Health Catalyst Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 5 speakers on the call.

Operator

Welcome to the HealthCatalyst Third Quarter 2023 Earnings Conference Call. At this time, all participants have been placed on a listen only mode and the floor will be open for your questions following the presentation. We kindly ask that you limit yourself to one question. If you have any follow ups, please reenter the queue. So others can hear your questions clearly, we ask that you please pick up your handset for best sound quality.

Operator

Lastly, I would now like to turn the call over to Adam Brown, Senior Vice President of FP and A and Investor Relations.

Speaker 1

Good afternoon, and welcome to HealthCatalyst earnings conference call for the Q3 of 2023, which ended on September 30, 2023. My name is Adam Brown. I am the Senior Vice President of Investor Relations and Financial Planning and Analysis for HealthCatalyst. And with me on the call is Dan Burton, our Chief Executive Officer and Brian Hunt, our Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8 ks furnished to the SEC, both of which are available on the Investor Relations section of our website at ir.healthcatalyst.com.

Speaker 1

As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call. During today's call, we will make forward looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding trends, strategies, the impact of the macroeconomic challenges, including high levels of inflation and high interest rates, the tight labor market, our pipeline conversion rates and the general anticipated performance of our business. These forward looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward looking statements or outlook. Actual results may materially differ.

Speaker 1

Please refer to the risk factors in Form 10Q for Q2 2023 filed with the SEC on August 9, 2023 and our Form 10 Q for the Q3 of 2023 that will be filed with the SEC. We will also refer to certain non GAAP financial measures to provide additional information to investors. A reconciliation of these non GAAP financial measures to their most comparable GAAP measures is provided in our press release. With that, I will turn the call over to Dan. Dan?

Speaker 2

Thank you, Adam, And thank you to everyone who has joined us this afternoon. We are excited to share our Q3 2023 financial performance along with additional highlights from the quarter, I will begin today's call with some summary commentary on our Q3 results and outlook. We are And adjusted EBITDA of $2,000,000 with these results beating the midpoint of our quarterly guidance on each metric. Additionally, we are tracking slightly ahead of our previous full year revenue guidance and as a result, we are raising our 2023 revenue guidance range. Likewise, we are pleased with our strong bookings performance through Q3 2023 and we are reiterating our full year 2023 bookings expectations inclusive of net new DAS subscription client additions and dollar based retention rate.

Speaker 2

Now let me highlight some additional items from the you will recall from our previous earnings calls that we measure our company's performance in the 3 strategic objective categories The first category improvement is focused on evaluating our ability to enable our clients to realize massive measurable improvement, while also maintaining industry leading client and team member satisfaction and engagement, let me begin by sharing an example of a client improvement from a recently published case study. WakeMed Health lacks the data and analytics infrastructure to enable widespread clinical improvement work across its system. After evaluating its options, WakeMed decided to both establish internal clinical transformation teams As well as implement our DAS data platform along with a robust suite of our analytics applications. WakeMed now integrates data from its numerous source systems within our data platform and has employed the resultant high value data and analytics to execute on its clinical transformation strategy, inclusive of improving the consistency of care provided to its patient population, streamlining its clinical workflows and improving health equity and care quality. As a result of these initiatives, in just 1 year, WakeMed achieved $10,000,000 in direct variable cost reductions And improved care processes for 23 of its distinct patient populations.

Speaker 2

Within the improvement category, I'd also like to highlight our team member engagement. For many years, we have utilized the Gallup organization to help measure our team members' engagement levels. In our most recent results, we achieved an overall team member engagement score in the 94th This latest engagement level continues a pattern that has been in place for many years of industry leading team member engagement Consistently ranking at or above this percentile level in terms of overall team member engagement scores. We as a leadership team continue to maintain a primary and prioritized focus on team member engagement, the center of our strategic flywheel because we recognize the central and foundational contributions that our team members make in building the software and providing the services expertise that enable our clients to achieve massive measurable improvement. Also in the improvement category, we have been fortunate to receive several additional external recognitions related to our team member engagement.

Speaker 2

First, we were excited to be included in U. S. News and World Report's inaugural best companies to work for in the healthcare industry list. Next, we are pleased to be included in Fortune's list for best places to work in healthcare for 2023, ranking 10th among the top 40 healthcare companies in the large company category as well as Fortune's best place to work for women in 2023 list. Lastly, we are excited to have been included in top workplaces best workplaces in Healthcare 2023 list As well as the Salt Lake Tribune's top workplaces in Utah list, our next strategic objective category is growth, Which includes expanding existing client relationships and beginning new client relationships.

Speaker 2

To summarize, our operating environment continues to align with what we have shared in prior quarters with some slight improvement in recent months. This has translated to strong bookings performance through Q3 of 2023 that was consistent with our expectations. And during the Q4 of 2023, our pipeline continues to grow and our anticipated Q4 bookings Inclusive of dollar based retention rate between 102% 110% And net new DAS subscription client additions in the low double digits. As it relates to our current selling environment, we continue to experience similar tailwinds and headwinds that are consistent with what we have described over the last few quarters. While health system operating margins continue to be challenged relative to longer term historical levels, we are encouraged to see their operating margins improving in recent months.

Speaker 2

Given the budgeting cycles of most health systems and the typical length of our sales cycle, we anticipate this will translate as a mid term bookings tailwind. Related to our full year 2023 bookings expectations, let me first share a reminder The Q4 2023 is anticipated to be a large bookings quarter consistent with our commentary since the beginning of the year and consistent with what we have experienced historically in terms of our annual bookings cadence, we anticipate the largest component of our for 2023 bookings will be from our tech enabled managed services offering, supported by our robust pipeline in this operating area that continues to grow. Next, we continue to anticipate 2023 professional services bookings achievement to be higher than technology bookings achievement driven by strong tech enabled managed services bookings. Next within the growth category, I am excited to announce a meaningful new DAS client partnership with Accountable Health Partners, a clinically integrated network in the Greater Rochester, New York area. Accountable Health Partners will leverage our DOS data platform, including healthcare dotai and a subset of our applications such as Measurable, along with our professional services expertise in an effort to improve its operations across clinical, financial and operational use cases, we are honored that Accountable Health Partners has entrusted us to provide technology and professional services to support their mission and we look forward to Supporting the realization of meaningful improvements that we anticipate they will achieve through our partnership.

Speaker 2

Lastly, as it relates to growth, we have continued to maintain a pipeline of tuck in acquisition opportunities that provide software and or services to support our clients in their improvement goals. In that vein, we are excited to have closed the acquisition of Electronic Registry Systems Inc, also known as ERS at the beginning of October. This small tuck in acquisition provides us with an oncology registry development provide similar capabilities within oncology as Armus provides within the cardiology domain. As a reminder, we acquired Armas in April 2022. The combination of oncology registry technology from ERS And cardiology registry technology from Armas further strengthens our strategic differentiation within our tech enabled managed services offering area are chart abstraction.

Speaker 2

The purchase price for this tuck in transaction was 13,500,000 and the impact of this acquisition on our 2023 financials will be immaterial. We are thrilled to welcome ERS's talented team members And we look forward to working together with them in support of our shared mission. Lastly, as you'll hear from Brian later in our prepared remarks, we are pleased to raise our revenue guidance for the full year. We continue to track well towards our mid term targets, including a reacceleration of our revenue growth rate in 2024, a 10% adjusted EBITDA margin in 2025 And meaningful positive adjusted free cash flow in 2025. Additionally, we continue to feel confident in our long term revenue growth target of 20 plus percent and our long term adjusted EBITDA margin target of 20 plus percent.

Speaker 2

We continue to see material operating leverage in our financial model, inclusive of significant tech enabled managed services That require little incremental operating expenses. Likewise, we anticipate seeing more materially more material R and D operating leverage beginning in 2024 as we streamline and work to complete certain investments in our data platform. With that, let me turn the call over to Brian. Brian?

Speaker 3

Thank you, Dan. Before diving into our quarterly financial results, I want to I echo what Dan shared and say that I am pleased with our Q3 performance. I will now comment on our strategic objective category of scale. For the Q3 of 2023, we generated $73,800,000 in total revenue. This represents an outperformance relative to the midpoint of our guidance and it represents an increase of 8% year over year.

Speaker 3

Technology revenue for the Q3 of 2023 was $46,000,000 representing 4% growth year over year. Professional services revenue for Q3 2023 was $27,800,000 Representing 14% growth relative to the same period last year. For the Q3 of 2023, total adjusted gross margin was 47%, representing a decrease of approximately 430 basis points year over year. In the Technology segment, our Q3 2023 adjusted technology gross margin was 68%, an increase of approximately 5 basis points relative to the same period last year and in line with previously shared expectations. This year over year performance was mainly driven by headwinds due to the continued costs associated with transitioning a small subset our multi tenant Snowflake and Databricks enabled data platform environment offset by existing clients paying higher technology access fees from contractual built in escalators without a commensurate increase in hosting costs.

Speaker 3

In the Professional Services segment, our Q3 2023 adjusted professional services gross margin was 12%, representing a decrease of approximately 8.90 basis points year over year And a decrease of roughly 540 basis points relative to the Q2 of 2023. This quarterly performance was slightly below the expectations that we shared on our last earnings call, primarily driven by slightly lower utilization rates than anticipated. As we move into 2024, our utilization rates will be positively impacted by a reduction in force starting in Q4, 2023 that I will describe when sharing guidance commentary. In Q3, 2023, adjusted total operating expenses were 32,600,000 The total operating expenses were 44%, which compares favorably to 58% in Q3 2022. Adjusted EBITDA in Q3 2023 was $2,000,000 with this performance exceeding the midpoint of our guidance And represents an improvement of $6,500,000 relative to the same period last year.

Speaker 3

This Q3 2023 adjusted EBITDA result was mainly driven by the quarterly revenue outperformance mentioned previously, along with the timing of some non headcount expenses that we anticipate will be pushed out to the 4th quarter. Our adjusted basic net income per share in Q3 2023 was 0 point Adjusted basic net income per share in Q3 was approximately 56,700,000 shares. Turning to the balance sheet, we ended Q3 2023 with 347,700,000

Speaker 1

of cash, cash

Speaker 3

equivalents and short term investments compared to $343,800,000 As of Q2, 2023, in terms of liabilities, the face value of our outstanding convertible notes is the principal amount of $230,000,000 due in 2025. As it relates to our financial guidance For the Q4 of 2023, we expect total revenue between $70,100,000 $75,100,000 And adjusted EBITDA between $300,000 $2,300,000 and for the full year 2023, we expect total revenue between $291,000,000 $296,000,000 at their respective midpoint, this represents an increase of $500,000 compared to the full year revenue guidance we provided we also continue to expect full year 2023 adjusted EBITDA between $10,000,000 $12,000,000 Now let me provide a few additional details related to our Q4 2023 guidance. In terms of our adjusted gross margin, we continue to anticipate that our adjusted technology gross margin will be in the high 60s in the Q4, in the Professional Services segment, we anticipate that our Q4 adjusted professional services gross margin we'll be roughly similar to Q3 2023. Importantly, in late Q4 2023, we will affect a reduction of approximately 10% of our company wide team member base, which we'll optimize our cost structure and focus our investment of resources in key strategic priority areas.

Speaker 3

While the reductions are taking place across our operating segments, it is focused within professional services as we right size our cost structure to the appropriate utilization levels and within research and development, as we conclude a large portion of the spend we have been making in our next generation Snowflake and Databricks enabled data platform. We also anticipate additional but smaller cost savings initiatives to be finalized in Q1, 2024. These cost reduction streamlining initiatives will result in our Q1 2024 professional services gross margin being several points higher as well as us continuing to see material incremental operating leverage in 2024. With that, I will conclude my prepared remarks. Ian?

Speaker 2

Thanks, Brian. In conclusion, I would like to recognize and thank our clients and team members for their high levels of engagement and consistent contributions to our shared mission. And with that, I will turn the call back to the operator for questions.

Operator

The floor is now open for questions. We kindly ask that you limit yourself to one question and that you please pick up your handset when posing your question to provide optimal sound quality. Thank you. And our first question will come from Elizabeth Anderson with Evercore ISI. Elizabeth, please make sure that you're unmuted on your end.

Operator

Okay, we will move next to Vishal Patel with Piper Sandler. Your line is now open.

Speaker 2

Hi. Thanks for taking the question and congrats on the quarter. This is Vishal Patel on for Jeff Hasson. My question revolves around gross margins. Could you help us understand how you're thinking about the anticipated progression of Gross margins in 2024, we're curious to the net impact of new tech enabled managed services launches and whether the gross margin impact of new 2024 launches Would be offset by the greater maturity from the prior cohort launches.

Speaker 4

Thank you.

Speaker 3

Yes, great question, Vishal.

Speaker 2

Yes. So I'll

Speaker 3

speak to both the technology gross margins as well as the professional services gross margins. On the technology side, so As I shared in the prepared remarks, we anticipate that to remain similar in Q4 as to what we've seen throughout the year in the high 60s range. We're not yet giving exact color on 2024 Technology gross margins because there are some items that we're working through, including deploying further some of the next generation Snowflake and Databricks enabled components of our data platform, Which could bring some migration costs, but also could be offset by additional efficiencies that we're striving for on the technology side In terms of support and compute costs related to that new platform. So more to come then on the technology side. On the professional services side, to your point, there are Couple of factors that will play into what that gross margin will look like next year.

Speaker 3

One, I mentioned in the prepared remarks relates to our consulting professional services business, which as I mentioned has had a little bit lower than targeted utilization rate this year. We are affecting a reduction in terms of cost moving forward in order to rebalance that team member base In line with demand and the targeted level of utilization for those team members moving forward. And so that will Positively impact our professional services gross margins beginning in Q1, 2024. That will be a benefit to us. To your point, the other piece, Vishal, that we'll see is we do anticipate some continued progression on our existing TEMS contracts As they mature into 2024, that'll be a benefit to that margin profile.

Speaker 3

An offset will be that we do anticipate Adding new TEMS contracts in Q4 as well as into next year just given the strong demand that we're seeing from that offering area. And so those will offset to some extent, but you'll see a benefit from that consulting professional services business utilization rate improving into next year.

Speaker 2

And I would just add, Vishal, we do anticipate given some of those factors that Q1 of 2024 from a services gross margin perspective will be several points higher than what we've seen in Q3 and what we anticipate in Q4.

Operator

Thank you. Our next question will come from Daniel Grossweig with Citi. Your line is open.

Speaker 1

Hi, guys. Thanks for taking the question. I know you're not guiding to 24 yet, but I'm wondering if you could just provide some high level Thoughts on how you're thinking about the sales cycle for next year. Dan, you mentioned that Health Systems Financials are improving. But if you listen to the quarterly reports this quarter, they're still struggling, particularly with physician subsidies more recently.

Speaker 1

So I guess it's 2 questions really. 1, Given what you know now, do you still expect to see an acceleration in net DOS adds next year? And 2, are there any solutions in particular that you have or that you Are developing that can help systems out with some of these physician staffing levels?

Speaker 2

Yes, great questions, Daniel. Thank you. So as you referenced and as we referred to in our prepared remarks, we are seeing some improvement in our end market. Obviously, each health system is in their own journey towards improved operating margin and there still are meaningful financial pressures that health systems are experiencing. We are seeing general improvement, not quite to the pre pandemic levels of operating margins in most cases with our clients, But generally speaking, we are seeing some improvement.

Speaker 2

As it relates to the areas of our Pipeline where we're seeing the most traction. One of the dynamics for this year and from a bookings We do believe will influence next year has been more interest and more focus on those parts of our portfolio that do offer hard dollar savings and a hard dollar ROI and financial return that includes our Tech enabled managed services segment for example as well as some of our applications like The financial empowerment suite, the proportion of our pipeline that is represented by those elements of our portfolio is larger this year Than it has been, for example, in prior years, as a result of some of that financial pressure. And that is one of the reasons why we do anticipate that the professional services segment will likely outpace the technology segment in terms of the growth rate In the near term in 2024, you can see some of that reacceleration which we're encouraged by in professional services in Q3. So we do anticipate that given some of those financial pressures, those elements of our portfolio that do help address those issues and we do have For example, and we have seen growth in that part of our pipeline and some meaningful opportunities that we believe will expand.

Speaker 2

The last thing that I will share is that depending on the year over the last several years, we've seen some years where our tech growth has been higher than our services growth. This year in 2023, our tech and services will grow about the same pace. Next year, we do anticipate based on our bookings performance thus far that for the reasons I mentioned just a minute ago, the services will likely outpace the tech growth. But long term, we believe in that overall reacceleration that we Shared in our prepared remarks, those long term growth targets of 20 plus percent. Long term, we believe that both the tech components of our solution and the service Components of our solution are each really important in delivering against our differentiated value to enable massive measurable data improvement.

Speaker 2

We do expect long term that both of those components of our solution will continue to reaccelerate back towards those long term levels.

Operator

Thank you. Our next question will come from Elizabeth Anderson with Evercore ISI. Your line is open.

Speaker 4

Hi, guys. Can you hear me? Yes. Hey, this is Sameer on for Elizabeth Anderson. I just wanted to quickly ask just in terms of like the Summit and related costs to that.

Speaker 4

Is that part of what's maybe driving some of the expense On OpEx for 4Q or is that mainly kind of isolated to 1Q next year?

Speaker 3

Yes. It's a good question, Sameer. It's mainly isolated to Q1 of 2024 where the bulk of that cost will be incurred, But we are incurring some of that this year

Speaker 2

as well. There will be a

Speaker 3

portion that's recognized in Q4, but most of that will be timed into Q1.

Speaker 4

Got it. Thanks.

Operator

Thank you. Our next question comes from David Larsen with BTIG. Your line is open. Hi. This is Jenny Shen on for Dave Larson.

Operator

Congrats on the quarter and thanks for taking my question. So I just wanted to get some more color on your enterprise DOS versus your modular DOS offering, I know that more customers are choosing the modular one in the current macro landscape, which makes I'm wondering if you're seeing a shift more towards the enterprise side now. And also if you could just explain a bit more about the 2 and the price differences between them. Thanks. Yes.

Speaker 2

Thank you for the question, Jenny. I'll make a few comments and then Ben and please feel free to share additional thoughts. So in this particular year thus far in 2023, I I think due to some of the meaningful financial pressures that we just referenced a few minutes ago, we have seen more interest in the modular DAS Offering relative to prior years and that hasn't been a surprise to us. And so we do expect for 2023 That we will see a higher proportion of our total net new subscription clients to be more in that modular category than we've seen in However, we are seeing commensurate with some of the improved financial situation that we referenced As operating margins are improving a little bit, we are seeing a little more interest on the new client side, inclusive of more interest in a more broadenterprise subscription offering. Now that will take time to play out through our bookings pipeline and then some more time to play out through our P and L and revenue performance as a company, but we are Already seeing some of that increased interest that we think will play into 2024 In some of that overall reacceleration that we expect, we're not providing specific guidance during today's earnings call, But we are seeing some of those green shoots that are encouraging.

Speaker 3

And just to add, you asked Jenny about some of the kind of differences between the enterprise DOS And more of our modular DAS or lighter components from a pricing standpoint. So an average kind of price point for enterprise DAS Of both technology and services, historically has been around $1,500,000 of annual recurring revenue For a typical new client, for our more modular or DAS Lite offerings, it's around 40% Of that value, in terms of the technology and services starting point and can be a little lower than that even in certain cases where clients Our purchasing, some of our DAS modules, which include Healthcare dotai, Popp Analyzer. Those are horizontal DAS components that enable data to be spread through the masses of an organization. And then we can also deploy those in concert with a vertical application use case like our financial applications, for example. So, Also, those are the types of offerings and the differences in the price points.

Speaker 3

And what that means for us this year given the mix that Dan mentioned is Our average selling price for those new clients is lower than what we've seen historically and we'll provide kind of more color on that for 2024 at Beginning of the year, as we assess the mix between those two items within our pipeline.

Operator

Great. Thank you. Our next question comes from Scott Schoonhouse with KeyBanc. Your line is open.

Speaker 3

Hi, team. Thanks for taking my question. You talked about a lot of about technology investments and you put The release on the new acquisition to sort of bolster your tech enabled solution and then you also mentioned the headcount reductions. Is there does All meaning that structurally these gross margin profiles on year 1 don't now start at 0. And in fact, there is some EBITDA or sorry, gross margin contribution coming from these contracts that ramps up more quickly than you had previously outlined for professional services or tech enabled service offering?

Speaker 2

Yes. Thanks for the question, Scott. So we are encouraged to see and we do anticipate continued efficiency gains through the use of technology in these tech enabled managed services contracts and we're excited about the efficiency possibilities that we believe will realize through this recent acquisition of ERS, Very similar to what we've seen in terms of the benefits with the Armis acquisition from a year ago. We do have some variation from contract to contract and client to client in terms of exactly where we start from a gross margin perspective. As we've shared in the past, That gross margin starting point could be around 0%.

Speaker 2

Sometimes it's a little higher, sometimes it's a little bit lower. But we are encouraged to see continued consistent progress as we begin those relationships and as those relationships mature That we're able to achieve meaningful efficiencies while also maintaining really meaningful timeliness and quality as well and we're certainly encouraged by that. We're constantly looking for ways to be more efficient and yet also do that in ways that don't Disrupt the quality or the timeliness of the solution.

Speaker 3

Yes, that's right, Danielle. And Scott, what I would share is the unit economics for the TEMs relationships on the services side, we think is pretty similar to what we've heard in the past, As Dan mentioned, where those typically start at essentially neutral to up to 10% services gross margin and then ramp over time to that 25% services gross margin level and we've shared some proof points for clients that are more mature that have ramped to that level. What excites us more about the small tuck in acquisition that we did ERS is a little bit less related to the upfront gross margin profile and more related to the over a few year or longer term gross margin profile, whether it could be some just given the additional efficiency provided by that technology, some additional upside in terms of the longer term gross margin profile. We obviously are early in the acquisitions. We want Want to be careful around seeing a lot of proof points of that, but that's a part of the rationale there.

Speaker 3

I think just related to your question as well, some of the reduction from a cost standpoint that we're doing is that is mostly related to that consulting services, professional services, hardware. We are trying to increase utilization rates there to the appropriate level and a little bit less related to our tech enabled offerings. And one other thing, Scott, that

Speaker 2

I would add to that Is that we do continue to be encouraged from an OpEx perspective to continue to see really meaningful operating expense leverage as we enter into these tech enabled managed services contracts that they're very efficient as it relates to Any need for incremental OpEx, so that is also encouraging from an EBITDA perspective.

Operator

Thank you. Our next question will come from Stan Berenstain with Wells Fargo. Your line is open.

Speaker 3

Hi. Thanks for taking my questions. Dan, maybe one for you. You've obviously been on the road all year meeting with clients. Clearly clients want hard dollar savings.

Speaker 3

But if you think back to the conversations you've had with clients a year ago and Compare them to the conversations you're having now, has anything changed? Is the sales funnel different in any way?

Speaker 2

Thanks. Yes. Great question, Stan. So, the conversations are a little different in 2 ways. First, the level of financial pressure from a year ago, 16 months ago relative today has generally improved.

Speaker 2

And so it allows our clients to think a little bit more broadly About what they can do or have a little bit more time and space to think through how to improve their cost structure, how to improve the quality of The delivery of healthcare. So that's one way in which things are gradually improving. It's incremental, but it is incrementally positive. The second element is related to the first and that is 16 months ago, the openness of prospective clients to really seriously consider HealthCatalyst, particularly on a more enterprise wide basis From the enterprise DAS subscription perspective was very, very limited. There was so much financial pressure that was just very hard for prospective clients To think about incremental investments, as I mentioned a few minutes ago, that is a second observation that we're having There's more of an openness now and I think it is directly tied to the operating environment improving a little bit.

Speaker 2

And so I'm starting to spend a little bit more time. Our Starting to spend a little bit more time discussing, meeting face to face with prospective clients and I think there's more of an opportunity to explore And I think seeing meaningful pipeline movement moving forward in the new client space. That will take time to play out. We're just starting

Speaker 3

to see some more

Speaker 2

of those opportunities emerging, but we are encouraged to see that and that will impact way that we think about the proportion of our time that we spend with existing clients, we'll still spend lots of time with existing clients, but we are starting to spend

Operator

thank you. Our next question comes from Sarah James with Cantor Fitzgerald. Your line is open. Thank you. I was hoping to get a little bit more color on what changed in your view around professional services or the consulting aspect professional services, so has there been a change in the view of the revenue potential or maybe the near term revenue of that service line?

Speaker 2

Yes. Thank you for the question, Sarah. So certainly, in the back half of last year and the first half of this year, we have seen that the a little bit higher priced FTE based professional services coaching model of consulting has been under pressure and we do believe that is directly tied to the financial pressure that our Health System clients have faced. Contractually, we've made it flexible for clients to choose to dial that up or down and have been supportive of clients that are facing meaningful financial Being able to press pause or reduce the kinds of projects that we're pursuing As it relates to those consulting type projects, as financial pressure subsides a little bit, we do believe that we will see some incremental demand for that FTE based consulting model and some more of those projects get prioritized moving forward. At the same time, we continue to see lots of interest and lots of need Given that there still are meaningful financial pressures for our technical managed services offering where that is a lower price point And it does provide hard dollar cost savings where we can perform certain functions better, faster and cheaper than our clients.

Speaker 2

We believe that will continue long term, We also believe that there will likely be some improvement in that part of our business, the consulting part of our business. That will take some time to play out on the P and L, but we are starting to see some signs of some of

Speaker 3

that pressure subsiding. Just one thing, Ed, one of the benefits of the tech enabled managed services model is from a contractual standpoint that those services are typically locked in over a 5 year term, Which is different than our more consultative professional services model. And so, we like that approach in terms of higher visibility For both technology and services under that model, it does create large deal sizes for those types of deals that Optum required Board approvals and a lot of work to put through. And so that can make the timing of those kind of precise timing of A little bit difficult to exactly forecast, but we feel very confident in winning those deals and have a very high conversion rate there. And as Dan mentioned, in addition to the tech enabled option, we'll be ready to kind of adjust the client needs if the consulting model continues to

Operator

And at this time, there are no further questions in the queue. So I'd like to turn the floor back over to Dan Burton for additional or closing remarks.

Speaker 2

Thank you everyone for your interest in HealthCatalyst. We appreciate the opportunity to provide these updates and look forward to staying in touch in the future.

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Earnings Conference Call
Health Catalyst Q3 2023
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