Definitive Healthcare Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2024

There are 10 speakers on the call.

Operator

Welcome to Definitive Healthcare's Q2 2024 Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would now like to turn the call over to Matt. Please go ahead.

Speaker 1

Good afternoon, and thank you for joining us today to review Definitive Healthcare's financial results. Joining me on the call today are Kevin Coop, Chief Executive Officer and Rick Booth, Chief Financial Officer. 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, the anticipated impacts of global macroeconomic conditions on our business, results and customers 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 sections and elsewhere in our filings with the SEC.

Speaker 1

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 to 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 and investor presentation on the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure.

Speaker 1

With that, I'd like to turn the call over to Kevin.

Speaker 2

Thanks, Matt, and thanks to all of you for joining us this afternoon to review Definitive Healthcare's Q2 2024 financial results. Let me begin by saying, I'm very excited and energized to be the new CEO of Definitive Healthcare, and I look forward to meeting with many of you in the days and weeks ahead. As you will hear on today's call, our performance was mixed in the Q2. Our total revenue was $63,700,000 dollars up 5% year over year and exceeding our guidance range. Adjusted EBITDA was $20,900,000 up 21% year over year and exceeding our guidance range.

Speaker 2

Adjusted EBITDA margin was 33%, up 4 50 basis points year over year, also exceeding our guidance range. In addition, we continue to drive improved renewal rates versus prior year. Although these results highlight Definitive Healthcare's business model and commitment to profitability, we underperformed on our internal logo and upsell expectations, largely due to continued macro headwinds and sales execution challenges. These sales challenges caused us to revise our guidance for the remainder of the year, which is disappointing, but as I will address in my remarks, I believe that many of the operational fixes we need to make across the business can be done fairly quickly. Before we dive into the details of last quarter results, I will give some background on myself and what attracted me to Definitive Healthcare, provide my initial thoughts on what I've learned in my first 30 days in the job, outline at a high level the action plans we're putting into place to drive towards improving our operational and financial performance, and I will highlight some of our key wins from the Q2.

Speaker 2

I'd like to start by framing initially though why I decided to join Definitive Healthcare. With 30 years of experience in driving business transformation at all levels of scale across many verticals, I was attracted to Definitive Healthcare and the combination of skill sets that this role requires, which also align with my own capabilities and interest. One constant has always been a product centric focus, always with the foundation in data and a relentless adherence to commercially driven results. As part of the leadership team that took Dun and Bradstreet private, I was responsible for the global commercial transformation that returned the company to growth, while also realizing substantial cost synergies and ultimately was the P and L leader for North America as its President. At Black Knight, now part of ICE, the Intercontinental Exchange, I led the data and analytics businesses that returned that division to double digit growth and profit and also allowed us to accelerate our return to the public markets with a very successful IPO.

Speaker 2

Prior to that, I led the data and solutions businesses for Verisk. In this role, I led the businesses to sustain profit and growth, which drove double digit annual increases and expanding margins for a decade, ultimately supporting its very successful IPO. Most recently, as CEO of DailyPay, a market leading FinTech in the work tech space, I led the team to accelerated growth, achieving profit goals ahead of schedule. And in all of these roles, I developed a deep understanding of the power of data, the ability to identify root cause issues, translate those and identified needs into action, and perhaps most importantly, how do you build a high performing, accountable and efficient go to market engine. At the core, I'm a growth oriented executive, a trait that I have nurtured and developed through years of commercial leadership.

Speaker 2

I'm very proud to have had a direct impact on improving the growth profitability performance of every business that I've been trusted to lead. As I assessed the opportunity at Definitive Healthcare, I had several specific things that I was looking for. 1st, a great team with deep domain expertise and a passion for serving customers. Secondly, a growing and vibrant market that would provide ample opportunity for long term sustainable growth third, a differentiated and compelling set of data and technology assets that can deliver great value to customers and benefit from a sustained competitive moat and finally a business that would benefit from a commercially focused leader. My extensive due diligence made it clear that Definitive Healthcare checked each of these boxes.

Speaker 2

And after being here for a month, I'm happy to say that I'm even more confident that this is a business with strong fundamentals, particularly its people and data assets. A few observations from my 1st month here. We believe our reference and affiliation data is a true differentiator. We have a robust and growing data set and we are seeing good early traction with our enhanced data visualization tool in healthcare providers. We have a great customer base that counts on Definitive Healthcare to improve their operational performance day in and day out.

Speaker 2

My initial customer conversations give me great confidence that we can add even more value and I'm excited to meet directly with more of our customers, prospects and key partners over the coming weeks. Our product and data science teams have deep domain expertise and are already positioned on a simplified roadmap and strategy that we believe is focused on the right problems with our best people and best talents. Overall, our bench of talent exceeded my expectations with a good mix of long tenured domain experts who deeply understand our customers and products and seasoned managers who are experienced in scaling organizations. Our core assets provide a tremendous foundation for improved growth and profitability for Definitive Healthcare going forward. And to build upon these strengths, we have spent the last month undergoing a process of ruthless self reflection to identify the things we are doing well and the things that we need to improve.

Speaker 2

A part of that process, we needed to acknowledge that the business is not executing as well as it can. Positively, we believe there are things we can fix quickly that should enable us to deliver meaningful growth better over time. When demoing and talking to customers about our and solutions, I'm incredibly impressed with the breadth and depth of our data assets and technology. In Q2, we launched Kervoyance, our new platform for the medtech industry, along with a new mobile app for our flagship VUE platform. In addition, we continue to expand our datasets, recently adding management services organizations and independent practice associations to our physician view dataset.

Speaker 2

We were also selected as the 2024 Databricks Healthcare and Life Sciences Partner of the Year, which is a testament to our focus on delivering innovative data and AI solutions to the healthcare and life sciences industries. So we have great data and we are making great strides in delivering even more great products for our customers. What we are now focused on is simplifying and prioritizing our product roadmap. Our end to end solutions for life sciences, provider and diversified industries To stream To streamline our development teams and to further our product innovation, the team is now focused on bringing these point solutions together into a more unified platform that is easier to use for our customers and solves a broader range of their most important business problems. In addition, we've put together a new product roadmap framework that will streamline decision making for more targeted and efficient future product development decisions.

Speaker 2

This process will also ensure that we stay focused on the parts of the market where we believe we will be able to compete as a top tier solution. So what are the things that we need to improve? At a high level, I would summarize it as simplification, both in go to market and product development. We've been doing too many things at the same time and execution has suffered as a result. This has led to inefficiencies and made it harder for us to deliver on our objectives than it needs to be.

Speaker 2

Let me give you a couple of examples. From a go to market standpoint, there's been a tremendous amount of change over the past 6 to 9 months, and we have to simply acknowledge that it's been a mixed bag. I believe the high level approach outlined by the team last quarter, which includes devoting more resources to our most important enterprise customers, while creating a separate sales motion for small and medium sized customers is the right framework. However, I firmly believe that we can do this more efficiently and effectively with some very straightforward changes. As we announced last week, Keri Lazarzak has resigned her position as CRO to pursue other opportunities.

Speaker 2

Given my extensive background leading commercial sales This will allow me to quickly and effectively enact required changes. For example, one of the key learnings we've identified so far is that our enterprise go to market efforts have become too complex. Given how the business has evolved, we often find ourselves selling point solutions rather than a unified platform. This has made our pricing and packaging more complicated than it needs to be and it's made our demand generation and sales efforts less efficient and effective than they could be. Said another way, our go to market team is having success selling point solutions, but I believe we have an even greater opportunity to evolve towards a more of a platform sale.

Speaker 2

Much of this can be addressed through a more simplified selling motion, which will be driven in part by our unified product vision. We also believe a simplified enterprise go to market motion will enable us to continue to improve churn by better serving our customers. By presenting a more unified platform and solution through a streamlined effort, we will be able to help our customers grow into solutions that meet more of their needs and fully unlock the entirety of our offering. In the SMB market, we will focus on strengthening our self serve capabilities and developing a product led growth motion to expand our reach in this part of the market. The good news is that many of these operational fixes that we need to make across the business can be done fairly quickly.

Speaker 2

We've already begun to operationalize many of them and continue to identify other areas for improvement. Obviously, we're at the early stages of finalizing and executing on the near term challenges we will be making across the business, but I can tell you that there is a tremendous sense of excitement and urgency amongst everybody at Definitive to operationalize these changes and drive improvements as quickly as possible. So while we believe the future is very bright for Definitive Healthcare, we did have a very challenging quarter in Q2. Elongated sales cycles, a heightened sense of scrutiny on spending remains prevalent for many customers and prospects, particularly in the Life Sciences market. Challenging market conditions are what they are, but we are dedicated to ensuring that they will not prevent us from delivering better operational results going forward.

Speaker 2

We are confident that as we execute the strategy I laid out above and bring stability to our go to market team, we can return this company to consistent growth. I'd now like to highlight a few key customer wins from Q2 that demonstrate the growth opportunity we have. An AI software provider of personalized screening early detection breast cancer needed to understand a complex network relationship, clinical volume by provider and place of service and executive contact hierarchies. Through integration of our claims data and proprietary reference and affiliation data, Definitive Healthcare will serve as the foundation for their market intelligence and commercial strategy planning functions. Next up, one of the largest U.

Speaker 2

S. Providers of electronic medical records systems recently expanded the relationship with Definitive Healthcare. Since 2017, their sales organization has relied on Definitive Healthcare's View suite of products for competitive intelligence, hospital technology install analysis and whitespace identification. After they were acquired by a larger multinational software company, the newly formed go to market organization has expanded their use of our data for their marketing programs in addition to sales. Their marketing team selected Definitive Healthcare for our in-depth affiliation data, account data granularity and ease of use of our online portal.

Speaker 2

Another win for us in the medtech space is the cardiovascular division of 1 of the largest providers of diagnostics, medical devices and pharmaceuticals. They recently selected our Clairvoyance platform for their marketing and field sales teams to understand patient movement for cardiovascular procedures within specific territories and to support their competitive displacement initiatives focused on the beginning stages of the physician referral funnel. A large health system on the West Coast selected Definitive Healthcare to provide insights into their market opportunity at the service line level, including neurology, cardiology, oncology, orthopedic and maternal child health. This analysis will allow them to allocate resources more efficiently, increase referrals and reduce out migration. Finally, the Healthcare and Life Sciences field sales teams of 1 of the world's largest software companies will be leveraging our HospitalView and ImagingView data to target hospitals, health systems, imaging centers that utilize EPIC systems and EHR platforms.

Speaker 2

After the initial rollout to their field teams, they plan to expand their use case into additional facilities types. Before I turn the call over to Rick, let me wrap up by saying I couldn't be more excited about Definitive's future. The first 30 days only served to confirm my enthusiasm before joining. The team has built a great business and a truly differentiated technology that can solve some of our customers' most important operational needs. I believe we are in a great position to build upon that foundation to deliver even more value for our customers and return to the financial performance our shareholders expect.

Speaker 2

With that, let me turn the call over to Rick to walk you through the numbers. Rick?

Speaker 3

Thanks, Kevin. I'll start by reviewing our Q2 results in detail, then finish with our guidance for Q3 and for the full year 2024. In all my remarks, I will be discussing our results on a non GAAP basis unless otherwise noted. As Kevin mentioned, we're pleased with the 2nd quarter revenue and profit results, but face sales execution issues late in the quarter, leaving us well short of our internal bookings expectations. While the booking shortfall did not impact on Q2 results, it did impact our view of Q3 and the full year, which I'll discuss at the end of my remarks.

Speaker 3

In Q2, we are pleased to deliver revenue and adjusted EBITDA above the high end of our guided range. We remain focused on what we can control and continue to advance our efforts to operate more efficiently, while delivering innovation for clients. Both these efforts are expected to position us well as the market recovers and growth improves. Financial highlights of the 2nd quarter include revenue growth of 5% compared to Q2 2023, and we grew adjusted EBITDA, adjusted net income and non GAAP earnings per share by 21%, 14% and 13%, respectively over the same period. We delivered a 33% adjusted EBITDA margin for the quarter, up over 4.50 basis points year over year.

Speaker 3

As a result, our Q2 revenue growth plus the trailing 12 month adjusted EBITDA margin was 36% and we generated 21,500,000 dollars of unlevered free cash flow in the quarter $78,600,000 on a trailing 12 month basis, which is up 50% versus the 12 months prior. Turning to our results in more detail. Revenue for the Q2 was $63,700,000 up 5% from the prior year and above the high end of our guided range. This includes $1,700,000 of professional services revenue as large clients engage us to work on some of their most challenging issues.

Speaker 2

In a small note, as part of

Speaker 3

the strategy to allocate more of our sales resources to enterprise customers, as we described in our last call, during the Q2, we completed a project to refresh our customer hierarchies to reflect industry consolidation. At the same time, we normalized prior periods to reflect the same changes. In some cases, this moved existing customer entities under larger parent accounts and therefore reduced our total client count while ARR was unaffected. To provide investors with transparency to the impacts, the adjusted counts for 2023 2024 are disclosed in the 10 Q filed today. And on this call, we will reference these adjusted counts normalized for the updated mapping in discussing the following quarter over quarter and year over year changes.

Speaker 3

We ended the quarter with 5 37 enterprise customers, which we define as customers with more than $100,000 per year in ARR. This was an increase of 32 enterprise customers or 6% year over year and the decrease of 4 customers quarter over quarter as adjusted. As a reminder, these customers represent roughly 2 thirds of our ARR and are a key focus of our go to market programs. Our total customer account, which includes smaller customers, was approximately 2,600 at the end of Q2, down about 200 from Q2 2023 and down 100 from the previous quarter as current conditions have disproportionately impacted smaller customers. Adjusted gross profit margin of $53,100,000 was up 1% from Q2 of 2023.

Speaker 3

And as a percentage of revenue, the adjusted gross profit margin of 83.4 percent decreased approximately 260 basis points from Q2 2023 due to the impact of Populi, which was acquired in Q3 2023. Note that while Populive reduces gross margin in the short term, we expect it to benefit from operating leverage as it scales, and we believe it will operate at comparable gross margins to definitive in the long term. Sales and marketing expense of $19,800,000 was down 9% from Q2 of 2023. As a percentage of revenue, sales and marketing expense was 31.1% of revenue, an improvement of nearly 450 basis points from Q2 2023. 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 investment.

Speaker 3

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 approximately 200 basis points relative to 2023. Product development expense was 6,900,000 down 1% from Q2 2023. As a percentage of revenue, product development was 10.8% of revenue, consistent with Q2 2023. 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. Kevin touched on some examples of these earlier and we'll continue to invest in the highest ROI opportunities we have identified on our long term product roadmap.

Speaker 3

We continue to expect full year 2024 product development expense as a percentage of revenue to be fairly consistent with the full year 2023. G and A expense was $6,500,000 down 11% from Q2 2023. As a percentage of revenue, G and A expenses were 10.3 percent of revenue, which is an improvement of over 150 basis points compared to Q2 20 23. We expect G and A expense as a percentage of revenue in 2024 to improve 50 basis points to 100 basis points year over year. Adjusted operating income of $19,300,000 was up 21% from Q2 2023.

Speaker 3

And as a percentage of revenue, operating income was 30% of revenue, up over 400 basis points from Q2 2023. The year over year margin increase was primarily due to spending efficiencies in sales and marketing. Adjusted EBITDA was $20,900,000 a 21% increase from Q2 2023. As a percentage of revenue, adjusted EBITDA was 33% of revenue, up over 4.50 basis points from Q2 2023. For the full year 2024, we continue to expect to see year over year improvement in our adjusted EBITDA margin.

Speaker 3

We'll continue to make investments in the areas that are most important to us and our clients and maintain a balanced financial profile that drives profit margin expansion. Adjusted net income was $14,200,000 or $0.09 per diluted share based on the 156,900,000 weighted average shares outstanding. Turning to cash flow, Definitive Healthcare's high margins, upfront billing and low CapEx requirement provides substantial free cash flow generation. We focus on trailing 12 month cash flows due to seasonality. Operating cash flows were $44,800,000 on a trailing 12 month basis, up 34% from 33 $500,000 in the comparable period a year ago.

Speaker 3

Unlevered free cash flow was $21,500,000 in the quarter. On a trailing 12 month basis, unlevered free cash flow was $78,600,000 up 50% from the comparable period a year ago. Unlevered free cash flow was 30% of revenue on a TTM basis, equivalent to 95 percent of our TTM adjusted EBITDA of $82,500,000 As announced on the last earnings call, on May 1, the Board authorized the repurchase of up to $20,000,000 of our stock. We expect the repurchase program to continue through the end of 2024. Within the second quarter, we've repurchased approximately 1,300,000 shares at an average price per share of $5.54

Speaker 4

for a

Speaker 3

total of $7,000,000 The buyback authorization and our implementation of it reflect our strong cash flow generation, our confidence in the business' long term prospects and our commitment to enhancing shareholder value. At this time, we expect to continue to be active in the market in the 3rd Q4 of 2024. But as always, any repurchase program is subject to other ongoing relevant considerations, including market conditions. On the balance sheet, we ended the quarter with over $296,000,000 of cash and short term investments. With strong adjusted EBITDA profitability and only $251,000,000 of debt, we believe we are well positioned to fund both organic and inorganic growth initiatives.

Speaker 3

Current revenue performance obligations of $171,000,000 were down 3% year over year as reported, but flat year over year when adjusting for contracts that are excluded from CRPO due to opt out clauses. Total revenue performance obligations were down 2% year over year and deferred revenue of $97,100,000 was down 0.6% year over year. After quarter end, we undertook an assessment of our equities book value versus our stock's market value and that review identified a $363,600,000 goodwill impairment as of June 30. That write down also generated approximately $40,000,000 of gain on the remeasurement of the TRA liability and a $22,000,000 deferred income tax benefit. As a reminder, these are non cash accounting charges.

Speaker 3

They have no impact on our debt covenants and all impacts are excluded from our adjusted earnings. As Kevin discussed, we continue to experience macro headwinds and sales execution challenges and we're adjusting our guidance accordingly. We believe this revised guidance fully contemplates year to date performance, current conditions and potential short term disruption from the recent organizational change. For Q3, we now expect total revenue of $61,000,000 to $62,500,000 resulting in a revenue decline of 4 percent to 7% year over year when compared to Q3 2023. This reflects both the wrap on the Populaya acquisition and our first half bookings performance.

Speaker 3

Within total revenue, we expect subscription revenue to be down low single digits with a more significant year over year decline in professional services revenue. From a profitability perspective, we expect adjusted operating income of $16,000,000 to $17,500,000 adjusted EBITDA of $17,500,000 to $19,000,000 or 28% to 31% adjusted EBITDA margin in Q3 and adjusted net income of $12,000,000 to $13,000,000 or $0.07 to $0.08 per diluted share on 156,500,000 weighted average shares outstanding. Rolling forward to the full year 2024, we now expect revenue of $247,000,000 to $251,000,000 ranging from 2% decline to approximately flat year over year. From a profitability perspective, we're tightly managing operating efficiency and the associated costs to protect margin expansion for the year. Accordingly, we now expect adjusted operating income of $67,000,000 to $71,000,000 adjusted EBITDA of $74,000,000 to $77,000,000 for a full year margin of 30% to 31%.

Speaker 3

I'd like to reiterate, despite the top line pressures, we remain committed to profitability and expect 50 to 100 basis points of margin expansion from full year 2023 results. Adjusted net income is expected to be between $50,000,000 $53,000,000 and earnings per share are expected to be $0.32 to 0 $0.34 on 156,800,000 weighted average shares outstanding. So in conclusion, we're pleased to have delivered revenue and adjusted EBITDA above the top end of our guidance for the quarter and to have delivered double digit growth in adjusted EBITDA, adjusted net income and non GAAP earnings per share, while getting on track with our buyback program. We believe our revised guidance fully contemplates year to date performance, current conditions and potential short term disruptions from recent organizational changes. And we remain confident that we're 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.

Speaker 3

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

Speaker 2

Before I open it up to questions, I want to frame for investors how we think about judging the success of our strategy. We recognize that the changes we have discussed today will take some time and will require some patience from investors. So let me be clear what we are focusing on achieving. We believe Definitive Healthcare is a growth company and that we can return double digit revenue growth. It will take some time for us to deliver on that goal, but the opportunity is clearly there.

Speaker 2

We are also committed to delivering high levels of non GAAP profitability and continued operating efficiency. Given the highly scalable nature of our business model, we believe that the most effective way to drive durable margin expansion is through faster growth. So we will continue to invest in the most important areas to our clients and maintain a balanced financial profile that drives long term profit margin expansion. Finally, knowing that no company needs to do everything itself, we plan to expand the reach of our partnership and inorganic growth strategies. We look forward to updating you on our progress on future earnings calls.

Speaker 2

And with that, I'd like to open it up for questions.

Operator

And our first question today will come from Saket Kalia with Barclays.

Speaker 5

Okay, great. Hey, guys. Thanks for taking my questions here and welcome Kevin. Really look forward to working with you.

Speaker 2

Thank you. It's good to be here.

Speaker 5

Kevin, maybe just to start with you. Your prepared remarks, I thought were really helpful in sort of framing where you'd like to go with the go to market organization. And of course, you're just 1 month into the role, right? So this might be a little bit of an unfair question. But maybe you could just double click on how you envision shifting to more of a platform sale.

Speaker 5

And just maybe even higher level, what does a platform sale look like to a definitive customer? Does that make sense?

Speaker 2

Yes, I think so. I think first, we the way I look at the situation is it's really one of continuity, right? So a lot of stuff was started here prior to my arrival, meaning the reorganization. And it was a rather large and complex one. And obviously, that's going to take some time.

Speaker 2

And there are areas that there was probably more impact than we had anticipated. But recognizing the situation, it's familiar to me. It's what I signed up for. Frankly, it's what I sought is we've got a quality asset, large strategic valuable segment and things were already underway. And so when we think about moving from more of a point solution to a platform, what that really means is with a flatter GTM, with a more simplified approach, that's more efficient and effective and you start to stitch together the products that today are still for the most part often sold as individual point solutions, you're starting to sell those products through a much more unified go to market and it's what the product organization is already doing.

Speaker 2

So this is something that was started prior to my arrival, Saket, where you've got a much more simplified roadmap that is taking what was it was significantly larger in number of things that were going on that were just very difficult to execute on concurrently. And by focusing on fewer things, interoperability, a common UI UX, the ability for our customers to access more solutions through a single simplified interface, it makes it easier to sell, makes it easier for our customers to consume and ultimately that affects your renewal rate and we'll start to help with areas in churn and others that we're focused on.

Speaker 5

That makes a lot of sense. And maybe just on that point, maybe that's a good dovetail into my follow-up question for you, Rick. Could you just talk about how net revenue retention might sort of trend through the rest of this year, even anecdotally? I think what we said in prior calls is that we're starting to lap some of the periods of higher churn and you correct me if I'm wrong, but when does that sort of translate into maybe some improvement in that overall NRR metric?

Speaker 3

Thank you, Saket. We still have half the year to go. Q4 is typically our largest bookings quarter. So what we're really focused on is progressing those second half opportunities. We are not reiterating our NDR guidance today because of the slow start to first half bookings, particularly the late Q2 shortfall.

Speaker 3

And our current guidance scenario does not depend on NDR improving year over year, but it's too soon to put a finer point on it.

Speaker 5

That's very helpful. Thanks guys.

Operator

And our next question will come from Craig Hettenbach with Morgan Stanley.

Speaker 6

Thank you. A question for Kevin and appreciate all the context in your prepared remarks. Understanding if there's going be some patients required as you retool here, what are some of the things you would point to in terms of proof points that over the next couple of quarters you'd be hoping that you can share with the investment community in terms of progress on the turnaround?

Speaker 2

Yes. So I think part of this is, you've really got to be disciplined in your focus on root cause, right, root cause analysis. And the good news is I think for us is that when we look at the market in general and you look at the segments that we service, you've got basically an increasing focus of customers on ROI. You've got some goodness in areas like frankly diversified is showing a point of relative strength. We've got provider where our data visualization and extension of Populi into that segment.

Speaker 2

It's really helping our renewals. Care Voyance is in line with expectations for the year. And we've got biopharma, which is still challenged. And so as you start to really look at this in a more simplified focus, you're going to it's the metrics we already talk about with you, right? It's just you're going to be able to see hopefully some very quick uptick as we look at what I would call kind of low hanging fruit with the simplification process around what where do we have our right to win, the prioritization around our segmentation strategy.

Speaker 2

The fact that we've had change in our go to market, while that wasn't expected, the upshot of that is it's allowing me to take a more directive hand in getting closer to the customer with more customer intimacy. I'm seeing customers, I'm going out with the sales organization. And you can really very quickly start to determine where and what we need to, whether it's pricing and packaging, whether it's different sales motions or how we're actually taking products to market. And that's what I've got a lot of experience in and that's what I'm focused on doing so that we could show when we talk to you in the next quarter, we're hoping to have a significantly different story that we'll be able to start talking about. And it'll make it a much more enjoyable conversation.

Speaker 6

Got it. And then just a follow-up for Rick, understanding there was a lot of work done early in the year in terms of reorg and taking costs down, which have helped margins this year. Given the lower run rate for the back half of the year, are you doing anything around the edges in terms of cost and how you're thinking about that today and as you segue into next year?

Speaker 3

Thanks for acknowledging. We're proud and pleased with our revised lower run rate cost structure. We did manage to expand EBITDA margin by a full 4 points year over year. We feel good about that as a baseline. And of course, we continue to manage costs prudently, but we are not planning any new incremental RIPS or other actions of that type.

Speaker 6

Got it. Thank you.

Operator

And your next question will come from Joe Vruwink with Baird.

Speaker 4

Great. Hi, everyone. Kevin, thanks for all the detail around the go to market strategy. When you think about moving away from point solution focus, taking a more platform approach to selling, would you characterize that as macro agnostic just in the sense that it's ultimately better for customers in all ways the capability they get to consume at once probably makes deal closing likelier and that's the 2 sided benefit. So that's my macro agnostic comment.

Speaker 4

Or do you think this action is maybe aimed or better suited for an improving macro and so DH gets leverage on the upside when things do start to come through in a better way?

Speaker 2

Yes. I mean, it's an interesting question. I mean, for sure, I think that the improving macro market environment will help no matter what, right? It will get better. If the market improves then everybody ought to improve, right?

Speaker 2

It's just sort of natural. But the reality of whether or not the sales cycles are elongating, whether you have more stringent approval processes, people are deferring decisions and maybe there's a heightened focus on ROI, especially in some segments, which we can't control. I kind of look at that independent of what we need to be able to do to grow because that's not really you're not going to hear a lot of that emphasis on this call, maybe you've heard more of that in the past. And that despite whatever the macro challenges are, we have a lot of goodness and we need to reinforce more on what's working and less on what isn't working. And so I look at this as we need to grow and we will grow regardless of the macro environment.

Speaker 2

And if the macro market turns more favorable, that's only going to help us for sure.

Speaker 4

Okay. That's a great answer. And then I just want to be clear at my understanding on where the sales disruptions occurred. If I look at enterprise accounts that grew, if I calculate ARR per total account, it looks like that value grew. So I'm wondering, was it more in the total customer logo churn and maybe that small and medium exposed where you undershot expectations?

Speaker 4

So I was trying to reconcile what happened towards the end of the quarter.

Speaker 2

Yes, I think it's a couple things, right? So first of all, we didn't just have one big disruption. It happened at a couple of times, right? So number 1, you've sort of you've exacerbated it by creating trauma over a longer period. Balanced growth is always the key, right?

Speaker 2

You need to have an eye on profitability all the time. But when you have the majority of the restructuring, the way we did it, where we eliminated a lot of overlay resources, We minimized a lot of spans and layers. We looked for efficiencies in areas and sometimes those were actually well thought through and I think they're great. We're going going to do more of it. In other areas and without getting into the detail, they probably they didn't have the impact that we thought.

Speaker 2

We're going to have to probably reevaluate those decisions. But for example, we have more quota carrying enterprise reps than we did prior. That was offset slightly at the lower end of the market, but that does align our teams with the biggest market opportunity. But through that reorganization, you have with books of business being moved around, you've got sales reps being reallocated into different markets. From the outside and on a PowerPoint, it probably looks like it's going to be particularly efficient.

Speaker 2

But when you have people, sales teams are complex adaptive systems just like a technology infrastructure. And the people dynamic sometimes gets affected in ways that aren't calculated probably completely. And so, while that's where I started off by saying some of the things that we did, I think we're actually really we're seeing some real green shoots and productivity in other areas, we need to address it pretty quickly. And so that's coming back to my initial comment about it's as simple as it is. You've got a flattened GTM with more customer enthusiasm focus.

Speaker 2

We start to focus on more efficiency and effectiveness. And you've got this notion around bringing things more towards a platform as opposed to a point solution through the way we entitle our deals, contract for the deals, the product team, the way they're building them to bring them to market and ultimately the compensation structure that we've created our enterprise sales team, this starts to show some immediate returns. And that's where I think I'm hoping that we will be able to do this in a way not hoping what I expect is that we will have a very different story here in about 90 days to be able to start to show some proof points on how that started to impact the business.

Speaker 4

Okay. Got it. Great. Thank you very much.

Operator

And we'll move next to David Grossman with Stifel.

Speaker 7

Thank you. Kevin, thanks. You've given us a great sense of operationally your sense for the business and these changes that you want to make. And if I think back just maybe at a higher level, the company went public during a healthcare bubble really, and now we've got the exact opposite more of a healthcare recession. So as you think about this and the strategic changes that you've undertaken, perhaps you could relate that to the shift in the value proposition for the industry going forward because environment is so much different today and probably be so much different tomorrow visavis what it may have been 2 or 3 years ago?

Speaker 2

Yes. So we have a situation where and it's not just isolated to healthcare, right? You have a with the technology improvements that are happening at such an accelerated rate these days, the proof points that you may have 2 years ago are going to change. And there's no difference in the segment that we compete in. So we have as great as we believe we are and as good looking and fantastic, we have competitors that are not standing still either.

Speaker 2

And we've got more of them. And that's actually, I think, in a way, it's actually very healthy because it starts to spur a sense of urgency around what was the original value proposition for the IPO. A lot of that still remains constant today. We have fantastic data. We've got truly differentiated data, especially as it relates to our reference and affiliation data.

Speaker 2

We are enhancing that with better data visualization to make it a more easy to consume solution to our customers, which is underway with a simplified product roadmap that's bringing more urgency and acceleration to it. So I kind of look at that as actually David that we've got into a market now where even though you have a great team, tenured leaders, great domain expertise, we've got accountability that we're driving into the organization. The fact that the market is a bit challenged here is necessity breeds innovation. And it's really rallied the team and the folks that we that I was very pleasantly surprised today even more than when coming in are really focusing on our biggest challenges with our best customers. And so I'd love to be in a market where you don't have any competitors and people aren't innovating, but that's hard to find.

Speaker 2

So I think in this case, it's actually being it's going to

Speaker 3

benefit Right.

Speaker 7

All right. Well, thank you for that. And Rick, I have a quick question just about the implied guide for the Q4. It looks like both revenue and margin is expected to be down sequentially. Is there some dynamic at play there or maybe you could just give us a little bit more color if my math is right?

Speaker 3

Your math is right, David. And the dynamic that's in play is we anniversary in the Q3, the anniversary of Populi. And as we've assessed the potential impact of the sales reorg and other factors. We have removed any assumption of improvements in our churn rate and we're not assuming an increase in the close rate on pipeline. So those two things together result in the sequential decline that you're seeing.

Speaker 3

That sequential decline is greater in professional services throughout the second half than it is in subscription. Pro services is a smaller number, but we just want to be clear in terms of what we're seeing.

Speaker 7

So just to be clear, Populi, how does that impact the sequential dynamic? Wouldn't that be a year over year dynamic or?

Speaker 3

Sorry, that set us up going into sorry, I thought you were asking about the year over year revenue decline. So we're down 7% year over year in the second half. Okay. Now the impact of the sequential revenue is more conservative bookings assumptions and assuming no improvement in churn.

Speaker 7

Got it. Okay, very good. Thank you.

Speaker 6

Thank you.

Operator

Our next question will come from Ryan MacDonald with Needham and Company.

Speaker 8

Hey, this is Matt Shea on for Ryan. Thanks for taking the question and appreciate all the color on the internal changes. But maybe thinking about external, could you just expand on the incremental deal scrutiny you're seeing or any changes to call out? And I know price sensitivity has been an issue in the past. So curious if pricing changes are potentially on the table or if sales cycle improvement really just revolves around moving towards a more package sale that will help better communicate that ROI?

Speaker 2

Yes. I wouldn't say that that's 30 days into this. And I'm sorry, is it from is this Matt or for Matt?

Speaker 8

This is Matt. I'm for Ryan McDonald.

Speaker 2

Yes, Matt. So Matt, I wouldn't say that there's a pricing and packaging plan, but I can tell you that as we're evaluating different and it varies by solution to solution. You have to always be aware of the market dynamics of what the market the demand curve and what your supply cost is. And so we're looking at that to fundamentally understand. It goes back to my kind of root cause comment earlier.

Speaker 2

If you're seeing longer sales cycles and the approval process is increasing and with some of the additional scrutiny because there has not related to definitive, but other companies in the market that have had some data issues and there's been increasing compliance and other regulatory scrutiny for whatever reason. You have to be thinking about what does that do to your pricing strategy, right? You've got price elasticity and your customer segmentation is 2 core components of your product strategy. So I'm not trying to dodge the question, but that's something I look at is just basically product 101. You've got to constantly be reevaluating the market dynamics of what's happening, including what the demand curve might be for the supply that you're offering.

Speaker 2

So we're going to continue to evaluate that not just now but in the future.

Speaker 8

Fair enough. Yes, probably jumping the gun on asking you this early. So maybe just shifting over to the product roadmap, I was wondering given the simplification, if you could just provide an update on Populi, are you still planning on rolling this out to other end markets in the second half of the year? And should we expect any pipeline lift from that? Or just where does Populi stand right now in your R and D priorities?

Speaker 2

Yes, I think it's very important. I mean, we've got that's being integrated into the entire product roadmap. We have the team, it's been from my The teams are blended. We've got leadership that we took best of breed from 2 different companies and they've really embraced the definitive brand and we're seeing that as a major data visualization component that's being pushed through to all of our end users. Thanks guys.

Operator

And we'll move next to Allen Lutz with Bank of America.

Speaker 9

Hi, this is Hannah Lee on for Allen Lutz. Thanks for taking the question. Just was wondering if you can talk about what you've been seeing in terms of the M and A environment and if you expect any changes around your M and A priorities?

Speaker 2

Well, I think to be a any well run operation, you're going to constantly be looking at this from a concept, you need a concept of time. You need to look at everything you're doing in a build, buy or partner manner. I don't think that Definitive historically has probably really leveraged the partnership aspect or angle as much as we can. So that is something that even in 30 days, we've really started ramp up to look at how we can go faster with a greater sense of urgency. And I think there's going to be a lot of opportunity out there.

Speaker 2

I think that definitive is in pretty good shape and Rick can comment on that. But our I think our capital structure is great. The Board is super supportive and it's a fantastic Board of Directors. And we're going to evaluate those as part of kind of a multi pronged growth strategy opportunistically. And I think there's going to be a lot of opportunity that is going to show itself to us.

Speaker 9

Great. That's helpful. Thank you.

Operator

And our next question will come from Brian Peterson with Raymond James.

Speaker 7

Hi. Thanks for taking the question. This is John on for Brian. Maybe just a double click on the longer sales cycle commentary. Any commonality you're seeing there?

Speaker 7

Any specific geographies you call out or segments where you're seeing the longer sales cycle? Or is it just broad based? And then I have a quick follow-up.

Speaker 2

It's 30 days in. So I don't know if I can really give you a definitive, but looking at the data, it does appear to be pretty broad based, which does indicate that it's probably more of just kind of a macro in general as opposed to a segment issue. But I think we probably need to take that and come back with a little bit more sense of analysis unless Rick you think you can add. That's exactly right Kevin. Yes.

Speaker 7

Okay, perfect. Thanks. And maybe just following up with Rick here on the net retention. How would you maybe stack rank the drivers of the net down sell? Is it primarily a function of biotechs combining, seating operations, competitive pressures?

Speaker 7

Or is it just downsizing of just sales and marketing spend in the enterprise? Just curious to get more color there.

Speaker 3

Yes. So we saw more pressure on the upsell and more delays, but not outright losses on new sales. And so as a result, the churn, although it did improve year over year at an overall level, the impacts were fairly similar, with a little bit more of an impact on churn in biopharma. Life Sciences continues to be sorry, I meant life sciences, not biopharma. But life sciences continues to have a relatively elevated churn rate compared to what we were seeing in 2022.

Speaker 7

Thank you very much.

Operator

And our next question comes from Jared Hayes with William Blair.

Speaker 4

Yes, good afternoon and thanks for taking the questions. I sales, but with moving to that platform approach, do you expect that to ultimately lead to sort of longer sales cycles on average because it's a larger and more complicated sale? Now I'm wondering if that would almost create like sort of an air pocket as you're kind of looking to move back to growth, but if clients need more time to get the buy in because it's a larger budget allocation or just a more complicated decision criteria?

Speaker 2

Yes. My experience has not been the case, but I think part of it's in doubles in the detail, right? So if you're talking about more of a complex multiproduct sale that has multiple buying personas that might be, but if you're selling more products to the same personas, that's probably not the case. And even if take for argument's sake that it did slightly elongate the sales cycle, More products per customer is very easy to draw a correlation to improve renewal rates and you will have better value per customer over time. And there's a lot of goodness your NPI is going to your NPS score is going to go up.

Speaker 2

I mean, there's just a lot of goodness that comes from that. And so I wish I had a proof point to tell you this here, but my experience of doing this for 30 years is, it is not more difficult to sell more than one product. In fact, it's easier. And it also provides a way for you to go back to your existing customers who are happy and to sell them more products and upsell them over

Speaker 4

time. Yes, that makes sense. I think the emphasis on ROI should be easier or at least multiproduct approach. So appreciate that. Maybe just as a quick follow-up, Kevin, for you kind of stepping into the role here.

Speaker 4

Would be curious to hear your thoughts just on corporate culture in general, kind of from a high level. Obviously, a lot of moving parts, a lot of areas or opportunities for improvement that you've detailed here. Just as you kind of work through that, how do you kind of maintain culture and morale and all of that sort of thing in order to keep everyone aligned and moving in the right direction?

Speaker 2

Yes. I mean, it's always a great question because it's the secret sauce that if you don't get that right, right, things start deteriorate pretty rapidly. And I think that the reality here is definitive and it's a testimony to Jason Krantz and his original vision behind what he's built a great business is you've got a very team and family approach, but it isn't just that people are that get along and have that sort of chemistry. You've also got a very tenured and domain we've got a lot of tenured domain experts that go through the organization, right. We have people, many people that are very critical that have been here for 8 years, 10 years, right.

Speaker 2

So Aitman is a relatively young company. We have very, very tenured people. And so part of my challenge was to basically it's on me to be able to create and continue that culture to where people want to stay and be part of the team as we start to evolve into a much more hyper growth company, which has more expectations on performance, as well as continuing to build products and what was at one point maybe a little bit of an easier macro environment. So I think that the opportunity here for us is you've got to retain that corporate memory and those domain experts and you need to bring in and leaven into it some external folks that are going to augment the team in a way that it doesn't change what is ultimately the very we have a lot of goodness here that we don't want to lose. And so that's one of the reasons that I joined is through very extensive conversations with the Board and not only the Founder, but many of the executives here is I think we have that kind of like minded approach of we're going to build something great and we have a great foundation.

Speaker 2

And now this is the question is you've got to kind of redouble your effort on kind of the organizational design, getting to a couple of extra people that are secret sauce on boat and then everybody needs to start rolling in the same direction. And I'm going to come back to this because I think that while it's simple, it's really critical here is you have to just have a very simplified balanced approach, fewer things that are done well that you can measure and that you can report on and add to it. And simplifying is actually more difficult than expanding, right? And so that 1st 30 days was really spending a lot of time on that. And I'm very comfortable that we've got the right people now on the right problems and we've got the right focus and we're going to start to see some acceleration.

Operator

That concludes our question and answer session. I'd like to turn the conference over to Mr. Coop for his closing remarks.

Speaker 2

Yes. Just want to thank everybody for their time today. It was a pleasure talking to you and I'm looking forward to future conversations and that concludes our time together today. Thank you.

Operator

This concludes today's conference call. Thank you for attending.

Speaker 9

The host has ended this call. Goodbye.

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Earnings Conference Call
Definitive Healthcare Q2 2024
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