Health Catalyst, Inc. (NASDAQ:HCAT) Q4 2022 Earnings Call Transcript

Health Catalyst, Inc. (NASDAQ:HCAT) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Welcome to the Health Catalyst Fourth Quarter and Full Year 2022 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. I would now like to turn the call over to Adam Brown, Senior Vice President of FP&A and Investor Relations.

Adam Brown: Good afternoon, and welcome to Health Catalyst’s earnings conference call for the fourth quarter of 2022, which ended on December 31, 2022. My name is Adam Brown. I’m the Senior Vice President of Investor Relations and Financial Planning and Analysis for Health Catalyst. And with me on the call is Dan Burton, our Chief Executive Officer; and Bryan 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-K furnished to the SEC, both of which are available on the Investor Relations section of our website at ir.healthcatalyst.com. 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 and the lingering impact of the COVID-19 pandemic on our business and results of operations, our pipeline conversion rates and our general anticipated performance of the 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. Please refer to the risk factors in our Form 10-Q for Q3 2022 filed with the SEC on November 9, 2022, and our Form 10-K for the full year 2022 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, let me turn the call over to Dan for his prepared remarks, and then Bryan will subsequently provide his prepared remarks. Dan and Bryan will then take your questions. Dan?

Dan Burton: Thank you, Adam, and thank you to everyone who has joined us this afternoon. We are excited to share our fourth quarter and full year 2022 financial performance, along with additional highlights from the fourth quarter. Reflecting on 2022, it proved to be a challenging year than anticipated as a result of the inflationary macroeconomic environment and the meaningful financial strain that our health system end market faced, primarily due to significant increases in labor and supply costs without a commensurate increase in revenue, leading to substantial margin pressures. While those items resulted in challenges related to our bookings performance in the first half of 2022, I’m pleased with our financial performance in the second half of 2022.

And overall, I’m proud of all that we accomplished during the year, especially in light of the continued challenging macro environment. For the full year 2022, our total revenue was $276.2 million. This represents 14% year-over-year revenue growth and an outperformance relative to the midpoint of the guidance that we shared on our last quarterly earnings call. Likewise, for the full year 2022, our adjusted EBITDA was a loss of $2.5 million. This represents an improvement of $8.8 million relative to 2021. Importantly, this adjusted EBITDA outperformed the midpoint of the original full year guidance we provided at the beginning of 2022, demonstrating continued operating leverage in our business despite lower annual revenue growth for 2022 as compared to our initial guidance for 2022.

Now let me highlight some additional items from the quarter. You will recall from our previous earnings calls that we measure our company’s performance in the three strategic objective categories of improvement, growth and scale. And we’ll discuss our quarterly results with you in each of these categories. The first category, improvement, is focused on evaluating our ability to enable our clients to realize massive, measurable improvements while also maintaining industry-leading client and team member engagement. Let me begin by sharing a client improvement example from a recently published case study. We have observed over time that health care organizations that build a homegrown data and analytics infrastructure frequently underestimate its complexity and total cost of ownership with the problems getting worse as the infrastructure ages, INTEGRIS Health spent years attempting to build and maintain an internal data warehouse but ultimately concluded that operating costs were too high and that this infrastructure was unable to produce the data, analytics and insights at scale that its leadership and teams needed.

In response, INTEGRIS sought out an industry-leading, commercial-grade solution, ultimately selecting Health Catalyst as its enterprise solution. After implementing our data platform, inclusive of Healthcare.AI, along with a robust set of our analytics applications, including Pop Insights, Touchstone and PowerCosting, INTEGRIS now has a scalable data and analytics platform that can deliver the high-value data and analytics required to understand and continually improve its organizational performance at scale. Following implementation, INTEGRIS has realized more than $3 million in annual indirect labor cost savings through a reduction in duplicative data ecosystem costs, including the resources required to maintain a homegrown data and analytics platform.

Building on this recent client success story, we are pleased to have announced today that INTEGRIS has recently meaningfully expanded its partnership with Health Catalyst, inclusive of an all-access technology subscription and a new tech-enabled managed services contract. This larger multiyear contract nearly doubles the total revenue from our relationship and makes INTEGRIS one of Health Catalyst 10 largest clients. Health Catalyst will staff, manage and maintain INTEGRIS’ enterprise integrated analytics and data abstraction programs to further enable INTEGRIS to achieve data informed healthcare improvements. We are excited to share another example of our clients simultaneously expanding their technology relationship with us, while we deliver valuable talent retention and cost savings through our tech-enabled managed services offerings.

Also in the improvement category, we have been fortunate to receive multiple recent external recognitions related to our team member engagement. First, we are honored to have been named one of the Best Companies to Work for in 2022 by Utah Business Magazine. Next, we’re pleased to have recently received a top Workplaces USA award placing 16th out of more than 100 organizations on the list of top Workplaces with 1,000 to 2,499 employees. Selected based on employee feedback survey results. Additionally, we are appreciative to have recently received recognition by Newsweek as one of America’s Greatest Workplaces for Women in 2023. And finally, we’re grateful to share that Health Catalyst was also recently named by Newsweek as one of America’s Greatest Workplaces for Diversity in 2023.

Our next strategic objective category is growth, which includes beginning new client relationships, while also expanding existing client relationships. First, let me provide some commentary on our 2022 bookings performance. At a summary level, I am pleased with our growth related performance in the second half of 2022, which included bookings results that were toward the top end of the range we shared from our last quarterly earnings call. Our dollar based retention rate achievement for 2022 was 100% towards the high end of the 97% to 101% expectation range we provided last quarter. In terms of the segment breakdown of our 2022 dollar-based retention, consistent with our prior expectations our professional services dollar-based retention rate was slightly higher than 100%, and our technology dollar-based retention was slightly lower than 100%.

In the Professional Services segment, our tech-enabled managed services comprised the largest component of the expansion ARR in 2022 with a significant portion driven by the previously announced Carle Health expansion. Next, our net new DOS subscription client addition for 2022 was eight. We were pleased to come in towards the high end of the mid to high-single-digit expected range provided on our last quarterly earnings call. And we would note that relative to prior years, a slightly higher proportion of our net client adds came from our more modular DOS light offering, as we mentioned, we anticipated on our last earnings call. As a few highlights of our recent net new DOS subscription client additions, we are excited to publicly announce today our partnership with Deaconess Health System, a leading provider of healthcare services to 50 counties throughout Indiana, Illinois and Kentucky.

Through this five year partnership, Deaconess will utilize Health Catalyst’s enterprise analytics solutions and outcomes improvement expertise to transform its clinical, financial and operational domains and improve analytic efficiency across its team. Also, we are excited today to announce an expansive multi-year partnership with Bryan Health, a Nebraska-based health system that includes five acute care medical centers, a physician network, the Bryan College of Health Sciences, and over 6,000 highly trained staff members. Bryan Health will leverage our DOS data platform and a subset of our analytics applications, including value optimizer, measurable and self-service analytics in its effort to improve system-wide performance and quality of care.

Lastly, I’m happy to share that the GI Quality Improvement Consortium has announced that it has selected Health Catalyst for the purposes of deploying our recently acquired ARMUS hybrid cloud-based registry technology. Health Catalyst’s extensive experience with data extraction will allow the GI Quality Improvement Consortium a streamlined user experience, while our ARMUS technology will enable longitudinal data collection and robust reporting to fuel quality improvement as well as reporting to CMS’ Quality Payment Program. Next, as it relates to our current selling environment, I have personally had the opportunity over the past approximately six months to now have held over 80 face-to-face visits with C-suite executives at our top 100 clients.

As I along with our growth organization, have synthesized recent feedback from our clients and prospects. I would share that we continue to see both headwinds and tailwinds as it relates to our growth in 2023. As it relates to headwinds aligned with what we shared on our Q3 earnings call, our health system end market continues to experience meaningful financial strain, primarily due to significant increases in labor and supply costs without a commensurate increase in revenue leading to substantial margin pressure. We anticipate this dynamic will persist for at least the next few quarters. Translating this to our business, we have seen a decrease in pipeline demand and some anticipated elevated churn levels for the parts of our solution portfolio that do not offer near-term measurable ROI, such as our clinically focused technology offerings and our more traditional consulting professional services.

As it relates to tailwinds, while we have seen that financial strain has continued to pressure health system budgets in our recent sales conversations, we have continued to hear a strong acknowledgement that our portfolio includes solutions that directly reduce health systems’ current financial pressure, especially related to the segments of our offering that have a clear near-term financial ROI, such as our tech-enabled managed services offering, our financial empowerment technology suite and components of our population health technology suite. We are encouraged to continue to see a meaningful increase in the size of our pipeline in these parts of our portfolio that offer near-term hard dollar cost savings. These offerings largely drove our strong second half 2022 bookings results and comprised a significant portion of our projected 2023 sales pipeline.

Given the increased demand levels for our tech-enabled managed services offering as compared to historical levels and that this solution offering has been a higher priority focus area for us over the last few quarters based on the feedback from our end market, let me take a few moments to comment on this offering and why we are seeing heightened pipeline demand in this area. First, in terms of our tech-enabled managed services offering, we currently offer this solution in two main functional areas that include chart abstraction and core analytics. Currently, less than 10% of our DOS client base has a tech-enabled vantage services contract with us. Next, in terms of why we are seeing a more robust increase in demand, our client conversations over the past six months have validated our belief that as health systems have seen increasingly significant pressure related to their labor expense, which typically comprises well over half of their operating expenses, they have sought solutions to effectively address their near-term labor expense challenges, especially in areas that are not typically their core competencies or in areas where they typically struggle to recruit and retain talent.

Our tech-enabled managed services offering typically allows a health system to realize near-term cost savings and gives some certainty in their labor expense profile over a multiyear period. Lastly, we would highlight a few reasons why Health Catalyst has been and continues to be differentiated in our solutions in this operating area. One, unlike traditional business process outsourcing vendors, Health Catalyst primarily drives efficiencies in labor costs, utilizing our robust technology solutions as opposed to primarily leveraging offshoring; two, we have already developed the technology needed for efficiency gains in these core operating areas like analytics and chart abstraction, so the kind of value is significantly faster. And lastly, our tech-enabled managed services clients have chosen Health Catalyst because of our long-term trusted partnerships with these clients that includes a multiyear track record of shared success.

With each of the tech-enabled managed services expansion contracts we have signed to date, none of them have gone out to an RFP. A recent example we announced in December was Carle Health’s decision to enter into the largest expansion in the history of Health Catalyst, inclusive of an all-access technology subscription plus tech-enabled managed services in the areas of analytics, data management, reporting and abstraction. This five-year contract totals approximately $80 million over the life of the contract and is inclusive of an $11 million a year expansion, resulting from a technology increase and a significant tech-enabled managed services contract. Later in our prepared remarks, Bryan will comment on the typical financial profile of these types of tech-enabled managed services relationships.

With all of that as background, let me now provide some commentary on our 2023 bookings expectations. First, I would share that we anticipate that a higher proportion of our gross bookings will come from our existing client base as compared to historical levels, inclusive of upsells to both our DOS client base as well as upsells to our over 400 other more modular non-DOS clients. This expectation is driven by the current end market dynamics in which we have observed that existing clients that have already realized a strong ROI and are aligned on a long- term partnership framework tend to be more receptive to expansion conversation, particularly in areas of near-term financial ROI, as compared to discussions with potential clients regarding net new client logos.

Next, in terms of our 2023 bookings expectations, we anticipate a higher proportion of our bookings will come from our tech-enabled managed services offering. As I just shared, this solution offering is strongly resonating with clients given its near-term hard dollar ROI, allowing health systems to effectively address their near-term labor expense challenges by deepening their relationship with a trusted long-term partner. Importantly, given the size of these tech-enabled managed services contracts and our somewhat limited forecasting history, they may create some lumpiness in our quarterly bookings results, translating to a 2023 dollar-based retention range that is wider than we have provided historically. Lastly, let me share that we anticipate a higher SKU of our bookings will occur in the second half of the year as compared to our historical average, largely resulting from the anticipated timing of our larger pipeline opportunities inclusive of our tech-enabled managed services pipeline.

As you may recall, we began more proactively discussing tech-enabled managed services opportunities with existing clients starting in Q3 of 2022. While we continue to gather data on the progression of these opportunities, we anticipate that the sales cycle for tech-enabled managed services deals will be similar on average to the company’s overall one year estimated sales cycle. With this backdrop, I will now share some perspectives on our anticipated 2023 bookings achievement levels, first, as it relates to our 2023 dollar-based retention. We anticipate realizing meaningful improvement relative to 2022 with an anticipation of dollar-based retention achievement for 2023 between 102% and 110%. As previously mentioned, we anticipate our professional services achievement to be higher than technology, driven by our tech-enabled managed services pipeline.

In our Technology segment, we continue to anticipate that our contractual expansion will drive the bulk of our expansion. Based on many recent discussions with our largest clients, we feel encouraged by their long-term commitment to the Health Catalyst partnership. At the same time, we anticipate some modular technology churn in our smaller, more limited client relationships and some professional services churn outside of tech-enabled managed services driven primarily by continued financial pressures faced by these health systems. Next, as it relates to our net new DOS subscription client achievement, we anticipate improvement relative to 2022, likely resulting in low double-digit net new DOS subscription clients in 2023, but not yet a return to pre-2022 net new DOS subscription adds due to continued macroeconomic pressures.

Lastly, as it relates to our financial performance, let me share that I am extremely pleased with our full year adjusted EBITDA performance in 2022. And our significantly higher EBITDA guidance range for 2023 relative to 2022. Our 2022 achievement level, despite our lower than originally anticipated revenue growth, demonstrates the continued operating leverage of our business and is highly encouraging as we look to 2023. In 2023, as Bryan will cover in his prepared remarks, I am pleased that the midpoint of our adjusted EBITDA guidance is well ahead of our previous expectations of approximately 300 basis points of year-over-year margin improvement. I continue to feel confident in our near-term adjusted EBITDA progress as well as our mid-term adjusted EBITDA margin target of 10% in 2025 and our long-term adjusted EBITDA margin target of 20% plus.

In a few moments, Bryan will provide more color on our anticipated revenue mix in 2023 and our ability to continue to drive towards these adjusted EBITDA targets, even if our revenue mix moderately shifts towards more professional services over time. Let me conclude my remarks by sharing that we are honored to announce that Matthew Kolb, Executive Vice President and Chief Operating Officer of Carle Health, will be joining Health Catalyst’s Board of Directors effective July 1, 2023. Matt is deeply committed to Health Catalyst’s and Carle Health’s shared mission of data-informed healthcare improvement, and has been an extraordinary leader throughout his career in enabling massive improvements in the healthcare ecosystem. We are honored to have Matt contribute his depth of character, commitment, and experience to our Board, and anticipate his contributions to be significant and impactful in the months and years ahead.

Additionally, Carle Health has made the decision to deepen its long-term investment in Health Catalyst with a meaningful purchase on the open market of Health Catalyst’s common stock. We welcome them as a deeply mission-aligned long-term-oriented owner in the company. Consistent with my own personal decisions to purchase Health Catalyst shares on the open market over the past several months, which we estimate places me among Health Catalyst’s 20 largest shareholders, I am grateful to add a like-minded, deeply mission-focused and long-term oriented fellow shareholder to our company’s ownership group. This announcement builds on the news we shared in December 2022 at which time Carle nearly quadrupled the size of its client relationship with Health Catalyst.

We are grateful for this deep, long-term and multifaceted relationship with Carle Health, which mirrors some similar positive dynamics we’ve historically experienced with a few of our other most successful client relationships. And with that, I’ll turn the call over to Bryan. Bryan?

Bryan Hunt: Thank you, Dan. Before diving into our quarterly and annual financial results, I want to echo what Dan shared and say that I am pleased with our fourth quarter financial performance. I will now comment on our strategic objective category of scale. For the fourth quarter of 2022, we generated $69.2 million in total revenue. This total represents an outperformance relative to the midpoint of our quarterly guidance, and it is an increase of 7% year-over-year. For the full year 2022, our total revenue was $276.2 million, representing 14% growth year-over-year. Technology revenue for the fourth quarter of 2022 was $44.7 million, representing 11% growth year-over-year. This year-over-year growth was driven primarily by recurring revenue from new client additions and from existing clients paying higher technology access fees as a result of contractual built-in escalators.

For the full year 2022, technology revenue was $176.3 million, representing 19% year-over-year growth. Professional services revenue for Q4 2022 was $24.5 million, representing a 1% decline relative to the same period last year. This year-over-year performance was primarily due to our professional services dollar-based retention in the first half of 2022 being less than 100% as well as a modest amount of non-recurring professional services revenue that was recognized in the fourth quarter of 2021. For the full year 2022, our professional services revenue was $99.9 million, representing 6% year-over-year growth. For the fourth quarter 2022, total adjusted gross margin was 51% representing a decrease of approximately 140 basis points year-over-year.

For the full year 2022, total adjusted gross margin was 53% representing a decrease of approximately 10 basis points year-over-year. In the Technology segment, our Q4 2022 adjusted technology gross margin was 69%, a decrease of approximately 90 basis points relative to the same period last year. This year-over-year performance was mainly driven by headwinds due to the continued costs associated with transitioning a portion of our client base to third-party cloud hosted data centers in Microsoft Azure, which increases our hosting costs partially offset by existing clients paying higher technology access fees from contractual built-in escalators without a commensurate increase in hosting costs. For the full year 2022, our adjusted technology gross margin was 69%, an approximately 10 basis point increase year-over-year.

In the Professional Services segment, our Q4 2022 adjusted professional services gross margin was 18% representing a decrease of approximately 570 basis points year-over-year and a decrease of approximately 280 basis points relative to Q3 2022. This quarterly performance was roughly in line with the expectations we shared on our last earnings call. With these results, partially driven by lower utilization rates, a result of higher per client staffing levels than we anticipate at steady state and partially driven by the mix of services delivered in the quarter. For the full year 2022, our adjusted professional services gross margin was 24% and approximately 350 basis point decrease year-over-year. In Q4 2022, our adjusted total operating expenses were $35.6 million.

As a percentage of revenue, adjusted total operating expenses were 52%, which compares favorably to 62% in Q4 2021. For the full year, adjusted total operating expenses were $148.3 million. As a percentage of revenue, adjusted total operating expenses were 54% for the full year 2022, which compares favorably to 58% in the full year 2021. Adjusted EBITDA in Q4 2022 was a loss of $0.6 million, which outperformed the midpoint of our guidance, mainly driven by the strong quarterly revenue performance mentioned previously and our cost reduction efforts. For the full year 2022, our adjusted EBITDA was a loss of $2.5 million, which compared favorably to an adjusted EBITDA loss of $11.2 million in 2021. Our adjusted net loss per share in Q4 2022 was $0.05.

The weighted average number of shares used in calculating adjusted net loss per share in Q4 was approximately 54.5 million shares. For the full year 2022, our adjusted net loss per share was $0.26. And the weighted average number of shares used in calculating adjusted net loss per share in 2022 was approximately 53.7 million shares. Turning to the balance sheet, we ended 2022 with $363.5 million of cash, cash equivalents and short-term investments compared to $445 million at year end 2021. Additionally, the face value of our outstanding convertible notes is a principal amount of $230 million, and the net carrying amount of the liability component is currently $226.5 million. As it relates to our financial guidance for the first quarter of 2023, we expect total revenue between $70.3 million and $72.3 million and adjusted EBITDA between $1 million and $2.5 million.

For the full year 2023, we expect total revenue between $290 million and $295 million and adjusted EBITDA between $9 million and $11 million. Now let me provide a few additional details related to our 2023 guidance. First, as it relates to our Q1 2023 revenue expectations, we anticipate that both our Technology and professional services revenue will grow a few points sequentially. Next, 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 first quarter. In the Professional Services segment, we anticipate that our Q1 professional services adjusted gross margin will be roughly flat as compared to Q4 2022. This is partially driven by our continued lower anticipated utilization rates as a result of higher per client staffing levels than we anticipate at steady state and partially driven by the anticipated mix of services to be delivered in the quarter, inclusive of a higher percentage of tech-enabled managed services, which start out at a lower gross margin.

Lastly, we anticipate our operating expenses will decrease relative to Q4 2022, mainly the result of the cost reduction efforts that continued in Q4 2022 and into Q1 2023. Next, let me share a few additional details related to our full year 2023 guidance. From a revenue mix standpoint, we anticipate 2023 professional services year-over-year revenue growth will slightly outpace Technology year-over-year revenue growth, driven by the heavier weighting of our tech-enabled managed services bookings in the second half of 2022 and anticipated in 2023. In the first half of 2023, we anticipate limited year-over-year professional services revenue growth, driven by the tougher year-over-year comparison, and that this revenue segment will not have the benefit of our anticipated first half bookings achievement with professional services year-over-year growth meaningfully increasing in the second half of the year.

Next, in terms of our adjusted gross margin, we expect our adjusted Technology gross margin will be in the high 60s through 2023. We anticipate the built-in client level technology gross margin expansion, driven mainly by contractual escalators, will be partially offset by the headwinds of a small subset of our client base transitioning from on-premise to third-party cloud-hosted data centers in Microsoft Azure as well as from costs associated with migrating a subset of our client base to our multi-tenant Snowflake and Databricks enabled data platform environment. We anticipate our adjusted professional services gross margin will be roughly 20% for the year. Given that our anticipated utilization rates continue to be lower than historical levels for the next couple of quarters and that our mix of professional services is comprised of a larger percentage of tech-enabled managed services, which start out at a lower gross margin.

Next, we anticipate our adjusted operating expenses as a percentage of revenue will be down between approximately 500 to 750 basis points year-over-year, largely the result of our restructuring efforts and meaningful continued operating leverage. The largest year-over-year reduction will occur in SG&A, the result of further M&A integration, the pausing of our life sciences adjacency and rightsizing our cost structure to align with our current go-to-market inclusive of tech-enabled managed services unit economics. Next, we anticipate our adjusted free cash flow will also make meaningful progress in 2023 and will be in line to slightly better than our adjusted EBITDA progress as a percentage of revenue. Lastly, we anticipate our stock-based compensation as a percentage of revenue will be meaningfully reduced by approximately 500 basis points in 2023, which in absolute dollars will result in stock-based compensation declining year-over-year.

Next, as Dan mentioned earlier, let me share some comments on the typical unit economics of our tech-enabled managed services offering. First, in terms of contract structure, we are usually signing long-term locked-in contracts, which also require clients to sign a long-term technology subscription renewal or expansion. As part of a tech-enabled managed services contract, Health Catalyst typically rebadges existing health system team members within the applicable functional area as Health Catalyst employees. We aim to provide a client with cost savings relative to their existing spend typically starting nine months after contract signing. And we drive incremental gross margin over time by leveraging our technology, scale efficiencies and process improvement efficiencies to reduce the labor footprint necessary at that client while also providing opportunities to displaced team members in other growth areas at Health Catalyst.

As such, and consistent with what we’ve seen with our historical relationships, typically the tech-enabled managed services component of our contract starts at a low gross margin in year one, typically 0% to 10%, and increases over a few year period to an approximately 25% gross margin. Importantly, there is very little incremental operating expense associated with these contracts as they typically come from existing client relationships and do not require meaningful incremental SG&A or R&D. Thus, over the long run, we feel confident that the total client economics are in line with our long-term targeted adjusted EBITDA margins. Lastly, related to this topic, let me share a couple of comments on our long-term revenue mix. For the full year 2022, our technology revenue comprised 64% of total revenue.

As mentioned previously, we expect a higher proportion of our bookings mix to come from professional services in 2023 based on the pipeline demand we are seeing for tech-enabled managed services. In terms of our longer-term revenue mix at this point in time, we are continuing to assess our bookings mix by segment over time, which will inform our mid- and longer-term revenue mix projections. If the elevated demand for our tech-enabled managed services persist over the long run, such that we continue to see a higher percentage of our bookings come from professional services over time, we still continue to be confident in our ability to drive operating leverage and meet our mid- and longer-term adjusted EBITDA and profitability targets, given the tech-enabled managed services unit economics and significant operating leverage that I just described.

With that, I will conclude my prepared remarks. Dan?

Dan Burton: Thanks, Bryan. In conclusion, I would like to recognize and thank our committed and mission-aligned clients and our highly engaged team members as well as express my excitement and optimism for the future. And with that, I will turn the call back to the operator for questions.

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Q&A Session

Operator: Thank you, sir. And our first question will come from Stephanie Davis with SVB Securities. Your line is open.

Stephanie Davis: Hey guys. Thank you for taking my question. So Dan, you are super positive on tech-enabled outsourcing last time we met up in August call, and you were super cautious on DOS and what the demand could look like. But you announced a bunch of DOS wins with the brand. So what changed? Is it a change in the environment? Was it a change in the outlook after you did the year-end round of clients? Or is it something else I’m missing?

Dan Burton: Yes. Thanks for the question, Stephanie. So we continue to be optimistic and encouraged by the pipeline that we’re seeing with regards to tech-enabled services. We were excited since the last earnings call to announce the Carle Health meaningful expansion and today to have announced the INTEGRIS Health, meaningful tech-enabled managed services expansion as well. And we have a robust pipeline that we’re excited about as well. As we’ve discussed in the past and as we mentioned in our prepared remarks, we do anticipate that there’s still a meaningful sales cycle associated with these large tech-enabled managed services deals. And we might estimate that they will look on average similar to our overall one-year sales cycle.

So it will take some time for that to play out, and we wanted to be thoughtful in the way that we forecast the timing of the conversion of that part of our pipeline. And so that informed our perspective and some of what we shared in the prepared remarks around back half weighting the way that we think about the pipeline conversion. If we found that the sales cycle was a little bit earlier or faster than that one year, that might represent a little bit of upside in terms of that part of the pipeline. As it relates to DOS, we continue to be pleased to see that DOS does offer €“ it is one of those solutions that offers an ROI to clients like the INTEGRIS case study example that we shared that it is often a lot lower cost to maintain as a commercial-grade alternative to a homegrown solution.

And I think that’s what we have been seeing in the marketplace. We did have a strong Q4 from a bookings perspective, and we were pleased to see that strong Q4 play out, both on the existing client expansion side and on the new client side. But we also still recognize that there are headwinds that both our existing clients are facing €“ especially, I think we’re seeing that more in our smaller modular client relationships as well as from a professional services side perspective, but also in terms of prospective client discussions. And we wanted to just recognize that there’s still a lot of those financial pressures that are making it challenging for health systems as they consider purchasing decisions. But no doubt, we were encouraged by a really strong Q4.

Bryan Hunt: Just one thing to add to that, Stephanie. I agree with Dan. The other dynamic that we saw in Q4 as we ended the year, and we mentioned this in the prepared remarks, was that our DOS adds did skew a little bit more towards the DOS Lite offering that we have, just given the financial constraints that Dan mentioned. And that made our average ARR for our net new DOS adds a little lower than our historical target of $1.5 million. It was around $1 million for 2022. That does have some impact as we roll through revenue in 2023. But overall, we’re encouraged by our ability to land even in these kind of smaller use cases and then have that kind of full expansion potential thereafter.