Ladies and gentlemen, thank you for standing by, and welcome to the Health Catalyst Fourth Quarter 2019 Earnings Call. [Operator Instructions]. I would now like to hand the conference over to your host, Senior Vice President, Investor Relations, Adam Brown. Sir, please go ahead.

Good afternoon, and welcome to Health Catalyst's earnings conference call for the fourth quarter of 2019, which ended on December 31, 2019. My name is Adam Brown. I'm the Senior Vice President of Investor Relations for Health Catalyst. And with me on the call is Dan Burton, Health Catalyst's Chief Executive Officer; and Patrick Nelli, Health Catalyst's 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. As a reminder, today's call is being recorded, and a replay will be available following the conclusion of the call. During the 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 and 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 of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may differ materially. Please refer to the risk factors in our Form 10-Q for Q3 filed with the SEC on November 13, 2019, and our Form 10-K for the full year 2019 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 measures to their most comparable GAAP measures is provided in our press release. During the call, we may offer incremental metrics to provide greater insights into the dynamics of our business. These details may be onetime in nature, and we may or may not provide updates in the future. With that, let me turn the call over to Dan for his prepared remarks, and then Patrick will provide his prepared remarks as well as provide our outlook for Q1 and the full year 2020. Dan and Patrick will then take your questions. Dan?

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 2019 financial performance along with the other highlights from the quarter. First, on our fourth quarter and full year 2019 financial results, I'm pleased with our performance across the board. To start, I am happy to report that our total revenue for Q4 of 2019 was $43.5 million. This represents an outperformance relative to the midpoint of our guidance and results in 21% growth relative to the fourth quarter 2018. Total adjusted gross margin in the fourth quarter was 51.2%, which compares favorably to 48.6% in the fourth quarter 2018. And our Q4 2019 adjusted EBITDA was a loss of $6.5 million, which represents an outperformance relative to the midpoint of our guidance and shows meaningful improvement from a loss of $9.4 million for the same period in the prior year. Translating this to full year 2019 results. Total revenue was $154.9 million representing 38% annual growth. Total adjusted gross margin for 2019 was 52.2%, an increase of roughly 430 basis points compared to 2018. And full year 2019 adjusted EBITDA was a loss of $27.4 million, a meaningful improvement from a loss of $38.1 million in 2018. Now let me transition to some of the highlights from the quarter. You'll recall from our last earnings call that we measure our company's performance in 3 primary strategic objective categories of improvement, growth and scale. And we'll discuss our fourth quarter results with you in each of these 3 categories. The first category, improvement, is focused on evaluating our ability to enable massive, measurable improvements for our customers while sustaining industry-leading satisfaction and engagement. First, I'm pleased to report that the number of documented improvements achieved…

Thank you, Dan. As Dan mentioned, I will be discussing our company's performance in the strategic objective category of scale. This category focuses on enabling greater contribution to our mission by sustainably scaling our organization. Before diving into our fourth quarter financial results I want to echo Dan's sentiment and say that I'm pleased with our fourth quarter results and the momentum we are seeing across our business. For the fourth quarter of 2019, we generated $43.5 million in total revenue. As Dan mentioned, this represents an outperformance relative to the midpoint of our guidance and it represents an increase of 21% year-over-year. The outperformance relative to the midpoint of our guidance was driven primarily by new customers and expansion contracts signing earlier in the quarter than expected, increasing the revenue we were able to recognize within the quarter. Technology revenue was $22.6 million, an increase of 20% compared to the same period last year. And professional services revenue was $20.9 million, an increase of 21% year-over-year. Total year-over-year organic growth was driven primarily by recurring revenue from new customer additions, from existing customers paying higher technology access fees from contractual built-in escalators and from existing customers expanding their relationship with us. In line with what we communicated previously; I'd share that the Medicity business was a headwind on our technology revenue growth rate in the fourth quarter. Additionally, as a reminder of what we shared in our last earnings release, our revenue in the fourth quarter of 2018 included certain performance-based revenue arrangements where performance was measured and achieved in that quarter. Moving forward, performance-based revenue arrangements will be a much smaller portion of our overall revenue base, and thus, they posed a headwind to our Q4 2019 year-over-year professional services revenue growth rate. For the full year 2019,…

Thanks, Patrick. In summary, we are pleased with the performance of the company. We could not have made this progress without all of the hard work, commitment and dedication of our Health Catalyst team members who work hard each day to enable our customers to realize improvements. We're looking forward to keeping you updated on our progress throughout 2020. And with that, let's open it up for questions.

[Operator Instructions]. Our first question comes from the line of Robert Jones of Goldman Sachs.

I guess maybe just to start off on the new adds in '19 for this year, any more you guys could share just around the composition of adds in the year versus your base, anything more on risk-bearing entities versus hospitals? And then just related to that, Patrick, you mentioned kind of a mid-teens expectation again for new adds in 2020. Wondering if you'd be willing to share any expectations around Medicity cross-sells in that expectation?

Absolutely. So Bob, this is Dan. I'll start out and then, Patrick, if you have additional thoughts, please share them. So as it relates to your first question, Bob, the composition of the 15 net new DOS subscription clients looked very much like what we have seen in the past several years, a mix of a majority of customers that are in the provider space, health systems, but also inclusive of some risk-bearing entities and others as we've described in the past. And then as it relates to the second question, as we mentioned in our prepared remarks, in 2019, we saw 3 Medicity customers who became Health Catalyst DOS subscription customers, which was encouraging to us. But as we noted, 2 of those 3 cross-sells were already within our Health Catalyst core pipeline. And so we would think of that similarly as we think forward to 2020 that we may continue to see an acceleration within our core Health Catalyst pipeline of overlapping clients with Medicity that may also decide to become Health Catalyst DOS subscription clients. And then we would expect and hope that similar to 2019, there may be some incremental benefit as well. Anything you'd add, Patrick?

The only item I would add is, if we cross-sell more Medicity customers in 2020 than we did in 2019, that would be incremental to that mid-teens expectation that we shared.

Our next question comes from Anne Samuel of JPMorgan.

I was wondering if you could maybe provide a little bit of color of how to think about cadence of growth and new DOS subscription customer additions throughout the year. I know you talked previously about maybe the second half being a little bit more of a Medicity opportunity just given you started the cross-sell conversations kind of midway through last year. So how should we be thinking about that cadence?

Thanks, Anne. I think that's a reasonable way of thinking about the Medicity component that, as we've mentioned in the past, we do experience around a 1-year sales cycle in general for the discussions that we have with health systems. And our experience to date has been that, that is the right way to think about the sales cycle for the cross-sell as well. And as we mentioned in the past, we really began those cross-sell discussions in earnest in the summer of last year. And so we would expect to see some of those results coming towards the latter part of this year. Anything you'd add, Patrick?

And as far as standard net new DOS subscription customers go, we usually see those weighted towards Q2 and Q4. Rough numbers would be that approximately 40% of the full year net new DOS subscription customers come in Q2 and approximately 40% in Q4, similar to what we've seen over the past several years, although there can be some variation on that exact timing.

Very helpful. And then maybe just one on Able Health. How many other opportunities like that in terms of tuck-ins to the apps layer are there? And how should we be thinking about your criteria as you evaluate buy versus build?

Yes. Thank you for that question, Anne, great question. So we are very excited, as we mentioned in our prepared remarks, to welcome our teammates from Able Health to join Health Catalyst. And they're a great example of a company that operates within the apps layer of the 3 layers of what we provide to customers. So the first layer is the platform. The second layer is the apps layer. And the third layer is the wraparound expertise and services that we provide. Importantly, we see, by far, the most opportunity for acquisition activity in the apps layer, where there are literally hundreds of companies, many of which are start-ups that have developed some very innovative capabilities, technology capabilities where, as we evaluate moving forward, we believe there will be a number of other cases where the acquisition path will be the most effective path for us to meet the needs of our clients across the application suite area. So I would anticipate that we will continue to be active. And we have a very robust and meaningful pipeline of potential companies where we are in discussions. And we will continue to do that in the months and years ahead.

Next question comes from Ryan Daniels of William Blair.

Yes. One on the upsell opportunity to an existing customer. I believe you mentioned, one, it was $10 million. And I'm curious if that's an annual opportunity or kind of the contract value? And number two, it seems like a novel data point and quite a strong opportunity so maybe a little bit more color on what drove that and the potential for similar opportunities going forward.

Great. Thank you for the question, Ryan. As it relates to that upsell opportunity, to your first question, that does represent an annual recurring number. So that greater than $10 million is annual recurring revenue, which is inclusive of both technology and services. And as it relates to some of the specifics that we feel are perhaps repeatable at other health system clients, we do see, as we mentioned in the prepared remarks, a trend towards more and more of our clients looking for greater support and help at the lower levels of the analytics adoption model where, through the use of our technology and through the use of our expertise and our scale, we are in a position to provide some of those lower levels of activities better, faster and cheaper than any of our clients could achieve on their own. And that does involve us taking over processes that were often manual processes and automating them through the use of our technology and then also benefiting from process improvements on the expertise side that, when coupled together, provide us with real differentiation relative to what our health system clients could achieve in terms of both the efficiency and in terms of accuracy and effectiveness. And we do believe this will be a pattern that will repeat itself for many of our clients. We would anticipate that within our TAM, there are likely hundreds of clients that could grow to a similar size as what we just experienced in 2019.

Okay. That sounds great, that color. And then if we think about visibility at this point of the year, I know most of the 15 new contracts will drive the bulk of revenue growth, provide the ramp throughout the year. But how much visibility do you really have at this point? Is it extremely high as we look towards the revenue line?

Good question, Ryan. It is extremely high. As we've discussed in the past, over 90% of our revenue is recurring in nature. And related to that, we have over 90% visibility to our projected 2020 revenue, which is very helpful in terms of our forecasting and planning process.

Just one more, if I could, on the Able acquisition. I'm curious if you could talk about the potential revenue opportunity? I know it's not material in your guidance, but is that really to drive more all-in purchases? Does it help you support pricing improvements over time? Or is it really something that you see as a client acquisition vehicle that you now have an even broader value proposition versus really a separate revenue generation line for the company?

Yes, very good question. I think we see some elements of each of those categories that you mentioned, but I might emphasize just a couple of things. And first, let me broaden to the general M&A topic that as we acquire a company, particularly at the apps layer, in general, the acquisition of that new technology would fall outside of the current technology subscription that our clients have with us. So there is an upsell technology opportunity through these acquisitions generally. We do expect a small incremental upsell opportunity within our existing client base specifically related to the Able Health acquisition. And we do believe also that there are other meaningful opportunities for us to cross-sell within Able's customer base and for us to have a new entry point, potentially at a lower cost, to begin new client relationships by virtue of this new capability that Able Health brings to us. Anything you'd add, Patrick?

Just to emphasize that we felt very much about the acquisition enhancing specifically our quality and regulatory measures application suite. And we focused on the product capabilities it could bring us more so than its independent financial characteristics.

Okay. Great. Congrats on the closing of the transaction.

Our next question comes from Sean Wieland of Piper Jaffray.

So just digging into Able Health a little bit more. I just want to understand. You spoke a little bit about the strategic importance, but what is their offering versus your existing offering that you had in quality and regulatory reporting? Is there overlap there? Are there shared clients? And can you give us any specifics on revenue and EBITDA contribution or number of employees?

Absolutely. Great questions, Sean. So I'll share a few thoughts and then Patrick, please also share. So as it relates to their offering compared to our existing offering, importantly, we see meaningful complementarity and a minimal amount of overlap. Our focus on quality and regulatory measures has included, in the future road map, the desire to offer our clients the specific capabilities that Able Health brings and that is specific to our clients submitting regulatory measures, but that has not been an area that we had yet developed on our own. We have been more focused on the curation of those metrics in the improvement work that we have done to improve clinically, operationally with our clients. So the addition of the Able Health capabilities is very complementary to what we have today and it's very consistent with our desired product road map and consistent with feedback from customers that they would like that additional capability as it is a good example of a process that, in many cases, is very manual when our clients handle all of the steps of submission themselves. Whereas with Able, they automate and streamline many of those steps as well. Patrick, what would you add?

The only item I'd add is, we shared in the 8-K that Able will have an immaterial impact on our 2020 revenue or EBITDA. I would also share that it is a relatively small team that we're bringing on. A very talented team that we are very excited to bring on, but a relatively small team.

All right. And Patrick, can you comment on the trend on deferred revenues on the balance sheet?

Of course. So when we look at our deferred revenues, there's a little bit of noise there given the acquisition of Medicity and the fact that Medicity has a different deferred revenue profile than Health Catalyst. The other item that can cause a little bit of noise is the deferred revenue profile between technology and services for our core business does vary. And depending on the timing of new client additions or the timing of expansions, it can have fluctuations in our deferred revenue in given quarters. The last item I would note is, because our average ARR per customer is approximately $2 million a year, invoices can be fairly large. So an invoice moving between one quarter or another can also have a fairly material impact on our deferred revenue.

All right. That's helpful. And then one more quick one. What percentage of DOS clients today are on Azure and how many converted in the quarter?

So we've shared that starting approximately 4 years ago, all of our new clients went to the Microsoft Azure environment, which means that the majority of our clients are in the Microsoft Azure environment. We do have a minority, but still a material portion of our DOS subscription customers, that are in our private cloud data center that we have been converting into the Microsoft Azure environment and expect to continue to convert over the next year plus, 1 to 2 years. And then we also have a few on-premise clients remaining that we expect to move to the Microsoft Azure environment. And that process, we also expect to take over a 1- to 2-year time period.

Our next question comes from Michael Newshel of Evercore ISI.

I guess I wanted to ask about the trajectory for gross margins. I know the flat gross margins you've guided to for this year is something that you talked about before because of the continuing transition to Microsoft Azure. But is there any just update on time line for completing that transition and can we see more gross margin improvement in 2021?

From a financial impact, we would expect to continue to have a headwind from moving clients to the Microsoft Azure environment in both 2020 and 2021. We are obviously doing our best to try to outperform those expectations. But from an expectation perspective, we would expect it to take both 2020 and 2021, and that's why technology gross margins will be roughly flat over that time period.

Got it. And so similar size headwind in 2021?

Yes. And I should note that the natural tailwind is from the fact that our escalators on the technology side are very high margin because they don't come with corresponding costs. That would naturally lead our technology gross margins to expand every year, but the headwind counteracts that and results in overall flat technology gross margins.

Got it. And maybe separately, I know this is kind of speculative, but I was just wondering if you have any thoughts about whether hospitals' response to coronavirus could have any indirect impact on you? I mean is it possible preparations and uncertainty, just the competition for attention could have any delays on contracting decisions or is kind of like the process and people involved separate enough and the process is visible enough that you don't really foresee any impact?

Good question. Thank you for the question, Michael. So let me offer a couple of thoughts there. So first of all, we, along with many others, share deep concern for the well-being of those who have been impacted by the coronavirus. We're also, on behalf of our team members, closely monitoring the situation and its impact on the well-being of our team members. We continue to provide our health system customers with significant data and analytics support for this specific health issue along with all the other health issues that these clients help to address. And we recognize and respect the dedication, commitment and sacrifice of health care providers around the world, including our exemplary customers. I would share, specifically related to your question, that we have not yet seen any impact of the coronavirus as it relates to our pipeline and therefore, our forecast either.

[Operator Instructions]. Our next question comes from the line of Sandy Draper of SunTrust Robinson Humphrey.

This is Stan on for Sandy. Maybe a continuation of the previous question. Just looking at the sales pipeline, is there anything to call out given that this is also an election year that maybe you're seeing any changes in decision-making?

Yes. Good question. What we have found is that as we have shared in the past, we continue to not see a material impact from the 2020 election cycle. The good news from the perspective of Health Catalyst is that in whatever political or reimbursement landscape we find ourselves within, the market continues to believe in the need for data and analytics. And importantly, our model is not tied to the transition to value-based care like some other health care IT companies. Fundamentally, our model and our value proposition to clients is to help them manage the complexity of data and the economic model complexity that they have to deal with in working within both a value-based and a volume-based economic model. Now all that being said, we have also observed over long periods of time that health care providers tend to be more cautious in purchasing situations, so this is something that we'll continue to closely monitor.

Got it. That's helpful. And maybe just a follow-up. Besides the 2 wins from Medicity that you called out that were already in your pipeline before the acquisition, are there any Medicity clients today that you have not yet cross-sold but were in your pipeline before the acquisition? And if so, can you quantify that number for us?

Of course. Thanks, Stan. Yes, that number would be very low. So since we have approximately a year-long sales cycle and we are more than a year since the time of acquisition, at this point in time, there are very few customers that were in our pipeline at the time of acquisition that are Medicity customers.

Thank you. At this time, I'd like to turn the call back over to Dan Burton for closing remarks. Sir?

Thank you. And thank you to everyone who has dialed in for this earnings call. We appreciate your interest in the company, and we look forward to keeping you updated in the months ahead. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.