Good morning, afternoon, evening, and welcome to the Definitive Healthcare's Third Quarter 2022 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask question. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to David Samuels, Chief Legal Officer. Please go ahead.

Good afternoon and thank you for joining us today to review Definitive Healthcare's Third Quarter 2022 financial results. Joining me on the call today are Robert Musslewhite, CEO; Jason Krantz, Founder and Executive Chairman; and Rick Booth, CFO. During this call, we will make forward-looking statements, including, but not limited to, statements related to our market and future performance and growth opportunities, the benefits of our healthcare commercial intelligence solutions, our competitive position, customer behaviors, our financial guidance, our planned investments and the anticipated impacts of the COVID-19 pandemic and global macroeconomic conditions on our business results and clients and on the health care industry generally. Any looking forward statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section and elsewhere in our filings with the SEC. Actual results may differ materially from any forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statements 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 on the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I'd like to turn the call over to Robert.

Thanks, David. I would like to thank all of you for joining us this afternoon to discuss Definitive Healthcare's third quarter results. On today's call, I will review our third quarter results, offer some perspective on what we are seeing in the market and provide a few examples of Definitive Healthcare's differentiated value proposition, and then Jason will highlight some of our latest product innovations. Let me begin by providing a high-level overview of our financial performance. We once again delivered an attractive combination of strong top line growth and substantial profitability. Revenue exceeded the top end of our guidance range, and adjusted EBITDA was at the top end of our range, a clear demonstration of our highly efficient business model. Our total revenue was $57.4 million, which represents 33% year-over-year growth, and our adjusted EBITDA was $16.4 million, which translates into a 29% margin. We signed important wins with new and existing customers in each of our core markets: life sciences, providers, health care IT and diversified. We launched several important new innovations, including our new MonoclExpertData product and our new Passport Express product. We made good progress on the continuing integration of Analytical Wizards into Definitive Healthcare, and we delivered all of these results in a market that has grown increasingly challenging. While the quarter's results were solid, the macro environment is having an impact on our commercial performance. Building on the trend we saw last quarter, deal cycles continued to elongate as customers implemented more stringent approval processes or pushed out final decisions to later periods. And while in Q2, we saw this behavior primarily among new customers, in Q3, this trend expanded to also include upsells to existing customers. Also, it became clear during the quarter that we saw this trend more often with our life…

Thanks, Robert. Our innovation flywheel continues to spend in the third quarter. Of particular note, we shipped Passport Express in August, just six months after we closed the acquisition of Analytical Wizards. Passport Express integrates the comprehensive analytics built by Analytical Wizards with the proprietary data from Definitive Healthcare. Passport Express delivers fast and easy access to off-the-shelf health care commercial intelligence, enabling biopharma companies to better understand treatment pathways, brand behavior and market share. For any given therapy area within Passport Express, we've extracted mission-critical proprietary data from our commercial intelligence platform, including medical and prescription drug claims, physician affiliation information and health care provider reference data. These data are then populated into the Analytical Wizards' environment where customers can instantly query flexible dashboards and powerful visualization tools to quickly get answers to their questions. The integrated data and analytics in Password Express practically eliminates the research requirements and time lines traditionally required for commercial teams to search real-world data, normalize and link it, and then build analytical models on top, saving the months of time and getting them to insight more quickly than they've been able to in the past. This is the first of what we expect to be seeing many innovations to come that will combine the power of the highly proprietary Definitive Healthcare data with the best-in-class commercial analytics platform that Analytical Wizards has developed. The market interest in Passport Express has been very high. Also in the third quarter, we shipped a new ExpertData module. This improves the productivity of medical science liaisons and internal medical affairs teams by providing a seamless way to integrate our proprietary ExpertData with our clients' internal systems. Available in two editions, it can be added to the client's ExpertInsight subscription to create a single enriched and updated view…

Thanks, Jason. I'll start with a detailed review of our quarterly results before finishing with our outlook for Q4 and full year 2022, along with some remarks on our 2023 outlook. In all my remarks, I'll be discussing our results on a non-GAAP basis, unless otherwise noted. Our strong business model allowed us to deliver good results in Q3, highlighted by strong revenue growth and profitability despite deteriorating economic conditions. Highlights include 33% revenue growth compared to Q3 2021, 29% adjusted EBITDA margin and a 32% unlevered free cash flow margin over the last 12 months. Revenue growth plus trailing 12-month unlevered free cash flow margin was 66%, putting us well above the Rule of 40. We believe Definitive Healthcare's combination of high growth, high visibility and attractive profitability positions us well in a large and expanding market. Turning to our results in more detail. Revenue for the third quarter was $57.4 million, up 33% from prior year and 2% above the midpoint of our guidance. This performance is driven by strong organic innovation and execution as pro forma organic revenue growth was 27%. We ended the quarter with 504 enterprise customers, which we define as customers with at least $100,000 in ARR. This was an increase of 127 enterprise customers or 34% year-over-year and an increase of 18 enterprise customers from the previous quarter. As a reminder, these customers represent the majority of our ARR and are a key focus of our go-to-market programs. Our total customer count, which includes smaller customers, was 3,022 at the end of Q3, up from 2,769 in Q3 2021. Overall, economic conditions were more challenging in Q3 than they had been in Q2. From a sales and new bookings perspective, deal cycles continued to extend, especially in life sciences and providers. Upsell deal…

Thanks, Rick. Before I open up the call for questions, I want to take a moment to welcome Jon Maack to the Definitive Healthcare leadership team. As you likely saw from the press release this afternoon, Jon has joined Definitive Healthcare as our new President, with responsibility for product management, engineering, corporate strategy and M&A. I've worked with Jon at both the Advisory Board and at Optum, and I'm thrilled that he's decided to join me here at Definitive Healthcare. Jon has a keen strategic mind and decades of health care industry expertise and I'm sure he's going to make a significant contribution to Definitive Healthcare and help us execute on our robust growth strategy. Speaking of our team, our fantastic group of employees continues to do a tremendous job carrying out our mission while creating a great culture, for which we continue to still receive strong external recognition and awards. Just in Q3, we were named the top charitable company in Massachusetts by the Boston Business Journal, and we received a National Stevie Award for Employer of the Year in the Health Products and Services category. We were also recently named a Tech Top 50 winner in the categories of business accomplishment and social responsibility by the Massachusetts Technology Leadership Council. I'm extremely proud of our whole Definitive Healthcare team for their hard work every day on behalf of our customers and their deep commitment to improving our communities. I'll finish by reiterating our confidence in our ability to generate strong growth at scale over time. While our near-term commercial performance is being impacted by the challenging economy, customer interest remains robust and our business remains highly profitable with strong cash flow and tremendous scalability. We have clearly established health care commercial intelligence as a large, growing and strategically important market in which we are tremendously well positioned for years to come. Our solutions help customers drive profitable growth across all stages of the health care market in a way that we believe nobody else can. With that, we will now open the line for your questions.

[Operator Instructions] Our first question comes from Craig Hettenbach with Morgan Stanley.

And thanks for the color on 2023, at least early thoughts. And I know Q4 will also shape kind of net dollar retention as you think about 2023. But any early thoughts there as well in terms of how net dollar retention is shaping up and what that means in terms of how you're thinking about next year?

Yes. Net dollar retention, as you know, is heavily impacted by upsells. We're starting to see some impact there. So we'll best know at the end of Q4. But right now, I would expect it to come in at an overall level, somewhere around 2019 levels, and perhaps have a slightly greater impact on enterprise customers, because those are heavily concentrated in biotechnology and providers. Well actually, let me restate, biotechnology and providers have a higher concentration of enterprise customers, because we have enterprise customers across all our verticals.

Got it. And then just as a follow-up, I know this year, there's been a lot of investment in sales and marketing and just how you're thinking about that now in a more difficult backdrop and then how you plan to kind of modulate that going into next year?

Yes. We will, of course, look at that carefully and be sure that our investments are tailored against the highest leverage growth opportunities. We do that every year. But obviously, this year, we want to be careful as we go to next year and put our investments where the most important growth opportunities are. I do want to stress that we're not stopping investment. We really are continuing to invest in the areas where we see growth, and we're continuing to grow very rapidly across all of our client segments. So I'm not anticipating this being a time where we're really pulling back on sales, just a question of being very targeted and where we put additional dollars against our commercial activity.

Our next question comes from Joe Vruwink with Baird.

Just maybe a question on the broader spend environment. And I suppose this question is specifically aimed at Life Sciences. But earlier today, we heard from Aviva at their Investor Day just talking about how kind of the broader environment as they have seen it hasn't really changed in the last 90 days. So do you think this is maybe a function of just a little bit different exposure for you? Could it be the case that maybe spend is temporarily happening elsewhere? And has there been any change in kind of the overall pipeline as you see it?

It's a great question. I can't really speak for Aviva. I do know that we try to be direct and candid in all of our street communication. So it may be that they had a luckier quarter.

So what's behind your question a little bit? The facts we look at out there, win rates have remained consistent. We continue to see very strong demand from our customers across all segments, including in the segments that feel a little more challenged right now, and that includes biotechnology. And we've seen pipelines at their highest level ever. So it's really a question, we're not feeling like there's anything different going on competitively. We're just feeling like deals continue to take longer to close and have more process steps put in that are keeping us from closing the typical amount of deals that we have in a particular quarter. So our sense is we feel tons of demand for what we're doing and clients really want to do it. They're just being held back in a lot of cases by additional processes and additional approval steps.

Our next question comes from Saket Kalia with Barclays.

Robert, maybe just to start with you. Maybe back to that last question. I was wondering if you could talk a little bit about the competitive landscape a little bit. I mean, Definitive has got a lot of proprietary data. We heard a lot of the examples. But I'm curious if you've seen customers consider other options, whether that's third-party providers like an IQVIA or Aviva or maybe even doing something in-house. I know you spend a lot of time with customers. What do you sort of hear on the competitive landscape?

Yes. I tend to think about competitors in two broad buckets. Before I even start talking about competitors, I want to remind you, as you know, we're very differentiated like no one else can do what we do because we have this proprietary map of the health care ecosystem and the references and affiliations data. When we add new data sources like claims, which a lot of other people have, and we add it to our proprietary data, it enables use cases that no one else can fulfill. And so when we think about competitors, and see others out there, in general, people will bring us in whether or not they have other sources of information. So the one example I give is on our diversified segment, a lot of people use list vendors, things like ZoomInfo where they might do something like that across industry, but they'll still bring Definitive in to help with their health care focused sales and marketing efforts, because we're so much deeper in health care than anyone else out there. We enable use cases for them and help them grow their business more effectively in health care than anyone else out there. On the Life Science side, particularly in biopharma, we do see some of the companies you mentioned. In general, if I look at, like, say, Aviva, Aviva is still primarily a CRM. And so clients will oftentimes work with us for our data. Again, it's very unique data, and then load that data into their CRM to make their CRM more effective. So we tend to have a much more symbiotic relationship in those situations. Most clients in the space have worked with or work with IQVIA in some way, shape or form, but that still doesn't prevent us from coming in and developing very strong relationships again, because our data is unique, and our data tends to satisfy use cases that really require understanding the mapping of the ecosystem and the references and affiliations inherent they're in. So yes, we always fight for every deal and every once in a while, someone might compare us and stack it up against someone else, but we generally win on our independent value proposition because we're unique relative to those others.

Got it. Got it. That makes a lot of sense. Rick, maybe for you. I'm just curious, I understand that this quarter, we start to see a little bit of impact on to the upsell sales cycles as well. But I was wondering if you could just talk about kind of broad brushes. What percent of the business kind of comes from new logo business? And I mean, upsell, if you can disclose, but I guess the net retention from existing customers so far has been pretty solid. The new business, of course, is the one that has the potential to be most impacted by the macro. How big is that either on a bookings or a billings basis? And do you feel comfortable that we've sort of reached a low enough point where you feel that part of the forecast has sort of been derisked?

Well, we have prudently assumed that new business will be a smaller percentage of our growth in 2023. We won't formally guide 2023 until our February call after which we will have seen the Q4 renewals. But we've tried to be prudent there. We've assumed in our base case scenario that Q4 and all of 2023 look like Q3.

Our next question comes from David Grossman with Stifel.

So if I could just kind of follow up a little bit on your prepared remarks in the context of the high-level thinking about next year. And thank you very much for that, by the way. That was actually very helpful. Did I hear you right that you said that if things stay the same that we grow mid-teens and if things get modestly better, it would be closer to 20%? So can you help us maybe understand where do you see the leverage points from a revenue perspective? Is it more just growth in existing versus new logos? Is it certain segments like kind of biotech? Just trying to understand what may be some of the indicators we should be looking at that may have the most kind of dynamic impact, if you will, in next year?

Yes. I think the Q4 quarter is a super important quarter as we finalize our outlook on 2023. As you recall, we have a large number of renewals that occur in that quarter. I would also keep an eye on industry conditions vis-a-vis providers and biotechs. I would hope that this disruption is transitory. We've tried to be conservative and assume that it lasts for the whole period. But those are some of the leading indicators that I look at.

And as you think about, again, the margin profile next year, I fully appreciate kind of the desire and need to reinvest and -- independent of the economic environment given you're highly profitable already. Is there reasons to think that, that changes with better revenue growth? Or do you think just based on where we are right now, kind of margins or maybe even just modest margin improvement is the way to think about next year, whether we get kind of some late kind of impacts that may favorably impact the revenue growth?

I think we've definitely got opportunities there. Let me just go one level deeper on thinking through the 2023 margin outlook. What we're assuming right now is that we have two existing data sources coming online in January. Those are both related to claims information. They are significant additions to our core capabilities. They will help us drive both innovation and additional business. That takes about 200 bps off of gross margin. That's partially offset by efficiencies within OpEx. We're cutting G&A expense, and we're investing in a very targeted way in both sales and marketing and product development.

I'd just add that the dynamics of our model. Generally, growth is very profitable. So as we inflect growth upwards, and we will do that as we emerge from this economic environment, we have plenty of demand pent up. We feel like these are the first dollars that people want to spend when they can, because it's spending on growth. So as those conditions improve as revenue increases, we do have a lot of scalability inherent in the model.

Got it. And just one last question, if I can. Just in terms of the biotech and provider segments as a percentage of revenue. Can you just update us and give us some kind of guidepost in terms of how big they are as a percentage of revenue?

The two combined are between 1/3 and 1/4 of the revenue. So meaningful but not the majority.

Our next question comes from George Hill with Deutsche Bank.

It's Maxi on for George. So we've been talking about the sales cycles getting longer as clients have more hoops to jump through to approve the deal. But are you seeing any pressure on pricing? And if the condition deteriorates going into next year, is lowering prices an option to drive growth?

We're not changing our approach to pricing. We are seeing some competitors that are doing that, but we're focused on the long term.

Okay. Got it. I have a quick follow-up. We have been hearing about hiring freezes or layoffs in a lot of tech companies. Are talents easier to get now? And do you expect it to help relieve the wage pressure you're seeing right now?

It's an interesting question about the labor market. On the one hand, we have seen those trends out there in the market as well. On the other hand, there are still some areas where we felt like hiring has still been tight and can take a while. So our sense is that we will continue to be -- do everything we can to remain a destination employer for talent while being prudent in where we continue to make investments for the future.

Our next question comes from Jonathan Yong with Credit Suisse.

Given where we kind of are standing right now, possibly teetering on a recession. I guess, how are your clients kind of thinking about that? Do they -- are they expecting that it does get worse? Or are they kind of going along with the status quo right now and that they're just on pause? Just trying to get a sense of if things do get worse, would they actually pull back? Are these going to get delayed out longer? Just any color on what you're hearing from your own clients?

Yes, we've heard pretty consistent -- pretty consistently from our clients that our buyers really want to work with us. They feel stymied by internal processes and budget processes that have been put in place across the latter portion of this year. Most of the conversations that we hear on this front have to do with this period. So we hear a lot about whether or not they have the opportunity to persist and continue for this period or whether they are stymied, what's this period budget look like as in this quarter. So our clients are not coming out and saying, hey, this is something that we're going to put on hold for another year. It's a question of weeks or a month here and there. So that's what we've heard. The other thing I'd remind you and just I think when we look at where clients will spend and we've seen in the past is, they want to spend around their growth. So even in a tougher environment, these are the dollars that they would like to spend, because they really do help our clients grow. That's where our value comes. It's where our solutions are targeted. It's about driving increased sales or increased growth for our clients. And so even in a tougher environment, once there's clarity and stability about where things are headed, we feel good about our chances to continue to win deals and get back to historical close rates.

Our next question comes from Ryan MacDonald with Needham.

This is Matt Shea on for Ryan. Appreciating that in Q4, it's a big renewal month but -- or a big renewal quarter, but assuming that you guys have done some renewals over the course of the year, wondering if you could kind of comment on how those renewals are going and maybe the upsell activity that you've been seeing with those renewals and then assuming that the upsell activity with the renewals has not been as strong as expected. If you don't upsell during a renewal, does that kind of box you out until the next renewal process? Or do you feel like clients can still add on additional modules maybe outside that renewal process that will help you still grow the number of modules with clients over time despite the elongation of the sales cycle in the near term?

GDR was -- overall GDR was virtually unchanged in Q3 '22 versus Q3 '21. As Robert mentioned, customers see real value in these solutions. There's more pressure on the upsell portion. But the good news is not getting an upsell at the time of the renewal keeps the option open to continue to work. And we believe there is a dynamic where it's just taking more time for the end users, who highly value our solution to flow that up the chain through to executives. So that's a lever that we're going to be working as we move through the year.

Got it. Appreciate that. And then in a similar vein with that elongation in the sales cycle, we've heard similar things from other customers, but also heard some success from other companies. We've also heard some success though with them using pilots to get into their customer account, have them use the product and then bring that up to their exec team and it's helping to smooth out the sales process. I know that's not something you guys are particularly fond of pilots, but are pilots or any other kind of go-to-market changes on the table as you kind of manage through this elongation?

I would say that, of course, we're responding to the elongation as best we can. So things like training our sales team to paint a broader map of potential client constituents and franchising them earlier in the process. Frequent process management at the deal-by-deal level, being sure our materials reflect clear ROI. We have fantastic client ROI stories, like I mentioned in my script on the website. How do we be sure that our commercial teams are highlighting the potential ROI to clients, and while we don't do pilots like you say, we can show a lot of the value through the site. We can sit down with the client and explain based on their business and the data they're looking for, here's how we put data in their salesforce hands. It's very clear where they get the value. So I think we do as good a job with that as we can in terms of getting clients and franchise. And then positioning our products so that we're well set up to cross-sell. So -- for example, in biopharma, we have several solutions, we can tell that all add value and they're all complementary doing a better job of showing all that so that when the time comes and the budget opens up, we're there for that opportunity. So I do feel like we're being responsive to the environment and doing everything we can, not doing things that don't make sense for the business, but doing things that should help. Again, as approval processes open doors, we want to be right there ready to jump in.

[Operator Instructions] Our next question comes from Brian Peterson with Raymond James.

This is Johnathan McCary on for Brian. Just be the one from us. So you focused on M&A in the past, and I've talked about the success with Analytical Wizards, but now kind of balancing valuation compressions with an increased focus on profitability, given the macro, how are you thinking about investing for growth from here?

We continue to see M&A as a great lever for us. We -- again, you mentioned Analytical Wizards, and if you go back to Monocl, those have been really great capability additions to our portfolio and really good financial acquisitions for us. And we're thrilled to have both teams on board as part of what we can bring to market. So we'll continue to look out there at companies that have that nice mix of an additional capability that we can add on as well as a good financial profile, a fast-growing company, a company that can approach our margins over time and a company where we have a lot of synergy in taking their product out to our clients and putting their data capability onto our platform to enhance it. And there are a lot of companies out there like that. You mentioned as valuations pull in, in our experience, the private market always takes a little while to adjust to things going on in the public market. So we'll continue to be prudent in terms of looking at what we might pay for certain assets, but we'll continue to be very active, and I expect us to stay on pace to do one to two deals per year. In terms of other investments, I mentioned earlier, we're being prudent and want to be sure that we're tailoring investment against the highest value growth opportunities. So in an environment like this, being sure that every dollar we're spending has a meaningful return associated with it. We have a huge TAM and great opportunity across clients and we think long term. So we'll continue to develop products. We'll continue to enhance our platform. We'll continue to add new data sources, but we'll do that in a very careful investment environment to be sure it's tailored against the highest opportunities and the best opportunities.

Speaking of adjustments, I just want to remind people, we have a very high LTV to CAC, which supports our efficient sales model. And we also, from a development perspective, the foundational data that we add to our unified data is foundational. It helps us to spin off additional innovations as well as increasing demand for the product. So it's an inherently efficient model in which we can be very targeted with our investment.

This concludes the question-and-answer session. I would like to turn the conference back over to Robert Musslewhite, CEO, for any closing remarks.

Thank you all for your attention. I know tonight it was a big night with lots of calls. We appreciate the questions, and we'll look forward to talking with many of you and seeing many of you in the coming weeks.

Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.