Welcome to Definitive Healthcare's Q1 2024 Earnings Call. Our host for today's call is Jason Krantz. [Operator Instructions] I would now like to turn the call over to your host, Mr. Krantz, you may begin.

Good afternoon, and thank you for joining us today to review Definitive Healthcare's financial results. Joining me on the call today are Jason Krantz, our Founder, Executive Chairman and Interim CEO; and Rick Booth, our 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 health care 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 and the anticipated impacts of global macroeconomic conditions on our business results and clients and on the health care 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 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 statement included in the earnings release that we have just posted in 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 Jason.

Thanks Matt, and thanks to all of you for joining us this afternoon to review Definitive Healthcare's first quarter 2024 financial results. As you will hear on today's call, our first quarter performance was mixed. While we met our revenue guidance for the quarter, we underperformed our new logo and upsell expectations, largely due to the continued macro headwinds and disruption from our restructuring at the beginning of the year. However, we delivered strong adjusted EBITDA margin expansion as we continue to focus on operational efficiencies to set ourselves up for long-term profitable growth. Furthermore, we continue to improve our customer renewal rate during the quarter as our work to deliver more value to our customers faster, continue to take hold. Finally, the financial power of our business model is shown as we translated 97% of our adjusted EBITDA into unlevered free cash flow over the last 12 months. Before I get into the details, I would like to reiterate how excited I am about the long-term opportunity for definitive health care. We have highly differentiated data and cutting edge data science delivered through a scalable SaaS platform. We have a talented and committed workforce, and we compete in a complex market with a large and growing TAM. Furthermore, we have a fantastic business model that is able to generate a powerful combination of growth, profitability and free cash flow. And we believe that the work we are doing today will set us up to get back to the growth we expect. With that said, for the quarter, our total revenue was $63.5 million, representing 7% year-over-year growth. And our adjusted EBITDA was $20.0 million, a 32% margin. We also during the quarter delivered record unlevered free cash flow of over $28 million. Additionally, as Rick will discuss in more…

Thanks, Jason. I'll start with a detailed review of our Q1 results before finishing with our guidance for Q2 and commenting on the full year 2024. In all of my remarks, I'll be discussing our results on a non-GAAP basis, unless otherwise noted. As Jason mentioned, our performance was mixed in the quarter. We delivered both revenue and adjusted EBITDA within our guided range. And while we're pleased with the profit performance in the period, revenue was at the low end of our expectations. We remain focused on what we can control and we continue to advance our efforts to operate more efficiently while delivering innovation for clients, both of which we expect to position us well as the market recovers. Highlights of the quarter included revenue growth of 7% compared to Q1 of '23, and we grew EBITDA, adjusted net income and core EPS by 28%, 44% and 41%, respectively, over the same period a year ago. We delivered a 32% adjusted EBITDA margin for the quarter up over 500 basis points year-over-year. And as a result, Q1 revenue growth plus the trailing 12-month adjusted EBITDA margin was 38%. and we generated $28.3 million of unlevered free cash flow in the quarter and $76.1 million on a trailing 12-month basis, which is up 43% versus the same period a year ago. Turning to our results in more detail. Revenue for the first quarter was $63.5 million, up 7% from the prior year and within our guided range. This includes $1.7 million of professional services as large clients engaged us to work on some of their most challenging issues. We ended the quarter with 559 enterprise customers, which we define as customers with more than $100,000 in annual recurring revenue. This was an increase of 30 enterprise customers or 6%…

Before I open it up to questions, I want to reiterate our excitement about the future of Definitive Healthcare. We have an incredible team that is committed to driving real value for our customers in a market with a large and growing TAM. We have proprietary data assets that create a true competitive edge and we are confident that the work we are doing to drive innovation and operational efficiency will translate into the long-term growth and profitability that makes this company such an exciting investment. With that, I would like to open it up for questions.

[Operator Instructions] And our first question will come from Craig Hettenbach with Morgan Stanley.

Jason, you mentioned the disruption in the first 2 months of the year looking to see kind of into March and April, what type of changes are so as years started to progress from the reorg? And then really kind of when you think some of these changes will start to gel and have an impact?

Yes. Thanks. Great question. So we made a significant GTM change in January as everyone knows, to reduce overlays and restructure in a way that we think sets us up to better align with our customers. So more resources looking at our enterprise customers, a separate motion for our small- and medium-sized customers. That change is done at this point. So all of the structural changes have been made of the transitions of customers to new owners, all of that is done. So now we are laser-focused on driving the activity and building the pipelines that will turn into growth in the later part of this year. So we're focused on -- now that the changes are done, we're focused on doing all the things that we can to take advantage of what we believe is a much better operating setup for our go-to-market team.

Got it. And then just as a follow-up, you highlighted kind of the 6% growth in enterprise customers. I know that's an area where you've seen some improvement in retention. Can you just discuss what you're seeing out there on enterprise? And then on the longer tail of smaller customers, do you expect that to continue to bleed down in terms of the number? Or when would you see some stabilization perhaps in the smaller-sized customers?

We're incredibly focused as an organization on those enterprise customers. They now make up somewhere around 65% of our total ARR. So we see much better renewal rates with those customers, and there's also tremendous more opportunity to expand with those customers. So a lot of the product investments that we are making will help those customers and allow us to expand the number of use cases that we solve for them. So that remains our key focus because of the strength of that market. The small and medium, I mean, those are always going to churn at a higher pace to small customers in particular. They're going to churn at a higher pace than other customers. But we are focused with our new group that focuses solely on those customers. We believe that we're going to be able to provide them more value delivery as we work with them on scale rather than the way that we structured it before, where the segmentation was a little bit less clear and the motions were a little bit more intermingled as a result.

And our next question will come from Jared Haase with William Blair.

Yes. Maybe just on the updated guidance for revenue obviously implies a little bit of a sequential improvement in the second half of the year. I was just hoping to hear a little bit more about kind of the visibility you have in terms of what gives you confidence in that second half ramp with the outlook. And specifically, I'm wondering, are there any kind of discrete assumptions in terms of improvements in the macro environment? Any other assumptions just as you think about that rollout of Populi to the broader customer base, is that contributing at all? Just would love to unpack a little bit further.

It's a great question, Jared. This is Rick. We're seeing continued improvements in renewals, which are consistent with our prior expectations and with expanding NDR by 100 to 200 bps by the end of the year. We are also in our guide, assuming overall sales productivity in the second half, which is similar to what we saw in Q1. So we're not building in a massive rebound there. And we're taking into account that we are focused on product-driven subscription revenue over onetime fees. So we've adjusted to actually take into account that we expect pro service revenues or onetime fees to actually decline year-over-year. So all those things together make us feel that this is an appropriate guidance for us.

Okay. That's super helpful. And then, Jason, you talked a little bit about kind of the differences in experience between new logos and the expansions and upsells with the customer base. In terms of the new logos, I'm curious if there have been any changes in terms of just how you're approaching the market to maybe see better win rates there. Anything you're doing from a messaging perspective or maybe even in terms of like free trials or things of that nature. Anything changed as it relates to your go-to-market motion with new logos?

Yes, it's a good question. So I think there's two changes of note. So the first is -- as we've discussed, we've separated our enterprise clients from our small clients. So the way that we're approaching small clients is all about high velocity and how do you go drive growth within that segment very efficiently. So I think what you'll see is when we grow those clients, we do so in a more efficient manner than we've been able to do in the past. The second thing that we're focused on overall is thinking about how we can expand our marketing to drive free trials and drive other opportunities across all of those markets. So continuing to figure out different ways to emphasize ROI with our clients is increasingly important for them, making sure that as they are more cost conscious and trying to evaluate every buy and all that cost scrutiny that's going on at presenting an ROI and demonstrating to them that they can get value very quickly from our products is important. And you see that in our product development as well. So we are trying to continually use, for example, the Populi claims analytics platform, that is all about how do we design analytics that are very specific to the use case of our clients so that they can see how can I use this data tomorrow to improve my business and drive ROI.

And we'll move next to Ryan MacDonald with Needham & Company.

This is Matt Shea on for Ryan. Jason, you called out new logos and upsells as an area of weakness that those restructuring changes -- or with those restructuring changes, you started to see better new logo adds in March, but didn't necessarily hear you comment on the upsell. So curious if you've started -- didn't see an improvement there. Just any commentary you can provide with that? And then with those new logo improvements in March, is there any end markets to call out that were particularly strong?

Yes. So I think a couple of things. So the upsells were less impacted by our changes. And that has been true in general through this more difficult macro environment where our clients are loyal to us. They get tremendous value of our products, and we're able to upsell and expand with them more easily in difficult markets than new logos. So I think it's more a reflection of January and February to be more difficult for new logos than seeing improvement across the board. In terms of markets that we're seeing solid performance in providers is continuing to be a really good market for us. Obviously, we made a great acquisition last year, and we've got a product that really meets the needs of that market. So we've done well in both new logos as well as continuing to drive down customer churn within that area. The other markets have performed similarly as they have in the past. So continued difficult conditions for both life sciences as well as smaller software and IT organizations.

Got it. That's helpful. Yes, it seems like Populi has really been a huge benefit on the provider side. Curious as you look out to the second half of the year and that rollout to the other end markets. Have you been able to start marketing to those other end markets or you provide demos of the Populi platform to them? Or any signals that is giving you that confidence in Populi helping drive growth in those other end markets in the back half?

Yes. As we develop the product for those end markets, obviously, we're doing a lot of testing with our clients. We are getting very good feedback. Again, as you think about what it does, it's all about time to value for our clients. So being able to design analytics and workflow in a way that meets their exact needs is very powerful. So as we roll that out, we would expect that to have a similar impact in terms of driving more expansion, more deal velocity and also improving our renewal rate within those markets. But that will take time. Obviously, as we roll this out, we need to go get in front of clients, start to build that pipeline and start to bring on more deals and drive up that renewal rate.

[Operator Instructions] And our next question will come from Anne Samuel with JPMorgan.

Maybe just a follow-up to the one on the different markets. With Capital Markets in the life sciences space, starting to come back a little bit, I was wondering if maybe you could speak to your [ pipeline ] and if things start loosening up a little bit, how long that might take to translate to revenue for you?

Yes, generally speaking, depending on the size of the customer and the complexity of the deal, our deal cycle is between probably 120 and 150 days overall. So as that market improves, we should see impact of that later in the year. I would say it's somewhat offset by big pharma is in a cost-cutting mode right now. So that is somewhat offsetting somewhat of the revival within the biotech market. But that's the type of time frame you think about as you think about bringing new stuff into our pipeline and when that starts to translate into actual closed business.

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

I was just looking at it -- and sorry, I joined the call few minutes late. But looking at the enterprise customers sequentially. I know you commented year-over-year. Is there anything -- is there a CECL dynamic there? Is that -- is the loss of the fixed net -- was that in line with your expectations? Or is that -- some of that just fall off from the restructuring that you've been talking with regard to [indiscernible].

Yes. I don't think there's anything specific to point out there. I think just in general, a slower start to the year is driving that number a little bit. But we would expect continued growth in that over time. Obviously, the year-over-year number is very good.

Right. And did that impact the sequential dynamic with CRPO? Or those are related?

Yes. The disruption that Jason mentioned definitely impacted CRPO. Overall CRPO is up 1% year-over-year if you normalize that for the opt-out clauses that we discussed last quarter, you've got about 2 points of CRPO and then there will be some contribution from new business as well. As well as the increase in MDR that we talked about of 100 to 200 bps.

Got it. And then just back to Populi and Carevoyance. Can you talk a little bit about just how these acquisitions are playing out for you from a growth perspective? I know you don't really break out organic versus inorganic growth. But -- anything you can talk about in terms of the success that you're having in getting out of those acquisitions? Or are they really acquisitions that will generate returns over a long period of time? Kind of an undoubtful period when you think about the cyclical dynamics of the structure.

Yes, it's a good question. So our integration strategy has been very focused on tuck-in acquisitions that we believe can drive innovation. So right now, we're super focused on go-to-market excellence as well as innovation overall. A way to innovate more quickly, of course, is doing these tuck-in acquisitions. So we integrate these very quickly into our organization. So we start feeding our data into these products very quickly to make them better and we can expand their growth that way. Our commercial team is very quickly selling all of these products as part of their overall product suite that they offer to our customers. We do centralized marketing back office is integrated within a few months, typically. So it becomes very difficult to sort of separate organic versus nonorganic. But these are important growth drivers for us. We need to continue to innovate in a market that's changing quickly. And if we can find great companies like Carevoyance and Populi that can expand our product portfolio, we see that as setting us up for long-term growth that we're looking for.

Got it. And sorry, can I just ask one other question. I think I heard you said that you're still expecting about 100 to 200 basis of improvement by year-end in dollar retention. So if I -- kind of think about the other things you said on the call, is the idea that it's really just the current weakness is really just driven by new logos. So the things that you've seen through April, May you're pretty satisfied with kind of the dollars that you're getting from the installed base [ is really ] just new logos that are impacted guide for the year?

Generally, yes. So I think what we're seeing is that customers that have experienced the benefit of the product are renewing at improving rates, which we're very pleased with in terms of the early feedback on some of the product changes that we've been talking about. We've built that expectation in the second half of the year as it flows through our guidance.

And our next question will come from Stephanie Davis from Barclays.

I was hoping you could expand a little bit more about the large uptick you saw in your pipeline in March. Can you help us understand how much of that acceleration was from a shift in your go-to-market versus maybe upsell success or new products or expansion in new end markets. Is there anything about the nature of this uptick in your pipeline that would maybe change your pipeline conversion or make it less certain than history?

I don't think there's any major changes in it. In general, what you'll find is based on the way that we've redesigned our strategy overall, more of that pipeline will be in larger customers by definition because we have more resources focused on those markets. The big increase that I talked about from January to March is really about we've worked through a lot of the changes that we made is hard work and making sure that we get our team refocused on getting out there, meeting with clients, building pipeline. That just took a bit more time than we thought, but now we're starting to see that work and that's reflected in the March pipeline numbers.

Thinking about the forward trajectory there, should we assume that this is more the go-forward cliff and then eventually that's going to convert into revenues in a much quicker way? Or are we taking a more cautious approach, just given the year-to-date performance?

Yes. I guess I would be careful to look at our January to March number since that's all in quarter. I think year-over-year, the fact that we are meeting last year and beating last year's pipeline adds is important, however, we'll continue to focus on that. So this is -- this is one of the M3 things that we're focused on as a company is go-to-market efficiency and how do we drive that activity and build that pipeline. Product innovation and how do we continue to delight our customers with new innovative products and then continue to run with operational efficiencies. So rest assured, we are fully focused on it, and we will continue to build that pipeline over time.

Super helpful. If I could sneak in a quick one. As much as I love hearing Jason, on the call, is there any updates on the CEO search?

Yes. Well, I appreciate that comment first. But yes, we're continuing focused on finding a great candidate. We have met a lot of good people. There's tons of interest in this job overall. Our timing, as discussed previously, is when we find the right person. We need to find somebody that is a great operator that can help us see our way to $1 billion in revenue over the next 10 years. And we need to find somebody that is customer obsessed and focused on driving the type of innovation we need to meet those numbers. So when we find that person, you'll be the first to know, but we're actively looking and seeing a lot of great candidates.

All questions have been addressed at this time. I'd like to turn the conference back to Jason Krantz for closing remarks.

Great. Well, thanks, everyone. We appreciate your time today. As we said, we are very excited about the long-term opportunity for Definitive Healthcare. This is truly a great market that we compete in. And as macro conditions improve, we believe all the things that we're doing right now, whether it be the go-to-market efficiency work that we're doing, all of our product innovation that is accelerating and doing so in a way that drives profitable growth is something to be really excited about. So thank you for your support, and we look forward to continued conversations.

And this concludes today's conference call. Thank you for attending.