Just one other quick question, if I could. So the margin, I think, headwind, I think you said in your prepared remarks for AW was about 160 basis points. And I think when we talked before, it was closer to 200. So is it just the second quarter was lower and it's 200 for the year? Or is the margin headwind a little bit less than you thought it would be at the beginning of the year or post-acquisition, I should say.

[Richard Booth:]

We're making really strong progress with integration of AW, we've already integrated their North American operations on to our ERP. And so we're very pleased with our progress there. And you've asked about CRPO and total RPO. CRPO, $163.3 million and total RPO $256.6 million.

[Operator:]

Your next question comes from Jonathan Yong with Credit Suisse.

[Jonathan Yong:]

I'll just kind of jump on the sales cycle again. What's -- do you have a sense of how long the elongation is kind of taking? Is it adding 3 months, 6 months? Kind of is there any color that you have on that in terms of the sales cycle will take kind of on a go-forward basis? And then secondly, if this does persist throughout the second half, is there anything that you can do on your side to try to loosen that up a bit?

[Robert Musslewhite:]

Yes. Thanks, Jonathan, great questions. I think on the first part, we just started seeing it this past quarter. And so our sales cycles are typically kind of 2 to 4 months. So I can't give you a quantitative answer on that, only that it just feels like we're getting a little bit greater budget scrutiny, a little bit additional approval steps driven by procurement or CFOs or new executives getting inserted kind of late in the sales process. So it's really more process steps than a sort of overall fundamental change in the sales cycle. And like I said, we're working hard to continue to get those deals signed and all our deals signed. When you talk about like the -- what we can do, first and foremost, we really feel like this is a short-term issue. Like I've said, we remain confident that revenue-generating solutions like ours will get prioritized and funded. It just might take a few extra steps to do that. Second, we continue to drive innovation, as we've talked about today. And innovation is great because it lets you accelerate sales conversations in many cases. And ExpertGO, Passport Express and all the things we're doing, give us some use cases to come in and accelerate some of those. And then, of course, we're doing a lot of work just enabling our sales team to match their messages to today's environment. And that's things like training the teams to focus really heavily early in the cycle on the process required to close deals. So understanding every required step, every key decision maker mapping out that full path, being sure we're not surprised in any sales cycle. Things like frequent deal level process management. So ensuring that the deals progress through all the required steps and the reps and franchise all expect individuals early in the process, things like that. And finally, things like retraining on ROI. Obviously, we have great ROI in our products. We want to be sure that our clients recognize that. So when our sales reps are out talking to prospects. They have really good case examples, really good proof points, really good product marketing materials to be able to articulate that value in a compelling and clear way so that clients know they'll get the value really quickly. And if you look on our website, we have more than 40 client testimonial stories. Those are great to use with prospects just to highlight the really high ROI. So we're doing a lot to be sure that in this environment, sales reps are matching their message to this environment.

[Jonathan Yong:]

Great. And then just on the upsell into existing clients. Presumably, there doesn't seem to be much elongation there, but just one, I want to confirm that. And two, given the commentary about the higher ROI for people that are already using your solutions, is there an -- is there greater upsell opportunity because of that given the current environment?

[Robert Musslewhite:]

We've seen upsell continuing to perform well. So we're still very bullish, and that's really part of our land and expand strategy. So once we have clients and they start seeing the value, exactly like you said, we want to be bringing them new solutions and upselling into new use cases and increasing our revenue with those customers because we're increasing the value we deliver to them. So that continues to be a big focus.

[Operator:]

. The next quest comes with Saket Kalia with Barclays.

[Saket Kalia:]

Well, I joined late, so apologies if these questions have been asked. But Robert, maybe just to start with you, totally get it increased scrutiny from new logos. Can you just talk about whether that was maybe focused in any particular subvertical like life sciences or health care IT? Or was it more of a trend kind of across the subverticals that you serve?

[Robert Musslewhite:]

We've seen similar trends across each of our core end markets. So it's been something we kind of have perceive across the board. I don't think it was focused in any particular area. The one thing we did say, if you missed the early part of the call, is it's been primarily with new business and particularly the larger deals in new business where we have a little more complexity and already more process steps.

[Saket Kalia:]

Got it. Got it. Rick, maybe for you, again, apologies if this was mentioned, but how much did Analytical Wizards add to billings and RPO, if you have that handy, just to sort of get a sense of the organic growth rate for billings and bookings.

[Richard Booth:]

So Analytical Wizards performed strongly in the quarter. So we're very pleased by its performance. As I mentioned earlier, it's running ahead in terms of its profitability. It contributed almost $3 million of revenue. We don't break out CRPO and bookings and billings by subsegment. AW is less than 5% of our revenue. I would say that their business model by its very nature, generates less CRPO per dollar of revenue. So that gives you a sense. But less to 5%, we don't break out.

[Operator:]

The next question comes it Ryan MacDonald with Needham.

[Ryan MacDonald:]

Appreciating the commentary that sort of all the end markets have remained resilient. As we enter the back half of the year, if you see some end markets start to slip can you factor that into your sales motion and dynamically adjust the changes in the market? Meaning, for example, like if health systems are struggling, but pharma is resilient, do you dial up efforts on pharma and maybe pull back on health systems?

[Robert Musslewhite:]

It's a good question. I mean obviously, if we saw a longer term secular trend, we would adjust where we make investments in our sales and marketing investments to target more in areas of opportunity, which we've done that across the past couple of years as we've added teams to our provider we started to focus more there and seen really good growth there and added more to life sciences as we've seen opportunity there and have more products targeted there. I think it would be a hard thing to do kind of mid-quarter given our sales cycles are typically 2 to 4 months, and we're out there seeing really strong opportunity in all our end markets. That's kind of where we're out pushing. So the hope is that we continue to deliver strong growth in each of those verticals across the rest of this year. But if we get to the end of the year and felt like there was some change like that, certainly, we would take that into account and going into commercial planning for 2023.

[Richard Booth:]

Yes. I think more broadly, we measure everything. It's a big part of our culture, and we have very strong returns on sales and marketing. We manage this business over a multiyear perspective. And so there's nothing that indicates to us that there is anything longer term going on. But we would, of course, adjust as appropriate if we saw a continuing trend of a change in those investments. So rest assured we pay attention to it, but there's nothing here indicating something long term.

[Ryan MacDonald:]

Makes sense. Appreciate that. And then it seems like with some of the product innovations that the product strategy for pharma is moving earlier in the drug approval time line. We've also heard with some of these earlier-stage biotech or pharma companies that are constrained, data vendors might be, what ends up getting cut from the spending budget. So have you seen that at all in your go-to-market motion? And then maybe if you could just compare and contrast the differences of selling to some of these earlier stage pharma companies versus some of the larger pharma clients you have today?

[Jason Krantz:]

Yes. Overall, we, as you think about where we innovate and where we focus within life sciences, we are really later stage with these organizations. So we don't tend to sell much into research level, research stage life sciences companies. And those are the ones that have really gotten hit the hardest by the financing crunch within that market. So as companies start bringing a drug through market and start thinking about commercialization, that's really where our product is most impactful on their ability to commercialize that in size markets and figure out where to find the best experts and invest their resources. So we don't see an outsized impact within that market as a result.

[Operator:]

The next question comes with Brian Peterson with Raymond James.

[Unidentified Analyst:]

This is Johnathan McCary on for Brian. Just the one from us. So one of the themes that we're hearing in software is that there's efforts to consolidate vendor relationships. Do you feel as though there's point solutions that could be a source of share gains for you? Or how do you think about that dynamic?

[Robert Musslewhite:]

It was a little hard to hear your question, but I think I got it, which is as people are trying to consolidate vendors or software vendors, do we see impact to that? And I think what's great about our solution is we're unique, and we have a distinctive set of data and a distinctive solution that no one else has. So if you kind of look at any of our end markets, we represent something that if people want the value of understanding how to sell into health care and how to navigate the complex health care ecosystem. They're going to need to work with Definitive. So for example, if you're someone who's outside of health care and wants to focus on selling into health care, you might have services you use that look across the industry, but they're not going to be deep in health care. And so if you really want to penetrate health care, you got to work with Definitive. We're the only one that has the unique data that we have around navigating that ecosystem and all the affiliations, all the reference data, all the specific players in the market, we have nearly 100% of the market mapped. If you're inside the industry, like a life science company, you might have, for example, claims data from a couple of other sources that you work with, but you don't have that claims data combined with our 11-year buildup of that map of the ecosystem and all the references and affiliations. And when you put those together, it creates much more powerful data set. So if you're inside the industry, even though you might work with other vendors, if you want to get the information that's critical, you're going to be working with Definitive as well, and we sit side by side with them. So we don't really have someone that we could be "consolidate" into in terms of that spend, and that's because we've really created a lot of differentiation over time in building up over 11 years, our proprietary data and building that into our SaaS platform, which provides quick return on our clients' investments.

[Operator:]

This concludes our question-and-answer session. I would like now to turn the conference back over to Mr. Robert Musslewhite for any closing remarks. Please go ahead.

[Robert Musslewhite:]

Thank you, everybody, for joining the call today, and I look forward to seeing and talking to many of you in the coming weeks, where at several conferences coming up, and thank you very much.

[Operator:]

This conference has now concluded. You may now disconnect. Have a great day.